The black hole of 1MDB

The black hole of 1MDB

1MDB should have been rolling in the black with some RM12bn in land revaluation gains; instead it finds itself pouring money into a black hole of borrowings incurred to finance goodness-knows-what, says Anil Netto.

Many are scratching their heads over the sale of the Bandar Malaysia land to a joint venture consortium and the convoluted share arrangements and financing of the deal.

But instead of getting mired in that, let’s zoom out at take a look at the big picture of the 1MDB land banks and how much they are worth.

Basically, there are two major land banks in 1MDB’s books:

  • the Sungai Besi land for the Bandar Malaysia project and
  • the Tun Razak Exchange project site (TRX).

If 1MDB had just sat on these land banks that it had bought cheaply from the government and then disposed of them, it could have made a fat surplus – without doing anything and without incurring much debt!

Let’s see how much these land banks are worth:

TRX land (70 acres):

Market value RM2,500/sq ft* x 70 acres x assuming 70% useable x 43,560 feet/acre = RM5.3bn

Acquisition cost RM65/sq ft x 70 acres x 43,560 feet/acre = RM0.2bn

Surplus on TRX land based on estimated current value = RM5.1bn

Bandar Malaysia land (486 acres):

Market value RM416/sq ft** x 486 acres x 43,560 feet/acre = RM8.8bn.

Acquisition cost RM76/sq feet x 486 acres x 43,560 feet/acre = RM1.6bn (which comes with a relocation agreement)

Likely revaluation gain on Bandar Malaysia land = RM7.2bn

Total surplus for both land banks – without doing any work: RM12.3bn, say RM12bn.

In other words, had the federal government not sold the land to 1MDB or had 1MDB not incurred debt (to finance who-knows-what) and then sold the land now, it would have been rolling in billions of ringgit in extra cash which would have enriched public coffers.

This RM12bn is based on a fairly conservative estimate of the valuation at a time of softening property prices. If 1MDB had not been desperate to sell to pay off its debts, it could have held on to the land banks until such time when property prices pick up again.

Anyway, out of the RM12bn estimated surplus, RM5bn had already been booked into the accounts of 1MDB as revaluation surpluses by 31 March 2014. This allowed 1MDB’s annual profits (or loss) to look much rosier than they actually were for several years.

These were the revaluation surpluses on the land banks booked into the 1MDB accounts for the financial years ending:

31 March 2011 = RM0.827bn.
31 March 2012 = RM0.570bn.
31 March 2013 = RM2.736bn.
31 March 2014 = RM0.896bn.

Total revaluation surpluses on investment properties already booked in: RM5.029bn, say RM5.0bn.***

(The audited accounts for the financial year ending 31 March 2015, which should have been submitted by 30 September 2015, have been delayed as auditors scratch their heads.)

Now let’s compare the RM5bn in revaluation surpluses already booked in to 1MDB’s total equity (attributable to the owner of the company) at 31 March 2014:

Capital RM1.0bn + Reserves (profits to date) RM0.7bn = Equity: RM1.7bn

This means that without the RM5bn in revaluation surpluses from the cheap land acquired from the government, the total equity in 1MDB would have been more than RM3bn in deficit – which would have indicated a company in dire financial straits, indeed insolvent.

Thus, the RM5bn in revaluation surpluses helped to gloss over the actual performance of the debt-saddled 1MDB.

The black hole of 1MDB
Anil Netto
16 Jan 2016 – Aliran


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