What if there were no 1MDB?

Cover Story: The Edge says… : What if there were no 1MDB?

IS it a serious business or monkey business? Some think that the government has flip-flopped on its decision again. It aborted the sale of a 60% stake in Bandar Malaysia to IWH CREC Sdn Bhd (ICSB). However, Minister in the Prime Minister’s Department Datuk Seri Abdul Rahman Dahlan said there was no flip-flop. The government had no choice as ICSB could not make its payments and the land’s value had appreciated.

On May 3, the top officers of ICSB, including China Railway Engineering Corp (CREC) chairman Li Changjin, were supposed to receive Prime Minister Datuk Seri Najib Razak in Bandar Malaysia for his first official site visit.

They did not see Najib that day. Instead, they received the notice of termination from the Ministry of Finance’s (MoF) TRX City Sdn Bhd. TRX City was aborting the sale immediately on the ground that ICSB had failed to meet payment obligations despite having been given several extensions.

CREC is a state-owned enterprise, which is under the purview of the State Council of the People’s Republic of China and chaired by China’s premier Li Keqiang. CREC holds a 40% stake in ICSB, while Iskandar Waterfront Holdings Sdn Bhd (IWH) owns the remaining 60% stake.

Businessman Tan Sri Lim Kang Hoo holds a 63% stake in IWH while the remainder is held by Kumpulan Prasarana Rakyat Johor Sdn Bhd.

ICSB has disputed TRX City’s claim that it had failed to make payments. Interestingly, TRX City, a former unit of 1Malaysia Development Bhd (1MDB), refunded the RM741 million deposit as well as the sum that ICSB had been paying for the relocation of the air force base from the Bandar Malaysia site.

This happened less than two weeks before China’s inaugural One Belt One Road (OBOR) Forum. Najib arrived in Beijing on May 13 to attend the two-day forum. It is learnt that the atmosphere during his meeting with Chinese leaders was rather tense.

China’s President Xi Jinping and Li were not pleased with the termination of the stake sale as well as the manner in which the Malaysian government had done it.

Several sources confirmed that the financing was ready, with Bank Negara’s approval obtained, but it was late by three days.

Is the Malaysian government being ungrateful? Is it “destroying the bridge after crossing”, as the Chinese idiom goes?

The sale of the 60% stake in the Bandar Malaysia project to ICSB was for RM7.41 billion. It is undeniable that the sale raised money for cash-strapped 1MDB to meet its debt obligations.

(Yes, the deal signed on Dec 1, 2015, was akin to selling 486 acres of government prime land, which is barely 8km from the Petronas Twin Towers and KL Sentral, to pay 1MDB’s whopping debts. Why had 1MDB borrowed so much? That is another story that Malaysians should know. It is not fiction at all.)

The sale enabled 1MDB to instantly offload the RM1.6 billion sukuk to ICSB. Indeed, the redemption value of the sukuk will be RM2.4 billion upon its maturity in 2023. ICSB also agreed to finance the relocation of the air force base, which would cost RM1.9 billion.

The government then started telling the public that 1MDB’s financial woes would be behind it soon, thanks to its asset sales, including the sale of all its power assets to China General Nuclear Power Corp for RM9.83 billion cash, also in 2015.

The asset sales met with criticism — the country was selling too many strategic assets to China. The government defended the deal, praising ICSB as the right partner for the massive development as it could bring in foreign companies, particularly China-based conglomerates, to set up regional offices.

Now, the land in Bandar Malaysia has appreciated since Dec 31, 2015. The old air force base is worth more than the RM12.35 billion, or RM583.36 psf, it was valued at back then.

Hence, some quarters have defended the government, saying that terminating the deal was the right thing to do and the government should ask for a higher price. Better still, the Ministry of Finance could now wholly own the Bandar Malaysia project — all the benefits will go to Malaysians.

Is the increase in valuation unexpected? The man in the street may be excused for not expecting the value of Bandar Malaysia to appreciate so soon and by so much.

However, it should not be a surprise to the Malaysian government, as it knows that since it sold the land to 1MDB for RM1.6 billion or RM75.58 psf, the strategic investment fund has been booking in asset revaluation gains every financial year to boost its profits.

The revaluation gains were mainly derived from two parcels — Bandar Malaysia and Tun Razak Exchange near Jalan Tun Razak. The government sold the Tun Razak Exchange land to 1MDB for RM194 million or RM64 psf. Today, the Tun Razak Exchange land is going for as much as RM4,683 psf, based on the RM255 million Affin Bank paid for 1.25 acres of it. That is a whopping 73 times 1MDB’s initial cost.

What if these assets — TRX and Bandar Malaysia — had not been injected into 1MDB? The land would remain an asset of the government.

Well, you may say both parcels are back with the MoF now, so there is no loss to the government and the country.

Mind you, 1MDB, which is now the wholly-owned unit of MoF, still has the US$3 billion Global Investments Ltd (GIL) bonds to service. In addition, Bandar Malaysia has issued RM1.6 billion worth of sukuk. The government is shouldering these debts, along with the RM1.9 billion cost for relocating the air force base.

The interest expense for the GIL bonds alone is US$200 million a year.

Will the money from future sales of the two parcels go into the nation’s coffers or will it go to 1MDB’s creditors?

Cover Story: The Edge says… : What if there were no 1MDB?
June 01, 2017 – The Edge Malaysia


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