1MDB is a castle built on very thin ice propped up entirely with the “generosity” and protection of the Federal Government

 

 

Media statement by Tony Pua, Member of Parliament for Petaling Jaya Utara and DAP National Publicity Secretary on Wednesday, 26 February 2014 in Kuala Lumpur

 

 In 1Malaysia Development Bhd (1MDB)’s rebuttal to my statements last week published in The Malaysian Insider on the 21 February, the company and its sources were crowing about the fantastic achievements of the company.

The report quoted the source that “with RM1 million in equity and cash, 1MDB has built up its capital structure with, now, in excess of RM1 billion in equity from its profits generated over the years in a very challenging environment.”

The source even ridiculed other government investment vehicles saying that 1MDB’s achievement "is measured against Khazanah and other institutions that started with billion and billions of cash".

The attempt to polish the image and performance of 1MDB cannot be more laughable, even if the numbers cited are true.

Firstly, the global investment markets have been on a “bull run” over the past five years generating record levels of percentage gains for all creeds of investors.  Hence I have no clue how 1MDB found itself to be stuck “in a very challenging environment” in the past few years of its existence.

Secondly, it is absolutely disingenuous for 1MDB to claim that it was given only RM1 million in equity and cash for it build its castle over the past 4-5 years.  While the Federal Government may have given the company only RM1 million in seed money, it has provided Government guarantees for 1MDB to raise its first RM5 billion sukuk (Islamic loan)!  Why would any financial institution lend the company so much money with only RM1 million in the bank, if not for the fact that the company is 100% government-owned, and better still, the loan is 100% guaranteed?

Thirdly, the Federal Government has pumped into 1MDB well in excess of RM1 million.  When 1MDB purchased the Sg Besi military air field from the Federal Government for a cut-price RM1.6 billion, the Federal Government in turn paid 1MDB RM2.7 billion to shift the air force current sited there.  Hence 1MDB had a net cash receipt of RM1.1 billion.  This RM1.1 billion has since mysteriously “vanished” because the company has gone to the banks to borrow an additional RM2.4 billion to fund the RM2.1 billion contract (awarded to the Armed Forces Fund (LTAT)) to shift the air force.

Fourthly the so-called “excess of RM1 billion in equity from its profits generated” is pure bunkum because it is derived entirely from sweetheart land deals given by the Federal Government to 1MDB.  From just a single land transaction where 1MDB was sold the land for Tun Razak Exchange at RM194.1 million in 2011, the land was immediately revalued to RM1.02 billion to recognise a revaluation gain of RM826.6 million or a 426% “profit”.  Despite the massive gain, 1MDB recorded only a net profit of RM544.3 million for its financial year ending March 2011.  It means that without the revaluation, 1MDB would have made RM282.3 million in losses.

And if 1MDB could get away with it for 2011, it did the very same in 2012.  The company managed to revalue the same land again in 2012 to RM1.59 billion, to record another RM569.9 million revaluation “profit”.  However, despite the massive revaluation, 1MDB recorded only a meagre profit of RM44.7 million in the financial year ending March 2012.  This means that again, without revaluation gains, 1MDB would have made RM525.2 million of losses that year. The land has since been pledged to AmInvestment Bank Bhd as part of the collateral to raise RM2.4 billion in new debt.

Hence the entire “excess of RM1 billion in equity from its profit generated” is a complete sham, resulting from the Federal Government selling super-prime land to 1MDB at dirt cheap prices.  Had the Federal Government decided to auction the land openly, they would have generated at least RM1.59 billion in cash based on the valuation, without suffering the hundreds of millions of losses suffered at 1MDB.

It is therefore not an exaggeration to describe 1MDB as a castle built on thin ice barely held together by a very generous and protective Federal Government.  The ice is cracking under the sheer weight of 1MDB’s estimated RM30 billion debt burden.  The Federal Government is on the other hand desperately attempting to glue the ice together with sweetheart land deals. The latest is for the Government to award a new 2000MW independent power producer contract to company, despite 1MDB charging a higher tariff rate than the lowest-priced competitor.

 

Tony Pua