UNTIL 1Malaysia Development Bhd (1MDB) explains why it has put US$2.318 billion (RM7.55 billion) in a fund in the Cayman Islands, the government-funded investment unit will continue to come under scrutiny.

Considering that the principal activities of 1MDB, which is property development and power generation, are all based in Malaysia, the critics cannot be faulted for asking why the money has not been brought back to local shores where it is needed more.

When it was first reported that 1MDB had put the money — proceeds from the sale of a 49% stake in an oil and gas company in the Cayman Islands — there, it became a hot topic in the non-mainstream media and among politicians.

Questions were raised in Parliament, but answers were not forthcoming.

1MDB was established in 2009 as a catalyst for promoting foreign investments in projects that have a high impact on the economy.

Set up with a fund size of RM5 billion, raised in the debt market, thanks to a government guarantee, 1MDB was to use the money for equity in joint ventures in Malaysia with big foreign names.

But nothing of that sort happened. Instead in September 2010, 1MDB formed a joint venture with little-known PetroSaudi International (PSI) to explore oil and gas opportunities in the Caspian Sea. It paid
US$1 billion (then RM3.49 billion) for a 40% stake in the joint venture.

That was when 1MDB’s money started flowing out of Malaysia.

In March 2011, the 40% stake was converted into investments in Islamic debt paper issued by PSI. According to 1MDB’s annual reports for 2011 and 2012, additional funds were poured into debt paper issued by PSI, raising the amount to RM6.8 billion as at March 31, 2012.

In June 2012, PSI settled the RM6.8 billion debt with a debt-to-equity swap, whereby 1MDB ended up with a 49% stake in PetroSaudi Oil Services Ltd (PSOSL).

In September 2012, the 49% equity was sold to an external party for US$2.318 billion and the proceeds placed in various classes of participating shares in a segregated portfolio company registered in the Cayman Islands.

While 1MDB’s fund of US$2.318 billion is in the Cayman Islands, on the domestic front, it has gone to the banks to borrow for the acquisition of power plants.

It acquired Tanjong Energy’s power plants for RM8.5 billion in 2012 and Genting Sanyen Power for RM2.3 billion. It also acquired a majority stake in Jimah Energy Ventures Sdn Bhd for an undisclosed amount.

The idea was to list all the power plants, but so far this has been unsuccessful.

Even though 1MDB has been in the news of late because of its venture into the power generation sector, it is only a matter of time before the question of the RM7 billion investment in the Cayman Islands crops up.

This article first appeared in The Edge Malaysia Weekly, on December 23, 2013.