Cover Story: Time of reckoning for 1MDB

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Unlike other sovereign wealth funds (SWFs) that were established primarily due to economic reasons, the birth of 1Malaysia Development Bhd (1MDB) came about partly from a political settlement reached between the federal and Terengganu governments, post the 2008 general election.

The political undertone is one reason why the strategic development company is constantly being thrust into the spotlight. Sceptics had raised questions right from the time when 1MDB undertook a RM5 billion fundraising exercise to when it made investments in a joint venture (JV) with a foreign state-owned company.

So far, 1MDB has invested US$1 billion (RM3.4 billion) in a joint venture with PetroSaudi International Ltd (PSI). The Saudi portion is US$1.5 billion. The venture caught the attention of critics who speculated that the fund had stepped into areas that did not get the support of all board members.

This was compounded by the recent resignation of a founding board member, Datuk Mohd Bakke Mohd Salleh. The Felda Holdings Bhd managing director is seen as a shining star among managers of government-linked companies (GLCs) under Prime Minister Datuk Seri Najib Razak’s administration.

Bakke is known for his no-nonsense approach, which is why his departure from 1MDB is a surprise. After all, 1MDB was formulated around the 1Malaysia concept — the cornerstone of Najib’s policies to win back the hearts and minds of Malaysians.

Bakke’s position as chairman of the board has been taken over by Tan Sri Lodin Wok Kamaruddin.

But 1MDB CEO Shahrol Halmi vehemently denies the notion that the departure of Bakke was due to differences in investment strategy.

Shahrol says the board changes were in line with the understanding that the members could return to their duties when their task had been completed.

“When 1MDB was set up, professionals in GLCs and funds at CEO level were tapped to provide expertise. They agreed to assist with an understanding that they could return to their core areas — managing the companies they head — once their tasks are completed,” says Shahrol in written answers to The Edge.

On the JV with PetroSaudi, Shahrol says the JV company has identified key business and economic opportunities in Malaysia.“The JV with PSI will look for opportunities primarily in the energy sector in Malaysia. There is no time frame for this but we will implement projects suitable to our needs at the most opportune time. We can expect the JV to make an announcement in due course.”

Shahrol also says the JV did not involve the acquisition of assets, contrary to speculation.

Another issue that has been broached is the obscurity of investors who subscribed to the RM5 billion bond issue. The papers were issued with a coupon rate of 5.75% and the lead arranger and facilitator was AmInvestment Bank.

The criticism arose as many local investment banks with big balance sheets were not invited to share the risk. The list of investors is also not known. Some critics have suggested that certain intermediaries had pocketed a hefty profit from the bond issue.

“The whole process is a little low key considering that it is a big issue,” says a bond market dealer.

Questions were raised as to why 1MDB did not raise the papers itself and whether it had optimised government backing for the bonds to sell the papers at the best rate (see Shahrol’s answers in the Q&A).

Shahrol clarifies the issue of the 1MDB bonds. He says 1MDB received the full proceeds of the RM5 billion and the bonds were raised in a period when the credit market was challenging.

“It broke new ground by being the first 30-year bond ever issued in Malaysia. We acted on professional advice from world-class international investment banks that were also supported by local investment banks to secure the most competitive terms possible, given the prevailing weak market conditions,” he says.

Shahrol adds that the placement of the papers was market-driven.

“We are made to understand that the placement was market-driven and arranged by lead investment banks which have placed the bonds in reputable institutions of international standing and [which are] known for their prudence at competitive levels,” says Shahrol, a graduate of Stanford University, who played a key role in the planning and execution of the merger of the Sime Darby group.

A pioneer in 1MDB, Shahrol started with a staff of five. Today, he has a team of 18 to look into various projects.The origins1MDB’s origins can be traced to the 2008 general election, which saw the Umno-led Barisan Nasional losing its two-thirds majority. The BN lost five states, which had an effect on the position of the menteris besar of states under BN rule. In Perlis, there was a change in menteri besar, said to be due to intervention by royalty.

The same thing happened in Terengganu where the Sultan was unhappy with the then menteri besar Datuk Idris Jusoh. One of the major issues was the utilisation of oil royalty amounting to more than RM1 billion per annum by the Umno-led state and federal government agencies. 

To stop the unaccountable spending of oil royalty, the Sultan, together with a few advisers, came up with the idea for the Terengganu Investment Authority (TIA).

A year after its conceptualisation, TIA was established with the blessings of the state and federal governments in March 2009. It is said that as part of the “settlement” of the unaccounted-for oil royalty, the federal government gave a RM5 billion guarantee to kick-start TIA.

One of the key people who had advised the King in establishing TIA was Low Taek Jho, a young merchant banker with strong links to the Middle East. Known as Jho Low to his friends, the young man is also said to be well connected and has done a few major corporate deals. His “lavish” lifestyle in New York was the subject of a feature article in the New York Post last month. Jho, the son of Penang businessman Datuk Larry Low — a former shareholder and director of MWE Holdings Bhd — has however denied that it was he who had splurged on a lavish celebration as had been reported.

Coming back to TIA, the idea was to establish the fund along the lines of Mubadala, the SWF of Abu Dhabi. In fact, Khaldoon Al-Mubarak, CEO of Mubadala and chairman of Abu Dhabi Executive Affairs Authority, still sits on the board of 1MDB.

The fund size was initially targeted at RM11 billion, comprising RM5 billion from the federal government and another RM6 billion to come from the securitisation of future annual oil royalty that Terengganu gets from Petronas.

But after the initial RM5 billion, raised by a federal government guarantee, the troubles at TIA began. The state, led by Menteri Besar Datuk Ahmad Said, wanted control over the utilisation of the money, something that went against the charter of the fund.

The funds were supposed to be managed by a professional team and overseen by a board of directors and advisers. It was a triple-layer structure to ensure the money is well spent.

But the prime movers behind the funds found out early that this was easier said than done. Subsequently, TIA became a federal entity, which gave birth to 1MDB.

Wider scope for investmentsFour months into its founding, 1MDB made its first major move — teaming up with PSI to go into oil and gas (O&G) ventures.Apart from the O&G sector, 1MDB is said to be looking at renewable energy such as hydroelectric power. Thus, industry observers do not discount the possibility that 1MDB may take an active role in the development of hydroelectric dams in Sarawak with Chinese government-owned companies. This was evident during President Hu Jintao’s recent visit to Malaysia when Najib mentioned that there was scope for cooperation with Chinese companies in the establishment of an aluminium smelter and paper and pulp plant. Both projects are said to be located in Sarawak and energy intensive.

When the fund was originally set up, one of the projects that was poised to take off was the development of a resort-cum- hotel in Pulau Bidong, Terengganu. The sceptics were not impressed — and they could not be blamed as there were already too many resorts in the region. It was viewed as a project to primarily favour the state and did not have much commercial merit.

But that has changed, with 1MDB becoming a federal government entity.

Shahrol indicates that as 1MDB is considered a federal entity, it has a new mandate to cover the whole of Malaysia and its options are now wider.

“The Terengganu project is one among several real estate projects we are assessing. Now that we are a federal entity with a new mandate to cover the whole country, we have a healthy pipeline of projects. Our confidence is also shared by our international partners,” says Shahrol.

Since its conceptualisation as TIA and transformation into 1MDB, a lot has happened to Malaysia’s second SWF. Some consider it a new Khazanah but 1MDB sees itself as complementing the role of Khazanah (Nasional Bhd) in the sense that it creates business opportunities and forges global partnerships to spur foreign direct investments (FDIs) into Malaysia.1MDB has more than its fair share of critics. The next year will determine how it can differentiate itself from the other vehicles and if its projects and JVs can attract FDIs.

Until that happens, the political and business critics will continue to take potshots at the strategic development company.

This article appeared in Cover Story page of The Edge Malaysia, Issue 785, Dec 14 – 20, 2009.