MoF will not fund TRX infrastructure requirements

This article first appeared in The Edge Malaysia Weekly, on June 11, 2018 - June 17, 2018.
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LAST week, the senior management of TRX City Sdn Bhd (formerly known as 1MDB Real Estate Sdn Bhd) met up twice with officials from the Ministry of Finance. On Monday, the management met Finance Minister Lim Guan Eng and on Friday, they sat down with his special officer Tony Pua.

While details of the meetings are being kept under wraps, The Edge understands that the government is not willing to inject any more money into the 70-acre Tun Razak Exchange (TRX) financial centre in the city centre.

“In a nutshell, TRX is cash-strapped and the government will not be pumping any more money into it. How much more funds are required is uncertain as the figure is at present a moving target,” a source familiar with the matter tells The Edge. “MoF wants the TRX management to source for funds.”

At present, TRX needs funds mainly for infrastructure development, which, the source estimates, could cost between RM1.5 billion and RM2.5 billion.

It is understood that plans at TRX ran into difficulties when TRX City’s proposed sale of 60% of its unit, Bandar Malaysia Sdn Bhd, which owns a strategically located 468-acre tract in the city, fell through in May last year.

“Basically, without the sale of Bandar Malaysia, there was insufficient cash to develop TRX,” the source explains.

The agreement then was to dispose of a 60% stake in Bandar Malaysia to a consortium made up of businessman Tan Sri Lim Kang Hoo’s Iskandar Waterfront Holdings Bhd and China Railway Engineering Sdn Bhd for RM7.41 billion. But the agreement was terminated by the seller on the grounds that the buyer failed to meet payment obligations despite repeated extensions. Although the consortium wanted to proceed with the purchase, TRX City insisted on calling off the sale, according to market players, believing that it could do better in a second tender.

MoF — the sole shareholder of TRX City — then invited requests for proposal for the stake a month later when it set the bar much higher as its terms required the interested party to be a Fortune 500 company with a minimum revenue of RM50 billion over three financial years.

In August last year, Tan Sri Irwan Serigar Abdullah, the former secretary-general to the Treasury, revealed that six parties had expressed interest and that the government was expecting proposals by the end of the month. However, nothing else was heard about the matter after that, and the long radio silence prompted corporate observers to surmise that the government had been left holding the baby.

It is understood that there was a plan for the Minister of Finance Inc to buy Bandar Malaysia off TRX City but this was foiled by Pakatan Harapan’s ouster of Barisan Nasional in the 14th general election.

In the interim, TRX City has had to grapple with financing to move on to the next phases of TRX’s planned infrastructure.

In October 2015, WCT Holdings Bhd had secured a RM754.8 million two-year contract from 1MDB Real Estate for underground road structures, installation of direct buried utilities, at-grade and elevated roadways as well as associated earthworks and mechanical and electrical works.

This was aimed at providing direct links between TRX and major highways, such as the SMART tunnel and Maju Expressway as well as Jalan Tun Razak and Jalan Sultan Ismail.

According to TRX’s master plan, the infrastructure also includes a wastewater recycling plant and various public amenities. News reports in 2015 indicated that TRX City was looking to invest as much as RM3.8 billion in infrastructure works.

Other than the infrastructure requirements, much of TRX’s development is privately funded. For example, the 17-acre Lifestyle Quarter is 60%-owned by Australian outfit Lend Lease Corp Ltd and 40% by TRX City.

Other investors include Affin Bank Bhd, which bought a 1.25-acre plot in 2015; pilgrims fund Lembaga Tabung Haji, which acquired a 1.6-acre plot in the same year; and WCT, which is being paid partly in kind — 1.7 acres of land — for construction works.

Global banking group HSBC has also invested US$250 million in building its headquarters in TRX while retirement fund Kumpulan Wang Persaraan (Diperbadankan) had indicated that it may invest in TRX, but has yet to do so.

One development that is being built at a frenetic pace and is scheduled for completion next year is the signature tower, The Exchange 106. It will stand at 492.3m, dwarfing the 451.9m Petronas Twin Towers, currently Malaysia’s tallest building.

MoF has a majority stake in The Exchange 106 by virtue of its acquisition of 51% of Mulia Property Development Sdn Bhd in July last year in a partnership deal that was questioned by many.

Prior to this, Indonesia’s Mulia Group had purchased a 3.42-acre parcel in TRX for RM665 million and subsequently awarded the construction of the 106-storey tower to China State Construction Engineering (M) Sdn Bhd, a unit of China State Construction Engineering Corp Ltd.

Whether the mega building can be fully tenanted — or monetised — when it is completed next year remains to be seen, given the large overhang of office space in Kuala Lumpur and the Klang Valley.

Other than the sale of Bandar Malaysia — itself now less attractive as the RM110 billion Kuala Lumpur-Singapore high-speed rail project has been aborted to save costs — there is the potential of TRX selling its 40% stake in Lifestyle Quarter.

Yet, whether this will pan out is questionable. “Any prospective buyer will only buy [into Lifestyle Quarter] if the infrastructure is certain,” the source observes pointedly.

In mid-2016, the assets under 1Malaysia Development Bhd, including TRX, Bandar Malaysia and parcels of land in Ayer Hitam, were transferred to MoF in line with the recommendations of the Public Accounts Committee. 

Along with the assets of the scandal-ridden state-owned strategic development company, MoF also had to absorb its debts, which the new administration estimates is in the region of RM50 billion. 

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