July 5, 2020

More questions for 1MDB


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1MDB CSRBy P Gunasegaram, malaysiakini

QUESTION TIME So far, strategic development company, 1Malaysia Development Bhd or 1MDB has released two statement which attempt to answer many questions raised in two series of articles in KiniBiz and reports in other publications, as well as statements by opposition politicians.

But instead of throwing further light on the activities of 1MDB, which has borrowed some RM20 billion at unfavourable terms and so far has just some RM10.8 billion in energy assets bought at high prices, they raise even more questions.

We have highlighted some of 1MDB’s salients points made in its statements (in bold) and have put our questions and comments in italics below that to indicate the substantive issues the statements don’t address.

The proceeds from the US$3 billion capital raised is being utilised for investments in strategic and important high-impact projects like energy and strategic real estate which are vital to the long term-economic growth of both countries.

1MDB chief executive officer Mohd Hazem Abd Rahman said: “This success underlines investor appetite and confidence in the Malaysia-Abu Dhabi partnership as well as in Malaysia as a sustainable growth centre enjoying peace, stability and good governance.”

The bonds are guaranteed by the government and has the same rating as government bonds, so the question of investor appetite and confidence does not arise. Why were the bond terms not disclosed? Were they issued at such an attractive yield? Why was Goldman Sachs the sole lead for the issue?

Besides the energy investments, 1MDB is invested in property where it holds government land for development. What urgency is there to get funding for this when bridging financing can be so easily obtained?

1MDB has also earmarked US$2.318 billion, which are proceeds originating from its 1MDB-PetroSaudi International joint venture, for future investments. As of FY13, all PSI Murabaha notes have been fully redeemed at a profit. The proceeds are reinvested in various classes of participating shares in a Segregated Portfolio Company, registered in the Cayman Islands.

The investments in the 1MDB-PetroSaudi venture were redeemed but instead of getting cash, 1MDB extended loans. Why finance PetroSaudi? Why make a convoluted deal before the RM7 billion is realised and who is the party who bought the stake? Again, why the secrecy.

Hazem said: “1MDB is transparent and open about the placement of its funds. This was reported in the company’s annual return lodged with the Companies Commission of Malaysia. It is an interim measure until we identify suitable investment opportunities. The returns generated match or exceed the cost of financing.”

The annual return to the Companies Commission is required under law. 1MDB has kept its disclosure to the bare minimum and never made any announcements of the deals as and when they were made. If 1MDB is open and transparent, why did it not announce the deals as and when they were made? And why did it not  reveal the terms of its various lendings and borrowings?

Closed book

1Malaysia Development Berhad (1MDB) firmly states that the US$2.318 billion as stated in its audited accounts is safe. These are proceeds and profits originating from its initial 1MDB-PetroSaudi International joint venture. This fact is clearly reported in the company’s audited account that is publicly available from the Companies Commission of Malaysia and has been independently audited by a global reputable and established firm.

If it is safe, why can’t 1MDB state precisely what are these assets that the US$2.318 billion or some RM7 billion is invested. Could it not have been brought back so that there will be no need to take yet another US$3 billion loan under dubious conditions, dubious terms and dubious pricing? Can 1MDB expect any confidence from the public when it is such a closed book and throws no light on its various dealings?

1MDB regrets however that certain quarters with political agendas have hidden facts to persistently make baseless allegations. This is a smear campaign for their own intended benefit. The notion that these monies were put in Cayman Islands companies and will vanish is based on a lie perpetuated by these quarters and is completely absurd.

Is it becoming part of a political agenda to ask legitimate and relevant questions about the funding and investments of our very own strategic development company operated and funded with money guaranteed by the federal government?

Is it unreasonable to expect that anyone will be suspicious of money parked in Cayman Islands or Saudi Arabia when it should be contributing to the strategic development of Malaysia? How would keeping money in Cayman Islands be strategic? Destinations such as Cayman Islands and British Virgin Islands are used by many international private funds to hide their operations, obtain tax advantages and operate in jurisdictions which ask few questions.

What business does a sovereign strategic development company have putting a huge part of its assets and operating in such places? Wouldn’t anybody be suspicious?

1MDB has earmarked the proceeds (from the PetroSaudi joint venture) for investments in the near future. Pending that, these funds for cash management purposes are currently placed under regulated and licensed international fund managers managing Cayman Island based international standard fund structures.

Cayman Islands had in August 2009 joined the global OECD ‘white list’ of countries using internationally recognised tax standards. OECD is the Organisation for Economic Cooperation and Development which has set a benchmark for greater transparency and freer exchange of information to counter bank secrecy.

Global reputable international funds and fund managers all manage Cayman Island based funds as it is an established and well regarded jurisdiction for set-up and management of funds.

Surely 1MDB is not saying that there is no other way to invest in reputable funds. They operate all over the world. Is it because it makes it much more difficult to track its activities? As a sovereign fund, there are no tax advantages for operating in Cayman Islands because 1MDB pays no tax. Something does not compute.

1MDB is government-owned and supported but driven by private sector thinking and practices. It strives to fulfill the aspiration of the government with the agility of the private sector. Bonds raised are part of capital for the strategic initiatives it undertakes.

As a prudent government owned entity, 1MDB considered all of its options (pricing, structure, investment bank, and others) in the recent financing and chose the optimal path in light of the various considerations. The company stressed that 1MDB opted for a private placement to ensure the timely completion of this economic initiative.

Really? If it was the private sector and if 1MDB had mispriced its bonds the way it has, its entire management and board would have been sacked and taken to task. If it is prudent, why have a sole manager? If it is prudent, why not get the best price from the market via bidding? If it was prudent, why did not 1MDB release a list of those who obtained the bonds?

Why was there a hurry via private placement when bridging finance was always an option for property development and even the energy acquisition? All of 1MDB’s financing requirements could have been done locally where there is much liquidity. Why was it not?

P GUNASEGARAM is founding editor of KiniBiz.

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