1MDB sale: Red flags over $760m loss

The sale by Malaysia's state investment firm 1MDB of its energy unit has raised several red flags among its critics, including the realised loss of some RM2.3 billion (S$760 million) in public money and allowing a foreign company to take over key power assets.

While 1Malaysia Development Bhd (1MDB) will manage to wipe out about a third of its debts of RM42 billion from the sale of Edra Global Energy, investment analysts and the political opposition say there are issues that must be dealt with first.

Under the deal announced on Monday, China General Nuclear Power Corporation (CGN) will pay in cash RM9.83 billion for Edra and take over some RM8 billion of the Malaysian company's liabilities.

Edra controls five power plants in Malaysia, and eight others in Bangladesh, Egypt, Pakistan and the United Arab Emirates.

Analysts say the good news is the deal will slash between RM16 billion and RM18 billion from 1MDB's borrowings. The bad news: 1MDB had raised US$3.5 billion (S$5 billion) in bonds and another RM7.4 billion in loans to buy these plants.

In terms of pure cash, 1MDB had paid close to RM12.1 billion to acquire the assets, or RM2.3 billion more than what CGN is paying.

"1MDB desperately sold its power companies... despite the fact that government has awarded 1MDB many new power contracts and extended its expiring contracts," said opposition MP Teo Nie Ching yesterday. "This proved the fact that 1MDB overpaid for its assets resulting in massive losses."

The sale of 100 per cent of Edra to a foreign firm has raised flak because non-Malaysian companies are usually limited to a 49 per cent stake in power plant assets. The government is believed to have agreed to lift the cap in the CGN deal.

Energy, Green Technology and Water Minister Maximus Ongkili yesterday defended the sale by saying Edra controls only 14 per cent of Malaysia's total electricity generation capacity, while foreigners own 80 per cent in Singapore. "In Singapore, 80 per cent is under foreign ownership. In other countries, it's the same," he told Parliament.

He said government-owned utility Tenaga Nasional controls 50 per cent of power generation in the country, followed by independent power player Malakoff with 24 per cent. He did not say who controls the remaining 12 per cent.

Datuk Seri Ongkili said the government will continue to protect Malaysia's interests despite the Edra sale. The issue is a sensitive one because consumer electricity is subsidised, and the government also subsidises gas prices sold to power plants.

For 1MDB, the sale of Edra makes perfect sense as it helps its rationalisation plan to overcome its cashflow problems.

1MDB president Arul Kanda told reporters last month that its RM42 billion debts would be whittled down by the sale of Edra, its landbank Bandar Malaysia, and with a debt-for-asset swap with Abu Dhabi fund International Petroleum Investment Company (IPIC) for RM16 billion.

This means that selling off a controlling stake in Bandar Malaysia - a 202ha mixed township development in Kuala Lumpur - will help to cover the loss in the energy venture. 1MDB plans to sell a 60 per cent stake in Bandar Malaysia, with a company source saying it is targeting the end of the year to complete the deal involving foreign and local bidders.

Besides Bandar Malaysia, 1MDB has another prime landbank in KL, the 28ha Tun Razak Exchange (TRX) financial centre, that it is keen to sell in small parcels at premium prices.

This might well help the state investment fund, whose advisory board is headed by Prime Minister Najib Razak, sort out its liabilities and cashflow issues - but questions over alleged missing billions won't go away.

This is because the Najib administration sold the Bandar Malaysia and TRX - owned by the government - for a total of RM600 million. 1MDB has said the market value for Bandar Malaysia alone today is at least RM11 billion.

shannont@sph.com.sg

This article was first published on Nov 25, 2015.
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