Q1. Is 1MDB a sovereign wealth fund?
From time to time, we see people referring to 1MDB as a sovereign wealth fund. However, the fact of the matter is that we are a strategic development company. In practice, this translates into a company that is independently run and funded, but one whose investment decisions are driven by the interests of the national economy.
Like a sovereign wealth fund, we are wholly owned by the Government, but there is an important distinction between the two: whereas a sovereign wealth fund is directly funded by the government and invest on its behalf, we raise and invest our own capital, and have only ever received RM1 million in equity provided by the government at the time of our inception.
Q2. What purpose does 1MDB serve?
1MDB is tasked with driving the sustainable long-term economic development and growth of Malaysia. As a Government-owned company, with an independent management team, we are able to combine the practical support of the Government with private sector expertise and capital to unlock potential value. As a result, we have a unique ability to clear log-jams, unlock value, and drive forward projects.
For example; we are the master developer of the Tun Razak Exchange (TRX) which will be Kuala Lumpur’s first financial district upon completion. The 70 acre site TRX is being transformed into a world-class financial centre, only minutes away from the Petronas Twin Towers. Similarly, we have acquired and intend to transform the land around the old Sungai Besi airport into a new urban mixed-use development that we envisage will serve as a benchmark for sustainable communities in the region.
Our investment, along with the investors and direct foreign investment that we are able to attract from around the world, will transform these areas into thriving new districts creating thousands of new jobs in the process.
Q3. Which sectors does 1MDB currently operate in?
At present, 1MDB is focused on two sectors: energy and real estate.
Our energy business comprises a portfolio of 15 power and desalination plants in five countries, with a net power generation capacity of 5594MW, making us the second largest independent power producer in Malaysia. Our focus on this sector stems from the Government’s strategic aim of ensuring Malaysia’s energy security, with sustainable provision of power seen as being critical to maintaining investor confidence and supporting the economic growth of the country.
On the real estate side, we are responsible for a number of transformational projects in Malaysia. This includes TRX – which will be Kuala Lumpur’s first dedicated financial district upon completion, and Bandar Malaysia – a new 486 acre mixed-use urban development on the site of the old airport in Sungai Besi.
Q4. Does 1MDB contribute anything to the economy?
1MDB’s mission is to drive sustainable economic development in Malaysia by forging strategic global partnerships and promoting foreign direct investment into the country as well as participating in strategic sectors that help drive socio-economic growth. Since our inception in 2009, we have built a successful track record in attracting leading players from the international financial markets to Malaysia, which should lead to an in-flow of capital into the country.
Taking TRX as just one example; leading companies and institutions from Australia, China and the Middle East amongst other regions are investing in the development, which will spur growth and create thousands of jobs in Kuala Lumpur alone. Their support for our investment activities and the desire of investors to participate in the Malaysian growth story is a sign of the growing appreciation of the country in the global economy.
Furthermore, as a company that is wholly-owned by the Government, making a positive socio-economic impact is core to our business objectives, and we are committed to making a lasting contribution to the communities within which we operate. We are focused on delivering progress in three key areas; education, quality of life and youth development, and are proud that over 2.5 million Malaysians have benefited from our various programmes including scholarships, entrepreneurial training, sports and youth skills development, the provision of mobile healthcare and the building of energy and water infrastructure.
Q5. How is 1MDB funded?
Like any major company, we raise capital on the local and international debt markets. The fact that we have consistently been able to do so reflects the support, goodwill and confidence that the international financial markets place in us. Furthermore, we have successfully built a number of strategic partnerships with leading international investment companies, which should result in an in-flow of foreign investment into Malaysia.
Contrary to claims, we are not funded by the Government. In fact, in terms of actual funding, 1MDB has only ever received RM1 million in equity from the Government, which has been used to good effect in building a solid business that will help drive economic growth in the country over the long-term.
Q6. Does 1MDB have funds invested abroad?
It is common practice amongst major companies to invest surplus funds, especially in foreign currency, with regulated and licensed international fund managers/administrators and custodian banks in jurisdictions that adhere to international best practice. These institutions adopt an absolute return strategy with the primary objective of achieving long term capital appreciation and/or steady income via their investments. There is nothing unusual about this.
Q7. Specifically, does 1MDB have funds invested in the Cayman Islands?
In 2009, 1MDB and a Saudi Arabian company entered into a joint venture to facilitate long-term economic cooperation between Malaysia and Saudi Arabia.
As part of this, we made an investment into a joint fund with the company, which was set up to undertake investments on projects that would generate financial and strategic benefits to both countries. However, due to various factors, both parties eventually decided not to proceed with these plans. As a consequence, our investment in the company was converted into a fixed income instrument in the form of Murabaha notes, essentially a loan, with an annual interest rate of 8.75%. This loan was paid back in full, for US$2.318 billion with a profit of US$488 million, in 2013.
Repatriating these funds to Malaysia would have exposed them to fluctuations on the foreign exchange market. In order to ensure that we maintained a strong liquidity position with a truly diversified global portfolio, these funds were invested in a 1MDB subsidiary that was registered in the Cayman Islands.
There is nothing unusual about this and numerous blue chip companies have invested funds in entities that are registered in the Cayman Islands, which is one of the largest registered fund jurisdictions internationally, with the Cayman Monetary Authority recognised as one of the leading fund regulators in the world. Indeed, as the Companies Commission has stated, over 200 Malaysian companies including a number of household names have also invested their funds in this region.
In terms of our investment, the company has now fully redeemed these funds, as announced in January 2015. A statement to this effect can be found here:
Q8. Is there any reason to be concerned about 1MDB’s debt levels?
Not at all.
Like any major company, 1MDB has raised capital on the international debt markets to finance specific projects, the scale of which has required us to do so. All of our debt is backed by solid assets, and the total value of our assets exceeds the value of our total debts. Furthermore, we have never missed a payment schedule, nor do we intend to do so.
Our consistent ability to raise funds on the international markets, and from quality investors, reflects the confidence they place in us, and the listing of our energy business is one of a series of exercises that we intend to carry out to deleverage our balance sheet.
In addition, we continue to develop our real estate business with projects such as TRX, which will be Kuala Lumpur’s first financial district upon completion. And, over the past year, we have entered into a number of agreements with leading companies from around the world, including the international property and infrastructure group Lend Lease and the Export-Import Bank of China, which should result in an investment of over $1.3 billion into Malaysia.
As we continue to enhance the value of our real estate assets, we intend to use the funds generated to drive future growth as well as reduce our debt levels.
Q9. Could 1MDB’s debt have any impact on Malaysia’s sovereign rating?
1MDB’s debt has no bearing on the sovereign rating or financial stability of the country.
As mentioned above, all of our debt is backed by solid assets and strong cash flows, and the total value of our assets comfortably exceeds the value of our total debts. Of our total debt, the government has only provided guarantees for RM5.8 billion, on which we have significant interest cover. Furthermore, due to the fact that 1MDB is a limited liability company, the risk borne by and exposure to our shareholder (the Government) is limited.
Q10. There has been considerable scrutiny of 1MDB’s fund raising activities and it has been suggested that the interest rates the company pays on some of these bonds is particularly high. How does the company respond to this?
We are aware that concerns have been raised about the 5.75% interest rate assigned to a RM5.0 billion Islamic bond issued by 1MDB in 2009, and there have been suggestions that this was a particularly high interest rate. As a comparison, it has been noted that another government-linked company Petronas paid an interest rate of 3.6% on its bond at the same time. This is an unfair comparison that does not take into account a number of important factors.
When subscribing to a bond, lenders take on a certain degree of risk. The longer the tenure, the higher the risk for the bondholder. As such, bonds that have a longer maturity period typically have a higher interest rate. As far as we are aware, the only Petronas related bond issued in 2009 that carried a coupon rate of 3.6% was for a RM100 million bond with a tenure of only three years, whereas the bond issued by 1MDB had a tenure of thirty years. Given the significant difference between the maturity periods, it should not be surprising that the bond issued by 1MDB had a higher interest rate.
More broadly, it is important to note that the bond issued by 1MDB in 2009 was the first Malaysian bond with a 30-year tenure, and the first Islamic bond to be issued with a maturity period of that length. In light of the economic climate at the time, the fact that 1MDB successfully managed to raise this amount of capital on the international financial markets reflects the support, goodwill and confidence placed in the company.
Q11. There have also been suggestions that the fees and commissions paid by 1MDB are exceedingly high and, in some cases, that payments may have been made to ‘middlemen’. What is 1MDB’s position on this?
We have noted with concern the unsubstantiated speculation that a portion of the interest rate on the Islamic bond issued by 1MDB in 2009 had been paid to middlemen. This is a serious allegation, and we wish to make clear that the entirety of the 5.75% annual interest rate is paid to our bondholders, which includes some of Malaysia’s leading institutions, twice a year in accordance with the payment schedule. To suggest otherwise or insinuate that a portion of this amount is being paid to middlemen is factually incorrect.
Concerns have also been raised about the commission and fees incurred by 1MDB for two additional debt issuances in 2012 and 2013, for US$1.75 billion and US$3.0 billion respectively. These bonds were issued at a discount typical of most bond offerings. Any difference between par value (issued value) and the net proceeds of a bond comprises not only fees and other expenses but also its effective yield, which takes into account the discount and the remaining tenure of the bond. This was to ensure the successful completion of the fund raising in view of various challenges arising from internal and external factors in the market, the speed within which the offering was completed, as well as the scale of the underwriting.
Both debt issuances were fully underwritten by Goldman Sachs, which is one of a handful of banks with the ability to underwrite debt issuances of this size and scale, and we have also noted with concern the insinuation that the bank may have made payments to third parties. This is an allegation we deny in unequivocal terms. As Goldman Sachs has publicly stated: “Other than legal and accounting firms providing professional services, no fees or commissions were paid by 1MDB or Goldman Sachs to external third parties in connection with these transactions, nor have we ever been asked by 1MDB or others to pay such fees or commissions.”
Q12. It has been claimed that 1MDB has only ever made a profit due to revaluations to it asset portfolio. Is this correct?
As outlined in the results we submitted recently, our overall return for the financial year ending March 2014 benefitted from a fair value adjustment of approximately RM896.8 million to the group’s property portfolio. This reflected a net positive market movement over the period, and is representative of the value we are generating at our land parcels, specifically TRX and Bandar Malaysia.
We understand that this revaluation, and those conducted in the past, have been used to claim that 1MDB would be loss-making were it not for the gains obtained through these. If this is true, one also has to consider the write-downs incurred by 1MDB, on some of the energy assets the business has acquired for instance.
One cannot, on the one hand, accuse a company of underpaying for assets, and revaluating these upwards to reflect a gain in its financial results whilst, on the other hand, accuse the same company of underpaying for assets and making losses on these.
The revaluation, up or down, of assets acquired by a business is perfectly normal and is a standard component of entering into a deal or making an acquisition. Any time a company enters into a deal or makes an acquisition, it does so on the understanding – based on the advice of experts and advisors who specialize in the relevant sector – that the assets in question represent compelling long-term value.
In some instances, a company will acquire an asset and add value to it, thereby increasing its overall value. For instance, if a company acquires an empty plot of land, and then develops it, the value of the land will increase. This is what has happened in the case of our investments in land parcels which will be used for TRX and Bandar Malaysia.
OUR PROJECTS & PORTFOLIO OF ASSETS
Q13. Some reports have suggested that the power plants acquired by 1MDB were nearing the end of their lives and could have been acquired for free. Did 1MDB overpay for its energy assets?
Like any business, we only acquire assets when we are convinced that they represent compelling value.
In line with the Government’s strategic aim of ensuring Malaysia’s energy security, we have acquired a number of energy assets since 2012. These acquisitions have allowed us to diversify our fuel mix and country risks, as well as benefit from healthy cash flows and the expertise of their excellent management teams.
The claims relating to the amounts we paid for our energy assets revolve around values that were attributed to the assets at the time they were acquired and on the basis of certain assumptions made by external parties. However, we take a long term view and consider broader synergies for the group, as well as the social and economic impact on the country, when we evaluate assets and forecast economic returns. As such, we believe that the value we paid – which may have involved a premium in certain instances, as is common when acquiring another business – is commensurate with their existing and future potential.
In particular, it is important to note that we acquired our first energy assets in 2012, and have built this into the second largest independent power producer in Malaysia with a strong presence in international markets within three years. In total, we have consolidated 5594MW of net capacity, comprising both gas and coal fired plants.
This portfolio provides the business with healthy cash flows and enables us to participate in bids for coal and gas fired plants, the two primary fuel source for power generation assets in the markets that 1MDB operates in, allowing us to create further value and drive the company’s future growth. As such, the economic benefit gained from these assets means that we have recuperated any excess value we paid at the time of the acquisitions.
Q14. Does 1MDB receive preferential treatment on tenders for power projects?
Our scale as Malaysia’s second largest independent power producer, successful track record in the sector, and experienced management team mean that we are a competitive player in any tender process.
Any award takes a number of factors into consideration to ensure secure and cost effective energy supplies to consumers: the technical standards of the bid, the track record of the company, the bidding price, the urgency of the project and energy security and the whole systems cost of the bid to name a few. The projects that we have been awarded, in Malaysia and abroad, have been on this basis.
Q15. There were some questions surrounding the award of Project 3B – the construction of a 2,000MW coal-fired power plant in Jimah. What is 1MDB’s position on this?
Earlier this year, a joint consortium consisting of 1MDB and Mitsui & Co, Japan’s second-largest general trading company, participated in an open and competitive tender exercise for a 2,000MW coal-fired power plant known as Project 3B. Following due consideration of the various bids, the Energy Commission announced that our consortium had been chosen as the preferred bidder.
Subsequently, there have been suggestions that 1MDB received preferential treatment, and the basis of these claims is that our bid was not the lowest offered. This rationale is flawed as it fails to take into account the fact that any award is based on a number of considerations, not just the tariff.
Whilst there was a bid that was slightly lower than the one presented by 1MDB, the fact is that 1MDB’s was the lowest compliant bid, with a proposed levelised tariff of 25.33 sen/kWh. Whilst there was a bid that was fractionally lower, of 25.12 sen/kWh, this proposal did not comply with a number of requirements set out by the Energy Commission, key amongst which was their lack of experience operating a coal plant.
As the Energy Commission announced in a public statement (which can be read in full here: http://www.st.gov.my/images/highlight/2014/tender/Media_Release_07032014…), the 1MDB-Mitsui Consortium won the bidding exercise “in a fair and square manner with a well-proven technology that would enhance security of supply expected of a 2000MW coal-fired power plant operating in a grid system of our size”.
It is also important to note that there are other tenders that 1MDB has participated in where the contract has been awarded to other parties. For example; despite 1MDB offering the lowest bid for a gas-fired plant in Prai, another company was deemed as offering a better over-all package and awarded the contract on that basis.
Q16. 1MDB has made a number of land acquisitions in recent years. What is the rationale for these?
As a strategic development company, wholly owned by the Government, we do not make simple property plays as an ordinary investor would do. Instead, we take targeted and strategic real estate decisions, with the aim of generating value and spurring economic growth. This covers a broad spectrum; from providing affordable housing for the local population in Penang, to the creation of a new world-class financial district in Kuala Lumpur.
Q17. Some reports suggest that 1MDB has underpaid for land parcels it has acquired, whilst others suggest that it has overpaid for some of its land acquisitions. Which is true?
Any decision we make to invest in real estate is reached following an extensive period of due diligence, which includes the appointment of independent appraisers to determine the value of the land we intend to acquire, whilst also taking into account the value we can add to it. All of our investments are undertaken in line with the best interests of the business, and with a view to stimulating economic growth and prosperity in Malaysia.
In some instances, the land we acquired has been revalued, and this has been done in tandem with changes to the market price in the surrounding areas, and to take into account the investments we have made to prepare the land to be ready for development. For instance; the cost of relocating RMAF bases in the case of Bandar Malaysia and the cost of relocation of residents and businesses in the case of TRX, as well as the preliminary groundwork that precedes earthwork and construction, the costs of the master planning and obtaining the necessary approvals from the relevant authorities.
Q18. Did 1MDB significantly overpay for the land it acquired in Penang?
The land we acquired in Penang is located in the centre of the town of Air Itam, a much sought after area where property prices have seen a substantial increase in recent years. Furthermore, the size of the land meets our requirements and will allow us to build close to 10,000 affordable homes, with the remaining parcel of land – which would be of a significant size – being used for other development purposes from which we expect to generate significant value. As such, we are confident of adding to the overall value of the land, and believe that the price we paid is commensurate with this.
This is reflected in the prices that other developers have paid to acquire land in neighbouring areas which, at over RM200 per sq ft, is substantially higher than what we paid. We understand that in one instance, dating back to 2013, approximately 9.8 hectares in Air Itam were purchased for RM267.4 million, about RM251 psf, for a mixed-use development.
Q19. Shouldn’t 1MDB be focusing on profit-making ventures instead of building affordable homes with low returns?
As a government-owned entity, generating maximum profits isn’t the sole objective when we undertake projects, and our investment decisions are made with a view to driving the growth of local economies.
With respect to Penang, given the recent increase in property prices there, which is increasingly shutting locals out of the market, we announced our intention to build close to 10,000 affordable homes. We believe that this will serve as a catalyst in helping retain the local population in the area, as well as provide jobs and business opportunities for locals and local industries. At the same time, we intend to use the remaining parcel of land for other development purposes, which should allow us to generate significant value.
Q20. 1MDB is the master developer of TRX. What exactly will this development entail?
TRX will encompass a new international financial district underpinned by world-class residential, retail, leisure and cultural offerings spread over 70 acres of prime freehold land minutes from the Petronas Twin Towers.
Stage one of the development, for which earthworks are nearing completion, will initially comprise four office towers including a signature tower, up to five residential towers, up to two five-star hotels and a retail mall. It will also have a dedicated MRT station, planned to be the largest in Malaysia.
The district has a development period of 15 to 20 years, and will be built in demand-driven phases, with the initial phase of construction scheduled for completion in 2017.
Q21. Does Kuala Lumpur need a dedicated financial district?
Kuala Lumpur is rare amongst the major capital cities of the world in that it does not currently have a defined financial district. Whilst the supply of office space has increased over the past few years, there is still no space in the city where businesses can operate in one coherent physical location.
This curtails Kuala Lumpur’s ability to attract leading companies, and is one of the key factors delaying further investment in the city. TRX will fill help this gap and encourage the world’s leading companies to locate to the city, thereby strengthening Kuala Lumpur’s position as a global city of choice.
Q22. What is the latest update on TRX?
We continue to make excellent progress with TRX, both in terms of the earthworks taking place on site which are nearing completion, as well as in attracting leading partners and investors from Malaysia and around the world.
Earlier this year, we announced that we will be entering into an agreement with Lend Lease – one of the world’s leading property and infrastructure groups – to jointly develop the Lifestyle Quarter at TRX which is expected to attract up to RM3.2 billion (US$1 billion) in foreign direct investment to Malaysia. We are also entering into an agreement with Export-Import Bank of China to jointly develop the Signature Tower in TRX, with the bank expected to contribute up to RM900 million (US$300 million) towards its development. More recently, we signed a 20-year concession agreement with Veolia Water Technologies Southeast Asia for wastewater treatment and recycled water supply in TRX, which will be a key component of TRX’s sustainability framework.
Looking ahead, we have kicked off the tender process for the next stage of work that will include road works and tunnels to support the key infrastructure, and are in discussions with a number of parties about various other areas of the development. We hope to make announcements regarding these in due course.