Rama Ramanathan
The Malaysian Insider
9 July 2015

Because of 1Malayisa Development Bhd (1MDB), Prime Minister Datuk Seri Najib Razak must soon vacate his position. His successor will replace the Cabinet. What should we look for in the new Cabinet?

Of the many facts about 1MDB, I consider three to be especially pertinent: (1) the only money 1MDB ever had was borrowed – mainly from banks and partly from government agencies; (2) most of 1MDB’s profit is from revaluation of assets; (3) 1MDB overpaid for some assets.

I’ll consider each in turn.

First, banks will not lend without a pledge or a guarantor. To borrow RM900, you must pledge an asset worth at least RM1,000 – that’s “90% financing” – for a low-risk venture. Higher-risk ventures attract lower financing, e.g. 60%, though you must pledge the whole asset to the bank.
If you can’t pledge assets sufficient to cover the loan, you must provide a guarantor. If you miss repayments, the bank will collect from your guarantor.

Since 1MDB was established without any assets, and since Najib chairs its advisory board, it’s not hard to believe that 1MDB’s loans are guaranteed by the government.

That’s because bankers will only approve a loan if they have documentary proof that the loan and the interest can be recovered. They want to avoid being whipped by their internal auditors, external auditors, shareholders and Bank Negara. They want to avoid losing their jobs. (Except for Bank Negara, no bankers are suspected of wrongdoing around 1MDB.)

It’s been reported that 1MDB has RM42 billion in debts and owns RM51.4 billion in assets. If that’s true, and if 1MDB can make repayments, there are no financial losses. The only question that would arise is “how could the government be guarantor for 1MDB?”

However, 1MDB struggles to make payments. It has asked for extensions of time to pay. In February, it even borrowed money in order to pay Maybank and RHB.

So, on what basis could the government have agreed to be guarantor for 1MDB? Who signed the guarantees? What checks and balances were missing or failed? Who are the people who practised trickery to achieve a political, financial, or legal purpose?

That brings me to the second fact: 1MDB’s profits are mainly from revaluation of assets.

The best known example of revaluation by 1MDB is of land designated for the Tun Razak Exchange. 1MDB bought the land from the government in 2010, for RM191 million. Four years later, the land had been revalued to RM6.2 billion.

The RM6 billion “profit” wasn’t real money, so it couldn’t be used to make repayments. The land was revalued so it could be pledged to borrow more money.

Why should the revaluation “gain” go to 1MDB – with a huge cut to its directors, managers and brokers – instead of to all Malaysians?

What kind of political culture allowed 1MDB to happen?

Undervaluing assets to justify buying for peanuts, then revaluing and selling for coconuts is standard operating procedure in our government-owned agencies and in regime-linked companies. Just look at the properties owned by MCA, MIC and Umno.

Why would 1MDB (or similar) bother to earn profit through the hard toil of innovation and improvement when it’s so easy to profit through cronyism like other government-owned companies?

Malaysians are used to the sale of assets owned by all Malaysians to benefit select Malaysians such as the unit holders of Amanah Saham Nasional. Lending agencies like the EPF probably said “we should get a cut of 1MDB’s cut” when they discussed lending money to 1MDB.

The third fact is that 1MDB overpaid for some assets. For instance, in its accounts 1MDB took a write-down of more than a billion ringgit for power generation assets it had bought from Genting.

Overpaying is normal when procurement is not based on open tenders, when decisions are made for political rather than economic reasons and when the prime minister is also finance minister.

Under Tun Dr Mahathir Mohamad, Tan Sri Ani Arope, that honourable man who was boss of Tenaga Nasional Berhad (TNB), relinquished his job rather than agree to buy electricity from IPPs (independent power producers) at exorbitant rates.

TNB, a government-controlled company with expertise in power generation, wasn’t even involved in IPP negotiations with the EPU (Economic Planning Unit).

The chicanery around 1MDB was made possible by the culture entrenched by Dr Mahathir. The cabinet then, as now, accepts and promotes a culture of concentration of power. This includes a massive cabinet whose members are blind to their failures, a prime minister who is also finance minister and an Election Commission which labours to keep the government in office.

The political culture must change. The most important questions for members of the new cabinet are: what caused 1MDB? What must you change? How much time do you need? – July 9, 2015.