Jeevan Vasagar in Singapore Financial Times 7th May 2017
Property failure and Abu Dhabi deal leave taxpayer on the hook, says MP
In an ebullient New Year’s message, Najib Razak declared that 1MDB’s “major challenges” were behind it. But critics of the Malaysian prime minister have seized on two apparent reversals as evidence that efforts to clear the scandal-hit Malaysian state investment fund’s debts are in disarray.
A crucial part of Mr Najib’s claim was a $1.7bn deal to sell a stake in a Kuala Lumpur property project to a China-backed consortium. That deal has now collapsed, with questions raised about China’s role in vetoing the agreement.
Meanwhile, 1MDB made an agreement earlier this month to pay Ipic, Abu Dhabi’s sovereign wealth fund, $1.2bn to settle an embarrassing dispute in which Ipic was claiming about $6.5bn.
The Malaysian fund is at the centre of multiple global investigations into alleged grand corruption. Swiss investigators allege that up to $4.8bn was diverted from companies linked to 1MDB,which was set up by the Malaysian premier.
“With the latest collapse of the proposed [property project] sale, the entire ‘rationalisation’ exercise . . . hailed by the prime minister and cabinet has been completely unravelled,” said Tony Pua, an MP with the Democratic Action party, Malaysia’s main opposition group.
The setback for 1MDB’s debt restructuring came when a deal for a Chinese state-owned company to take a stake in the Bandar Malaysia property project fell apart.
The project, which involves transforming a former military airport near the capital into high-end housing and offices, was a centrepiece of 1MDB’s official aim of making strategic investments for long-term economic development.
TRX City, a former 1MDB division now owned by the finance ministry, said last week that the China-backed deal — agreed at the end of 2015 — had lapsed because the buyers “failed to meet the payment obligations”.
China Railway Engineering Corp, which was due to invest through a joint venture with a Malaysian partner, had not received the necessary high-level approval from the Chinese government, according to a person familiar with the matter.
But a crucial factor was the difficulty Iskandar Waterfront Holdings, the Malaysian partner, had in securing financing, according to two people with knowledge of the process. Mr Najib had lost patience and personally ordered the termination of the deal, one said.
IWH, controlled by Lim Kang Hoo, a Malaysian property tycoon, did not immediately respond to a request for comment. Last week, however, it said that the company disputed TRX City’s statement, which “does not fully and accurately reflect the circumstances and conduct of the parties in this matter”.
Defenders of the Malaysian prime minister insist a buyer can still be found for the land, describing it as one of the last significant pieces of prime real estate in the vicinity of the Malaysian capital.
“It became clear that a new deal could lead to a far higher price being obtained for the taxpayer — as the value of the land has significantly increased — and 100 per cent government ownership preserved,” an adviser to the Malaysian premier said. “There is no question . . . that Bandar Malaysia will continue. Indeed, the steps taken, and a new developer, will lead to a hugely better deal for the government and taxpayer.”
But Mr Najib’s opponents fear the collapse of the deal, and the agreement with Ipic, mean Malaysian taxpayers face mounting obligations.
Earlier this month, 1MDB agreed to pay Ipic $1.2bn by the end of this year in an effort to resolve a dispute in which the Gulf fund was claiming about $6.5bn. The dispute arises from a 2015 deal in which Ipic bailed out 1MDB. The Malaysian fund was to transfer assets in exchange.
A Malaysian parliament inquiry last year identified billions of dollars in questionable transactions by 1MDB, including funds transferred to a British Virgin Islands company whose name resembles that of an Ipic unit.
“Because 1MDB simply does not have any more substantial tangible assets or cash in its books, the Malaysian taxpayer will have to pay for most of 1MDB’s still outstanding debts,” Mr Pua said.
The collapse of the Bandar Malaysia deal has also raised broader concern about the health of Malaysia’s relationship with China. The Star, a Malaysian newspaper, claimed China had lobbied for “maximum returns” for its role in the project, including securing other deals such as the contract to build a high-speed rail line from Kuala Lumpur to Singapore.
But Mr Najib’s supporters insist the relationship between the two countries remains strong, with ties at a “historic high”, according to the prime minister’s adviser. “This will be seen again during Mr Najib’s long-scheduled trip to Beijing next week, following President Xi’s personal invitation to his One Belt One Road summit,” the adviser added.