Issues  |  MARCH 26, 2013 4:12AM

1MDB: Giant ponzi scheme or strategic investment fund?

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One opposition MP describes it as the biggest ponzi scheme the nation has ever seen. Some may consider that a bit much but when one examines the trail of of deals made by 1 Malaysia Development Bhd, including RM20 billion in bonds and acquisition of dubious assets and even more dubious partners, there is plenty – and we mean plenty – to worry about. In the first of a series of articles we look at how it was set up, and its first questionable deal.



Mohd Hazem Abd Rahman

Mohd Hazem Abd Rahman

Last week 1 Malaysia Development Bhd (1MDB) a government owned entity closely linked to premier Najib Razak, had a change at the helm— Hazem Abdul Rahman has now taken over the chief executive officer role from Shahrol Azral Ibrahim Halmi, who has joined the Performance Management and Delivery Unit (Pemandu).

Surprisingly, no announcements were made, and it was via a news report that the update was disseminated.

For a high-profile government-owned body which has made billions of ringgit in investments and  issued large amounts of bonds we would have expected more.

At about the same time last week, Bloomberg reported that 1MDB had issued US$3 billion (about RM9.4 billion) in debt papers, on March 19 on the quiet. According to Bloomberg 1MDB already has issued RM10.8 billion in debt papers, taking total bonds issued to over RM20 billion.

“It’s a wonder why things are so opaque at 1MDB…they should just announce the change, announce a bond issue, announce anything material. It’s not very good being so secretive. When it’s a government-owned unit, there is a need for transparency,” a market watcher said.

In July last year it was the same, 1MDB issued US$1.75 billion in 10 year debt papers, with yields just shy of six percent, and strangely enough guaranteed by International Petroleum Investment Co or Ipic, an Abu Dhabi government investment fund.

1mdb-najib-abu-dhabi-signing-ceremonyA fund manager added, “God knows what they are doing there (at 1MDB), so much in debt papers have been issued…and it’s clearly Najib’s baby… wonder what will happen after he steps down or is no longer in power?” the fund manager added.

Much of what 1MDB does is often shrouded in secrecy, and leaves many questions unanswered.     Why did it issue bonds at such a favourable rate to buyers? Who is PetroSaudi and  what has it to do with it 1MBD? Why the Middle East investors?

Why is 1MDB getting government land cheaply and then bringing in foreign partners to develop it? Why the tax concession for developers who undertake projects on these land? Why buy power assets, some of them about to expire?

But to understand all that, one needs to venture back in time and analyse the history of 1MDB, which is in itself quite interesting.

The colourful history of 1MDB

1MDB came about from the formation of Terengganu Investment Authority (TIA) back in the tail end of February, 2009, as a sovereign wealth fund to ensure the economic development of the East Coast state was sustainable and the economic well-being of the people of Terengganu safeguarded.

Low Taek Jho

Low Taek Jho

Playing a key role, it seems were the Sultan of Terengganu, Sultan Mizan Zainal Abidin, Menteri Besar of Terengganu, Ahmad Said, Ramli Shahul Hamid the managing director of Eastern Pacific Industries Corp Bhd, a Terengganu based company, largely controlled by the state, officials of Goldman Sachs and Low Taek Jho (Jho Low), the whizkid dealmaker, who shot to fame later, after his highflying ways and links to Paris Hilton came to light. Low is known to be close to Rosmah Mansor, wife of prime minister Najib.

Najib, who was the deputy premier back then in January 2009, had announced the formation of TIA three days before the Kuala Terengganu by-election, with a capital injection of RM10 billion.

This RM10 billion figure although not openly divulged, was derived from Terengganu receiving only about RM6 billion in oil royalty from the Federal government from 2000 to 2008, when the figure the east coast state was supposed to have received was to the tune of RM16 billion. To recap, the Federal Government had cut oil royalty payments when the state fell to PAS in 2000.

After much wrangling the TIA, it was agreed, would be set up with RM11 billion in funds, RM5 billion from the Federal Government guaranteeing TIA’s bond issue, and another RM6 billion from state controlled oil major Petroliam Nasional Bhd (Petronas), via the securitization of oil royalty.

The plan was for the fund to be modelled after the Mubadala Development Co, the sovereign wealth fund of Abu Dhabi.

TIA was the first state sovereign wealth fund, and initially was slated to set a new, high benchmark on how a state should control its finances.

After Barisan Nasional won Terengganu in 2008, then premier, Abdullah Ahmad Badawi had sought to reappoint Idris Jusoh the Menteri Besar, but the appointment was opposed by Sultan Mizan. The Sultan opted instead for Ahmad Said.

Although he initially opposed the Sultan’s choice, Abdullah backed down, leaving Ahmad Said as the Menteri Besar of Terengganu.

There were reports of threats that Sultan Mizan was prepared to dissolve the state assembly if a motion of no-confidence was called against Ahmad Said, as planned by Idris Jusoh and his supporters.

The main difference between the two was that Ahmad Said was more Terengganu centric, as opposed to Idris Jusoh who was closer to the Federal Government and willing to play ball with it.

As soon as the first RM5 billion was raised via bond issues supported by the Federal Government, the melee started. Both Ahmad Said and the Federal Government wrestled for control of the funds— while the charter had it that TIA should be run by professionals.

1mdb-shareholdings-and-assets-4.0Terengganu however had to concede, as it could not do without the Federal Government’s support—- and hence gave up TIA.

One of the key problems that TIA faced was that it had no track record. Since TIA had no track record it would need the Federal Government’s guarantee to raise funds to have lower cost of funding.

In a nutshell, without the Federal Government support the plan for TIA would literally not work.

Thus since TIA could not stand alone, it was taken over by the Federal Government, and renamed 1MDB.

Terengganu’s plan for TIA was all but shattered, and plans such as building the Bidong Resort in Terengganu—- a project at a cost of some RM6 billion— have since been forgotten.

The statement from the Prime Minister’s office said that TIA, “is being expanded to a federal entity called 1MDB with the aim of investing billions of ringgit in energy, real estate and hospitality sectors in the country.”

1MDB took over the cash already raised by TIA.

This new entity was much more interesting than TIA and its plans much more interesting than resorts and Terengganu based businesses. Critics of 1MDB have had a field day, poking holes in the company’s business plans and ventures, and even its partners.

One partner especially stands out.

Who is PetroSaudi International Ltd?

petro-saudi-logoAmong 1MDB’s first ventures was partnering PetroSaudi International Ltd, in September 2009— in a joint venture 1MDB-PetroSaudi International. 1MDB held 40 percent equity interest while PetroSaudi held the remainder.

According to sources, at the outset itself things started going wrong. Certain quarters say PetroSaudi instead of injecting funds worth US$1.5 billion, had injected an oil reserve in the Caspian Sea valued at US$1.5 billion, while 1MDB injected actual cash of US$1 billion.

Then 1MDB cashed out of the JV and converted its US$1 billion in equity to a US$1.2 billion debt with an 8.75 percent coupon. (See following articles)

There have also been some who question the founder of PetroSaudi, Sheikh Tarek Essam Ahmad Obaid, saying he only surfaced on Google after 2009 when the deal with 1MDB came about. They say that he is not a prince as others so vehemently say he is.

According to some sources PetroSaudi was set up to partner TIA, which was supposed to be dealing with Terengganu’s oil royalty— hence its name “PetroSaudi” in the first place.

There are also others who say that there are two PetroSaudi International companies. One the Saudi based one, and the other a company registered in the Seychelles.

Thus the only thing that seems certain about PetroSaudi is that it has garnered its fair share of sceptics. Some of PetroSaudi’s deals have also been under scrutiny.

In 2010, PetroSaudi had also made a general offer for UBG Bhd (formerly Sarawak Chief Minister Taib Mahmud’s Utama Banking Group Bhd) at RM2.50 a share, when it took over Abu Dhabi Kuwait Malaysia Investment Corp’s 52.62 percent in UBG.

Considering UBG had majority control of Putrajaya Perdana Bhd and Loh & Loh Corp Bhd, PetroSaudi forked out some RM1.5 billion to privatise the three companies. Among the directors of UBG was also Jho Low, and it was very well known back then that this deal was his.

Shahrol Halmi

Shahrol Halmi

It is understood that Jho Low and Shahrol, the former head of 1MDB had their fair share of differences, and did not see eye to eye on many things.

Meantime, 1MDB is in debt to the tune of over RM20 billion going by public records. It has acquired power assets for some RM12.5 billion, lent Petro Saudi some RM3.7 billion, and obtained government land for which it has big plans.

1MDB did not reply to questions sent by KiniBiz.

Tomorrow: The people behind 1MDB

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