1MDB in a nutshell – according to Mahathir

There have been many reports about 1MDB but no one has put it in a nutshell like Mahathir, who cleverly summarises the 1MDB debt situation.  Where did all that money end up?

A glaring omission in Mahathir’s roundup below, however, is the role played by Jho Low, the dubious transfers of funds, and the link to UBG, as reported in Sarawak Report – though Mahathir has raised questions about him elsewhere.

Perhaps this omission reflects the former premier’s recognition that Jho Low was probably just a trusted ‘backroom boy’ when the real drivers were much more powerful personalities hidden from public view.

This is the excerpt from Mahathir’s blog post (emphasis in bold is mine):

The Government invested RM1m in the 1MDB. According to known records 1MDB then borrowed from various sources RM42bn.

A company with RM1m capital with no assets cannot borrow 42,000 times its capital with no collateral. That 1MDB is able to do so is because of Government guarantees.

In other words it is Government which is borrowing the money. If 1MDB loses money, the Government will bear the loss. Yet the operation of 1MDB is not overseen by Government officers responsible for the management of Government funds.

Why has the 1MDB become controversial? What is wrong with 1MDB?

From the beginning it was wrong. It started off as an off-budget and it was not put before the Parliament.

The money was borrowed. So it is not sovereign wealth but sovereign debt.

The bond raised by Goldman Sachs costs more than is usual for Government borrowings. The interest rate at 5.9% was too high. Government loans usually attract about 3% or below.

In addition 10% commission went to Goldman Sachs which means that 1MDB gets only 90% of the money borrowed yet has to pay interest on 100%, raising the interest rate to 6.6%. Averaging at 6%, yearly interest on RM42bn is about RM2.5bn.

Since 2009 there has been no income from all the assets. And 1MDB had to borrow RM2bn to pay the interest. The loan is now RM42 billion.

Total initial borrowings amounted to 42,000,000,000 ringgit (RM42bn). As far as can be ascertained, the investments are as follows:

• Purchase of Tanjong Energy (now known as Powertek Energy Sdn Bhd) from Ananda Krishnan for RM8.5bn. This is higher than market price. The licence was about to expire.
• Purchase of Genting Sanyen Power (now known as Kuala Langat Power Plant) for RM2.3bn. Again high above market price. The licence was about to expire.
• Purchase of Jimah Energy for RM 1.2bn.
• Purchase of 70 acres of land in Jalan Tun Razak for RM320m i.e: RM64psf. Land last sold in the area was at RM7000psf.
• Purchase of 495 acres of land in the former Sungai Besi TUDM airport (now known as Bandar Malaysia) about RM363.5m i.e: at RM91psf. Estimated value RM1000psf.
• Purchase of 234 acres land in Air Itam in Penang RM 1.38bn i.e: at RM135psf.

It should be noted that TRX land is close to land recently sold at RM7000psf. Assuming the market price is RM3000psf the true value of this land is RM6bn. The Government has therefore lost RM5bn-plus because 1MDB paid only RM320m.

With regard to the Sungai Besi Airport land, 1MDB paid RM363.5m for 495 acres – i.e at RM91psf. Assuming market price for this land is RM1000psf. the Government lost approximately RM20bn.

The land in Penang is of poor quality and has more than 1000 squatters. Yet 1MDB paid RM1.3bn i.e at RM135psf.

These are all the purchases that are known. They all add up to RM14.7bn. So there is approximately RM27bn left.

More than US$1 billion were said to be paid to Petro Saudi without verification as to the value of this company or its assets.

Where is the rest of the money?

A certain amount was registered in the Cayman Islands. What was the money used for? What was brought back to Malaysia. What was brought back and deposited in a Swiss bank in Singapore. Why? Where was the money brought back from? Why is this money not used to pay the RM2bn interest. Why did Bank Negara allow the first tranche to be repatriated to Malaysia and not the second tranche. Now the Swiss bank has told the Singapore authorities that the document did not originate from them and does not represent a true account of the assets of 1MDB. So where is the money said to be registered in the Cayman Islands and is now brought back.

Clearly 1MDB is not getting any return from its investments. Not only is it losing money but the Government has lost money when 1MDB paid only RM683m for TRX and Sungai Besi. Total loss incurred by the Government is approximately RM25bn.

1MDB revalued all its assets at RM52bn. That is because Government land was bought at far below the market price. It can only use this money to repay loans if it succeeds in selling them off as land or after development. Progress on TRX is very slow and there is no work on Sungai Besi land. No money will be generated during development; only outflows.

It is this disappearance of a huge amount of borrowed money by 1MDB and the inability to answer questions regarding what happened to the funds that disqualifies Najib from being Prime Minister of Malaysia.

It is difficult to see how any leader can remain in power with such colossal lack of financial accountability.  The 1MDB saga is a stunning case study of how public assets have been sold off on the cheap to benefit private interests – so much money lost that could have been used to defer or cancel the implementation of GST.

But Mahathir himself should reflect on how during his administration – instead of public land being sold on the cheap to 1MDB – lucrative concessions with lop-sided terms were awarded to independent power producers. This resulted in the IPPs earning stupendous profits at the expense of Tenaga Nasional Bhd, a government-linked corporation. I believe we are still paying the price to this day in the form of higher electricity tariffs.

Mahathir must also share some responsibility as his administration spawned a culture of leaders not having to be accountable to the public for their actions.

In a sense, the chickens have come home to roost, and the country’s coffers are left with chicken feed instead of golden eggs. (Mixed metephors, again!)