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Wednesday December 16, 2009

1MDB in the process of sealing big deals

Slow but steady headway

IT’S been months since the inception of 1Malaysia Development Fund Bhd (1MDB) but truth is, the scrutiny (and scepticism to some extent) has been hard to completely shake off.

Much of it is rooted in its beginnings. It was originally meant to be Terengganu Investment Authority Bhd (TIA) – a state-owned sovereign wealth fund (SWF) with RM11bil in its coffers (indeed, an eye-popping amount considering the country’s recessionary pressures then) – RM5bil to be raised from government-backed debt papers and RM6bil worth of oil royalty.

But what was known as the country’s first state-owned SWF failed to withstand its most crucial litmus test.

On hindsight, it appears that the depth of divergent interests between the state and federal government was underestimated, triggering a major disconnect which brought everything, together with the fund’s much touted grand vision of turning around the state, to a grinding halt.

Meanwhile, RM5bil had already been raised. And so, to avoid “collateral damage” as one observer puts it, a plan was cleverly hatched to turn TIA into a federal-owned entity, this time, called 1MDB. Indeed, a plan which astute observers say, should have been the way from the very start. Also, the much worked on and impressive governance structure has also been retained.

In an interview with StarBiz, 1MDB CEO Shahrol Halmi, who joined the company in the early “TIA days”, admits that the transition from state to federal (government) was a tough period.

“The biggest hurdle was the transition. Once that was done, the wheels have been turning,” said Shahrol, who pointed out that 1MDB was no longer a SWF but a “strategic development company.”

For the time being, it appears that things are in motion. In late September, it joined hands with Saudi Arabia’s Petrosaudi International Ltd to set up a US$2.5bil joint investment fund. Under the plan, 1MDB would inject US$1bil while PetroSaudi will plough in the rest.

But there has since been very little news on its progress or nature of investments, which has set tongues wagging on whether the agreement was bearing fruit.

Shahrol was hesitant to disclose more as he said the JV is governed by a separate board and management structure, a template that may be duplicated in future tie-ups with foreign companies. “We will announce in due course. Since it has its own management and board, it is inappropriate for me to elaborate.

“We are sensitive to the fact that we are working with foreign partners who operate in other markets with their own vagaries and preferences on how they want to do it. We will be transparent but we will balance it with the needs of our foreign partners,” he said.

Of the RM5bil, it has so far committed US$1bil (RM3.43bil). Which begs the question - if that is the average benchmark for its capital commitments, could 1MDB soon run out of funds for new investments? And if so, is there room to raise more?

“We can’t say right now but we are a development company. So if it makes sense to raise more, we’ll do it but we have to figure out how to raise it,” Shahrol said.

Deals in the pipeline include working together with two other giant foreign entities from China and Abu Dhabi which promise to bring in even more foreign direct investment, one of its main guiding principles.

StarBiz reported recently that State Grid Corp of China (SGCC) had signed a joint agreement with 1MDB to set up hydro power plants and a massive aluminium smelter in Sarawak which could involve investments worth US$6bil-US$8bil.

Hydro power is one of Sarawak’s biggest competitive advantage and features prominently in the Sarawak Corridor of Renewable Energy (Score) plan. If the deal with China’s largest power utility materialises, the investment will no doubt catapult the state’s development programme, which has yet to draw in any such major investment.

Yet, questions abound. Is setting up power-hungry industries such as aluminium smelters, which require cheap electricity, the way to go? And what about the environmental impact of such a large scale development?

Shahrol declined to elaborate on the potential investment by SGCC, merely saying: “There are talks being held to catalyse certain industries in Sarawak under the Score banner, namely the energy sector.”

He added that talks were also being held with Abu Dhabi’s Mubadala Development Co, which were “slow going as we have our plate full. But we want to announce some deals in the first quarter as well. We have quite a lot of things running in parallel right now.”

Below are excerpts of the interview:

StarBiz: One of 1MDB’s objectives is to “create high-value opportunities in sectors such as energy, real estate and tourism. But 1MDB clearly has no such experience nor expertise. How will it manage this?

Shahrol: Yes, we will invest in these sectors. But because we don’t have the capabilities, for example, in terms of power plants, we will do it with the right partner that has the capital, desire as well as capabilities.

As a co-investor, 1MDB will be forking out capital for these investments correct?

Yes, we are co-investing. We can put in the money or we can work something out with the Government like including a concession or injecting assets and so forth. The idea is to have a 50:50 partnership and because we may not have as much capital as the foreign partner, we have to be smart about it.

You signed up with PetroSaudi two months ago. 1MDB committed US$1bil for the JV but nothing appears to have moved since. Why is that?

People have incomplete facts.

But that’s because there has been inadequate disclosure...

We will disclose when the time is right. It also involves the G-to-G (Government-to-government) level and there are elements that reflect that in the cooperation. But I can tell you that it doesn’t just involve the energy sector. They also want to invest in other areas that have synergies and which will benefit the bilateral relationship. We hope to announce something in the first quarter.

We also want to be rigorous with our decisions. We may sign a cooperation but we must make sure these projects make sense from a mandate standpoint. That needs thorough analysis without us jumping in.

The funds have been committed but technically, none has yet been utilised. Is that correct?

Yes.

Isn’t there a holding cost on the funds that were raised via Government-backed bonds earlier in the year?

Yes, but we’ve factored that in our budget. Every six months we will pay (interest of 5.75% on) the bonds, which means we have to be very disciplined in the projects we invest in as twice a year bankers will come a-knocking. The first one was in November.

Internal accounting wise, we are okay. We have made some paper profit already.

You mentioned that the strategy is not to hold on to investments for a long time but to sell and reinvest. What are the exit options you have in mind - listing, maybe?

Yes, we don’t plan to stay in and hold on to our investments for years and years. We are going to catalyse the project and then exit and reinvest.

We can sell down or list. That’s important. We need to list good stuff on Bursa Malaysia. I’m with the Government on this one.

Our market was dull before the Maxis (Bhd) listing and it is dull after the Maxis listing. There’s very little activity and free float out there. Listing makes sense as it would allow the public to have a stake in the developmental projects or companies.

But the principal is bring in foreign direct investment and catalyse certain projects and make sure the pieces fit in.

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