1MDB not doing what it has been designed to do

  • The Star Says
  • Wednesday, 23 Apr 2014

PERCEPTION matters especially when it comes to handling public funds. In this respect, the operations of 1Malaysia Development Bhd has always come under scrutiny for several reasons.

Chief among them is the fact that it was established with a seed capital of RM5bil debt that the company managed to raise, thanks to a guarantee from the Federal Government.

Effectively, public money is what drives 1MDB. It’s not private money.

It was established in 2009 to act as a catalyst to draw in investments that potentially has a high multiplier effect on the economy.

By design, 1MDB’s concentration should be in Malaysia. But what’s perplexing is that it has placed a substantial portion of its cash raised from the capital markets outside Malaysia.

The latest amount to be invested overseas is a sum of US$1.58bil (RM4.9bil). The money was placed through an overseas licensed financial institution into various investment portfolios on March 19, 2013.

Just six months earlier in September 2012, 1MDB had placed a much larger amount – US$2.3bil (RM7.3bil) – with a Segregated Portfolio Company that is registered in the Cayman Islands.

The total amount placed with funds outside the country is some RM12bil – which is almost double the cash and bank balances of RM6.7bil that 1MDB has in its books as at March 31, 2013.

For a fund that was set up to drive the economic transformation of the country, shouldn’t the bulk of its cash be kept closer home, where its activities are mostly concentrated?

1MDB has been raising money from the local financial system to finance its expansion into the power generation sector and property developments. Its balance sheet has ballooned with total debts of RM31.8bil as of end March last year. In 2012, the total debt was only RM3.4bil.

Considering the large debts, it’s easy to fathom why bankers are increasingly becoming cautious in extending loans for 1MDB. It has and will continue to be a talking point as long as the fund grows.

But taking on debts and putting the money with external fund managers is something else. For one it simply shows that 1MDB is drawing down more money than it needs for its activities.

In the latest instance, the sum of US$1.58bil was part of a US$3bil facility that it raised from the capital markets to help fund the Tun Razak Exchange property development project. Part of the money was placed outside the country since the development blueprint has yet to be firmed up.

For a fund that is undertaking mega-projetcs, there is nothing wrong in having a financing facility in place.

But why draw down the money when there is no need for it? Worse, if it is placed outside the country.

There is an argument that the funds placed outside earn better returns. But managing money is not 1MDB’s business. Stirring the economy is what 1MDB has to do.

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