1MDB’s sale of 60 percent equity stake of Bandar Malaysia to a consortium comprising Iskandar Waterfront Holdings (IWH) and China Railway Engineering Corporation (CREC), in a bid to pay its mounting debts, has sparked outrage .
Among others, critics question why the nation’s self-styled strategic investment firm is selling prime land it obtained from the government for a song, to a foreign entity.
This was compounded when China Railway’s notice to the Hong Kong Stock Exchange showed a price tag lower than what was announced by 1MDB.
Critics also raised concern that the sale will raise China Railway’s chances of winning the bid for the plum High Speed Railway project from Bandar Malaysia to Singapore.
1MDB responds to the concerns below:
Bandar Malaysia Sale - Current Proposed Deal Structure
The Sg Besi land is currently owned by TRX City Sdn Bhd (formerly 1MDB Real Estate Sdn Bhd) and Bandar Malaysia Sdn Bhd.
TRX City Sdn Bhd owns four plots and Bandar Malaysia Sdn Bhd owns 12 plots, which collectively make up the acreage of the project. Both companies are ultimately owned 100 percent by 1MDB.
The current proposed deal structure, is for a new special purpose vehicle (New SPV 1) to be formed, that will directly purchase the land (or indirectly purchase, for example through a New SPV 2 or through purchase of equity in Bandar Malaysia Sdn Bhd).
New SPV 1 will ultimately own all 16 plots of the Sg Besi land and develop the Bandar Malaysia project.
New SPV 1 will be owned 40 percent by 1MDB or Minister of Finance Incorporated (MoF Inc) and 60 percent by the IWH-CREC Consortium.
The consortium shareholding is 40 percent CREC and 60 percent IWH.
IWH shareholding is 40 percent Kumpulan Prasarana Rakyat Johor (KPRJ - Johor State Govt) and 60 percent Credence Resources (owned by businessman Lim Kang Hoo).
So, given the above shareholdings of the various parties the ultimate New SPV1 ownership can be described in the following ways:
40 percent 1MDB or MOF Inc (should the shares be transferred), 36 percent IWH and 24 percent CREC.
The ultimate project ownership therefore is 76 percent Malaysian and 24 percent Chinese.
Or, in the alternative:
40 percent 1MDB or MOF Inc (should the shares be transferred), 22 percent Credence Resources, 14 percent KPRJ and 24 percent CREC.
The ultimate project ownership is therefore 54 percent government and 46 private sector (federal government owns 40 percent via 1MDB/MOF Inc and state government 14 percent via KPRJ. Private sector owns 22 percent Credence Resources and 24 percent CREC).
Difference in announced values RM7.41 billion (1MDB) vs RM5.3 billion (CREC)
In essence, 1MDB is selling land, which is what we own. However, there are two liabilities indirectly linked to the land:
A. Remainder costs to complete relocation of Pangkalan Udara KL (PUKL Relocation)
- The main relocation contract and development agreement was executed between 1MDB and the government of Malaysia for a contract value of approximately RM2.7 billion.
This cost includes, among others, new land acquisition costs, construction costs, fit out/equipment costs and relocation costs.
- 1MDB in turn contracted to what was then named 1MDB Real Estate Sdn Bhd (now renamed TRX City Sdn Bhd) for certain construction aspects of the PUKL Relocation.
- · PPHM has, in turn, appointed over 50 qualified bumiputra contractors as sub-contractors to deliver various aspects of the construction. The remaining construction costs plus variation orders plus other costs of the PUKL Relocation are currently estimated at up to RM1.9 billion.
- It is important to highlight that PPHM as the turn key contractor and the over 50 bumiputra subcontractors will continue to remain as the designated contractors and will continue to perform their roles exclusively, regardless of the final deal structure.
- These contractors have been approved by the relevant authorities and construction is supervised by relevant officials from the Ministry of Defence and Ministry of Home.
As the construction will continue to be carried out by the current approved contractors, there is therefore no question of any impact on national security through the sale by 1MDB of its 60 percent interest in the Bandar Malaysia project.
B. The Bandar Malaysia Sukuk (Sukuk) – this debt is at Bandar Malaysia Sdn Bhd. (Nominal value RM2.4 billion at maturity, accrued value approximately RM1.63 billion at 31 December 2015.)
3. Final Purchase Consideration Determination
To determine the final purchase consideration to be received by 1MDB, the starting point, as agreed in the Share Sale and Purchase Agreement (SSA) executed between 1MDB and the consortium, is 100 percent of the land value = RM12.35 billion.
- · For its 60 percent share, the consortium has agreed to pay RM7.41 billion (purchase consideration), of which a 10 percent deposit of RM741 million is payable upon execution of the SSA.
- Whilst it is the intention of 1MDB and the consortium to transfer the remainder PUKL Relocation construction costs and the sukuk debt to the New SPV 1 (owned 40 percent by 1MDB/MOF Inc and 60 percent by Consortium), the transfer will require:
a) determination and agreement between the parties of the final costs for the PUKL Relocation and the sukuk and;
b) all relevant consents, including but not limited to, from the government of Malaysia, the contractor (PPHM) and sukuk investors.
- · Should 1MDB and the consortium agree on the costs and manage to procure the consent, then the consortium will pay its 60 percent share of the costs and the purchase consideration will be adjusted accordingly, i.e.: RM12.35 billion Land Value - RM1.9 billion PUKL Relocation Costs - RM1.63 billion Sukuk Costs = RM8.8 billion of which 60 percent of consortium share is RM5.3 billion.
However, if the costs cannot be agreed or the consent cannot be procured, then the purchase consideration of RM7.41 billion will be paid in full to 1MDB, who will still be responsible for the costs.
In either scenario above, the purchase consideration of RM7.41 billion to 1MDB does not change; the only difference is whether 1MDB receives the amount in full, then pays for the costs or whether the consortium pays for its share of the costs and remits the balance of RM5.3 billion to 1MDB.
4. High Speed Rail Project
Whilst the government of Malaysia has designated Bandar Malaysia as the terminus for the KL-Singapore High Speed Rail (HSR) project, the sale of equity in the Bandar Malaysia project is not in any way linked to the eventual award of the HSR project, nor has 1MDB or the government of Malaysia made any representations or agreements to that effect.
1MDB and the consortium both confirm that HSR is an entirely separate project, whose award will ultimately be determined jointly by the governments of Malaysia and Singapore, per a separate process, that is, and will not be linked or be contingent on, in any way, to the sale of 1MDB equity in the Bandar Malaysia project.
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