Controversial Malaysia Fund Misses Payment

The failure of Malaysia’s ill-starred state run investment fund 1Malaysia Development Bhd to meet a RMB 2 billion (US$563 million) repayment to domestic banks spells bad news for Prime Minister Najib Tun Razak, the chief advisor to and ostensible brains behind the fund.

Reuters reported on Jan. 6 that 1MDB, as the fund is known, had missed a Dec. 31 payment and is exploring ways to settle with lenders, primarily RHB and Maybank, two of the country’s biggest banks, by the end of January. It is the second time 1MDB has missed a payment. It previously asked Bank Negara, the country’s central bank, for a three-month extension on its loan obligations.

The performance of the fund, which has borrowings of RM42.2 billion, has become intricately bound up with the attempt to bring down Najib that is being waged by forces allied with former Prime Minister Mahathir Mohamad. In recent days the campaign to force out the prime minister has sprung into the open, partly over the fact that he was invited to play golf in Hawaii with President Barack Obama at a time when the east coast of the country was inundated with some of the worst floods in decades.

“It is a watershed and an ominous one when the rakyat (the people), through the blogs, the independent news portal and the social media outlets, discovered that the PM was golfing in Hawaii while a quarter million people were flooded out of their homes,” wrote A. Kadir Jasin, the former editor of the Straits Times and Mahathir’s chief spear carrier, on his blog. “They asked, ‘does the PM care?’”

When Najib belatedly rushed home to visit the flooded area, he caught an infection from e.coli bacteria in the polluted waters, opening him to ridicule from his critics. He also left behind in the United States Perdana 2, the luxurious government-owned Airbus ACJ320 executive jet. Blogs, especially those aligned with Mahathir, erupted in criticism, saying the plane had been left behind to make stops in Los Angeles, Indianapolis, Los Angeles, New York, London, Dubai and back to South East Asia, carrying the prime minister’s wife, Rosmah Mansor, whose taste for extravagant shopping and overseas travel have made her a lightning rod for criticism.

Muhyiddin Yassin, the current deputy prime minister, has in recent weeks stepped up his oblique criticism of the way the government is run, saying the ruling Barisan Nasional could lose the next election, due in 2018, if changes are not made. Criticism has been growing among the rank and file as well, with one UMNO member filing a complaint with the Malaysian Anti-Corruption Commission in December over the operation of 1MDB before he was told to knock it off.

The disastrous performance of the fund has been complicated by the circumstances of its 2009 inception. It was proposed to Najib by Jho Low Taek, then a 27-year-old investment advisor with a lot of Middle Eastern friends and a reputation as a playboy who made the papers of New York tabloids, partying with the likes of Nicole Ritchie and Paris Hilton as well as the prime minister’s wife, Rosmah Mansor.

Arul Kanda Kandasamy, formerly executive vice-president, head of Investment Banking Group and head of Corporate Finance for the Abu Dhabi Commercial Bank, was brought in last week to take over from former COO Mohamad Hazem Abdul Raman, who quit suddenly. Kandasamy told reporters he is confident the problems the fund faces can be overcome.

“I genuinely believe that the majority of the allegations that have been directed at the company have more to do with a misunderstanding of the business, or are raised for purposes that aren’t necessarily business related, as compared to any real issues that exist within 1MDB,” he said

Nonetheless, 1MDB has been struggling vainly for months to get away a US$3 billion IPO of its power assets, which critics contend were purchased at vastly inflated prices in an attempt to generate cash flow after much of its initial funding disappeared into a middle eastern oil exploration company called PetroSaudi.

Instead of repaying the RMB7 billion loan, PetroSaudi converted the money into an 11 year loan, to be repaid at 8.5 percent annual interest. The money was invested through the Cayman Islands, a notoriously unregulated banking haven. To criticism, 1MB replied that the fund is regulated by authorities in the Caymans, Switzerland and Hong Kong, which critics said means almost no regulation at all.

It was Jho Low, as he is known, who steered the RMB7 billion loan to PetroSaudi. According to records in London, he also used a letter from the fund to back a failed bid to take over three prestigious London hotels and there is considerable suspicion that he also used the fund’s credit standing to help guarantee funding for the production of The Wolf of Wall Street, a phenomenally successful movie co-produced by Reza Aziz, Rosmah’s son.

In recent months, the government, in an attempt to build up 1MDB so that its power assets can be listed, has strong-armed at least three no-bid contracts to build coal-fired and solar power plants to supplement the fund’s assets. One of those power plants, in Port Dickson near Malacca, was awarded to 1MDB despite a lower bid from a joint venture of YTL International Bhd and SIPP, partly owned by the Sultan of Johor, who is said to have been enraged by the snub and is demanding privately that SIPP be given its own no-bid contract for another plant. The government has also given another plant a 10-year extension to its production agreement, which was supposed to end in 2016 but has been extended to 2026.

Powertek, 1MDB’s fund’s wholly owned subsidiary, also has operations in five emerging markets in addition to Malaysia. They are Egypt, Bangladesh, the United Arab Republic, Sri Lanka and Pakistan.

"1MDB has invested the proceeds with regulated and licensed international fund managers, the fund said in a prepared statement early last year. “These fund managers adopt an absolute return strategy of which the primary investment objective is to achieve long-term capital appreciation and/or steady income through investments in listed and/or unlisted companies.”

The opposition has been cudgeling Najib for months on the fund, which appears to be in growing jeopardy to the point where major defaults could send a serious shock through the domestic banking system. The fund has twice missed deadlines for filing its annual reports and its auditors have quit twice. But when Mahathir unlimbered his criticism, the allegations picked up serious steam. In particular, they have been percolating through the UMNO rank and file, probably Najib’s most dangerous trouble spot, given that the opposition is regarded as disorganized an toothless.

One ominous harbinger, according to well-informed sources in Kuala Lumpur, is that Khairy Jamaluddin, the son-in-law of former Prime Minister Abdullah Ahmad Badawi, is said to have moved into Mahathir’s camp. Khairy abandoned the Badawi wing of the party after Mahathir and Muhyiddin pushed Badawi aside and joined Mahathir’s van.