As the magnitude of the 1MDB mega scandal becomes clearer with each revelation, worries now abound about the public having to bear the burden of its financial misadventures. With mounting debts of RM42 billion and serious doubts surrounding the sovereign fund’s ability to repay these debts, there is reason to believe that government funds and other public institutions will be used to bailout the troubled company.
PJU MP Tony Pua recently warned that the uncompetitive award of lucrative independent power producer (IPP) concessions to 1MDB, coupled with a raise in tariff rates for 1MDB power plants, would result in higher electricity rates at the public’s expense. Meanwhile, questions surrounding a RM3.81 billion loan from government pensions fund Kumpulan Wang Amanah Pencen (KWAP) to SRC International, formerly a subsidiary of 1MDB, remain unanswered.
In a recent development, The Malaysian Reserve[1] has revealed plans by Lembaga Tabung Haji (LTH) to purchase two plots of land measuring approximately five acres in Tun Razak Exchange (TRX), a 70-acre real-estate development project mooted by 1MDB to be a future “international financial and economic hub.”
Based on information from sources as well as an anonymous blog[2] that has published what it claims to be a complete set of leaked internal documents, it would appear that the Minister responsible for the national pilgrims’ fund has fast-tracked what can only be called a sweetheart deal between 1MDB and LTH.
Malaysians will recall that 1MDB had purchased the entire 70 acres of land in what is now known as TRX for a mind-bogglingly low price of RM64 psf back in 2011. The total acquisition cost for 1MDB was RM194 million.
According to the leaked documents, it would appear that the Minister had, on 13 April 2015, approved the LTH Investment Panel’s proposal dated 30 March 2015 to purchase two plots of land in TRX, with details as below:
- Plot B.10.15-RT, measuring 1.56 acres, for RM194mil or RM2,860 psf, to be developed into 40 storey serviced apartments.
- Plot C7.7-CT, measuring 3.4 acres, for RM578mil or RM3,900 psf, to be developed into a 74-storey office building.
The purchase of these two plots of land amounts to a whopping RM772 million for roughly five acres of land. The sale price, ranging from RM2,860 psf to RM3,900 psf, is unbelievably exorbitant, given that 1MDB had bought the land for a mere RM64 psf four years ago.
What makes the deal even more unbelievable is the risk assessment report by the internal LTH risk management team, which had on 9 April 2015 stated that they considered the project to be “high-risk.” This is based on many factors, including the currently lacklustre property sector that does not look set to improve due to weakening demand and a challenging macro-economic outlook.
At the same time, the report also warned about the increasing difficulty of buyers to obtain financing, as well as a post-GST drop in property transaction volume, a trend that has been seen even in Singapore. The report also noted that there is a current oversupply of luxury condominiums in the Klang Valley, with the bulk of the supply being in the city centre, where TRX is located.
Furthermore, the risk assessment also showed a softening of prices in the area since the end of 2013, with comparable transactions showing land being sold for between RM649.49 psf in Jalan Ceylon to RM2,266.85 psf in Jalan Changkat Ceylon. As anyone can tell, this is nowhere near the RM2,860-RM3,900 psf price paid by LTH.
The report also pointed out concerns about the slow pace of development of the TRX project, and the worry that major global investors from Qatar and Abu Dhabi are now said to be reconsidering their investments in TRX. Finally, the risk managers also cautioned about a potential “reputation” risk to LTH if it gets involved in such a project, due to 1MDB’s financial imbroglio and on-going investigations by the Parliamentary Accounts Committee and the National Audit Department.
With the above “high-risk” scenario, it is extremely questionable whether LTH would be able to recoup its projected total investment of RM3.2 billion, inclusive of RM772 million for the land and RM2.4 billion for development costs. Coupled with 1MDB Bandar Malaysia’s RM1.6 billion sukuk programme, the risk report noted that LTH’s total exposure in 1MDB would come up to RM4.8 billion, which was felt to be “quite substantial for a single entity investment.”
This issue would not be such a major concern to the public if LTH was a private developer gambling its money on a high-risk project. Unfortunately, LTH, as the Malaysian hajj pilgrim funds board, is an institution established to facilitate and manage the savings of Muslims towards fulfilling of the fifth pillar of Islam – the holy pilgrimage to Mecca. With such a responsibility on its shoulders, investments made by LTH should be shariah-compliant and not overtly risky so as not to jeopardise the savings of millions of pilgrims.
As my family and I are also depositors with LTH, I am shocked by this unnecessarily high-risk investment decision. I therefore call upon the Chairman of LTH, Dato’ Abdul Azeez Abdul Rahim, to immediately declare the veracity of these allegations. If all that has been said is true, then both Dato’ Azeez and the Minister in charge of LTH, Dato’ Seri Jamil Khir Baharom, should resign their positions immediately, as this desperate bailout attempt is nothing less than a despicable betrayal of the trust of Malaysian Muslim pilgrims.