We refer to The Star reports on 1Malaysia Development Bhd’s (1MDB) audited financial statement for the year ended March 31, 2013 published on April 22 and April 23, 2014. We wish to clarify on the following:
1MDB has full control of its funds
1MDB’s board has full control over its funds in the Cayman Islands. The fund is managed under the mandate given by 1MDB, and 1MDB can withdraw the funds as it so determines.
In the reports, the word “control” has been wrongly interpreted.
With reference to this, the full statement based on the Malaysian Financial Reporting Standards (MFRS) is: “The Directors concluded that the Group is unable to exercise control or significant influence over Segregated Portfolio Company (SPC) in accordance with the MFRS 127 Consolidated and Separate Financial Statements and MFRS 128 Investments in Associates respectively.”
In MFRS 127, “control” is defined as “the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities”. As clearly disclosed in the notes of the accounts, 1MDB’s investment in the SPC is only as a participating shareholder.
This is akin to investing money in a mutual fund, where 1MDB is a participating shareholder of the fund that already has an investment mandate of its own and thus, as a participating shareholder, is unable to influence the original investment mandate.
It most certainly does not mean that 1MDB has lost control of the funds it invested.
Available for Sale
MFRS specifies three classes of investments: 1) Held to Maturity, 2) Available for Sale, and 3) Held for Trading. In accordance with the guidelines of MFRS 139, 1MDB’s investments in the Cayman Islands are, therefore, classed as “Available for Sale”, as clearly the other categories would not be appropriate.
This does not indicate that 1MDB is putting the assets in the Cayman Islands up for sale. It is merely a technical classification of assets as stipulated by the MFRS.
1MDB has always stated that its investment in the Cayman Islands is a temporary measure. As per its press release issued in April 2013, 1MDB said the proceeds were earmarked for future investments, and pending that, the funds were placed in the SPC for cash management purposes.
Revaluation of investment
The claim that “the commonly adopted practice of property developers to do so every three to five years” is not applicable to 1MDB in this instance.
1MDB’s audited financial statement complies with the relevant accounting standards, be it the Financial Reporting Standards or FRS for financial year 2011 (FY11) and FY12 or MFRS. It is now a mandatory requirement for Malaysian companies to adopt the MFRS.
In the MFRS, land assets are either classified as fixed assets or investment properties. Investment properties are assets held for further developments. Since 1MDB has made clear its intentions of developing the Tun Razak Exchange (TRX) and Bandar Malaysia from day one, these land assets have always been classified as investment properties.
According to MFRS 140, the standard requires that “the fair value of investment property shall reflect market conditions at the end of the reporting period”.
The standard also encourages reporting entities, in the event of no active market or transacted prices, to use independent professional valuations, which 1MDB has complied with.
Valuations of land under development are also essential for 1MDB’s preparatory work for TRX and Bandar Malaysia. It is necessary in order to accurately reflect the enhanced value as the developments progress.
Obtaining market valuations for TRX was crucial for the Investment Memorandum process, which has already drawn interest from high-profile potential partner investors.
Bandar Malaysia is currently in the process of the relocation of Pangkalan Udara Kuala Lumpur involving the development of eight sites. The relocation, alongside the commercial revaluation of the property, lays the groundwork for the project’s progress.
The claim that the term loan used to purchase Genting Sanyen Power was guaranteed by the federal government is incorrect.
None of 1MDB’s financing for the purchase of energy assets is guaranteed by the Government. This is clearly indicated in the financial statement of FY13.
In fact, the bulk of 1MDB’s financing has not been guaranteed by the Government, but is instead backed by the company’s own assets. Only RM5.8bil of loans, mostly as part of 1MDB’s start-up, has been guaranteed by the Government.
Each financing exercise, including bonds, was targeted to specific projects and their development needs and supported by the respective projects’ forecast cash flow and asset value.
1MDB has captured strong value from its energy assets, which contributed significantly to the group’s profit after tax of RM778.2mil for the year ending March 31, 2013.
The profit was posted on the back of a RM2.6bil revenue streaming mostly from its energy subsidiaries – Powertek Energy Sdn Bhd and Kuala Langat Power Plant Sdn Bhd.
1MDB paid a value for the energy assets that is commensurate with our expected growth strategy and further values that the asset would generate in future. 1MDB strongly believes in the substantial future growth potential of the assets, led by a credible, experienced management which is already creating further value from the power business.
Despite a goodwill writedown of RM1.18bil of its energy acquisitions, which is a one-off, short-term event, the resulting value creation is already proven, starting from the ability to successfully win the competitive tender of the recent Project 3B bid worth RM11bil.
1MDB expects its energy subsidiaries to continue bringing in strong cash flows to the group. During the subsequent financial year ending March 31, 2014, 1MDB has purchased a 75% stake in Jimah Energy Ventures, whose principal assets is the 1,400MW Jimah power plant in Negri Sembilan.
As a leading independent power producer locally as well as emerging regional markets, 1MDB will continue to bid for projects in Malaysia and overseas. Its real estate arm, meanwhile, moves into a new phase of development, with TRX finalising new investments for phase one of the development.