Anil Netto surveys the backdrop to the spectacular unravelling of the Bandar Malaysia deal, a vital component of the 1MDB rescue plan.
I was midway writing a follow-up to my earlier piece ‘Black hole of 1MDB’, when news broke that the Bandar Malaysia deal had fallen through.
In that earlier piece, I had estimated that very conservatively 1MDB stood to gain RM12bn in revaluation surpluses from its two main land banks (RM7.2bn from its 486-acre Bandar Malaysia/Sungai Besi land and RM5.1bn from the 70-acre TRX land) – without doing any work at all! Recall that 1MDB had acquired its two main land banks at dirt cheap prices – RM65psf for the TRX land and RM76psf for the Bandar Malaysia/Sungai Besi land.
That RM12bn in revaluation gain was a conservative figure. Perhaps 1MDB could have gained up to RM15bn, based on prevailing land market values back then. Bandar Malaysia alone accounted for about half this figure or more. As 1MDB had already booked in RM5.0bn into its account, this means it (and indirectly the Malaysian government) still had an additional RM7-10bn to cushion further 1MDB losses.
Indeed, the total of RM12-15bn in revaluation surpluses would have come in handy in papering over the black hole of 1MDB and settling the US$6.5bn Ipic mess. There were at least $4.2bn of questionable transactions by 1MDB, including a $2.1bn payment to a firm with a similar name, Aabar Investments PJS Ltd.
The Malaysian government had been counting on receiving RM7.4bn from the sale of a 60 per cent stake in the firm managing Bandar Malaysia as part of the 1MDB rationalisation plan. The plan was to sell it to a consortium comprising Iskandar Waterfront Holdings (IWH) (60 per cent) and China Railway Engineering Corp (CREC) (40 per cent).
As they say about the best-laid plans…. Even back then, the China-led consortium seemed to be disputing the value of the 60 per cent stake, reportedly claiming it was worth only US$1.2bn (RM5.3bn) instead of RM7.4bn.
That was then. Now, former 1MDB unit TRC City Sdn Bhd, taken over by the Ministry of Finance, says payment hasn’t been made. But the consortium is insisting it has met all payment obligations. So the plot thickens.
Let’s just say something went terribly wrong and the deal fell through.
The jewel that lost its glitter
The Bandar Malaysia project, with a gross development value of RM160bn, was touted as the jewel in China’s deals with Malaysia, so much so that some mocked it as Bandar Cina. It was supposed to be a major railway hub linking the controversial RM55bn East Coast Rail Link project and the KL-Singapore high-speed rail project.
For China Railways, getting involved in Bandar Malaysia was one way of getting a foothold into the multi-billion KL to Singapore high-speed rail project. Even though this project was supposed to be through open tender, many rightly or wrongly expected both these major lines to be eventually built by China companies with the participation of Chinese financial institutions, which would be based in Bandar Malaysia.
Eyebrows were raised further when it was revealed that China Railways was supposed to locate the regional headquarters of China Railways in Bandar Malaysia. In fact, a large China Railways display board had already been put up inside the KL Sentral Terminal – a sign of things to come (or rather things that were supposed to come).
Bandar Malaysia was also supposed to be the hub for a “digital free trade zone” and a major focal point for mixed property development.
Though Abdul Rahman Dhalan tried to put on a brave front and said the Bandar Malaysia project would go on, there is no denying that it is a hammer blow. It raises all kinds of questions about the rest of the close to RM150bn in deals which Najib entered with China only recently.
Let us survey the backdrop to this mess which might give us a better picture of the whole affair.
KL – ‘a tunnel engineer’s nightmare’
Speaking of black holes…
One third of Kuala Lumpur stands on limestone bedrock. These limestone surfaces have many cavities which may be hollow or filled with water. This kind of formations may be vulnerable to groundwater drawdowns (eg during excavation work when the water table subsides and the weight of support from the water table for the soil above disappears).
Cavities in the formation which are not filled or only partially filled pose a serious risk and could lead to collapse of the surface or ground settlement ie sinkholes. When it rains, the soil above will be even more saturated and heavier, adding to the likelihood of collapse.
The area in and around Sungai Besi is made up of such difficult geological terrain, including limestone ie a mature karstic formation. This is something that engineers involved in the Smart Tunnel had to watch out for when carrying out difficult excavation work, using special German-made tunnel-boring machines. In fact, during excavations for the Smart Tunnel, engineers reportedly had to deal with 41 sinkhole formations.
Indeed, Kuala Lumpur has been described as “a tunnel engineer’s nightmare”. Even the Petronas Twin Towers had to be moved 60 metres from its original planned location because of the unstable geology there. See this video below:
What more building an entire city, chock full of skyscrapers (see artist’s impression at the top).
Would this have been a factor in making the development of Bandar Malaysia more difficult and expensive than expected?
Requirement for local involvement
It appears as if it is not just Bandar Malaysia alone that may be affected by this deal coming unstuck.
Previously, it looked as if Chinese firms would be heavily involved in building the railroad infrastructure. It was only in December that it was reported that China was ahead in the race to secure the high-speed rail contract, especially after its interest in the East Coast Rail Link and Bandar Malaysia mega projects.
But now, it is being brought to our attention that many other companies from Japan, South Korea and even the United States and Europe are also keen on the project. (See report here.)
There’s another point in that report. We are told that the foreign railway bidders involved would have to show how local contractors would be involved in its construction. Rahman Dhalan said, “We want to see companies have a plan to include Malaysia entities in sub-contractor works – whether this be civil, engineering or earth works at project sites.
If it was not the failure to meet payment obligations that made the Bandar Malaysia plans come unstuck, was there disagreement over the extent of local involvement – and local demands by any vested interests especially in an election year – in the Bandar Malaysia development deal?
Some believe similar sticking points over local involvement (eg the use of local vendors) may have hindered rescue attempts at Proton, especially in the car-maker’s bid to tie up with foreign partners.
It would not be unreasonable to presume that local involvement would also have been required in the development of Bandar Malaysia.
Tighter curbs in China on funds outflow
China has been clamping down on Chinese nationals buying property abroad. They can now only take out US$50,000 a year (although some might exploit loopholes in the system).
Alarm bells rang in February 2017, when it was revealed that China’s reserves fell below US$3 trillion for the first time in six years. No doubt this will lead to tighter controls over the outflow of funds from China.
Moreover, not all firms from China operating in Malaysia are state-owned firms. There are also private firms, including developers, from China operating in Malaysia, and the Chinese government may be less sympathetic to them than to its state-owned firms.
Such restrictions spell more trouble for major property developers here. It is no secret that many of them had based their rosy projections on the assumption that sales of expensive property to foreign buyers, mainly Chinese nationals, would continue. Now that prospect looks at best uncertain.
Glut in high-end property market
If that’s not bad enough for developers, some say there is even a glut in retail space in urban centres such as the Klang Valley and Penang, where the annual growth of available retail/mall floor space has outstripped population growth.
As for residential property, many local buyers simply cannot afford the expensive prices. Based on the real definition of ‘affordable housing’, such homes should be priced between RM160,000 and RM250,000. But not enough of such homes are being built. Instead, most of the homes being built are priced well in excess of RM250,000.
Mindful of the high household debt in Malaysia, banks too have tightened their approval criteria for housing loans at a time when many Malaysians are finding it hard to cope with the soaring cost of living.
So how would this slump in the property market affect the financial projections of Bandar Malaysia?
Impending polls: Waiting it out?
The outcome of next general election is going to be hard to call, given the changes in the composition of the opposition coalition with two new parties participating (Amanah and Bersatu) and the likelihood of a string of three-cornered contests with Pas putting up candidates in many seats.
That said, surveys have indicated that Najib’s and the BN’s popularity has plummeted especially with the unpopular GST and the ongoing 1MDB investigations in a string of countries.
Meanwhile, the tabling of RUU355 in Parliament and the apparent spread of religious intolerance can’t have impressed China either. Remember how the China ambassador reacted by distributing mooncakes when the red shirts threatened to march through Chinatown in Kuala Lumpur?
Would China want to invest heavily in – even rescue or bail out – the Najib administration ahead of a general election in which the BN has no guarantee of being returned to power? Or would China prefer to wait it out and then deal with whoever is in power after the general election?
IWC’s prospects now uncertain
The shares of Iskandar Waterfront City Bhd have reportedly been voluntarily suspended on Thursday after the Ministry of Finance (MoF) called off the Bandar Malaysia deal.
IWC’s parent company Iskandar Waterfront Holdings Sdn Bhd had partnered CREC in the Bandar Malaysia deal. The shares of IWC, as a listed firm, were seen as a proxy to the value of prime land in Johor Bharu and the Klang Valley by a research firm.
In March, IWC was reportedly the target of a reverse takeover by executive vice chairman Lim Kang Hoo Lim and his business associates, including the Johor Sultan. The new IWH would reportedly have had a total of 7,400 acres of land – a massive land bank by any standards.
Investigations into 1MDB
Among the string of foreign agencies investigating one of the world’s biggest financial scandals is the US Department of Justice.
Would China want to risk getting involved in anything to do with 1MDB given the intense scrutiny the Najib administration is under from all the ongoing probes?
If the BN loses the general election, however unlikely that may now seem to many, there is a real possibility that a new Pakatan administration will scrutinise the federal government’s accounts and take a closer look at all the mega deals with China, including the ECRL.
Very likely, there would be a closer look at the cost of the East Coast Rail Link, which has soared to RM55bn. The costing of this project has come under intense scrutiny as some have pointed out that it is much higher than the earlier estimate of RM30-35bn that was bandied about. Is this project even financially feasible (based on projected riderships) in the first place?
A new administration would probably also inquire into the affairs of 1MDB. Remember, 1MDB’s 2013 and 2014 audited financial statements have been thrown into doubt while the 2015 statements are long overdue.
Illusory mega deals
All the above factors may be relevant in trying to understand what is happening now even though they may or may not be the real reasons for the Bandar Malaysia deal not going through.
The larger question is, what about the rest of the deals with China? There is wisdom in the old saying, “Don’t put all your eggs in one basket” – in this case, don’t be heavily reliant on investments or patronage from a single source, ie China. For one day – pardon the mixed proverbs – the goose that laid the golden eggs might just buzz off.
Whatever the case, the unravelling of the deal will add further pressure on the Najib administration, which is trying to settle 1MDB’s enormous debts. It is time to face the music.
One final thought: shouldn’t we be pursuing a more sensible policy of economic development that is more organic – ie based on our own resources, perhaps aided by foreign expertise where necessary.
This would be a more sober approach than living beyond our means in pursuit of hasty, opaque mega deals with a superpower which could either undermine our sovereignty or come unstuck just as easily as they were inked.