Malaysia’s taxpayers set to foot the bill for 1MDB failures
Billions of dollars lost in shady deals surrounding Malaysia’s state fund 1Malaysia Development Berhad (1MDB) will be, at least partly, have to be shouldered by the country’s taxpayers, latest news suggest.
The troubled fund, which has amassed some $11 billion in debt over the past years, is currently selling off its assets but also needs support from Malaysia’s Finance Ministry, which is the ultimate shareholder and carries the financial risk of the fund.
One such risk is the arbitration claim of Abu Dhabi’s sovereign wealth fund International Petroleum Investment Co (IPIC) against 1MDB for $6.5 billion. IPIC’s investment arm Aabar Investments had guaranteed $3.5 billion worth of 1MDB bonds in 2012 and now claims that 1MDB has never made any payments for the guarantee or the interests owed. 1MDB, in turn, says they were defrauded and in fact paid a $3.5-billion cash deposits to a company called Aabar BVI on the British Virgin Islands, which, however, seems to have been a fake shell company.
The money is since lost and, at the end, Malaysia’s Finance Ministry as 1MDB’s owner, i.e. the Malaysian tax payer, is left with the liability for it. The country will have to make provisions as long as the court case goes on. If the court rules in favour of IPIC, the money’s gone. This puts pressure on Malaysia’s credit rating as it substantially weighs on Malaysia’s balance sheet, which, in turn, may lead to a credit rating downgrade.
The second risk is the fact that the government has to step in to take over 1MDB’s ongoing projects which the fund is now unable to finance. On June 16, the Finance Ministry signed an agreement to take over 1MDB’s remaining stake of 40 per cent in the multi-billion dollar development project Bandar Malaysia.
1MDB sold a 60-per cent stake in the huge real-estate project in December to a consortium comprising China Railway Engineering Corp., the Malaysian unit of China Railway Group, and Iskandar Waterfront Holdings for $1.7 billion. With Malaysian government support, a new fund, the Bandar Malaysia Fund, has been set up which is backed by Chinese and Malaysian banks and aims at continuing the project.
The ultimate risk is again left with Malaysia, as Iskandar Waterfront Holdings is partly owned by the state government of Johor through a public-private partnership which pushes Malaysia’s exposure towards the project above 50 per cent. The government will also provide incentives for companies involved in developing Bandar Malaysia, including a ten-year tax exemption, eight years relief of stamp duties and property gains tax and removal of import duties for construction materials not available locally, forgoing revenue streams for public coffers in those periods.
The third risk is that the Malaysian government through the Finance Ministry will also have to take over another 1MDB development, Tun Razak Exchange, a huge public-private partnership project with costs of around $2 billion. Since Middle Eastern investors pulled out, Malaysia now partners with Australia-based Lendlease Group which currently is the majority shareholder in the project in a joint venture with 1MDB.
Billions of dollars lost in shady deals surrounding Malaysia's state fund 1Malaysia Development Berhad (1MDB) will be, at least partly, have to be shouldered by the country's taxpayers, latest news suggest. The troubled fund, which has amassed some $11 billion in debt over the past years, is currently selling off its assets but also needs support from Malaysia's Finance Ministry, which is the ultimate shareholder and carries the financial risk of the fund. One such risk is the arbitration claim of Abu Dhabi's sovereign wealth fund International Petroleum Investment Co (IPIC) against 1MDB for $6.5 billion. IPIC's investment arm Aabar...
Billions of dollars lost in shady deals surrounding Malaysia’s state fund 1Malaysia Development Berhad (1MDB) will be, at least partly, have to be shouldered by the country’s taxpayers, latest news suggest.
The troubled fund, which has amassed some $11 billion in debt over the past years, is currently selling off its assets but also needs support from Malaysia’s Finance Ministry, which is the ultimate shareholder and carries the financial risk of the fund.
One such risk is the arbitration claim of Abu Dhabi’s sovereign wealth fund International Petroleum Investment Co (IPIC) against 1MDB for $6.5 billion. IPIC’s investment arm Aabar Investments had guaranteed $3.5 billion worth of 1MDB bonds in 2012 and now claims that 1MDB has never made any payments for the guarantee or the interests owed. 1MDB, in turn, says they were defrauded and in fact paid a $3.5-billion cash deposits to a company called Aabar BVI on the British Virgin Islands, which, however, seems to have been a fake shell company.
The money is since lost and, at the end, Malaysia’s Finance Ministry as 1MDB’s owner, i.e. the Malaysian tax payer, is left with the liability for it. The country will have to make provisions as long as the court case goes on. If the court rules in favour of IPIC, the money’s gone. This puts pressure on Malaysia’s credit rating as it substantially weighs on Malaysia’s balance sheet, which, in turn, may lead to a credit rating downgrade.
The second risk is the fact that the government has to step in to take over 1MDB’s ongoing projects which the fund is now unable to finance. On June 16, the Finance Ministry signed an agreement to take over 1MDB’s remaining stake of 40 per cent in the multi-billion dollar development project Bandar Malaysia.
1MDB sold a 60-per cent stake in the huge real-estate project in December to a consortium comprising China Railway Engineering Corp., the Malaysian unit of China Railway Group, and Iskandar Waterfront Holdings for $1.7 billion. With Malaysian government support, a new fund, the Bandar Malaysia Fund, has been set up which is backed by Chinese and Malaysian banks and aims at continuing the project.
The ultimate risk is again left with Malaysia, as Iskandar Waterfront Holdings is partly owned by the state government of Johor through a public-private partnership which pushes Malaysia’s exposure towards the project above 50 per cent. The government will also provide incentives for companies involved in developing Bandar Malaysia, including a ten-year tax exemption, eight years relief of stamp duties and property gains tax and removal of import duties for construction materials not available locally, forgoing revenue streams for public coffers in those periods.
The third risk is that the Malaysian government through the Finance Ministry will also have to take over another 1MDB development, Tun Razak Exchange, a huge public-private partnership project with costs of around $2 billion. Since Middle Eastern investors pulled out, Malaysia now partners with Australia-based Lendlease Group which currently is the majority shareholder in the project in a joint venture with 1MDB.
