Helping Tun M understand the RM17b 1MDB-Edra sale

I thought I would help Tun Mahathir answer his questions in his blog post today "1MDB EXITS POWER BUSINESS".

I would understand why Tun M would be confused why Tun M would be confused because just 5 months ago, he had also written in the same blog: 'Who would want to own overpriced and obviously unprofitable power plant? and "had 1MDB waited until the licenses expired, the price would be next to nothing.'

Therefore I can imagine Tun M's shock when he found out that more than a few bidders were willing to bid RM17.3 billion for these very power plants that others have called 'worthless' and 'scrap metal'. And one company even signed to buy them too. 

But before I finished wiring this, 1MDB has already issued an official press statement to also help Tun M answer his "genuine" queries. Better you read the official reasons than read from tme.

Media statement by 1Malaysia Development Berhad - Issued on 29 November 2015

Sale of Edra: Clarification on false allegations by Tun Dr Mahathir

1MDB refers to a blog post relating to the sale of Edra by YABhg Tun Dr Mahathir Mohamad, a retired and former politician, who has failed in his numerous attempts to politicise the 1MDB issue. We regret that Tun Mahathir persists in issuing misleading and wrong statements on 1MDB, which is then reported in an irresponsible manner, without analysis or journalistic enquiry, by certain online media portals.

Through the sale of Edra to CGN Group, based on Edra 31.03.2015 financial statements, 1MDB will receive for its equity, cash of RM9.83 billion. In addition, CGN Group will take over debt in the Edra operating assets of RM7.43 billion. Accordingly, through cash receipts and debt transfer, 1MDB will achieve debt reduction of up to RM17 billion, which is well within the anticipated RM16 billion to RM18 billion range per the rationalisation plan. Arul Kanda, the President and Group Executive Director of 1MDB, has clearly explained these facts, which were reported in the media last week.

LSS: For clarity, 1MDB did not pay RM18b cash to buy all the IPPs. 1MDB paid RM12.05 billion (RM8.5b for Ananda Krishnan's Powertek, RM2.35 billion for Genting and RM1.2 billion for Jimah) and assumed RM4.92 billion of legacy debts - making the total purchase value to be RM16.97 billion.

Therefore, the current propaganda of 1MDB buying at RM18b and selling for RM9.83b is WRONG!

It is important to clarify that the up to RM17 billion debt reduction is over and above the approx. RM2 billion cash dividends that 1MDB has received over time from the power assets during its ownership. Accordingly, 1MDB has essentially "broke even" on its investment, through an international tender process, despite having to sell its assets whilst under sustained and misleading attacks from the opposition and Tun Mahathir himself.

If Tun Mahathir took the trouble to review Note 29 (v) of 1MDB's 31.03.2014 publicly available audited financial statements, he would realise that of the RM42 billion 1MDB debt, RM19.82 billion of debt is denominated in Ringgit Malaysia and RM22 billion is denominated in USD.  Accordingly there is more than enough RM denominated debt to be settled from the RM9.83 billion Edra sale cash proceeds.

As for the USD debt which so concerns Tun Mahathir, per the binding term sheet executed with IPIC on 28 May 2015, it is the intention of 1MDB that USD3.5 billion of IPIC guaranteed bonds will be settled via a "debt-for-asset swap" with IPIC. This envisages 1MDB transferring to IPIC, 1MDB assets comprising USD denominated cash deposits and USD denominated fund units, in return for IPIC taking over the USD3.5 billion of bonds that it has guaranteed.

LSS: Basically, this means that 1MDB had long ago "hedged" their foreign currency exposure by keeping assets in USD to match the USD debts. As a matter of fact, if 1MDB had succumbed to political pressure by Rafizi Ramli and Tony Pua when they started attacking this 1MDB just before GE13 in 2013 to bring back the USD2.32b Cayman funds back to Malaysia, it would have resulted in big realised FOREX losses to the tune of RM3 billion when 1MDB had to settle the 10 year bonds and the interest costs and had to convert back to USD.

2013 USD1=RM2.96 hence USD2.32b = RM6.86 billion
Now: USD1=RM4.25 hence USD2.32b = RM9.86 billion

Would Rafizi and Tony Pua compensate 1MDB for this RM3 billion loss if 1MDB had listened to them then?

Tun Mahathir has also misled his blog readers by failing to mention that the IPP tariff for the Edra assets are fixed for the life of the PPA (power purchase agreement) period. On average across all the Edra power plants, this is for the next 10 years. So, there is no question of the IPP tariff being increased for the life of the PPA, despite the change of ownership.

Tun Mahathir has repeatedly misled the public with false statements. Most infamously, he is on the record as saying "RM42 billion hilang" ("RM 42 billion missing") from 1MDB. The sale of the Edra operating assets, with a debt reduction of up to RM 17 billion, clearly shows how Tun Mahathir was and continues to be, wrong. Secondly, Tun Mahathir has repeatedly insinuated that RM2.6 billion in the accounts of Prime Minister YAB Dato' Sri Najib Tun Razak was from 1MDB. This is despite the MACC publicly issuing three statements that no funds from 1MDB went into the accounts of Dato' Sri Najib.

1MDB requests that Tun Mahathir uses facts and figures in his arguments and to stop his misleading and wrong political attacks on 1MDB. We further urge the online news media to also properly analyse and use critical analysis prior to publishing such wrong and misleading statements by this retired, former politician.

There you have it. Tun M's questions about the Edra sale is well and comprehensively answered by 1MDB.

To be fair, Tun M's track record and understanding of the Independent Power Plant (IPP) concessions agreements has not been good - which explains those heavily lopsided IPP concessions during Tun M's time.

Opposition had attacked the government on these lop-sided agreements for years and accused it of losing hundreds of billions over the past two decades from Tenaga and from Malaysians who pay electricity bills  - including RM19 billion in gas subsidies yearly.

I am sure you have seen the above picture (and variations of it) as it had been widely spread in the past. Opposition have always accused Mahathir's IPP crony;'s to be the gang of four-  Ananda Krishnan, Genting, YTL and Syed Mokhtar.

Since 2011, Najib had made sure that 1MDB bought out Ananda Krishnan and Genting - so we can cross out those names.

And later in 2012, the government also did away with Mahathir era direct negotiations for IPP power purchase agreements and went full open tender.

The result of the open tender was that YTL's concession was not renewed while ALL power rates are now in low-single digit internal rate of returns compared to the high double digit returns of the Tun M's past - this also eliminated Syed Mokhtar's Malakoff's lucrative agreements of the past.

Due to Najib Government's efforts, that picture above you see is now history.

As a matter of fact, Tun M is not very good in understanding concession agreements of any sorts - including toll agreements and not just the IPP ones.

This was finally revealed by Tun M in Jan 2007 when he said:

"Acknowledging that the government during his time may have erred in signing the toll concession agreements, Tun Mahathir urged the present government to be more careful before agreeing to toll hikes.

"This is one of thing that we need to correct. What you have is a cabinet which is not very knowledgeable all the time because it is not made up of experts but politicians (and) some politicians like myself can sometimes be stupid," he said when told by reporters that all the five tolled expressways were constructed during his 22-year tenure as prime minister.

Mahathir said the agreements were drafted by officers and submitted to the cabinet and usually the small prints are not there.

"The cabinet merely gave approvals in principle and never really studied the implications in some parts of the agreements."

 Like what Tun M said above, he and his Cabinet members then were "stupid" (Tun M said himself, not me) and did not read the toll concession agreements properly before signing then.

Tun had then advised his predecessor governments to not to be like him and be more careful in signing future concession agreements.

However, Tun M did not comment how the present government should resolve the bad agreements he had signed before though as government cannot simply break agreements without paying compensation.

In October 2010, Najib had instructed Khazanah to buy back Malaysia's largest toll operator PLUS Highways from the private cronys and now PLUS is 51% owned by MOF and 49% owned by EPF - hence any toll concessions goes back to the govt and rakyat instead of to private hands.

And with this purchase, the govt was able to re-negotiate and prevent toll price increase without having to pay compensation - hence stopping toll prices to be increased for those PLUS highways.

Although the biggest and most lop-sided one was solved by Najib but there are still more than a dozen toll highway operators - many with lop-sided terms - that are still not resolved yet - thanks to Tun M and his cabinet's "stupidity" in not understanding the toll concession agreements or reading it fully before signing them.

As to Tun M's question of China "bailing out" 1MDB by buying Edra, the country that so-called "bailed" out 1MDB's Edra is also the same country that bailed out Tun M's Perwaja Steel.

Nobody ever complained when our "strategic sector" National Steel company got bailed out by China just 4 months ago in July also.

Tun Mahathir also said nothing then.

Or you mean steel is not a strategic sector also? If not strategic then why spend more than ten billions of ringgit building it and  keep on bailing it out time after time?

In Edra's case, at least govt got back all or most of its money.

In Perwaja case, all the ten billion all habuk pun takde- never to be recovered.

If 1MDB doesn't sell, you say 1MDB's debt too much and RM42b lesap,
If 1MDB sell, you will complain why sell profitable and cash-flow generating assets,
If 1MDB sell at low price, you will say 1MDB is stupid and lose a lot of money,
If 1MDB sell at high price, you will say "what's the catch?",
If 1MDB sell to a local government company, you will say it is a bail-out,
If 1MDB sell to foreigners, you will say "jual negara",

To avoid such complaints in future, perhaps Tun M, Rafizi and Tony Pua should clearly announce whether to sell or not, sell at what price and sell to whom - perhaps sell back to Genting, YTL or Ananda Krishnan.

Then 1MDB should just follow instructions and do what the tell you instead of doing something stupid like what you did now - which is maximising the value of your assets via international open tender.


Actually, if Tun M was still the prime minister, we would not be talking about whether 1MDB made money, lose money or broke-even on Edra.. Based on his past track-record, if Tun M was still PM, the Edra IPPs will all have mega-long concession period, all high double digit IRRs with highest power rates (instead of lowest bid for each and ever IPP tender that Edra had bid on since taken over in 2011) and take or pay formula with super-subsidized gas supply - just like before.

Edra would easily be worth RM30-40b instead.