FOR the past eight years, the 1Malaysia Development Berhad (1MDB) state investment fund has been no stranger to international controversy.
Described as one of the world’s biggest financial scandals, it has continued to make headlines, with the media both foreign and local meticulously picking apart the company’s financials to seek answers to burning questions on its debt burden, the US$700 million that reportedly landed in the bank accounts of Malaysia’s Prime Minister Najib Razak, and the more than US$4 billion allegedly laundered by closely-linked individuals.
Needless to say, the scandal has rocked Najib’s leadership. And though the prime minister has been absolved of blame and has adamantly denied any wrongdoing, the fund he established in 2009 remains at the centre of political debate in the Southeast Asian country, along with money-laundering probes in at least six other nations, including the United States, Switzerland, and Singapore.
And now, two weeks ahead of Malaysia’s widely-anticipated general election, Arul Kanda Kandasamy – the man tasked with repairing the debt-riddled company since early 2015 – met Asian Correspondent’s Senior Journalist, A. Azim Idris, to explain the status of 1MDB’s debts, and why he thinks the allegations have been acutely blown out of proportion.
Below is the first in a series of articles from Asian Correspondent’s interview with Arul in Bukit Damansara, Kuala Lumpur, on April 25.
Where did 1MDB go wrong?
1MDB’s problems grew in November 2014, when the application for initial public offering (IPO) of its power arm, Edra Energy Berhad, hit a snag, according to Arul.
“The IPO didn’t happen and then 1MDB suffered a cashflow mismatch because there was interest on loans that were due but insufficient cash flow coming in.”
1MDB has sold off Edra and is no longer an operational company, Arul says, while its major assets like the Tun Razak Exchange (TRX), a 70-acre development in the heart of Kuala Lumpur, and Bandar Malaysia, which has a gross development value of RM150 billion (US$38 billion), have been transferred to other companies that are managed by the country’s Finance Ministry.
“1MDB will receive payments from those companies and these payments would be used to service the remaining debts of the company,” Arul said.
In retrospect, Arul believes there were several mishaps that led to the eruption of 1MDB’s woes back in the day, describing it as a convergence of events that culminated into its current state.
“First, it was the IPO which didn’t occur. Secondly, 1MDB also announced its first-ever loss in November 2014,” he said.
At its peak, 1MDB accrued some RM50 billion debt (US$12.5 billion), but ever since taking the job as 1MDB’s president and chief executive, the lawyer-turned-investment banker says the figure has been brought down to the current RM31 billion (US$7.9 billion).
However, the assets belonging and due to the company stands at RM43 billion (US$10.9 billion), Arul says, adding the assets were “properly managed”. On the time needed to service the loans, Arul says the company has more than sufficient assets to repay the long-term debts, putting 1MDB in a “stable position”.
Arul said another factor was former prime minister Dr Mahathir Mohamad, now the opposition leader, who joined the 1MDB debate in 2014. Dr Mahathir, Najib’s mentor-turned-political nemesis, entered the fray via former personal aide Khairuddin Abu Hassan, who lodged a police report against the fund in December that year.
“So you had a confluence of events with the business problems and the political attacks, which came together… and as a result, investors lost confidence in the company,” Arul said.
“As you know, 1MDB is a company that is funded by debt. The moment investors lose confidence, they will demand repayment, so that’s what happened.”
The announcement of Arul’s appointment as president and chief executive of 1MDB in January 2015 came at a time when the company had hit rock bottom.
Despite this, Arul finds it difficult to pin blame on the board of directors and executives who preceded him.
“Obviously, those people had to deal with a particular set of circumstances at that time, and it’s not fair for me to put myself in their shoes.”
However, Arul says he thinks there are some general principles which were perhaps overlooked or not rigorously enforced.
“For example, to do an IPO you need advanced planning. You need people who have experience in conducting such an IPO,” he said.
“Regretfully, there were internal weaknesses and the management was not being capable enough to undertake the IPO on time.”
Arul claimed that the fund’s then-management did not have a contingency plan and when the IPO fell through, everything caved in.
“You can’t just put your all your eggs in one basket.”
Had he been at the helm at the time, he would have done things a little differently, Arul said, but did not push harder on the point.
“I think the future planning or forward thinking was insufficient because if you know where your debt repayment milestones are, you can plan well in advance to meet that.
“These are the things if I was there I would have done differently,” he said.
Another key failure of the firm was the lack of communication. Arul believes in the value of using good PR to control the firm’s narrative, noting that from 1MDB’s founding in 2009 up until 2015, it had little in the form of a communication strategy.
“There was actually no communication from 1MDB – about what the company was doing, about the criticisms, and allegations made against the company.”
He said some members from Malaysia’s opposition have been criticising 1MDB since 2010 and 2011, but due to the lack of communication, certain narratives became hardened.
“Certain opposition narratives became the de-facto narratives about 1MDB and that’s why there was so much negative perception,” he said.
“So when I came on board in 2015, I started a programme of engagement – I became very accessible to the media, I went on roadshows, interviews with local and foreign press, I went on TV local and international media to try and explain what had actually happened so that long period of silence didn’t help.”
“These are things that, had I gotten there (1MDB) earlier, I would have changed.”