RM140 bil Bandar Malaysia deal is a rotten one for the country

By P Gunasegaram

THERE are two reasons why the Bandar Malaysia deal signed on Dec 17 should have been scrapped – one, the price at which the land was transferred to the consortium was way too low and, two, the government is likely to forego a huge amount in development profits which it could have kept for itself.

This rotten deal, which will eventually cost more than 1MDB’s losses of a minimum RM30 bil, is an example of continued patronage politics in Harapan bordering, or even involving, corruption. It includes a businessman who eventually bought over the prime minister’s bread business, indicating serious conflicts of interest besides and the needless involvement of a China company. More on that later.

In his speech at the signing of the deal, Finance Minister Lim Guan Eng laid the credit (if you can call it that) squarely on the PM. “The revival of the Bandar Malaysia project is due largely to the efforts of YAB Prime Minister. In April this year, YAB Prime Minister was in China to lead and witness the signing of the Framework Agreement on April 25, 2019 which revived this project.”

Not satisfied with that, he went on to say: “Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (CREC – a China state company) as a consortium won the tender to develop Bandar Malaysia back in 2015. With an area of 486 acres, it is the single largest development plot within the city of Kuala Lumpur. In May 2017, the deal was abruptly terminated following the unravelling of the 1MDB scandal. The present government revived the deal after the necessary detoxification exercise proved that it can still generate economic benefits on urban development for Malaysia.” He did not elaborate on the detoxification exercise.

But that’s not the whole truth. 1MDB started unravelling from 2013, with the momentum picking up considerably in 2015. However, TRX City had a different story to tell previously. This deal, originally also valued at RM7.41 bil, was signed on Dec 31, 2015 but subsequently terminated by TRX City in May 2017, one year and five months later. This is what TRX City said on the termination of the deal:This is because, despite repeated extensions being granted, IWH CREC failed to meet the payment obligations outlined in the Conditions Precedent under the share sale agreement. As a result, the share sale agreement between the parties stands null and void with immediate effect.

“TRX City will immediately be inviting expressions of interest for the role of master developer of Bandar Malaysia, with full ownership being preserved by the Ministry of Finance. The selection process will involve very strict criteria, including track record, speed of delivery and financial capability for such large-scale development. This is to enhance all aspects of Bandar Malaysia, including its role as a business, transport, residential and tourism hub,” it said.

The consortium, however, said in response that “this does not fully and accurately reflect the circumstances and conduct of the parties in this matter”.

In a surprise turnaround, the new Pakatan Harapan government revived the terminated deal. Under the deal, a 60% stake in Bandar Malaysia is to be sold to the initial contractor IWH CREC Sdn Bhd – a consortium comprising IWH and CREC – because the previous administration had been “unfair” to them in terminating their agreement. The consortium is 60% owned by IWH and 40% by CREC.

IWH is reportedly owned 60% by prominent businessman Tan Sri Lim Kang Hoo, through his private company, Credence Resources Sdn Bhd, while the remaining shares are held by Johor government company Kumpulan Prasarana Rakyat Johor (KPRJ). According to its website, KPRJ, wholly owned by the Johor government, was set up in 1995 and has a paid-up capital of just RM1 mil. The remaining 40% of Bandar Malaysia is owned by TRX City, a wholly-owned subsidiary of the Finance Ministry.

Till today the government has not announced good reasons for reviving this deal which had already been terminated by the previous Najib administration and which was instead going to invite international bids for a master planner, with the ownership always being under TRX City, which is wholly owned by the finance minister. This would have been a far superior deal.

The revived deal is terribly deficient in two respects. First, the 60% stake in Bandar Malaysia was sold to the IWH-CREC consortium for a price of RM7.41 bil, which puts a value of RM12.35 bil on the entire 486-acre land. That is 21.17 million sq ft, giving a price per sq ft of RM583, which is far below the commercial value of such land. Even if affordable houses (say costing about RM450,000) are going to be built there much money can be made as they will be high-rise condominiums.

Here are some indicative prices of land in and around the city centre. Land prices transacted include about RM7,200 per sq ft for the Pavilion shopping complex land in Kuala Lumpur way back in 2010, RM4,700 for land at the Tun Razak Exchange and other transactions for as high as RM3,500 per sq ft  more recently, according to a report.

That means, the Bandar Malaysia land is seriously undervalued. Even if the land is valued at RM3,000 per sq ft, the undervaluation comes up to RM51.2 bil [(3000-583) X 21.17 mil]. That’s probably more than the total amount of money which will be lost eventually by 1MDB.

Put in another way, if the government had kept all of Bandar Malaysia and managed it very well, there is more than an even chance that in time it will recover more from this one project than all the money lost from 1MDB.

Second, the government loses development profits. Now, let’s consider the gross development value or GDV of the project which is stated to be RM140 bil. Let’s say the margin of profit of this is 20%, excluding the profit that is already made from the undervaluation of the land. That adds a profit of a further RM28 bil, making in all RM79.2 bil! And remember, we are using conservative figures.

According to finance minister Lim, dividends from land sales will be split 50-50. But the statement is silent on whether development profits will be split the same way. If they are, then the government will get 50% or RM39.6 bil in total through TRX City.

This means the government needlessly loses RM39.6 bil to other entities as well as control of the project in terms of the masterplan, contractors etc. This will go to the IWH-CREC consortium. CREC owns 40% of the consortium and will get RM15.84 bil, a totally needless transfer to a China company because all construction and property expertise can be bought and there is considerable property expertise within Malaysia. Anyway, how much property expertise can a railway construction company have?

The lion’s share of 60% or RM23.76 bil will go to IWH which is 60% owned by Lim Kang Hoo and 40% by Johor’s KPRJ which has a mere RM1 bil paid-up capital. Thus this Lim gets RM14.256 bil while KPRJ gets RM9.504 bil. The middling property developer becomes a billionaire many times over in terms of value while a RM1-mil company is now worth 9,500 times that.

Anyway it is seen, this is theft of the highest order – surpassing that of 1MDB. Ironically, the previous government which robbed 1MDB blind, was actually doing the right thing by keeping Bandar Malaysia under government control and seeking a master developer. That way, all of the profit would have come to the government.

One more thing, and this is very interesting. News portal Free Malaysia Today reported in April 2019, the same month the government announced the revival of this project, that PM Tun Dr Mahathir Mohamad-owned bakery The Loaf was reopened after it was bought over by Lim Kang Hoo’s Ekovest. Mahathir was present and made a speech at the Bandar Malaysia signing ceremony, extolling its virtues. Need we say anymore?

P Gunasegaram says until large-scale corruption is killed, expect billions more in public funds to be squandered.

 

 

 

 

 

 

 

 

 

 

 

Subscribe and get top news delivered to your Inbox everyday for FREE