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1MDB president and group executive director Arul Kanda Kandasamy says for now, the original plan cannot be implemented. 'So for this rationalisation plan, if the company has a liquidity problem or cash flow mismatch, there are really just three solutions. The first is getting new funds from shareholders, or issue new equities. Secondly, we sell assets and repay the debts. And thirdly, we invite new funds from new investors. But for 1MDB we take the third approach.' — TV3 screen grab
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KUALA LUMPUR, Aug 12, 2015:
1Malaysia Development Bhd (1MDB) president and group executive director Arul Kanda spoke on wide-ranging issues raised about the sovereign wealth fund, including investigations into its affairs conducted by Bank Negara Malaysia, the Royal Malaysian Police, the Malaysian Anti-Corruption Commission and the Public Accounts Committee (PAC).
Arul also elaborated on the implementation of the 1MDB’s rationalisation plan that would be able to resolve its debts within four to six months.
He said 1MDB was on track to meet its strategic development objectives and did not encounter problems in wooing investors, but was saddled by political accusations and allegations.
Here is the full transcript of TV3’s Norzie Pak Wan Chek and Izwan Azir Salih’s conversation with Arul on the Soal Jawab programme last night:
PREAMBLE: 1MDB president and group executive director Arul Kanda, in a statement, has asserted that he was fully responsible for any action against the company after helming it.
He gave the commitment to carry out his job professionally and to provide all the necessary information to assist the authorities seeking the truth behind 1MDB affairs.
Arul was appointed to carry out a strategic evaluation of 1MDB and now he spearheads the implementation of its rationalisation plan, which was tabled to the Cabinet on May 29.
So far this plan, which is set to reduce the company’s debt level, is running smoothly.
This was attested by the repayment of loans amounting to RM3.6 billion, which was announced on June 8.
First and foremost, let us get to know Arul, who was previously a banker in Abu Dhabi, the United Arab Emirates and the UK.
QUESTION: You have experience in restructuring companies, but not many people know you well, until after the 1MDB affairs became public knowledge. It is understood that you have a legal background?
ANSWER: Yes, I have an LLB and a Master’s in Law degree and studied in the UK for several years, after which I went into investment banking in London, Bahrain, Dubai and previously Abu Dhabi.
Q: When you were given the responsibility to lead 1MDB, it was debt ridden, its governance was questionable. What motivated you to accept the responsibility? Probably there were specific reasons related to the situation faced by 1MDB then?
A: There were many things that we needed to see before taking up a new post. As a professional, I was intrigued with the news that I heard and read on the Internet and social media on 1MDB while I was in Abu Dhabi. I heard a lot about 1MDB and its challenges.
I would like to know more about it and also with the background that I have in my work and the knowledge that I have on this kind of work.
The opportunity to return home and to implement the rationalisation plan was an opportunity that I needed to take as a professional. And we have to try and see what we can do.
Q: Were the circumstances described on 1MDB before similar after you had returned home?
A: Most of them were similar. Ironically, there were mostly negative news, but the audience needs to know that 1MDB is the biggest power producer in Malaysia.
It also owns strategic areas in Kuala Lumpur and in other parts of Malaysia. So business is as usual, we carry out daily tasks, but there were challenges to be overcome, especially the company’s debts.
So to me, as a professional, we look at the whole picture, not part of it only. The whole picture is what I had identified before returning home, but there were other challenges such as the political situation and so on, which is not my expertise.
I am a businessman and a banker, not a politician, so it was a little difficult.
Q: So, in other words, before you joined 1MDB, you were mentally prepared to face the brickbats or the debts payable and so on and certainly you had a special plan to drive 1MDB towards a better direction?
A: Alhamdullillah, a workforce of about 1,100 professionals in 1MDB go about their daily duties to generate power, and develop TRX and Bandar Malaysia and so on. So to me, it’s running smoothly and we do not need to worry.
But on the part of the financial burden, it takes a lot of air time in Malaysia, it is a bit difficult. But my background in the Middle East in the implementation of rationalisation plan was indeed my expertise, as well as legal and banking expertise. InsyaAllah, we can carry out the plan that was presented to the Cabinet on May 29, 2015.
Q: Let’s talk briefly on 1MDB’s core businesses as, to the general public, it is a company bogged down by debts. Briefly tell us about 1MDB’s background.
A: It is rather difficult to give a brief story as it is actually a lengthy one, but I will try. It originates from the Terengganu Investment Authority (TIA) that was established as a sovereign wealth fund, so a government fund, but it was changed because it was then only for the state of Terengganu.
So when Datuk Seri Najib (Razak) became the Prime Minister, a decision was made to convert TIA to 1Malaysia Development Bhd (1MDB).
So with the change, the strategic direction of the company converted to a strategic development company. This means the company delves into projects in the interest of the country to become catalysts, create new way hybrids for the private and government sectors, and also to bring in foreign direct investment.
So that’s the first chapter. Secondly, the 1MDB model from the beginning was to develop projects through loans. Why? Why use debts? At that time, when we used loans to buy assets such as land or cash-generating power stations, so the debt burden could be borne.
And the government then injected RM1 million into the company, so that other government funds can be used to build schools, hospitals and so on. So the model can be leveraged and we can use government funds for other things.
But when we implemented projects by taking loans, what is important is the execution. It meant that the 1MDB’s plan was to carry out an IPO (initial public offering or stock market launch) for the power generation company.
Secondly, to implement a master plan to develop its lands and break them into parcels for sale as well as to build infrastructure, for example the Tun Razak Exchange. 1MDB will spend RM3 billion to upgrade Jalan Tun Razak to build infrastructure and direct connections to the highways — MEX (highway), Smart and so on.
So all these activities were the responsibility shouldered and carried out by 1MDB. That was the 1MDB’s plan from the beginning.
But after several years, various allegations were hurled against it; the critics and so on definitely complicated plans to run the IPO or sometimes even to sell land was difficult.
That’s where the mismatch was, an imbalance between incoming cash flow, the cash required to pay the debts. At that time, the government decided to implement a strategic review and after that a rationalisation plan to correct the situation as the original proposal could not be fully implemented. So we need to handle the matter through the rationalisation plan.
Q: Is there a need for a business model like 1MDB in Malaysia and is there a duplication in the role played by 1MDB and Khazanah Nasional Bhd. Can you explain?
A: Basically, both companies are complimentary; it means they support each other. If we were to see Khazanah Nasional, it has successfully managed government assets such as Tenaga Nasional Bhd, Telekom and others.
The government shares were transferred to Khazanah Nasional, which also implements several new projects, including in Iskandar and so on. On the other hand, 1MDB carries out greenfield projects, such as the takeover of land in TRX, which used to have a hawkers market, a temple, a mosque and squatters.
As for Bandar Malaysia, it still has an air base there. So 1MDB has the responsibility to build eight new camps, namely six for the Defence Ministry and two more for the Home Ministry in several parts of the country at the cost of RM2.7 billion. So 1MDB has to develop them from scratch.
There is nothing there and we have to develop the area — which is different from the role played by Khazanah.
Q: Tell us your vision of where you are taking 1MDB in the face of negative remarks and wild accusations.
A: I understand why the comments and criticisms were levelled against 1MDB, but we have the facts. My responsibility is to provide the facts on 1MDB so that the wrong assumptions can be corrected and we have been doing that.
More than 48 press releases had already been dished out by 1MDB; a lot of information and facts were uploaded on our website, Facebook and Twitter and so forth as we strive to paint the correct picture on what is being done by us.
As we can see, 1MDB is among the biggest power companies in Malaysia, but that is not what we see. Unlike this table than can be pounded, electricity cannot be seen, and the same goes for TRX and Bandar Malaysia.
When we look at the (Sungai Besi) air base and Bandar Malaysia, it looks as if there is nothing there, but as I mentioned earlier, 1MDB is building eight camps throughout the country and the project is in progress and will completed by the end of 2016.
It takes time and expenditure and so on; it’s 1MDB’s responsibility. Just like TRX, we are spending RM3 billion for infrastructure in TRX, but the infrastructure is not visible now as it is mostly below and so forth.
InsyaAllah, when we complete the infrastructure, the buildings will rise from there. Developing land to build new power stations will take time and it is something that cannot be seen physically or openly, but will materialise soon.
Q: Most of 1MDB board members have outstanding business track records. Why then is 1MDB saddled with unwarranted remarks on its business performance? From your evaluation, what could you perceive on the company’s corporate governance before you took over the helm?
A: So first of all, what is important for us is to find out what is 1MDB’s real problem. The real problem is cash flow which is mismatched.
We have long-term assets that need to be developed over time, but the cash flow coming our way should be used to pay debts as the problem was due to mismatch and liquidity, financial liquidity.
On governance, we have to look back at several things that needed to be done, but for every decision made, what was important is that decisions were made correctly in the proper business context as well as in the context of time, which is also important.
When we looked back, there were things that could have been done in other ways. So at the time the decisions were made, the context should be seen, and also whether all requirements were taken into consideration in coming to the decisions, and to me, they had been done that way.
In business, it’s different, there are plans implemented that failed due to internal or external factors. So what is important is that when we look at the challenges, we need to take action. If something was not done according to the requirements, it needs to be corrected and hence, we have the rationalisation plan at this juncture.
Q: You said earlier that 48 press releases had been issued and you have appeared on TV3 many times. Are you satisfied with the explanations, which on social media don’t seem too clear?
A: We are still making improvements on this matter. We are always improving and trying to make it better for ourselves.
So for me, every time we issue an explanation or issue a press release, it helps us to give a clearer, truer and complete picture on 1MDB.
But the reality is, 1MDB is a complex and large company with about RM50 billion in assets, and it has other subsidiaries, and many transactions are done every day.
We are also not listed on Bursa Malaysia. If there’s a need to come up with an explanation, we try to achieve a balance between carrying out our daily business and giving the explanation.
But to me, for most of the very critical questions that need answers, it is better investigations are carried out, because some are just accusations. Not many people are interested in the fact that the Cabinet has asked the Auditor-General to investigate 1MDB.
So the process has come up with an interim report to the PAC (Public Accounts Committee), and to me the report is so complete, detailed and done professionally. So the answers we have given and in future will come from the ongoing investigations.
Q: Unfortunately, some of the investigations are still internal in nature and cannot be divulged to the public. In your opinion, what more can be done so that 1MDB can repay its debts in the time allotted?
A: The issue of debt repayment is the reason for the rationalisation plan, and as we are a company, the original plan was to buy land, an IPO and so on.
For now, the original plan cannot be implemented. So for this rationalisation plan, if the company has a liquidity problem, or cash flow mismatch, there are really just three solutions.
The first is getting new funds from shareholders, or issue new equities. Secondly, we sell assets and repay the debts.
And thirdly, we invite new funds from new investors. But for 1MDB we take the third approach.
So EDRA Energy is in the process of joining several local and international companies to buy some of the shares owned by 1MDB in the company. The money obtained will be used to settle the debts.
The value of EDRA is estimated at between RM16 billion and RM20 billion. Insyaallah (God willing), we will be able to repay the debts when we sell part of the company.
Secondly, in June, 1MDB signed a township agreement with IPIC of Abu Dhabi. IPIC, a company owned by the Abu Dhabi government, is valued at US$60 billion. And the township is for IPIC to take over 1MDB’s debts, which actually have bveen guaranteed by IPIC. The principal and debts come to about US$3.5 billion.
IPIC has also paid US$1 billion, which we have used towards the debt settlement.
So if we exchange our assets with IPIC, 1MDB’s debt burden will be reduced by RM16 billion to RM17 billion.
Thirdly, 1MDB is in the process of bringing in development partners to Bandar Malaysia. The process is being implemented with about 40 companies which have shown interest in becoming development partners for Bandar Malaysia.
To me, if Bandar Malaysia is sold at RM550 to RM600 per square foot, its value would be between RM11 billion and RM12 billion.
If we combine the three, they will become proceeds towards debt settlement, and the three processes are proceeding smoothly, but it will take about four to six months to complete.
Q: 1MDB’s business model needs a high degree of confidence from lenders, companies that will help us generate capital. How is investors’ confidence, amid negative talk about 1MDB? Are we sure the ongoing process will be continued?
A: Alhamdullillah (praise be to God), 1MDB’s assets are fundamentally strong. Their strong fundamentals have given the investors confidence. They are focusing on the fundamentals.
For example, the revenue from EDRA is about RM5 billion a year from energy, that will bring value to the company.
The Bandar Malaysia land is in Kuala Lumpur. There is no land of such size near KLCC and the KL city centre; that’s the only land available.
We add to the high-speed terminal there two, or potentially three, MRT (Mass Rapid Transit) lines, the KTM Komuter and so on. The value of the land is not constrained by current prices.
What that means is, the opportunity is immense. That’s why the investors are willing to discuss. Look at KL Sentral, KLCC, Mid Valley — now there are all sorts of development there, but when they began, the confidence was low. However, investors could see the long-term vision.
Q: How would IPIC (through acquiring EDRA’s assets) find the property developers to buy land in Malaysia? Is this a normal procedure, or, as some would say, a not-so-wise move?
A: 1MDB’s original plan when buying separate utility companies was to combine them into a bigger entity. The objective then, in 2012 and early 2013, was to implement an IPO.
For the TRX and Bandar Malaysia land, the original objective was to come up with a master plan, get planning approval, and put in the infrastructure and sell a small portion of the land.
Acquiring assets using the debts, and selling the assets, will bring in new funds. The funds will be used to repay the debts.
The difference is caused by cash flow mismatch and liquidity concerns. We were forced to come up with a new plan, which is to bring the funds to strategic investors, but the long-term plan remains.
In business, there are always difficulties, but what is important is the need to overcome the challenges; that is my goal. My job is to resolve the issue. That is why I was brought into 1MDB.
Q: Are we still on track, or are we far off-target?
A: Not to me. For instance, with TRX, we are in the process of selling the TRX land as in the original plan — with the entry of Main Board-listed companies to buy 17 of the 70 acres in TRX; selling the land to the Mulia Group, a prominent Indonesian company; and recently, to Affin Bank, which wants to build its headquarters.
So the plan is ongoing. With the power plants, we are still ongoing — 5,000 Megawatts every day — the difference is whether we sell the shares through an IPO or sell to strategic investors. In the current market situation, it is probably better for us to sell to strategic investors.
Q: The PM has said 1MDB’s debts can be settled in six months. With the current global economic conditions, and the value of the ringgit against the dollar, is six months a sufficient time period for the debts to be repaid?
A: I am confident the time period is sufficient, considering the condition of the company and market. Like what was said before about EDRA, we shortlist interested local and overseas investors.
Just like for Bandar Malaysia, 40 prominent companies from Malaysia and from outside —- China, Australia, Singapore and the Middle East — are interested in buying the land.
These assets are long-term assets. We cannot look at it just from the current perspective, as they will take a long time. These companies understand we cannot take a short-term view but rather a long-term view.
Like I said, 1MDB’s assets are strong, and we can implement the rationalisation plan to solve this cash flow problem.