KUALA LUMPUR, April 7 – The investigation by the Public Accounts Committee (PAC) on 1Malaysia Development Bhd (1MDB) found its capital financing structure and financial performance to be “not satisfactory” leading to the weak corporate governance.
However, in its Governance Management Control Report on 1MDB, the PAC said the government took immediate action to improve the strategic company’s cash flow problems that surfaced in November 2014. The report stated that 1MDB depended on debts in the form of bank loans, bonds and sukuk, as company capital, with part of the debts having received a government guarantee or government letter of support.
“The debt level and interest payment was too high compared to the company’s cash flow. As such, 1MDB depended on refinancing to make maturing loan repayments and also took on new loans, among others, to make payments on previous interest,” the report said.
It also revealed that the 1MDB business model was too dependent on loans, resulting in the company having insufficient income to service loans and its operational costs. The 106- page report also revealed that a number of investments and large loans undertaken were done without a detailed valuation, including an impact oversight in respect of 1MDB’s cash flow.
“The Board of Directors failed to fullfill their responsibility in protecting the interest of the company and its shareholders, as well as, not having taken any proactive measures in scrutinising the management’s activities and forward cash flow position. Closer supervision was required of the Board, including questioning the purchase of assets and cost of debts,” the report tabled in the Dewan Rakyat here today said.
The PAC was of the opinion that the company’s Advisory Board needs to be abolished, together with Article 117 in its Memorandum and Articles, and all reference to the Prime Minister be changed to the Finance Minister, in line with the provision for other companies owned by the Finance Ministry (Incorporated) (MOF (Inc).
1MDB group subsidiaries and assets such as the Tun Razak Exchange, Bandar Malaysia, land in Air Itam and Pulau Indah, should be handed over to the MOF (Inc) for tighter supervision. After five years of operation, 1MDB, wholly-owned by the government faced an imbalance in its cash flow in November 2014.
The Management and Board of Directors at that time depended on the initial public offering (IPO) of 1MDB’s wholly-owned subsidiary, Edra Energy Bhd, to generate funds for loan and interest repayments. However, the IPO was not implemented due to internal company issues and external factors. Following that, the company’s first loss of RM665 million announced in November 2014, impacted confidence in the company.
As a result, 1MDB was unable to refinance debts of RM2 billion that was almost maturing at that time. In summary, the result of the PAC investigation from May 19 last year found that 1MDB’s debts began at RM5 billion in 2009 and jumped to RM42 billion in the financial year ending Dec 31, 2014. In January 2016, the debt reached RM50 billion compared to assets of RM53 billion, with 1MDB spending RM3.3 billion to repay interest on debts between April 1, 2014 to March 31, 2015 (unaudited estimate).