Questions have been raised about the progress of 1MDB's Tun Razak Exchange and Bandar Malaysia projects since being announced in 2012. – Reuters pic, July 14, 2015.
The inspection was ordered by Prime Minister Datuk Seri Najib Razak in March, following mounting pressure over the firm's RM42 billion debts and opaque dealings.
According to the PAC, there are still hindrances in the probe as 1MDB has not been forthcoming with certain documents requested by the A-G.
The A-G's probe, which deals only with 1MDB's accounts and not the recent allegations by the Wall Street Journal (WSJ) of fund transfers to Najib's personal accounts, will only complete towards the end of the year.
How and why did a firm, set up to help the government to be a catalyst for economic growth, come under such a cloud of scandal in just 6 years?
Here is a recap of what 1MDB was meant to be, and some of the controversies it has become embroiled in.
The strategic development company is wholly-owned by the Finance Ministry. Its aim is to be an enabler for new growth ideas and driver of sustainable economic development by forging strategic global partnerships and promoting foreign direct investment.
It was previously known as the Terengganu Investment Authority (TIA), which was set up in February 2009 to invest the state's oil royalties, but when Najib became prime minister the same year, it was renamed 1MDB.
The only government funds 1MDB says it has ever received was RM1 million at the time of its inception.
Najib, who is also finance minister, is chairman of 1MDB's advisory board.
1MDB's main business is utilities and property development.
1MDB owns Tanjong Energy (now known as Powertek Energy Sdn Bhd), a 75% stake in Genting Sanyen Power (now known as Kuala Langat Power Plant or KLPP) and had owned a 75% stake in the coal-powered Jimah Energy.
All three were purchased at a total cost of RM18 billion, which its detractors, led by former prime minister Tun Dr Mahathir Mohamad, say is overpriced.
Defending these purchases, 1MDB has said the value it paid for the energy assets was "commensurate with their existing and future potential" and that "the economic benefit gained from these assets means that we have recuperated any excess value we paid at the time of the acquisitions".
The company had planned to list its energy assets but has yet to do so.
In a filing to Bursa Malaysia on July 10, national power company Tenaga Nasional Bhd (TNB) said it had acquired 70% of 1MDB's stake in Jimah East Power Sdn Bhd for RM46.9 million.
News of the purchase even before it was formalised had caused TNB's share price to drop.
Early controversies surrounding 1MDB began with land purchases by its real estate arm, 1MDB Real Estate Sdn Bhd (1MDB RE), which was said to have obtained land for the Tun Razak Exchange TRX and Bandar Malaysia projects cheaply from the federal government.
Questions have been raised about how these projects are progressing since being announced in 2012.
Only in 2015 did 1MDB RE finally announce a joint venture to develop the Lifestyle Quarter of TRX with Australian construction giant, Lend Lease, which owns a 60% stake in the joint venture.
The gross development value (GDV) of this quarter is RM8 billion, a small portion of the initial estimate of RM40 billion GDV for the entire TRX project.
Other than Lend Lease, there has been no official announcement of other global conglomerates joining TRX, which was envisioned as a global financial district.
In May, pilgrims fund Lembaga Tabung Haji sparked controversy when it bought a plot of TRX land from 1MDB for RM188.5 million, or RM2,774 psf, when 1MDB had paid the government RM64 psf for the land. This prompted claims of a bailout, which Najib denied.
Public outcry prompted Tabung Haji's pledge to sell the land within 2 weeks but to date, it has yet to confirm any sale despite its earlier claim that there were ready buyers.
Bandar Malaysia, meanwhile, is a 495-acre mixed development plan located 3km away from TRX, at the site of the old Sungai Besi airport.
Construction is expected to start in 2017, according to a full-page advertisement 1MDB placed in The Star in May this year.
No development partners have been announced to date, although expressions of "interest" have been received from 40 parties.
1MDB also has a 234-acre land in Air Itam, Penang which it bought in 2013 for RM1.056 billion.
The state-owned firm, however, announced late last month that it had received “significant” proposals for the Air Itam land and another 125 ha it owns in Pulau Indah, Selangor.
However, the Penang government under opposition party DAP has plans to stop all land deals involving 1MDB.
How the RM42 billion debt is spread out, according to 1MDB. – July 14, 2015.
1MDB's inability to repay its debts is a sign of its cash flow problems, as acknowledged by Putrajaya when it injected RM950 million into the company as standby credit.
The debt-laden firm also nearly defaulted on its RM2 billion debt until tycoon Tan Sri Ananda Krishnan's conglomerate, Tanjong PLC, helped rope in private investors to come up with the money in March.
The RM2 billion was part of a RM5.5 billion bridging loan taken by 1MDB subsidiary, Powertek Investment Holdings Sdn Bhd, to refinance a RM6.17 billion bridging loan taken in 2012 to partly finance the purchase of power assets.
1MDB also allegedly overpaid Goldman Sachs to manage its RM5 billion Islamic bond sales. Its interest rate of 5.9% was too high in comparison to government loans which usually attract about 3% or below.
1MDB critic and former prime minister Tun Dr Mahathir Mohamad had alleged that a 10% commission was paid to Goldman Sachs, meaning that 1MDB would only get 90% of the money borrowed while still having to pay interest on 100%, thus raising the interest rate to 6.6%.
Neither 1MDB nor the government has commented on the commissions paid to Goldman Sachs, and both have also not confirmed the amount to be 10%, a figure based on an Edge Financial Daily report.
However, Najib has dismissed claims of overpaying as baseless and that the fees and commissions paid to the American investment bank were "appropriate", in accordance to their size, tenure and liquidity.
“Concerns on the 5.75% interest rate charged for the Islamic bonds (issued) back in 2009, with the perception that the interest rates are particularly high, are baseless merely because the Islamic bonds were the first Islamic bonds issued in Malaysia that had a 30-year tenure,” Najib had said in a parliamentary reply in March this year.
Deal with IPIC and Aabar
Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah had announced on May 29 that 1MDB had entered into a binding agreement with Abu Dhabi's International Petroleum Investment Company (IPIC) and its subsidiary Aabar Investments (Aabar), whereby IPIC would make a payment of US$1 billion, on or before June 4, 2015.
1MDB would use the US$1 billion to repay a US$975 million (RM3.5 billion) loan, in advance of its due date, to a syndicate of international bank lenders.
This was denied by 1MDB who accused the opposition lawmaker of "misleading the public", saying the government's "explicit guarantees" were only for RM5.8 billion of its debt.
Cash or units? The puzzle over Cayman Islands funds
1MDB president Arul Kanda Kandasamy had said 1MDB had redeemed US$2.32 billion from its Cayman Islands investment, and the funds were separated into two tranches.
The first tranche, worth US$1.22 billion, was "fully spent" last year to service its debt interest, working capital and payments to Abu Dhabi's Aabar investments, he told Singapore's Business Times on February 7.
"The cash is in our accounts and in US dollars. I can assure you... I have seen the statements," he said.
On May 19, Najib in a parliamentary reply said that the balance of the US$1.103 billion were "assets" in US dollars kept in BSI Bank Limited Singapore.
Later, Husni said the assets were in the form of "units", but declined to elaborate further.
Joint venture with PetroSaudi Interntional
This may well be one of the more controversial of 1MDB's deals because of the alleged role of Malaysian businessman Low Taek Jho, a Najib associate who was involved in 1MDB's predecessor, TIA, and who describes himself an occasional consultant to 1MDB.
1MDB's joint venture with oil company PetroSaudi in September 2009 was meant to undertake investments in certain projects.
The deal ended 6 months after its inception, with US$700 million taken out of the joint venture company and given to PSI. It was later alleged that the money was siphoned off to Good Star Limited, a company controlled by Low.
A screenshot from Sarawak Report claiming the role of businessman Low Taek Jho in the 1MDB affair. – July 14, 2015.
The deal also saw PetroSaudi giving a US$700 million loan to 1MDB, but the money eventually ended up in another account, said to be Low's Good Star.
The joint venture itself ended 6 months later, with 1MDB's investment of US$1.83 billion converted into Mubaraha notes, which Arul said was paid back in full.
Changes in auditors
Deloitte, which was appointed by 1MDB in December 2013, had signed off on 1MDB's accounts ending March 2014 on November 3, stating that the accounts represented a "true and fair view" of the group's financial position then.
1MDB's previous auditors were KPMG which had stated that it could not conclude 1MDB's accounts, and Ernst & Young, which was appointed when the company was first set up in 2009 but resigned in 2011 without a single audit.
PAC has expressed its dissatisfaction over explanations given by Deloitte on 1MDB's 2014 financials, in reference to 1MDB's assets for sale, where the auditor had reported that the company was a "going concern" when it last audited the firm's accounts for the financial year ending 31 March 2014.
In financial terms, "going concern" means robust business function without any threat of liquidation in the near future.
1MDB, however, is undergoing a restructuring process which includes separating its two real estate developments into standalone companies.
- TMI
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