This article first appeared in The Edge Malaysia Weekly on April 15, 2019 - April 21, 2019
BACK in mid-2012, prior to the flotation of FGV Holdings Bhd (then Felda Global Ventures Holdings Bhd), a group — Gabungan Wawasan Generasi FELDA (GWGF) — sent a memorandum to the government and the Federal Land Development Authority (FELDA), asking them not to proceed with the initial public offering.
“I had warned them (the government) during [then prime minister] Datuk Seri Najib [Razak]’s time. I had objected to the listing,” says Tan Sri Rozali Ismail, chairman of GWGF, an organisation formed in August 2002, with the aim of uniting the generations of FELDA settlers and safeguarding their welfare and rights.
Rozali, a successful businessmen who at one time controlled 70% of water distributor Syarikat Bekalan Air Selangor Sdn Bhd via his vehicle, Puncak Niaga Holdings Bhd, is himself the son of a settler from FELDA Gedangsa, Hulu Selangor.
“In fact, we sent a few memorandums ... we had sent three to the government over the years. We were not happy with how FELDA was being managed. One of our worries was that the investments were not done properly,” he tells The Edge in a brief phone conversation.
In 2012, The Edge heard that Rozali was opposed to the flotation exercise but had declined to comment when asked.
“It’s not my style. I don’t use the press to fight … I voiced [my fears] via memorandums, I said that I represent 500,000 members of GWGF. There are more than 12 associations or outfits under us. I asked them (the government) to look into it (FELDA’s administration) but nothing happened ... we sent three memorandums,” he reiterates.
According to Rozali, for the longest time, the problem with FELDA has been its weak management.
The Edge asked the businessman why he was so adamant that FGV’s shares should not be publicly traded.
“I have run listed companies before. If you, an individual, control a listed company, you can grow it. You will work hard as the company is largely yours. In the case of a GLC (government-linked company), it’s not their (the management’s) company; they work for a salary,” he says.
“FELDA was OK private, so why list it? FGV, FELDA, including the settlers, all are facing difficulties now.”
On the latest revelations by Minister of Economic Affairs Datuk Seri Mohamed Azmin Ali and the police reports lodged against the alleged perpetrators of the various wrongdoings at FELDA, he says, “I am happy now ... They must find and question the culprits.”
The FGV listing
While Rozali takes the view that FGV should not have gone public, the shenanigans at FELDA and its 33.67% unit, FGV, would not have been widely known if FGV was not required to make quarterly announcements of its financial position.
About seven years ago, FELDA raked in RM6 billion from the offer for sale of shares at FGV’s initial public offering while FGV raised RM4.5 billion from the sale of shares to investors.
In July 2013, FGV announced its acquisition of Sabah-based Pontian United Plantations Bhd for RM1.2 billion in a deal that many thought was overpriced at RM74,800 per ha.
Then, in October 2014, FGV acquired Asian Plantations Ltd for about RM1 billion — RM628 million in cash and the assumption of RM388 million in liabilities.
In June 2015, FGV acquired four plantation companies and a tract of oil palm land in Sabah measuring 836.1ha from Golden Land Bhd for RM655 million in cash. While this acquisition was not viewed negatively, it did not excite.
FGV also invested in Cambridge Nanosytems Ltd, which produces high-grade carbon nanotubes and graphene from the by-product of crude palm oil.
Many of the acquisitions were contentious, and FGV even sought legal recourse against its former directors and senior management for losses suffered due to their failure to discharge their respective fiduciary duty, duty of fidelity and/or duty to exercise reasonable care, skill and diligence in the Asian Plantations acquisition.
FGV, to its credit, walked away from a US$505 million acquisition of a 37% stake in PT Eagle High Plantations Tbk, which fell into FELDA’s lap. The seller, Tan Sri Peter Sondakh, is a known associate of Najib (see accompanying story).
Nevertheless, there is a put option in the sales and purchase agreement, whereby if Eagle High fails to get the Roundtable on Sustainable Palm Oil certification by this year, FELDA can exercise the option, which will require the Rajawali group, the vehicle of Sondakh, to buy back the 37% stake with a 6% interest per annum.
Eagle High, it seems, is preventing FELDA from exercising this option (see accompanying story).
While FGV’s issues, such as the suit against its former directors and high-ranking executives, are in the public domain, FELDA’s problems are largely hushed up.
Problems according to the FELDA White Paper
The White Paper on FELDA tabled by Azmin in parliament last Wednesday was the second, although the first in September last year never saw the light of day as there were certain pending legal issues.
The minister summed it up when he said an explanation is needed for the issues faced by FELDA and on how FELDA can be revived to restore the people’s faith and ensure that the well-being of the settlers continues to be a priority of the government.
The White Paper looks at the problems faced by the settlers, the findings of a forensic audit on eight investments undertaken by FELDA and its units, and the financial standing of the plantation outfit, including the land lease agreement, loans to settlers and return on investments. It is also seeking the requisite approvals for the government to take action and undertake a plan — short, medium and long term — to revive FELDA.
Injecting RM6.23 billion
In a nutshell, the government will provide RM6.23 billion in the form of loans and grants for FELDA.
According to the White Paper, the problems with FELDA include its cash balance of RM35 million as at May 9, 2018, in contrast to RM2.5 billion in 2007. This has resulted in FELDA not being able to undertake operational costs, replanting costs and settlers’ assistance payments.
Prior to the flotation of FGV, FELDA registered operational profits from its commercial plantation management of 400,000ha. From 2007 to 2011, FELDA chalked up net profits of between RM200 million and RM1.1 billion a year.
As part of the flotation of FGV, FELDA handed over the management of the plantations owned by FELDA via a 99-year land lease agreement. FELDA was to receive payments of RM248 million a year for leasing its land and a share of the profits at a quantum of 15% per annum.
On average, FELDA only received RM400 million a year, in contrast to its minimum requirement of RM800 million a year, to manage and ensure the well-being of the settlers.
After FGV’s listing — for instance, in 2013 — FELDA suffered losses. In 2017, it registered its highest loss of RM4.9 billion.
The White Paper goes on to say that FELDA invested RM1.4 billion (proceeds from the flotation of FGV) in dubious or shady projects while another RM2.7 billion was used for political purposes.
Wasteful and expensive acquisitions at above market price, such as the acquisition of the 37% stake in Eagle High for RM2.3 billion, added to the strain on FELDA’s financials as the market value of the block of shares in Eagle High was only RM500 million.
FELDA’s debt rose 1,100% from RM1.2 billion in 2007 to RM14.4 billion in 2017, in contrast to its assets, which only charted a 107% gain. Profit fell 590% in the same period.
A forensic audit shows asset impairments of RM2.2 billion for the eight transactions, or 50% of the initial investment, due to weak management and the failure of internal controls.
There were also rampant cases of conflict of interest at FELDA as former chairman Tan Sri Mohd Isa Abdul Samad was also chairman of as many as 39 of its units.
Another issue is the settlers’ debts owed to FELDA, which as at 2018 stood at RM7.7 billion. This includes replanting costs, advances and amounts for sustenance. These debts are difficult to collect.
The suggestions to improve FELDA and Felda Investment Corp Sdn Bhd include having a new management that is made up of professionals, carrying out a restructuring exercise to improve efficiency and effectiveness, and putting in place checks and balances to prevent abuse of power and corruption.
Other salient features include government guarantees for loans, restructuring of FELDA’s debts with financial institutions and asset rationalisation exercises. If FELDA’s debts are not restructured, FELDA will be exposed to RM2.5 billion in finance cost this year, up from RM1.4 billion in 2018.
FELDA is looking at liquidating assets for cash flow purposes, and a new model for the managing of settlers’ land through long-term leasing is being drawn up as well.
The government is setting aside RM1 billion for a four-year time frame to teach the settlers to improve earnings via innovation, smart farming and precision agriculture, among others, which will reduce their dependence on palm oil.
Also on the cards is RM480 million specifically for advances and living expenses, RM2 billion to do away with interest on various loan schemes to settlers and RM250 million for housing purposes for the current year.
It is not clear what FELDA did with the RM6 billion it raked in from the IPO of FGV as there was no specific expenditure. The draft of the White Paper last September had it that FELDA only used 24% of the proceeds for future expansion.
A key problem with FELDA and FGV is that the plantations under the latter’s watch are ageing. FGV’s prospectus in 2012 indicated that 36% of its plantations were between 21 and 25 years and 16.9% were over 25 years. Or put another way, almost 53% of FGV’s plantations were regarded as old seven years ago.
If FELDA did not address this issue then, its current predicament is not entirely unexpected.
Investments in the spotlight
These are the eight investments by the Federal Land Development Authority (FELDA) and its unit, Felda Investment Corp Sdn Bhd (FIC), which were highlighted in the White Paper:
• PT Eagle High Plantations Tbk, a plantation company in which FELDA acquired a 37% stake at US$505.4 million — 95.86% higher than the market value — from Tan Sri Peter Sondakh’s Rajawali group (see accompanying story).
• Dataran Aras Sdn Bhd, a plantation company in Limbang, Sarawak, set up in 2007 but unable to commence operations for various reasons. FELDA paid RM148.2 million for the company and its almost 11,000ha of plantation land, but 54% of the plantation was encumbered with native customary rights, bringing down its value to a third of what FELDA paid, or about RM50 million. The original owners also gave out logging rights in 2011 to 2013 for RM500,000 without any payments to FELDA.
• Syarikat Grand Borneo Hotel Sdn Bhd was acquired by FELDA for RM86.4 million in 2013 after its board gave the green light. But the market value determined by an independent valuer was RM78 million, meaning FELDA overpaid by RM8.4 million. FELDA’s investments require an internal rate of return of at least 15% and a payback period of 10 years, which contrast with the hotel’s IRR of 12.6% and 12-year payback period. Another requirement for FELDA is that any business it acquires has to be profitable and cash-flow positive. However, Syarikat Grand Borneo Hotel is not, having suffered losses since 2010, with accumulated losses of RM18.3 million in 2011. The FELDA board approved the acquisition without any explanation. Syarikat Grand Borneo Hotel had also been pledged as security for various loans, among a host of issues.
• Kuala Lumpur Vertical City, where there is an ongoing court battle between FELDA and developer Synergy Promenade Sdn Bhd revolving around the development of FELDA’s land in Jalan Semarak, just outside the city centre. Synergy Promenade claims that it is the issues at FELDA that have given rise to the problems.
• Grand Plaza Serviced Apartments, a four-star establishment that FELDA, via FIC UK Properties Sdn Bhd, acquired from two companies for £98 million or RM524 million at end-July 2013. But the two companies were only paid £83.7 million or RM448 million, or a shortfall of RM76 million. Grand Plaza’s business declined and FIC UK Properties could not service its loans to FELDA, resulting in the unit taking on £48 million in loans, with a corporate guarantee by FELDA. FIC UK is bleeding losses to the tune of RM19.82 million a year.
• The Park City Grand Plaza Kensington Hotel in central London, which was supposedly acquired for £60 million (RM321 million) in 2014 but was actually bought for £46 million or RM246 million, with the remainder RM75 million shared by certain individuals. A valuation exercise in 2015 saw the hotel’s value dip to £26 million or RM139 million. The acquisition never received board approval but was merely announced three months after the acquisition.
• The Grand FELDA House, which was acquired for £24 million (RM128 million) in October 2014 from a vendor that had purchased the asset 13 days before for £17 million (RM91 million). FELDA House, meanwhile, was acquired for £10 million, or RM53.5 million, from a company that had acquired it a few weeks before for £4.35 million (RM23.3 million). The FELDA board had, in September 2014, agreed to acquire the 450-room FELDA House (then known as Dexion 1) and 802-room Grand FELDA House (then known as Dexion 2) in Wembley, London.
• Felda Wellness Corp Sdn Bhd, a subsidiary of FIC. The company was mainly involved in biopharmaceuticals but had dodgy deals, including with an Austrian company, and invested RM24.1 million in an American outfit and an Australian entity without the requisite approvals. Felda Wellness Corp also awarded 19 contracts worth RM119.6 million without tender and paid out RM46.01 million to companies without proof of any work being done. Felda Wellness was shut down in 2017.
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