Saturday March 10, 2012

CEO believes 1MDB projects should be self-sustaining

StarBizWeek spoke with 1Malaysia Development Bhd (1MDB) CEO Shahrol Halmi regarding the agency's latest purchase of Tanjong Energy Sdn Bhd and its ongoing property projects KL International Financial District and Bandar Malaysia.

Below are the excerpts of the interview.

SBW: When did you start talking about the Tanjong deal?

Shahrol: I first heard about it when I was in Abu Dhabi and I think Usaha Tegas has been shopping around for a while. Then the idea germinated back in October or September. We then found out that StanChart is running the process and they invited us to get into it.

Did you win because you were government-owned?

We won because we put in a good bid (laughs). Ananda Krishnan is not going to give it to you just because you're with the government. There was also the 49% ownership requirement.

Did that help swing the deal in your favour?

I can't speak for the vendors. They had more than ten to choose from. I'd like to think it's my charms, but it probably isn't.

Are you going to make changes?

We'll leave it as it is, if it's not broken why fix it?

How are you going to fund the acquisition of Tanjong Energy?

It's not going to be particularly different from any other buyout. We will get the financing from banks. It is like a leveraged buyout, so just go get financing, get a bridger and at some point we will seek out a better, cheaper source of finance. It could be bonds. I think it is too early for us to say, and we also don't want to set expectations that may or may not be met. The principal will be that, as with any LBO, at the right time we will go towards the most long-term, cost-effective source of funds.

Are you using internal cash or raising new funds?

It will be a mix of new funding and internal funds, because of course the banks are not so keen to write a blank cheque right? That's the other point I wanted to make. There's talk in the market that we're overpaying and is this going to put us deeper into debt and can we sustain it? My answer is very simple, the transaction is done on a commercial basis. The banks wouldn't lend to you if they don't think you can service the debt, and the banks are not going to lend if they feel the risks are too high.

What is the cashflow from the power assets?

The last reports were around RM1bil a year. So it is quite attractive. It is not going to be so sexy like the first-gen IPPs where you got 15%-18%, but it will be a solid 7%-8% level of return. I think moving forward in Malaysia, nobody would reasonably expect to get those sort of double-digit returns anymore.

Did you buy just the plants or the entire company and its expertise?

The latter. We bought the holding company which has a whole bunch of assets. They have a management company that manages those plants, a business development unit that goes around the world looking for opportunities it is the whole capability. I cannot say enough about how comfortable I am with the leadership over there. It would be a good addition to the 1MDB family.

Your website gives the impression that you are going into oil and gas, instead of owning power plants. Why the shift in direction?

It is not a shift, because we have always said that it is the energy sector. The reason we are looking at energy is because this is a very strategic sector to ensure the country's economic growth. Just looking at from a high level, at one point Malaysia was an energy-producing country, we were exporting. We used that capability to raise the GDP to a certain level and in order to do that we subsidised to catalyse a certain sector.

We are transitioning now to a stage where Malaysia is energy-deficient and we have to import energy. In order for us to be successful in this new paradigm we need to think about how our industries are subsidised. Does it still make sense to have big subsidies going to consumers and to industry?

Because as you start importing energy you need to diversify not only your sources of fuel but also where the fuel comes from. There must be an answer where the government has a role to play in such a strategic sector. However, all of us know that efficiency drops when the government is in a sector for a while. So there must be a hybrid where the private sector will drive the efficiencies and yet the government will look after the longer-term GDP growth, people's welfare etc.

For you, is it social or shareholder return that is your objective?

Our shareholder is the rakyat. It is totally aligned. In the end our shareholder is the Government, the Government is the rakyat. That means shareholder return is not necessarily measured in ringgit or percentage of returns. Our main goal is to ensure the long-term sustainable growth of the country. Again, we are happy to have these guys who have the expertise.

What about those who say this is another example of a government agency buying private business and you're crowding out the private sector? How is that good for private investment?

These are fair comments. There are certain things the private sector is best equipped to handle and certain things the Government is best equipped to handle. Rather than going by the general ideology that the Government should keep out of business, let's look at it from an industry to industry basis.

In this instance, we can all agree that power is very strategic to the country. We all agree that our past experience in privatising power generation has not resulted in optimal results. So lets try to mix the cake again and see what we come up with. In general, if you want to know if 1MDB crowding out, well we would be if we already have power plants. (With Tanjong) it is just an ownership change, and we are now refocusing the problems of our energy sector. If you ask me should government butt out of banks, then yeah. They obviously would be better run by the private sector. When you get to that point where you have ideological debates it is always going to be black vs white. But all we're about is actually solving problems.

But could there be a funding strain with all the projects you have now?

We look at each project with a clear filter. Each has to be on its own, economically self-sustaining, and stand on its own two feet. (The Tanjong assets) have got good cashflow, the bankers say it can service my debt. We don't see a problem at all. No robbing Peter to pay Paul.

The costs for the property project will be quite massive. How does that filter into the expansion at the power side?

As I said, this is like instant oatmeal. The nice thing about power plants that the banks will finance you for project-level financing because it's utility, its not something new. We thus won't need to raise new funds.

When you do infrastructure like KLIFD you have to put money upfront. We have an ongoing plan on that. This will not however slow down KLIFD or Bandar Malaysia because we're not taking money from there.

Where do you think are the opportunities you can expand in the country and out?

The bottomline is we will be as competitive as we can be in trying to win all this extra work. We looked at Jimah a while ago and had this idea for an instant energy team with Jimah but that did not happen. Jimah will be interesting, but others are looking at it too and we have to consider the pricing.

We now have a very good vehicle with Tanjong to submit bids for power generation. Internationally, we have good strategic parts in the Saudis, excellent relationship with the Qataris and Emirati. I'm going out there next month to talk to a few people. Mubadala has been with us from the beginning. Population and economy will continue to grow. It's just a matter of quantum, and how and when, and the trickier bit in the Middle East is how to secure your fuel supply on long-term contracts that are competitive.

Will you focus on the same markets or elsewhere?

Once the transaction is complete, we will hear from the management and board about their long-term plans and strategies. They already have this in place for them to endorse and tweak where necessary.

What is the status of your property projects?

For KLIFD, we are working out the last few details on the master plan. It has been approved in principle. We are working out the first wave of investors and so on. In terms of Bandar Malaysia, it is really ramping up right now. We've had awesome cooperation and hard work from all the relevant government agencies, Mindef, Attorney-General, Federal Land Commissioner. We expect the relocation as published. The tricky thing is we can't touch the land as it a “military operation” zone. The onus is on us to develop the sites for them to relocate in three to five years.

When will the development start?

For Bandar Malaysia, around 2017. We will accelerate whichever sites we can.

There is no delay with Bandar Malaysia. It is all in the plan. The eight sites have to be secured before construction starts. The misconception is this: when people hear Sungai Besi is going to be redeveloped, they expect the bulldozers to move in like now. The first part of it is actually the relocation. The plan is still the same.

Can you give a ballpark figure of how much you need going forward with all the real estate and power projects?

It is on a project by project basis. The Tanjong board will decide on the strategy they want to take. For KLIFD, we know the figure of RM25bil to RM26bil GDV has been bandied about. For phase one, which we expect to complete in 2016, it will take RM1bil to RM1.5bil for infrastructure over the next few years. The point I'd like to make is that each project has to stand on its own. In KLIFD, the location is good and we will seek financing based on the quality of the project. It is pushed down to the project level.

Is it a replica of KL Sentral?

Yes and no. We look at the overall infrastructure basis. But because it's an integrated structure, you can't do it block by block. Ideally you have a phase and they all come up concurrently. If your mall is ready but the office isn't, then koyak. As much as possible we want the district to come up as a whole. We have broken everything into phases. Ideally all sama-sama then poof. That's how you maximise the value creation.

Do you really need partners for land deals?

You can ask the question when Qatar came to do Pavilion. Some may ask if it would have been as successful. When you have world-class partners, they bring high expectations with them. We are only as good as the people in the room. They will demand the same standards as they have elsewhere, so it's a way for us to raise our game and be more than jaguh kampung.

Does it make sense to have a financial district?

That's the point we debated internally. It's not just about banks but also financial services. It's an ecosystem approach. It may very well evolve into a central business district type development. Bankers and fund managers need to invest in something. The centre of gravity for oil and gas right now is the KLCC Twin Towers. Why can't we have one for the finance industry too? We want to have a good place to shop and eat and we can price this at a premium. Twenty years from now people can take this as a benchmark.

Will there be an overkill with all the developments taking place?

That's a valid question. That's why we always keep an eye out on market conditions. But we cannot worry about what others are doing. We just have to focus on this and do it the best we can. Marina Bay could be seen to be three star next to ours and then we will see. Our location's also pretty fantastic.

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Saturday March 10, 2012

CEO believes 1MDB projects should be self-sustaining