PAC started investigating 1MDB on May 19, last year focusing on 1MDB’s governance control management since it was incorporated in 2009 -- after the Terengganu Investment Authority state fund -- was turned into a federal agency.
Shortly after the PAC released it's findings, the Board of Directors of 1Malaysia Development Berhad offered their resignation to MoF Inc., the 100% shareholder of 1MDB.
Here are the top five key findings in the report:
1. What went wrong?
1MDB is a wholly government-owned company established as a catalyst for strategic development to promote foreign direct investment (FDI) into the country.
However, 1MDB depends on loans from banks and bonds as part of the company's capital and part of the company’s debt had been guaranteed by the government.
1MDB’s debt increased every year, beginning with RM5 billion in 2009.
Value of debt : RM42 billion
Value of assets : RM51 billion
Debt interest payments : RM2.4 billion
Value of debt : RM50 billion
Value of assets : RM53 billion
Debt interest payments : RM3.3 billion
Clearly, the debt and interest payments were too high compared to the company's cash flow .
1MDB depends on refinancing for debt repayment as well as taking fresh loans to pay interests on previous loans.
2. How could this happen?
A few practices by the management and the Board of 1MDB led to the weaknesses in governance.
For example, the management, did not comply with the decisions and instructions of the board or took any action before obtaining approval from the board, for a couple of times.
There are several large investments and loans made without a detailed assessment (including the impact on the cash flow of the company) and some major decisions have been made through a written resolution based on the discussion at the previous meeting .
Several large investments and loans were made without a detailed assessment ( including the impact on the company’s cash flow) and some major decisions have been made through a written resolution based on discussions at the previous meeting .
The board is also too dependent on the management and often accepts their explanation without studying the issues arising, repeatedly.
3. What did the government do about it?
The government has taken steps to immediately fix the cash flow problems in the company that started in November, 2014.
In January 2015, a new top management team was brought in and after that the Minister of Finance Incorporated (MOF Inc) started concentrating on solving the company’s problem.
A strategic survey was carried out and the summary was presented in February, 2015.
Following that, 1MDB and MKD presented a rationalisation plan to the cabinet on May 29, 2015.
4. Who is responsible?
PAC opined that there were constraints and weaknesses by the management, led by former 1MDB CEO, Datuk Shahrol Azral Ibrahim.
The Committee suggested that Shahrol be investigated.
5. Can 1MDB be fixed?
There are five recommendations made by the PAC:
(i) Principles of governance
1MDB should adopt principles of good governance like the guide issued by the Putrajaya Committee on GLC High Performance Through the Green Book: Enhancing Board Effectiveness And Blue Book: Intensifying Performance Management Practices.
(ii) Avoid excessive debt
The use of excessive debt in the capital structure should not be allowed at all, especially when the cash flow is insufficient.
(iii) The Board of Directors should practice strict control
The board failed to carry out responsibilities and take care of the interests of the company and shareholders. They also did not take any proactive measures in monitoring the management’s activities and cash flow. More intensive regulations required of the board of directors, including the price of asset purchases and costs of liabilities.
(iv) Abolish the Advisory Board
The Advisory Board should be abolished, together with Article 117 in Memorandum and Articles of Association. All references to the Prime Minister should be changed to the Minister of Finance.
(v) Transfer Subsidiary companies
Subsidiaries and assets held by 1MDB such as TRX, Bandar Malaysia, Tanah Air Itam, Tanah Pulau Indah should be transferred to the MOF, supervised and managed properly.
View the full PAC report here.