AS the 1Malaysia Development Bhd (1MDB) scandal culminated in charges against former prime minister Datuk Seri Najib Tun Razak this month, the spotlight is already shifting to another government-owned company with another huge debt pile.

The Malaysian Anti-Corruption Commission (MACC) is currently investigating Pembinaan PFI Sdn Bhd, having interviewed Bangi MP Dr Ong Kian Ming on the matter, a local daily reported last week.

Ong has been tracking and speaking out on the company’s debt size and opacity for several years. MACC did not respond to emailed queries.

The MACC investigation raises the spectre of another possible scandal blowing up in the aftermath of Barisan Nasional’s fall from power, though the dimensions and implications are likely to be different from that of 1MDB.

At RM50.2 billion, Pembinaan PFI’s borrowings are on the same scale as 1MDB’s debt pile. It amounts to a quarter of the federal government’s committed government guarantees, which came to RM199.1 billion as announced on May 24.

And further investigation may shed more light on what is already a strange and convoluted scheme to dip into local pension funds.

In a statement last week, the Employees Provident Fund (EPF) confirmed it lent RM21.16 billion to Pembinaan PFI and that all repayments are currently in order.

“The financing was within EPF’s risk-return profile and a comprehensive documentation process was conducted to ensure that the basis of the investment was fair and reasonable,” said EPF.

While EPF’s lending to Pembinaan PFI is not a secret, its statement was understood to be a response to a renewed wave of viral WhatsApp messages alleging impropriety in its involvement with Pembinaan PFI.

Sources tell The Edge that as far as the EPF is concerned, it had provided financing at prevailing market rates for similar fund-raising exercises by the government.

Apart from ensuring that repayments are received in order, the EPF and other lenders would not have control over how the government spends the money raised by Pembinaan PFI.

The latest available data shows that Pembinaan PFI has an unsatisfied RM19.48 billion charge on its assets in favour of EPF, created on Aug 22, 2014.

Another known lender to Pembinaan PFI is Retirement Fund Inc (KWAP), although the latest quantum was unclear at the time of writing.

Pembinaan PFI is wholly owned by the Minister of Finance (MOF) Inc, the finance ministry’s corporate vehicle.

It was essentially set up to borrow money on behalf of the federal government in secret — that is, without adding to the government’s official debt figures.

This is done by disguising loan repayments for the debt as “rental payments” from the Treasury to Pembinaan PFI, which was done via a lease-leaseback arrangement involving government land.

This way, the repayments are classified as operating expenditure in the government’s accounts, rather than debt servicing.



Shrouded in secrecy

The intended secrecy was apparent from Pembinaan PFI’s first funding exercise.

On Aug 22, 2007, Pembinaan PFI inked a term loan facility from EPF for RM20 billion. The facility was for a 60-month period and the interest rate was the prevailing rate of Malaysian Government Securities (MGS) plus 0.5% per annum, calculated on a six-monthly basis.

A day earlier, Pembinaan PFI and the Federal Lands Commissioner (FLC) — which legally owns land on behalf of the federal government — had signed an agreement whereby Pembinaan PFI would lease 186 parcels of government land for a lump sum of RM20 billion.

To create cash flow so it can repay the EPF term loan, Pembinaan PFI then proceeded to sublease the 186 land parcels back to the federal government for a total of RM29.18 billion, spread over 30 twice-yearly payments between 2013 and 2027.

The next payment due from the Treasury to Pembinaan PFI will be on Aug 15, 2018, for RM1.02 billion.

The rationale for the Pembinaan PFI arrangement is that it enables the government to raise additional money to fund its development programme in secret.

But this is done at the cost of kicking the repayments — with interest — down the road, with the debt pile now snowballing to RM50.2 billion.

The scheme’s origins trace back to the time of then prime minister Tun Abdullah Ahmad Badawi, who had set out to execute infrastructure projects with the private finance initiative (PFI) model under the Ninth Malaysia Plan (9MP).

Some RM20 billion was earmarked for PFI projects in 9MP. A private finance initiative (PFI) is basically a concessional procurement method whereby the government outsources the construction of public infrastructure to private contractors.

In exchange for a concession to operate and maintain the infrastructure, the PFI concept means the private contractor would have to raise its own funding to complete the project.

However, subsequent reports and findings, including by the Auditor-General and the Public Accounts Committee (PAC) show that the Malaysian version was PFI only in name.

With funds raised via Pembinaan PFI, the Malaysian government proceeded to fund various infrastructure projects across the country.

Back in 2015, the PAC had found that there were 886 projects nationwide involving regular infrastructure works such as constructing schools and hospitals, although no further details surfaced.

To date, there is no complete publicly accessible list of these Pembinaan PFI projects. The companies that received these contracts were also never disclosed, except as throwaway mentions, such as in the Auditor-General’s reports.

For example, the first series of the 2016 Auditor-General’s Report identified a RM81.3 million contract to build the Malaysian Arts School in Kuching as a Pembinaan PFI-financed project.

However, it is also likely that most of the contracts were not identified as PFI projects, adding to the opacity.

In turn, what little is known about the PFI-funded government projects indicate a lack of effective oversight.

To illustrate this, the third series of the 2013 Auditor-General’s Report found that out of the first RM20 billion raised via Pembinaan PFI, 92.8% or RM18.56 billion had already been spent on 547 projects as at Dec 31, 2013.

However, the report found that 60% of these projects were over budget, while another 40% spent less than half their allocated budget.

This could be a critical area for the MACC investigation to shine the spotlight on, given the high risk of malfeasance in terms of contract awards.



The debt spiral

While the initial intent in the 9MP was apparently to raise RM20 billion via this SPV, the ease of borrowing more without adding strain to the federal balance sheet proved irresistible to the government.

At a press briefing in March 2015, then PAC chairman Datuk Nur Jazlan Mohamed described the arrangement as “innovative financing”.

His fellow committee member Datuk Abdul Aziz Sheikh Fadzir, at the same briefing, called the leaseback arrangement from Pembinaan PFI to the government as “a left pocket to right pocket transaction”.

After Pembinaan PFI’s first financing exercise, the government subsequently amended Pembinaan PFI’s stated objectives in its Memorandum of Association to include borrowing from KWAP, and later dropped the reference to the PFI concept.

Essentially, these changes turned Pembinaan PFI into an open-ended fundraising SPV that allowed the government to continue borrowing without showing it on its balance sheet.

Its second financing was a joint facility by EPF and KWAP for a total of RM10 billion. Some RM7.57 billion of this amount was later spent on 313 projects as at Dec 31, 2013, according to the third series of the Auditor-General’s Report.

From these 313 projects, however, 68% had spent less than half their budget as at Dec 31, 2013, while 27% saw cost overruns. Another 5% did not touch their budgets at all.

At the time of writing, it is unclear how many projects overall was funded via Pembinaan PFI to date.

Checks with the Companies Commission of Malaysia show that Pembinaan PFI had not submitted its annual accounts for years. Its latest available annual report was for the financial year ended Dec 31, 2014 (FY2014).

Between FY2010 and FY2014, the government apparently kept injecting assets into Pembinaan PFI to raise more money.

In that period, the company’s non-current assets increased from RM16.96 billion to RM26.04 billion while non-current liabilities grew from RM16.96 billion to RM24.99 billion.

That likely explains why, despite continuous repayments according to schedule, its borrowings have since grown to a massive RM50.2 billion.

Spotlight again on Najib

The scrutiny of Pembinaan PFI will draw even more attention to the Finance Ministry and Najib, who was finance minister for most of Pembinaan PFI’s fundraising run.

Unlike 1MDB, however, the Pembinaan PFI investigation is likely to be confined to Malaysian shores as the funds raised were supposed to be spent on local infrastructure projects.

It also remains to be seen if the investigation will unearth criminal elements as the 1MDB probe did, despite the convoluted efforts to disguise the repayments.

More likely, it will discover irresponsibility on the part of the BN government in terms of fiscal indiscipline that future generations have to pay for.