This article first appeared in The Edge Financial Daily on June 22, 2018

PUTRAJAYA: The Pakatan Harapan-led government is rescuing the 70-acre (28.33ha) Tun Razak Exchange (TRX) development in Kuala Lumpur, agreeing to inject RM2.8 billion of new capital into the project, which was mooted by the previous administration, to avoid bigger losses.

The RM2.8 billion bailout, announced by Finance Minister Lim Guan Eng yesterday, will help complete all the necessary infrastructure works in the TRX. The money would be released in stages up until 2024, with RM344 million to be disbursed starting this year.

According to Guan Eng, TRX City Sdn Bhd (TRXC), a wholly-owned subsidiary of the ministry of finance (MoF) and master developer of the TRX project, does not have the funds for infrastructure works to complete the project and had sought financial assistance from the government.

“Yesterday (Wednesday), the cabinet met and decided that the TRX project shall be completed, with government funding of up to RM2.8 billion. This decision will help allay concerns among the local and foreign investors, who have put in billions of ringgit, on the fate of TRXC,” he told a press conference yesterday.

This follows the government’s recent decision to cancel the Kuala Lumpur-Singapore high-speed rail and the Klang Valley mass rapid transit Line 3 projects as it tries to reduce the country’s debt load in excess of RM1 trillion.

Guan Eng noted that the alternative of not coming up with the RM2.8 billion funding and not completing the TRX project, is to pay RM3.51 billion in compensation claims, as well as the megaproject becoming a potential eyesore in the heart of the capital if it were abandoned.

“Apart from having to pay compensation of RM3.51 billion, the government will also lose the RM3.69 billion transferred earlier to TRXC,” he added.

With the latest capital infusion, the government would have forked out a total of RM6.5 billion for the controversial project.

“Completing [the] TRX will allow the full value of the project of at least RM7.6 billion to be realised. This will help to repay all borrowings [by TRXC], recoup all misappropriated funds, recover all funding investments and opportunity costs, as well as potentially achieve a small surplus return,” said Guan Eng.

The minister said the federal government had since 2012 guaranteed borrowings, extended advances and provided transfers to, as well as purchased land from TRXC amounting to RM3.69 billion.

Of the RM3.69 billion of transfers, Guan Eng said RM3.07 billion was misappropriated by 1Malaysia Development Bhd (1MDB), mainly for 1MDB loan repayments.

“As a result of the misappropriation of funds, TRXC does not have enough money to fulfil its obligations as the master developer of the TRX,” he said.

Guan Eng also said the government’s immediate priority is to ensure fiscal discipline by bringing down the project’s cost.

He promised that the MoF will ensure that the injection of funds is spent prudently to protect the interests of Malaysian taxpayers, and the existing foreign and local investors of TRXC.

“Our choices of options have been taken away from us. For us, it is about damage control and how to avoid paying the highest cost. RM3 billion has gone to [pay] 1MDB’s [debts]. So, if we cut [the] loss now we have to pay RM3.5 billion [in compensation claims]. What [other] choice do we have?” he said.

“You must remember [that] we have foreign investors, prominent companies like HSBC and Prudential [in the TRX] that had bought land there to build their main buildings. There is a lot of foreign interest and investment there. This will have wide ramifications if it (the TRX) is not completed. In that respect, we want to make sure that investors, both local and foreign, will be reassured that their investments won’t be written off and so, we will continue [the project],” he said.

To date, TRXC has sold parcels of land to local and foreign investors such as Mulia Property Development, HSBC, Affin Bank, Lembaga Tabung Haji, WCT Holdings Bhd and IJM Corp Bhd (whose building would be tenanted by Prudential). The Mulia’s Exchange 106 Tower and the Prudential building are expected to be ready by early next year.

TRXC, formerly known as 1MDB Real Estate Sdn Bhd, was formerly a subsidiary of scandal-plagued state fund 1MDB. TRXC was transferred to the MoF on March 31 last year, as advised by the Parliamentary Public Accounts Committee, because TRXC was unable to secure land sales or bank financing due to its association with 1MDB.

TRXC is the owner of the two key real estate projects under the 1MDB umbrella, comprising the TRX project and the 486-acre Bandar Malaysia development.

TRCX to lodge report over misappropriation of funds

Meanwhile, Guan Eng said he has instructed the management of TRXC, including its chief executive officer Datuk Azmar Talib and executive director Tan Hwa Min, to lodge a report with the investigative panel of 1MDB and the police on the RM3.07 billion misappropriated funds by 1MDB.

“It was used to pay off 1MDB debts, but let the police and the investigative panel look into it first,” he said, when asked how the money was transfer out of TRXC.

In a separate statement yesterday, Azmar confirmed that a police report will be lodged in relation to the funds meant for the TRX development that was taken by 1MDB when TRXC was a 1MDB subsidiary.

“We thank the government for having confidence in the TRX, Kuala Lumpur’s new international financial district. Our investors will view this commitment positively as it confirms the government’s pro-business stance,” he said.

“We have made significant progress in the project and attracted world-class investors. With this much-needed support, and the ongoing commitment from our partners, we look forward to delivering the project within [the] schedule and budget, for the benefit of Malaysia and all Malaysians,” Azmar added.