This article first appeared in The Edge Malaysia Weekly on March 11, 2024 - March 17, 2024

THE Federal Land Development Authority (FELDA),  the government agency that owns FGV Holdings Bhd, which is one of the largest producers of oil palm in the world,  has maintained its crown as one of the country’s biggest beneficiaries of government bailouts. But it still owes more than RM8 billion today, according to the latest Auditor-­General’s Report (AG’s report).

A recovery plan aimed at turning around the state-owned national land development agency’s operations that included a RM6.23 billion bailout from the government in 2019 failed to deliver anticipated results. The agency has not reported an annual profit since 2013.

In 2022, the government awarded grants of RM214 million to FELDA, down 37.4% from the RM342 million it provided in 2021. The drop in grant was mainly due to lower allocation from the Ministry of Finance (MoF) in 2022. However, FELDA, which falls under the purview of the Prime Minister’s Department, remains in crisis mode and continues to rely on federal funding through grants to continue its operations and service its debt. But how much taxpayer money will be used to resolve its crisis?

Last week, the National Audit Department said the agency owes RM7.97 billion to a number of lenders, and some RM686 million to the federal government. These loans were part of measures to restructure its debt from 2018 to 2022.

FELDA is far from alone in its struggle with debt. Of the 24 federal agencies with loan balances totalling RM123.14 billion in 2022, FELDA’s loan balance of RM8.66 billion is the third highest, after the Public Sector Home Financing Board’s RM62.08 billion and the National Higher Education Fund Corp’s RM41.5 billion.

The National Audit Department also flagged FELDA’s ability to continue as a going concern. It pointed to the agency’s cash balance of RM808 million as at end-December 2022, against its commitments totalling RM1.561 billion. These include commitments amounting to RM50 million per year under a Tawarruq Financing Facility agreement entered into by FELDA’s subsidiary FIC Properties Sdn Bhd in 2017 with Govco Holdings Bhd (GovCo), a company under the Minister of Finance Inc, for the first five years, starting in 2024, with the outstanding amount of RM2.595 billion scheduled over 15 years beginning in 2029. FIC Properties has been making a loss for three consecutive years from 2020 to 2022.

FELDA had secured the loan to support its US$680 million purchase of a 37% stake in Indonesia’s PT Eagle High Plantations Tbk from Indonesian tycoon Tan Sri Peter Sondakh’s Rajawali Group in 2015 - a deal that raised a lot of questions as FELDA’s 81.9%-owned unit FGV had scrapped plans to buy the same block of shares upon the advice of two separate advisers, Bank of America and JP Morgan.

“Based on its cash and equivalents as at Dec 31, 2022, FELDA is unable to fulfil its commitments of RM753 million,” the National Audit Department said in the AG’s report for 2022 released last week.

FELDA also found itself the top among the country’s five federal agencies with the highest net loss in 2022. It more than doubled its net loss in 2022 to RM1.01 billion, from RM545 million in the previous year.

At a loss of RM990 million in 2022, the Electricity Industry Fund was the second largest loss-making federal agency, followed by Railway Assets Corp (net loss of RM484 million), Kumpulan Wang Amanah Negara (KWAN) (RM353 million) and Kuala Lumpur City Hall (RM283 million).

According to the AG’s Report, FELDA’s net loss was mainly attributable to impairments amounting to RM742 million on investments, outstanding amounts from subsidiaries and settlers’ debt.

RM3.79 bil wall of debt looming for PR1MA

The AG’s report also flagged uncertainty around state-owned PR1MA Corp Malaysia’s (PR1MA) status as a going concern in the national housing agency’s financial report for 2022.

The National Audit Department warned that PR1MA would not be able to meet all its impending Islamic bond (sukuk) repayments on time based on its liquidity position.

The agency’s cash balance as at Dec 31, 2022, fell to RM428 million from RM820 million a year earlier. It lost RM257 million in 2022, as its residential and commercial sales revenue fell 33.7% to RM857 million in 2022 from RM1.292 billion in the previous year.

PR1MA, which is under the purview of the housing and local government ministry, will have to repay sukuk worth a total of RM3.79 billion up to 2027. This includes Tranche 2 of a sukuk amounting to RM1.75 billion due to mature in October 2024.

According to the AG’s report, PR1MA’s liabilities of RM5.75 billion exceeded its assets of RM5.62 billion in 2022, which resulted in its shareholder funds now being a negative RM125 million. PR1MA has emerged as one of four federal agencies where their liabilities now exceed their assets. The others are the Malaysian Highway Authority (LLM), Perbadanan Hal Ehwal Bekas Angkatan Tentera and Perbadanan Perwira Harta Malaysia.

To improve its cash and equivalents, the National Audit Department recommended that PR1MA review the development strategy of its residential and commercial projects based on current market needs to ensure the marketability of completed units, as well as to achieve the development objectives of the projects.

The agency has also been advised to ensure cash flow projections from the sale of its residential and commercial units can be achieved to finance operational activities and amortisation payment of the RM1.75 billion Sukuk Tranche 2 that is set to mature in October 2024.

Red flags in LTAT’s 2022 financials

Meanwhile, the AG’s report found that the Armed Forces Fund Board (LTAT) had failed to account for a total of RM812 million in impairments on investments at its subsidiaries, that is, a RM768 million investment in Boustead Holdings Bhd and a RM44 million investment in pharmaceutical company Pharmaniaga Bhd. This resulted in the fund overstating its net profit and investments in subsidiaries by RM812 million in 2022. 

That means LTAT would have made a RM379 million net loss for 2022 if that RM812 million impairment is taken into account. Instead, the LTAT reported a 13.1% increase in net profit to RM433 million in 2022 from RM383 million in 2021. The fund also saw its revenue rise 27% to RM653 million in 2022, from RM514 million in the previous year.

According to the report, LTAT had made an investment of RM5.29 billion in 13 subsidiaries in 2022, including investment costs of RM2.55 billion in Boustead and RM106 million in Pharmaniaga. In June last year, LTAT completed the takeover of Boustead, making the latter a wholly-owned subsidiary of the fund. LTAT directly owned an 8.615% stake in Pharmaniaga and indirectly held 51.835% via Boustead as at end-March 2023.

Additionally, the report found that LTAT divested its holdings in Perumahan Kinrara Bhd and Tanah Sutera Development Sdn Bhd, selling them for a total of RM43 million to Perbadanan Perwira Harta Sdn Bhd (PPHSB). In return, LTAT received PPHSB shares valued at RM232 million. From this transaction, LTAT recorded a non-cash profit of RM189 million, forming the basis for dividend payments in 2022 to its 122,936 contributors. In 2022, LTAT paid dividends totalling RM476 million (5%), utilising both its net profit and accumulated gains, the report stated.

The report also pointed out that there were 41 old stock portfolios that have not been addressed, leading to an unrealised loss of RM662 million, which contributed to a negative reserve of RM338 million as at Dec 31, 2022. LTAT’s reserves have consistently been in negative territory since 2020, recording figures of RM376 million in 2020 and RM285 million in 2021.

In a March 8 statement, LTAT assured the public that the negative reserve refers to the other comprehensive income (OCI) reserve, which is just one facet of its combined reserves. When the OCI is taken together with its retained earnings and reserve fund, LTAT said its combined reserve as at Dec 31, 2022, showed a net positive balance of RM160 million. “This net positive reserve position leads to a book value solvency of above 100%, affirming that our net assets at book value surpass the total contribution by our members.”

On the issue of non-cash items contributing to its income for 2022, LTAT said it still maintains a solvency position above the threshold required within its dividend policy even if those items were excluded. “As a retirement fund, our dividends, when declared, are non-cash in nature and are credited to members’ accounts. Thus, LTAT’s liquidity position remains stable, ensuring we can fulfil all commitments as they arise,” LTAT said in the statement.

What happens now?

State-owned agencies continue to rely on government bailouts to stay afloat and remain economically viable. Should they continue to be bailed out, or should they be allowed to fail?

For one, the National Audit Department is concerned about FELDA’s heavy reliance on financial aid to keep operating and has advised the agency to chart a clear direction without further financial assistance from Putrajaya.

On its part, FELDA said it has created a task force in collaboration with the Prime Minister’s Department as part of the agency’s recovery plan. In the recovery plan, the government has agreed to inject RM1 billion for a period of seven years for FELDA to settle its debts and government guarantee revolving credit.

Still, FELDA’s huge debt places a substantial burden on an already-strained national budget and further increases the growing debt bubble. If the government continues to prop FELDA up, it might unwillingly signal a kind of acceptance, or even encouragement, of risky behaviour. 

Other federal agencies can also interpret the bailout as reassurance that, if they ever face the same fate as FELDA, the government will always be there to save them.

But this isn’t a signal Malaysia wants to send. The government has already introduced new taxes on things like sweet drinks and luxury items, as well as an increase in service tax - all of which will hit some pockets hard.

FELDA’s crisis spiralled in 2013 when its income fell to RM200 million after FGV’s initial public offering (IPO), which saw FELDA earning RM5.7 billion from the offer for sale of shares. Since then, the agency has been registering revenue of below RM1 billion from 2014 to 2017. 

This reduction in income occurred because FGV was unable to contribute an estimated income of RM800 million per year as expected before the IPO, in addition to the fall in the price of crude palm oil to below RM3,000 per tonne from 2012 till 2019. A combination of weak management and financial mismanagement at FELDA by successive governments over the years has also been blamed for the agency’s fortunes going south. Felda Group had recorded a net profit of between RM200 million and RM1.1 billion from 2007 to 2011.

Meanwhile, PR1MA said it has formulated eight strategic development cores by developing residential projects through strategic collaboration and development on existing land that has been identified as providing high returns in the future.

“Since launching its business transformation exercise in 2019, PR1MA has changed its strategy from a build-then-sell concept of housing delivery to a “sell first, then build” model. Through renegotiations with the developer, PR1MA has signed a supplementary agreement, including conditions where the developer partner is responsible for selling the house, the AG’s report revealed.

PR1MA has also implemented several programmes and sales series to ensure that its residential units can be sold to targeted buyers based on market research, including current needs, purchasing ability, location as well as the provision of facilities and leisure centres. As at December 2023, PR1MA has sold 42,851 housing units.

Accordingly, PR1MA has applied for the postponement of its sukuk principal repayment with a government guarantee amounting to RM1 billion. On Jan 2, 2024, the MoF had approved the postponement application.

Perhaps PR1MA can take a leaf out of the success of Singapore’s Housing and Development Board’s (HDB) book, a statutory board under the Ministry of National Development responsible for the public housing in Singapore. It was reported that HDB flats house 80% of the city state’s resident population, of whom about 90% own their home.

Following the latest findings from the AG’s report, it remains to be seen how agencies like FELDA and PR1MA will resolve their pile of debt without resorting to major bailouts.  

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