Malaysia's sovereign fund's rationalisation plan may have run into some problems. The government has been forced to terminate a multi-billion deal that would have seen billions returning to its coffers as part of the restructuring of 1Malaysia Development Fund.
The deal to sell off a 60% stake in formerly 1MDB-owned Bandar Malaysia, a major residential and commercial real-estate project in Kuala Lumpur, to a Chinese state-owned company, China Railway Engineering Corp, and a local Malaysia partner has been called off.
The consortium, called ICSB, comprises Iskandar Waterfront Holdings Sdn Bhd (60%) and China Railway Engineering Corp (40%). ICSB agreed to jointly develop Bandar Malaysia in an agreement inked on 31 December, 2015.
The sale, valued at RM7.4bn (£1.33bn, €1.57bn, $1.7bn) was, according to the Wall Street Journal (WSJ), "a cornerstone of efforts by Malaysia's government to sell off 1MDB assets after the fund ran up over $13bn in debt".
Malaysia government to go ahead and develop land
The Ministry of Finance, which owns the land, has now indicated that it will go ahead with plans to develop it, and is seeking expression of interest for a master developer of the project.
According to TRX City Bhd, the company owned by Malaysia's MoF, the China Railway consortium failed to meet the criteria under the December 2015 agreement to complete the sale.
The Star newspaper reports that TRX City said that the share-sale agreement (SSA) over the development of the 486 acres of land in Sungai Besi lapsed because China Railway Engineering failed to meet the payment obligations, despite being granted repeated extensions.
The newspaper said Prime Minister Najib Razak was forced to cancel a scheduled visit at the last minute to the Bankar Malaysia development on 3 May after the deal fell through.
"Despite repeated extensions being granted, ICSB failed to meet the payment obligations outlined in the conditions precedent under the SSA. As a result, the SSA between the parties stands null and void with immediate effect," TRX City said, the Star reports.
"Looking ahead, given a significant appreciation in the value of the Bandar Malaysia land, TRX City's sole shareholder, the MoF, will now be retaining 100% ownership of the site to ensure that the Malaysian people benefit from its development in its entirety," it added.
Consortium raises concern over termination notice
The Chinese consortium, in a separate statement, said that it is reviewing the matter with its advisers and legal counsel.
"ICSB is concerned with the content of the termination notice and the subsequent press release issued by TRX City, which, given the factual matrix, does not fully and accurately reflect the circumstances and conduct of the parties in this matter," it said.
"ICSB takes this matter very seriously ... A further announcement on this matter will be made in due course."
The Star said it is believed that ICSB paid a RM150m (£27m) deposit when it was picked to be the master developer of Bandar Malaysia, together with TRX City.
In a statement issued by 1MDB, which used to own TRX City, on 5 January 2016, it said the ICSB consortium was to pay a 10% deposit, amounting to RM741m. The newspaper said that it is not known if the 10% deposit has been paid, or any of its other payment obligations were not met that resulted in the calling off of the deal.
The development of the Bandar Malaysia land was initially handed over to 1MDB, which selected ICSB after a competitive bidding process. The land, however, was returned to the MoF as part of the restructuring of 1MDB.
Bandar Malaysia is Malaysia's largest real-estate project and will become the country's transport centrepiece, connecting the Kuala Lumpur-Singapore high-speed rail, MRT lines, KTM Komuter, Express Rail Link and 12 highways.
Chinese government refused to authorise deal?
Separately, the WSJ claims that an internal Malaysian Finance Ministry document on problems on the sale, which it has seen, claims that the major reason for its failure "was that China's government declined to give the green light" for China Railway to make the investment.
The document said the consortium was given 12 extensions, with the latest expiring on 30 April 2017.
The Chinese government's information office did not immediately respond to a request for comment, the newspaper said. Neither did the Malaysian Prime Minister's Office nor 1MDB respond to requests for comment, WSJ added.
The MoF stepped in to undertake a major reshuffle of the assets and management of 1MDB. One of the first steps taken was the dissolution of the fund's advisory board chaired by the prime minister.
The fund is under investigation in several international jurisdictions, including the US, Singapore and Switzerland over allegations of money-laundering and bribery. Singapore has already charged and convicted several bankers over 1MDB.