Saturday 24 February 2018

Malaysia’s Vaunted Land Distribution Scheme Turns Sour

By: John Berthelsen
Malaysia’s long-praised Federal Land Development Authority, or Felda, founded in 1956 to resettle the country’s rural poor into newly reclaimed jungle areas to enable them to grow crops such as palm oil and rubber, has lost RMB1.5 billion (US$382 million) in a political deal to prop up a friend of Prime Minister Najib Razak, according to an internet news portal covering the international palm oil industry.
The International Palm Oil Monitor, established in 2017 to cover the industry, quoted a due diligence report prepared by the KPMG international accounting firm detailing what it called “numerous concerns/improprieties” including cash flow problems, an inflated acquisition price, non-compliance with laws and regulations, excessive borrowing and excessive amounts which are due for repayment to the banks and tax evasion in the purchase of 37 percent of the flailing Indonesia-based PT Eagle High Plantations TBK oil palm concern controlled by Peter Sondakh, an Indonesian Chinese, through his Rajawali Group, named a Tan Sri, one of Malaysia’s high-ranking if arcane honorifics.
“Essentially, as we know, the purchase was a bailout of Eagle High and Peter, who is a good friend of Najib,” said a well-connected businessman in Kuala Lumpur. “Peter owns the St Regis Hotel in Langkawi and in Bali, among other things. Last year, Najib and family and friends spent two holidays in Bali – all courtesy of Peter. Last weekend, they were in the St Regis in Langkawi for Chinese New Year holidays, again courtesy of Peter.”
The KPMG report was actually produced about a year ago and has been written about, although it has been handled very carefully by Malaysia’s mainstream press, all of which is controlled by the government. According to the International Palm Oil Monitor, Eagle High has also received intercompany interest-free advances of US$26 million – none of which has been repaid. The US$505.4 million for the 37 percent is said to have been a 95 percent premium to the closing price at the time, or Rp580 (US0.042 cents) per share. Eagle High is now trading below Rp204 per share. 
Although the story has been floating around, it has achieved added significance because Felda has become a major issue in Malaysia’s upcoming general election, which must be held before June 26 and is likely to be called sometime in April, political analysts in Kuala Lumpur say.
The land scheme, which is given major credit for keeping rural Malays and Indians loyal during Communist attempts to take over the country in the 1950s and 1960s, is in deep trouble from a variety of sources. It is almost sacred to the Barisan Nasional, or national ruling coalition, and particularly the United Malays National Organization, so much so that it is called UMNO’s fixed deposit.
Under the scheme, new settlers were each given 10 to 14 acres to cultivate crops, usually rubber or oil palm. They were required to reside in planned villages where their homes, built by FELDA, were located and included piped water and electricity. Schools, medical centers and places of worship were also provided. The schemes were designed as cooperatives.
But the government engineered a disastrous initial public offering in 2012 on the Kuala Lumpur Stock Exchange. The thousands of smallholders who bought what became known as Felda Global Ventures at the time of the IPO saw their investments fall by half because of disastrous mismanagement. 
While the shares surged in 2017 following a management change, the original owners who form UMNO’s vote bank have been furious. Net profit fell by more than 96 percent between 2012 and 2016. For the past year, the entity, which is the world’s largest crude palm oil venture in the world, has been attempting to cope with the Eagle High scandal.
Enter Mahathir Mohamad, the fire-breathing 92-year-old former Prime Minister who has vowed to drive Najib from office. He has campaigned implacably in the Felda areas, saying the scandal is a textbook example of how to steal from the government. “With all the bungling in Felda, this adds to the woes of the BN as far as getting support from Felda settlers in the General election,” said a Kuala Lumpur-based political analyst. “These are people who loved Mahathir and remember back to his period in office as a time when the country’s economy never stopped growing.”
They are also the people who the opposition Pakatan Harapan coalition, with its component the Democratic Action Party, has never been able to touch significantly because of their mistrust of the ethnic Chinese.
Today, according to a Feb. 20 release by the International Palm Oil Monitor, “Felda is sitting on a paper loss of approximately US$300 million. Additionally, Eagle High’s market capitalization is below US$420 million, which means Felda’s 37 percent is now valued at just US$155.4 million, less than one-third what it paid in the first place.
Eagle High’s problems have been compounded by the fact that in April 2017, the European Union pushed through a regulation to ensure that palm oil imported must come from sustainable sources after 2020.
“This does not bode well for Eagle High, whose unsustainable palm oil practices as well as its lack of RSPO and ISPO certifications have been widely documented. Given this, it is unlikely that Eagle High’s revenues will improve in the coming years. In fact, it is more likely to decline once the European Union regulation takes effect,” the Palm Oil Monitor said. “All in all, it looks like Felda’s investment in Eagle High has proven to be a complete bust and did not pan out the way Felda had hoped.”

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