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The Chain: Financial Troubles at FELDA May Impede FGV’s Sustainability Efforts

April 22, 2019

The Malaysian government announced on April 10, 2019 that the Federal Land Development Authority (FELDA) would be given a cash injection of RM 6.23 billion (USD 1.5 billion) to help ease its financial troubles. These financial issues could have a knock-on effect on FELDA’s Bursa Malaysia-listed commercial arm FGV Holdings Bhd, which has committed to restorative action on its concessions in West Kalimantan that may prove too expensive in the company’s current financial climate.

Announced in the federal parliament as part of its FELDA white paper, the government money will benefit the 112,635 families and their descendants (typically called settlers) who cultivate cash crops under FELDA’s land development scheme. The money will be used to write off loans, build housing units for second-generation settlers, provide agricultural development technology, and give support to reduce dependency on rubber and oil palm cultivation.

Economic Affairs Minister Mohamed Azmin Ali said FELDA’s financial performance declined after FGV Holdings Bhd was listed on the Bursa Malaysia in 2012. FELDA’s debt rose from RM 1.2 billion in 2007 to RM 14.4 billion in 2017. Its cash balance fell from an average of RM 2.5 billion between 2007 and 2011 to just RM 400 million in 2017.

The white paper announcement came two days after FELDA’s director-general Datuk Dr Othman Omar lodged a report with Malaysia’s police commercial crime unit, claiming FELDA was pressured into entering a sale and purchase agreement with PT Eagle High Plantations Tbk in 2017. FELDA’s USD 550.4 million acquisition of a 37 percent non-controlling stake in Eagle High, which is majority owned by the Rajawali Group, had already been questioned due to, among other issues, possible overvaluation of Eagle High and concerns that it was not in compliance of Indonesian law.

Dr Othman claimed that FELDA was forced to invest in Eagle High by former Prime Minister Najib Razak, who is a close friend of Rajawli Group’s head Peter Sondakh. He claimed the purchase price was 300 percent higher than the market value of USD 114 million and the purchase presented several clear risks. One such risk was that Eagle High was not certified by the Roundtable on Sustainable Palm Oil (RSPO) at the time of purchase and was unlikely to be fully certified within ten years. FGV, through which FELDA is an RSPO member, has seven certified management units and a certified area of 70,587 hectares (ha), plus a commitment to have its estates fully certified by 2021. Eagle High’s most recent ACOP shows it should have its first management unit certified in 2019 and that it commits to full certification of its own estates by 2025.

The bailout of FELDA will likely have political repercussions, given that it comes at a time when several underperforming government-linked companies, including Lambaga Tabung Haji, the parent company of palm oil company Tabung Haji Plantations, have required financial injections. It could also have repercussions for FGV’s willingness to comply with its sustainability commitments. Chain Reaction Research has previously covered non-compliance of NDPE policies by FGV concessions. This included 270 ha of potential High Carbon Stock clearance between September 2017 and January 2018 on the company’s Asian Plantations concession in Sarawak and peat clearance on PT Citra Niaga Perkasa (PT CNP) and PT Temila Agro Abadi (PT TAA) in West Kalimantan. The latter clearance led FGV to publicly commit to a stop work order and rehabilitation of land developed after August 2016, which amounts to around 1,000 ha. The case is still being deliberated by the RSPO’s complaints panel. As well as its own commitment to rehabilitate the 1,000 ha, FGV may be found liable for a significant amount of compensation, and it may need to compensate for clearance on Asian Plantations as part of recently announced grower recovery plans. With financial issues at FELDA that may be so significant that a government bailout was warranted, FGV may be less willing to shoulder the substantial costs of compensation (currently USD 2,500 per hectare). Any failure to honour publicly stated commitments could threaten FGV’s inclusion in NDPE supply chains and its reputation of commitment to industry NDPE policies.

One Response to The Chain: Financial Troubles at FELDA May Impede FGV’s Sustainability Efforts

  1. […] share price has fallen by half. Moreover, FELDA’s financial woes could bleed into FGV. As CRR reported in April, FELDA, which owns 12.4 percent of FGV, received a cash injection from the government […]

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