• Three Major Challenges for the Menteri Besar (MB), Menteri Besar Incorporated (MBI) and the Darul Ehsan Investment Group (DEIG)

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 7th of September 2015

    Three Major Challenges for the Menteri Besar (MB), Menteri Besar Incorporated (MBI) and the Darul Ehsan Investment Group (DEIG)

    The spotlight was shone on the Darul Ehsan Investment Group (DEIG) in the recently concluded Selangor state assembly sittings where certain concerns were raised regarding the purpose and transparency of this newly established holding company.[1] Some of these concerns were heightened because of the fear that DEIG could turn into another 1MDB. The following are three major challenges for the Menteri Besar of Selangor, Azmin Ali, which must be addressed in order to address the concerns raised during the state assembly sitting.

    • The challenge of transparency

    Azmin has likened DEIG to Khazanah in terms of the consolidation and management of the various assets which are currently parked under Menteri Besar Incorporated (MBI).[2] The consolidation of the 74 companies which MBI has controlling and minority stakes in make sense. The Select Committee on Agencies, Statutory Bodies and GLCs (JP-ABAS) under the Selangor state assembly has made this clear in their proceedings statement, except the recommendation for the consolidation and restructuring to take place under MBI rather than under a newly created entity such as DEIG.[3]

    The challenge of transparency must begin with MBI. Strangely, even though MBI is a statutory body created under the Menteri Besar Incorporated Enactment 1994, MBI is not required to table its accounts in the Selangor state assembly. A check with my colleagues in the Selangor state legislature confirms that the accounts of MBI were not tabled during the 5 year tenure of Tan Sri Khalid Ibrahim as Menteri Besar. If Azmin wants to reassure us that DEIG will be more transparent than Khazanah[4], the first thing he must do is to table the full accounts of MBI in the year end budget sitting, regardless of the state of the consolidation and restructuring exercise under DEIG. After all, Khazanah publishes information regarding its portfolio’s performance[5] as well as selected information regarding its balance sheet and income statement.[6]

    But Azmin should go further. He should disclose information such as the compensation packages of the top executives in MBI as well as the amount allocated to directors’ fees, information which is currently not disclosed by Khazanah. He should emulate the example of the Employees Provident Fund, which does provide this information (albeit at a consolidated level for its CEO and Deputy CEOs). This kind of disclosure would also be helpful in preventing the RM2.7 million dispute in severance pay involving several of MBI’s staff whose employment was terminated at the end of Tan Sri Khalid Ibrahim’s tenure as Menteri Besar.[7]

    In addition, Azmin should also review and reveal the current dividend policy of MBI as well as the GLCs under the MBI umbrella. I was surprised to learn that MBI has never made any contribution to the income of the Selangor state government via dividends.[8] I was also surprised to learn that other than Kumpulan Semesta Sdn Bhd, which is the company overseeing mining activities in Selangor, none of the other state owned companies contributed any dividends to the state government from 2004 to 2014 (See Appendix 1 below). In contrast, Khazanah announced a dividend of RM900m in 2014 and has paid out accumulated dividends of RM7.4b since 2004.[9]

    Needless to say, the same standards of transparency should be applied for DEIG.

    It is reassuring that Azmin has promised that the accounts of MBI will be tabled in the Selangor state assembly after the initial concerns regarding DEIG were raised.[10] But this is just a first step of many in order to prove that the standards of transparency in MBI are indeed better than Khazanah’s.

    • The Challenge of Strategy

    It doesn’t take a corporate strategist to see that the current structure of MBI is unfocused and needlessly complicated. (See Figure 1 below)

    Figure 1: Current Shareholding structure of MBI[11]

    For example, MBI’s leisure and hospitality assets which spans hotels, golf clubs and community halls are divided across 5 companies – MSNS Holdings, Perangsang Hotels and Properties, Brisdale International Hotel and Bukit Beruntung Golf and Country Resort. There are numerous property and construction companies under Kumpulan Darul Ehsan (KDE) and Permodalan Negeri Selangor Berhad (PNSB).

    The proposed restructuring of the various companies currently under MBI into 8 core areas seem to make sense, at least on paper. (See Figure 2 below) Whether or not this restructuring needs to take place under DEIG or directly under MBI is still a cause for debate.

    Figure 2: Proposed restructuring of the companies under MBI into 8 core areas under DEIG.[12]

    But more important than the issue of restructuring is the question of the corporate strategy which will be the focus especially under the core areas of Property, Infrastructure and Construction and Waste Management. Right now, there is little information on the website of DEIG to indicate that there is any coherent strategy for each of these core areas. The PKR MP for Kelana Jaya, in his preliminary report on DEIG, has said as much.[13]

    For example, how will the group of companies under the infrastructure and construction core area manage the water assets of the state especially after the takeover exercise of SYABAS, Puncak Niaga, Kumpulan ABASS and SPLASH is completed? Who will be responsible for upgrading the water treatment plants especially those which experience frequent stoppages so that elements such as mercury and diesel in the water supply can be filtered more efficiently? Who will undertake projects to increase the supply of treated water while awaiting the completion of the Langat 2 project? Who will be in charge of decreasing the level of non-revenue water (NRW) which is currently one of the highest in the country?

    Similarly, what will be the focus of the companies under the property core area? Would it follow PKNS’s model of doing joint ventures (JVs) with big property developers to develop high end properties and maximise profits for MBI or DEIG? Or will it choose to focus more on building affordable homes which are in great demand in the Klang Valley but would have a lower gross development value (GDV)? From the statement in DEIG’s website, it seems that the model which will be followed focuses more on profits rather than affordability.[14]

    In addition, will KDEB-Waste Management and Hebat Abadi try to muscle in on waste collection contracts which are currently the responsibility of the local governments? Would they be tempted to venture into new and possibly more expensive ways of waste disposal including the building and management of incinerator plants?

    These are valid concerns which have been raised by some of my colleagues in the Selangor state assembly and have yet to be addressed by the Menteri Besar.

    • The Challenge of Consolidation and Transformation

    Finally, the third challenge faced by the Menteri Besar is how the various companies under MBI will be consolidated and in many cases, turned around or transformed. Table 1 below lists the revenue and profits for the Financial Year 2014 for all the companies and subsidiaries which are owned and controlled by MBI (where such information is publicly available).[15]

    What is surprising and somewhat shocking from the figures in Table 1 is that 20 out of the 28 companies experienced an after tax loss in the Financial Year 2014. Kumpulan Darul Ehsan Berhad (KDEB), which is the main holding company under MBI, experienced an after tax loss of RM144.4m in FY2014. Kumpulan Hartanah Selangor Berhad (KHSB) experienced a massive RM235m in after tax losses in FY2014 on the back of RM31.5m in revenue.

    5 out of the 7 subsidiaries of Permodalan Negeri Selangor Berhad (PNSB) were dormant companies which did not register a single sen of revenue in FY2014 and which registered after tax losses ranging from less than RM4,000 for PNSB Construction to RM16.8 million for PNSB Development.

    All of MBI’s leisure and hospitality assets experienced after tax losses ranging from RM294,000 for the Bukit Beruntung Golf and Country Resort to RM1.95 million for Brisdale International Hotels to RM7.01 million for Perangsang Hotels and Properties.

    Perhaps more than DEIG, what is really needed for the companies and subsidiaries under MBI is a process similar to what the federal GLCs went through and are still going through under the GLC Transformation Program that seemed to have yielded positive results for most of the companies involved.[16] For some of the perpetually unprofitable and non-core companies, divestment or winding up should be seriously considered. For those which are deemed as strategic assets and which have a record of loss-making, a turnaround program must be identified and put in place.

    Many of these troubled companies and unconsolidated assets were left from the days of the previous BN government and not cleaned up during the tenure of the former Menteri Besar, Tan Sri Khalid Ibrahim. This is a timely opportunity for Azmin to restructure, consolidate and transform these companies and assets in a well thought out and strategic manner with the maximum amount of transparency possible. These are the challenges which must be faced and overcome, with or without the use of DEIG.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    Appendix 1: Dividends given by GLCS to the Selangor State Government, 2004 to 2014, Reply to YB Ng Sze Han’s (N30 Kinrara) question in the Selangor DUN

    [1] http://www.themalaysianinsider.com/malaysia/article/dap-questions-need-for-azmins-selangor-investment-firm

    [2] http://www.dealstreetasia.com/stories/selangor-state-launches-investment-arm-deig-khazanah-appoints-india-head-6856/

    [3] http://dewan.selangor.gov.my/assets/pdf/Penyata/Penyata-Sidang-2015/KERTAS%20BIL.%2048%20TAHUN%202015-JP%20ABAS_DEIG.pdf

    [4] http://www.sinar.tv/berita/deig-lebih-telus-berbanding-khazanah-1.422007

    [5] http://www.khazanah.com.my/khazanah/files/de/de899efe-c3f7-4e6c-9cfa-694db0d1e74d.pdf

    [6] http://www.khazanah.com.my/khazanah/files/45/457efe1e-cbf7-451d-9d30-690692b3a660.pdf

    [7] http://www.thestar.com.my/News/Nation/2015/01/03/Azmin-Khalid-MBI-severance-payment/

    [8] http://azminali.com/blog/2015/08/maklumat-asas-darul-ehsan-investment-group-deig/

    [9] http://www.thestar.com.my/Business/Business-News/2015/01/15/Dividends-will-continue-to-be-paid-despite-challenging-year/?style=biz

    [10] http://azminali.com/blog/2015/08/maklumat-asas-darul-ehsan-investment-group-deig/

    [11] http://www.mbiselangor.com/?page_id=767

    [12] http://www.deig.com.my/corporate_structure_en.html

    [13] https://drive.google.com/file/d/0B95Rfe9gWqpDcHBTYmcxa204cDg/view

    [14] http://www.deig.com.my/property_en.html

    [15] MBI controlled means that MBI owns directly and indirectly at least 50%+1 of the shares in the company. Source: Companies Commission of Malaysia (CCM)

    [16] http://www.pcg.gov.my/

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