12 ideas shaping khazanah book.indd

Inaugural Lecture by Tan Sri Dato’ Azman Hj. Mokhtar*

12 Ideas Shaping Khazanah

Building True Value:

CEO Faculty ProgrammeManaging Director, Khazanah Nasional Berhad

Universiti Teknologi Malaysia, Kuala Lumpur10 December 2015

* Views of the speaker are his personal reflections. Usual caveats apply.

12 Ideas Shaping Khazanah Book.indd 112 Ideas Shaping Khazanah Book.indd 1 17/12/2015 8:34:17 PM17/12/2015 8:34:17 PM

building true value : 12 ideas shaping khazanah

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SALUTATIONS

Yang Berbahagia Tan Sri Abdul Halim Ali, Chairman, UTM Board of Directors, Yang Berbahagia Prof Datuk Ir. Wahid bin Omar, Vice-Chancellor of UTM, Yang Berusaha Prof Dr Rose Alinda Alias, Deputy Vice Chancellor (Academic & International) of UTM,Yang Berusaha Prof Dr Wan Khairuzzaman Wan Ismail, Dean of UTM International Business School, Staff and Students of UTM, My colleagues from Khazanah, Distinguished Audience, Ladies and Gentlemen,

1) Introduction

a) Syukur Alhamdulillah, Jazakallah, my sincere thanks to Universiti Teknologi

Malaysia for having me to deliver a fi rst lecture under the Ministry of Higher

Education’s CEO@Faculty Programme. I’m truly grateful for being given this

chance to share with you what I have on this subject, in my twelfth year as the

CEO of Khazanah Nasional. I sincerely hope too that I will be able to share over

the course of this lecture series, knowledge and ilmu that is useful. Mudah-

mudahan, Insha’Allah.

b) Khazanah, as you know, is the strategic investment fund of Malaysia,

sometimes called the Sovereign Wealth Fund of Malaysia but a bit more on

that later. Here, in Malaysia, I don’t have to explain too much what Khazanah

means, but I have also found that Khazanah is not just a beautiful name

and word found in the Holy Quran1; it means the same, that is “treasure” or

“treasury” in no less than ten languages including Arabic, Turkish, Farsi, Urdu,

Hindi, several African languages and of course, Bahasa Melayu.

1 Al-Qur’an, 12:55


ceo faculty programme

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c) Perhaps at the start, I should share a question that I am often asked, which

is ‘how many shareholders does Khazanah have?’ Th e fi rst answer, literally,

says that there is of course only one. While this may well be true in that the

Government of Malaysia, through the Ministry of Finance, owns 100% of

Khazanah, it’s also not quite true as some would say Khazanah has 30 million

shareholders, and that it belongs to 30 million people that are the citizens of

Malaysia. Even then, some may say that that is not quite true as there are more

than 30 million, that is all the many millions who are, Insha’Allah, not born

yet; indeed this fund belongs to them too and with that, of course, there is an

explicit and implicit responsibility to manage this for future generations. And

then again, even that may not be quite true, in that Khazanah also belongs to

those who are no longer with us, those that have toiled away endlessly since

time immemorial, those who have sacrifi ced and indeed some who have given

their lives, the large, small, medium, famous and humble, that helped to build

this nation that we now enjoy and on whose shoulders we are able to stand.

Indeed, Khazanah belongs to all of the above and we must remember at the

outset – and I remind myself most of all – that we must not only remember

them, but to honour them in the best possible way by continuing to be true and

continuing to build value for them and the current and future generations.

d) It is in this spirit of remembrance and nation-building that I hope we begin

this lecture series entitled “Building True Value: 12 Ideas Shaping Khazanah”,

and may we be rightly guided in this endeavour, Insha’Allah. Th e topic in itself

has its roots in a speech, “Building True Value: 10 Ideas Shaping Khazanah,”

that I delivered in 2013 at two investment conferences in Hong Kong and Kuala

Lumpur. Th is was in response to a series of questions at that time, in my tenth

year of the Khazanah and GLC Transformation Programme, as to what were the

actual “secret recipes” or anecdotes and war stories on how value was being

created at Khazanah. I was initially somewhat reluctant to talk too much about

the so-called achievements of Khazanah, as I truly believed then – as I do now

– that the journey of transformation of Khazanah is still ongoing (perhaps



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never completing, more precisely), and our quest to not just “create value” was

still ongoing, and it was premature to talk about creating value in the past

tense, as if we are so arrogant or at least careless to think it as a certainty that

value had defi nitely been created.

e) Hence, the topic was carefully positioned to talk about not just “creating value”

but to emphasise that our task at Khazanah is really to “Build True Value” and

that we would steer the discussion to be in the present and not past tense, that

is to say “shaping” rather than be oh so certain to say that Khazanah has been

“shaped.” Th e simple question that I was posed as to how do you create value

also forced me to think beyond just the programmes, the transactions and

the deals, the people, the leaders and the characters and the war stories and

the anecdotes that goes with all of that – they were and still are important,

but I was looking for a way to synthesise all of this in as thoughtful a way

as possible. To put it in another way, to ask how was value being created, in

a manner that truly builds not just true (that is not just fi nancial, but also

economic, not just economic but also strategic, and not just strategic but

also of societal value) but sustainable value for the rightful shareholders and

stakeholders of Khazanah, and to focus not just on the “what” and “when” and

“who”, but more fundamentally the “why” and the “how.” Th e path I took to

bring all this together was indeed to move into the thinking process, into the

realm of thinking, into the realm of ideas.

f) Considering that this strand of presentation was fi rst delivered to an audience

of quite battle-hardened market participants who are usually more interested

in specifi c trading strategies, price-earnings ratios and asset liability mixes and

the like, this approach was not without its risks, but thankfully I believe the Ten

Ideas speech made its rounds and got some traction – it is still in print and

being read today. Two years hence, our work continues and my colleagues and I

have added two more ideas (innovation and inclusion), being two areas that on

which we have focused a lot over the last couple of years.



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g) Alhamdulillah, I am pleased and honoured to be given this chance to expand

further and update the thinking, through this CEO Faculty series, in this realm

of ‘ideas” with a distinguished audience of academics and students that I hope

in this process, the speaker and supposed “teacher” is as much the student and

learner, as indeed the old saying goes: pertanyaan itu kunci ilmu. I have had to

ask a lot of existential questions on the meaning of existence for Khazanah and

how we go about discharging our responsibilities and mandate to arrive at this

point. So, thank you again for having me here and for the next few years. Th is

must be some kind of karmic penance and will certainly force me to make up

for a lot of missed classes during my school and college days!

2) Th e context: Khazanah Nasional Berhad

a) However, fi rst, before I go into the twelve ideas, I would like to give some quick

context into what Khazanah is.



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I don’t have to explain too much to this audience but just to say that we are

offi cially the Sovereign Investment Fund of Malaysia, we manage about RM145

billion, depending how we count, we have about 80 major companies including

some of the most famous names in Malaysia and increasingly the region, in 14

sectors across 16 geographies (with fi ve overseas offi ces). As a holding company,

Khazanah has only 451 staff, but the companies under our stable total more than

200,000 employees. Khazanah was formed in 1994 (that makes us a sweet 21 this

year). Incorporated under the Companies Act 1965, by tradition, the Prime Minister

of Malaysia chairs Khazanah’s board which currently consists of 11 individuals, with

some of the most senior and distinguished ministers and professionals on the

board.

b) To further give the context to the ideas that I wanted to present this morning, I

thought the best way is to try and explain our journey through three reports

that I have brought with me, limited copies of which along with a few others are

available outside.

c) My fi rst assumption is for you to come for this lecture, you must surely have an

interest in Khazanah, and hence I am going to spare you the more basic stuff

and boring details. However, let me still get some numbers out of the way, all

contained in these great reports that you must read over the coming weekend!

Taken together, all these reports refl ect our aspiration of “Building True Value” as

the title of this lecture proposes.

3) Building True Value – three reports, three accountabilities

a) Of the three reports, the fi rst, “Th e Khazanah Report (TKR) 2014”, is our

annual report, a compendium of our work that builds in greater detail and

granularity on our regular Khazanah Annual Review which we issue in January

of every year. Th e second report is in our (former) role as the Secretariat to

the Putrajaya Committee for GLC (or “Government-linked Companies”) High

Performance, “GLC Transformation Programme Graduation Report,” which



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was issued in August this year, in conjunction with the graduation of the GLCs

from the ten-year transformation programme. Together with the graduation

report, we also issued the accompanying book, “Voices – Refl ections on a

Transformation Journey,” which is a collection of more than two dozen essays

by a broad range of personalities who were involved in the GLC Transformation

Programme, including Government ministers, Governmment-linked Investment

Companies (GLIC) and GLC leaders and executives, external advisors, and

media. Finally, the third report is “Th e Hasanah Report 2014” issued by

Yayasan Hasanah, a foundation set up by Khazanah to expand and deepen our

corporate responsibility (CR) initiatives. Th e report features the foundation’s

work throughout the past year in fi ve major areas – education; community

development; environment; arts, heritage & culture; knowledge; and public

spaces. “Th e Hasanah Report 2014” continues from Khazanah’s annual

publication of its “Corporate Responsibility Report” since 2009.

b) Taken together, the three reports and other related documents represent a

good and fairly complete summary of our work, representing not one but three

types of returns or three types of accountabilities. First, and quite importantly,

to create fi nancial value that is to deliver suffi cient fi nancial returns. Secondly,

to deliver good strategic and economic outcomes in the form of, for example,

creation of jobs, shifting the structure of the economy out of sunset industries

and helping to catalyse and develop new ones, moving up the technology

ladder, opening up new markets, developing new products, creating an

international footprint and linkages and so on. Finally, within certain set limits

and modalities, we also look to create and deliver societal and social value

through corporate social responsibility or CSR (or often referred to now as CR)

programmes, creation and support of creation of public goods such as education,

knowledge and human capital development and supporting all valid stakeholder

groups including employees, suppliers, customers, bottom 40% of society, the

Bumiputera empowerment programme and so on.



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c) Onto the fi rst set of returns around fi nancial returns then:

d) Firstly, our portfolio value is approximately RM146 billion (as of 31 December

2014). In terms of the purest measure of value – Net Worth Adjusted – it

was RM110.7 billion as at end of 2014, a rise of some 3.3 times since the start

of the revamp in 2004 or a CAGR of 12% per annum. Given the current soft

emerging markets worldwide, including in Malaysia, the corresponding number

is slightly below now, but the overall direction and quantum is more or less

there. Not super spectacular, but not bad either, in our view. Th is is especially

considering what we started with – a bunch of underperforming, problem or

at least problematic assets – thus-called GLCs that were former state-owned

enterprises (“SOEs”) and problem companies “collected” from the debris of the

Asian Financial Crisis of 2008. Unlike most other SWFs, we also do not have

money coming in every month, not from oil, not from foreign exchange (“FX”)

reserves, not from pension contributions. With very few exceptions, we just have

these problematic, underperforming assets to start with in 2004, on a wing and

a prayer and lots of ambition and quite great expectations.



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e) Further, over the transformation programme period for Khazanah from 2004 to

2014, we accumulated some RM22 billion of profi ts generating more than RM8.7

billion of dividends and taxes for the Government, several multiple times over

the previous ten year period. Alhamdulillah.

f) On the GLC Transformation Programme front, Khazanah companies in the G202

have returned Total Shareholders Return (TSR) of 12.6% per annum. to end of

2014, outperforming GLCs as a group (12.3%) and the KLCI (11.9%). Taken

to 28 July 2015 (the last day of the 10-year GLC Transformation Programme),

GLCs recorded an 11.1% TSR run rate, tracking the 11.1% of the broader KLCI.

GLCs have made signifi cant progress not just as national, but increasingly, as

regional champions. Over the 10 years of the Programme (up to 28 July 2015),

market capitalisation grew almost three times from RM134 billion to RM386

billion, while revenue grew from RM91.8 billion in FY2004 to RM229.3 billion

in FY2014, or 9.6% per annum. Financially, GLCs have never been stronger and

with that strength, they have increasingly become part of the solution and less

so being part of the burden. In addition to the strong fi nancial positions, GLCs

have contributed signifi cantly to the economy and to society with RM153.9

billion worth of domestic investments up to FY2014, and paying more than

RM108.6 billion and RM62.7 billion of dividends and taxes respectively, as well

as providing employment to 373,627 people.

g) Th ose are just some headline numbers and indeed the three reports,

representing three accountabilities have much to say. Alhamdulillah, these

numbers do record that these initiatives have come a long way. I am very

thankful and I say thanks too to many others who have tirelessly contributed

to these achievements. Suffi ce to say at this point, that we have thankfully

managed to achieve this fi nancial performance while simultaneously ensuring

that risk appetite is fairly moderate, that economic and strategic imperatives

are also achieved including creation of jobs, development of economic corridors

and special economic zones (“SEZs”), and helping incubate and support many

2 Most of the largest GLCs, currently 17 in total, that are the constituents of the PCG (Putrajaya Committee for GLC High Performance) chaired by the YAB Prime Minister and Minister of Finance. 7 out of 20 are Khazanah-controlled companies.



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national transformation initiatives. Indeed some of our so-called strategic

returns can be captured in this slide below:

h) It’s not just about fi nancial returns. It’s indeed many happy returns as they

say as encapsulated in “Th e Hasanah Report 2014”, which captures the various

Societal and Social returns as captured in the slide below. In addition to the

creation of a large endowment of RM3 billion under Yayasan Hasanah, this year

the amount of CR spend over the last 11 years has crossed RM500 million.



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i) Th ere are indeed a lot of details and a lot of numbers in these slides and even

more in the reports – too much for one lecture and all contained in the reports

– so I thought it’s best that I return to my original intent to tell the story as a

story of ideas – the ideas that my colleagues and I thankfully were given the

chance to conceive and then to execute. In this inaugural lecture, these ideas

are presented in outline form, with some examples to at least place markers for

future lectures. Each of these ideas are, and Insha’Allah will be the subject of a

lecture in itself. Today, I thought I should start with introducing them so that we

are able to see the whole thesis albeit in outline form.



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4) Idea # 1: Performance – focus, transformation and execution

a) Th is may be obvious today but back in 2004, many of these companies had

not heard of and certainly had not implemented key performance indicators

(“KPIs”). Our fi rst task was to get people to focus on performance, to link pay

to performance, to even defi ne what KPIs are and what acceptable targets

are, to put accountabilities to boards and managements, to put senior

management on 3-year contracts rather than the lifetime employment (some

say entitlement) that many were used to. Indeed the fi rst of our so-called

rainbow-coloured books was the Blue Book on this subject, launched, at the

launch of the GLC Transformation Programme in 2004. It was a big thing

then, big and hardly noticeable now. Feet were eventually put to the fi re when

management had to commit publicly to “Headline KPIs” – numbers and targets

they committed to publicly, and no games – what they agreed to after much

challenge in Board rooms is what they announced publicly. Th ey lived, and

some “died”, by it. Th ey even worked out what was an Economic Profi t, basically

having to take in the notion of beating a cost of capital. Th is was a quiet and

not so quiet revolution that took place, in 2004 and 2005, and this in particular

began to reverse many decades of underperformance.

b) We took up and lived the mantra of execution – “execute or be executed.” We

changed CEOs – not too often, but often enough and, at the right times, we

changed boards, we brought in a more diverse group, gradually, we sacked a

few, we even charged some to the police and eventually in courts when we

found some were unfortunately mostly fi t but not so proper. We instituted the

notion of, not just project, but programme management – many, many little

and not so little projects, put together into a coherent over-arching programme.

Th e GLC Transformation Programme had some 29 meetings in its 10 years,

that’s consistently averaging about three a year, chaired by the Prime Minister

no less, to check on the progress or lack thereof – fame and shame. I started

quoting the likes of Woody Allen as a pseudo-philosopher, “life is about 90%

turning up” and the need to just do simple things well and to stay the course.



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Today, all this focus on performance, execution and transformation is taken as a

given, a cliché almost, ex-ante at least if not always ex-post.

5) Idea #2: Khazanah as Macro-Manager, GLCs as Micro-Managers

a) Pre-2004, Khazanah’s mandate was very much custodial in nature, and

therefore passive. For example, pre-2004, there was no Khazanah senior

management on the board of Tenaga and Telekom that collectively was almost

50% of the portfolio value. Tasked with an ambitious, some say audacious,

mandate to actively create value, drive performance and generally be a “busy-

body” and agent provocateur, we had to quickly device a way to do this.

b) We coined the term to “macro-manage”, not micro-manage. Th at meant that

we took an active role as shareholders, Private Equity style; we defi ned the

valid levers of intervention – choosing management, defi ning strategy and

risk tolerance, ensuring systems and control are in place and then driving a

hard but supportive bargain in performance managing our companies – KPIs-

driven and happy to reward them reasonably well when they perform. It is a

partnership. We call it the Vidal Sassoon principle – as in “we look good if you

look good.” We also established the “no-bulldoze principle,” that is we work in

partnership with our companies, always with proper governance, often at a

premium for Minority Shareholders – hence we do not bulldoze our way onto

our companies, unless that is, there is “bull” or there is “doze!”

6) Idea #3: Sovereign Development Fund > Sovereign Wealth Fund

a) We have a confession to make. We are not quite an SWF. In fact our website says

we are the “strategic investment fund of the Government of Malaysia.” While

we are often labelled an SWF, we note that the classical sources of sovereign

wealth – natural resource wealth (oil and gas mostly in Malaysia’s case),

foreign exchange (“FX”) reserves and inter-generational wealth are all with

other well-functioning sister agencies. When we started, we basically managed

erstwhile problems or underperforming assets and were tasked to either make

them perform i.e. to grow, fi x or to exit them. Further, as said, we do it through



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attaining not just fi nancial returns, but also broader economic, strategic and,

in some cases, societal returns. We do it taking into account the stakeholder,

not just the shareholder, although we do maintain the latter is the fi rst among

equals. We do it by building not just fi nancial value; indeed economic, societal

and true value is at the heart of our work.

b) Nonetheless, this can be confusing. We have had a lot of debates internally and

externally about the “two keys” (fi nancial and so-called strategic mandate), the

duality of objectives. It was certainly not mainstream in 2004, but certainly

the notion of creating jobs and driving economic multipliers through your

investments is no longer so alien nor left fi eld these days. Being wholly

owned by the Government and technically belonging to the 30 million plus

Malaysians, or more as we have said, the soul of Khazanah is necessarily tied

to the nation’s economic development imperatives, but the aspiration at least

and often the execution too is that the body of Khazanah runs as a well-oiled

company, as fi ercely competitive as any company of private sector parentage.

We have been called a Sovereign Development Fund as such and we fi nd that

it is not just possible, but in many cases it’s even desirable or even required

to target these two objectives simultaneously. Th is is especially true if one’s

investment horizon is long and one places sustainability at the heart of one’s

strategy. Th e development of Iskandar Malaysia is a case in point, more on that

later.

7) Idea #4: Sensible, Real and Islamic Finance

a) Partly because we are not structured as an SWF in the classical sense where we

have constant infl ows of funds, we had to, very early on, ensure that our assets

and liabilities balance and liquidity and prudential ratios are sensible, and that

our overall risk tolerance was moderate and appropriate yet not too tight for the

ambitious task on the asset side. In short, we needed to design strong safety

nets that allowed us to do the triple somersaults and fl ying trapeze with which

we were tasked. One important aspect of this was the asset and liability risk

management mix with which we funded our business.



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b) Even before the 2008 Global Financial Crisis, we took a simple view of back to

basics fi nance, natural matching of currencies and cash fl ows, sensible risk

management, generally no derivatives and so on. We were and remain an early

adopter of many Islamic Finance issuances and structures, which has seen

many investors participating in many ground breaking and award-winning

issues, from the world’s fi rst Islamic exchangeable sukuk, the fi rst in Singapore

dollar, in Renmibi, to developing the so-called New Silk Road between the

Middle East and China and so on. We continue to do work and break new

ground on how we fi nance our assets, projects and even social-impact ventures.

Recently in June, we issued a RM100 million sustainable and responsible

investment (“SRI”) sukuk, the world’s fi rst Ringgit denominated SRI sukuk. Th e

proceeds from the sukuk will be used to fund additional schools under the Trust

School Programme. Th e sukuk combines the education and Islamic fi nance

sectors along with socially responsible investments through an innovative

structure.

c) As we develop, we have been able to build on our increasing presence and track

record to do co-investment structures with various like-minded if not similar

funds from around the world, and our roster of co-investors have included the

whole gamut running from SWFs (Mubadala, Temasek, Public Investment

Fund), to Private Equity (“PE”) funds, to Pension Funds, Entrepreneurs and

Family Offi ces, and to even Hedge Funds. We have been active in deploying into

and then out of equity capital markets depending on the stage of development.

Between 2004 and 2014, Khazanah made 121 investments worth RM65.3

billion and 67 divestments valued at RM42.8 billion, with overall gains on

divestments of RM19.4 billion. Last year, our investment in Alibaba was

monetised via its initial public offering (“IPO”) for proceeds of RM2.6 billion.

Before that, for example, we were able to create through a series of acquisitions

and then IPO what is now the world’s second largest hospital and healthcare

group, IHH, with a market capitalisation of some USD12.4 billion and growing.



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8) Idea #5: Cities and Economic Density

a) We have invested into internal research and think-tank capability that

goes beyond just our core work of investing and portfolio management.

One of the result of various studies that we did was a collaboration with the

World Bank in 2008 to study the economic density of Penang, as a proxy for

how economic development, industrialisation and de-industrialisation was

occurring in Malaysia. Concurrently, we incubated and kick-started the thinking

and planning on the development of the southern economic corridor that

is now called Iskandar Malaysia through the launch of the Comprehensive

Development Plan in 2006.

b) Th e confl uence of these work tracks and the insights gained prompted us

to work with the Economic Planning Unit by providing key inputs into the

Tenth Malaysia Plan that was released in 2010. Th e main insight here is that

while economic development and resource allocation have historically been

spread out throughout the country, it is now imperative with urbanisation and

rising international competition to create competitiveness through density

and concentration and network effects, in cities and SEZs and corridors.

Many other parties are also involved; this is perhaps being felt in the various

economic corridors and also the Greater Kuala Lumpur initiative as one of

the 12 Economic Transformation Programme (“ETP”) National Key Economic

Areas (“NKEAs”). Th e conical “paper thosai” is, after all, more healthy than the

fl atbread “roti canai!”

c) Today, as we know, Iskandar Malaysia has completed its fi rst nine years on a

solid platform in terms of quantity and quality of investments, delivery of the

fi rst wave of catalytic projects, complementarity with Singapore and, to some

extent, inclusiveness with the Johor and local populace. Since 2006, Iskandar

Malaysia has recorded RM172.5 billion3 of cumulative committed investments.

UEM Sunrise, one of our investee companies, has launched a total of 6,640

units of affordable homes in Iskandar Malaysia. We’ve also established i2M

Ventures to facilitate strategic investment promotion initiatives for the 3 Source: IRDA



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business services sector, which will create high-income jobs and retail and

residential demand, while Th inkCity is working on urban, cultural and heritage

preservation in Iskandar Puteri (Nusajaya previously), as part of our social

development initiatives. While there is, of course, much more to be done for

a twenty year project, we believe we have a good base now. In fact, we have

a different set of issues now and relatively high-quality problems, such as

how to manage and match strong demand with sensible supply to ensure

sustainability and to critically ensure that the development is more inclusive

and distributive with the local population. We are working with the new Johor

administration in this regard.

d) Elsewhere, in Kuala Lumpur, you will probably have read about our efforts to

develop Dataran Muzium and Tugu Park. Th is is a not-for-profi t public spaces

project to rejuvenate and reactivate Muzium Negara into a 21st century cultural

institution and separately convert a 66-acre site adjacent to Tugu Negara into

a people’s park. Th e idea is to stitch the urban fabric of Kuala Lumpur and re-

connect the sites via land bridges with KL Sentral and the Lake Gardens and to

various other Greater Kuala Lumpur initiatives, including the River of Life and

KL Cultural and Heritage Trails.

9) Idea #6: Collective Action, Complementary Advantage and Collaboration

a) We have all heard of competitive and comparative advantage. However, we also

think of complementary advantages as we go along. Perhaps it’s a function of

recognising that our task and certainly the expectations were and are big and

we can’t boil the ocean and that our bullets, even for the likes of Khazanah, are

limited. So, we asked ourselves, how we can work with others, where interests

are not only aligned, but, even better, where interests are aligned and where

capabilities are different but actually complementary! What a wonderful world

if we are able to work together and prosper together, in complementarity and

not in competition, and sometimes in collaboration and in competition. Th is

can be done and has been done.



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b) Perhaps this is best explained by a few examples. We have combined for

example the complementary land banks and capabilities of UEM Land and

Sunrise, we have worked out the complementarities and mutualities between

Iskandar and Singapore, and we have even shared infrastructure with the

likes of Telenor in Malaysia and Bangladesh while competing, fi ercely, on the

consumer end. Another example is our Desaru Coast Destination Resort project,

which is being undertaken by our leisure and tourism investment holding

company, Th emed Attractions Resorts and Hotels Sdn Bhd, and for this we are

partnering well-known international operating, brand and equity partners in

the leisure and hospitality industry. Sometimes, it can be a bridge too far as

experienced in the collaboration between Malaysia Airlines and AirAsia in 2011,

but generally we have found this to be one of the most powerful ideas when it

comes together through collective action – the notion that you are stronger and

smarter together when your interests are aligned and your capabilities are not

just pooled but are fed positively off each other.

10) Idea #7: Internationalisation and Regional Champions

a) We also recognised early on that Malaysia alone was too small a market in

itself, and hence we defi ned around 2005, that we needed to drive and build,

in partnership with our companies, so-called regional champions. Internally,

we even had or have (as it’s still on) a project called Project 515, which means

to build at least fi ve regional champions by 2015. We had long debates and

much analysis as to what a regional champion is and how to go about doing

it be it organically, mergers and acquisitions (“M&A”), directly, indirectly and

so on. Much of this was predicated on the notion that we had to build scale

and relevance, employ external benchmarking and competition to avoid being

just a “jaguh kampong” (local village champion). All this was critical to ensure

that we survive and then hopefully thrive. Underlying this was the belief that

globalisation and competition will come to us and that it is better that we go to

it, to shape it rather than be shaped. Underlying too is the belief that by 2015 if

not sooner, what a regional champion in is in scale almost certainly had to be

world-class if not quite a global champion in capability.



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b) Sure enough, it’s 2015 now, and we believe the likes of CIMB, Axiata, IHH, MAHB,

UEM Sunrise as a proxy for Iskandar Malaysia in our stable and other GLCs

such as Maybank and Sime Darby are already on that path if not entirely at

the full destination as yet. Th ese companies follow the likes of Petronas and

come with a wave of Malaysian non-GLC companies that are building pan-

regional businesses such as AirAsia, Genting, YTL, Sapura Kencana and so on.

Other Khazanah-linked companies (KLCs) have also demonstrated pockets of

excellence abroad that will hold them in good stead in the future, Insha’Allah.

c) Today, we also note that some 44% of the value-at-play in Khazanah’s portfolio

is attributed to operations outside Malaysia. Th is number was negligible in

2004. Th e G20 as a whole has revenue generating operations in 42 countries,

drawing 34% of its total revenue from abroad with an overseas asset base

of 26%, compared to 28% and 11% in FY2004 respectively. Axiata, where

Khazanah owns 39%, epitomises this regional championship game. It did not

quite exist, certainly not as a listed company as recently as 2008. Today, it

touches more than 260 million subscribers across eight countries, and winning

many coveted regional accolades in the telecommunications sector along the

way. IHH too is a success story, being, as mentioned, the second largest private

healthcare group in the world with over 7,000 beds in 38 hospitals across 10

countries, while CIMB has transformed into a regional banking platform with

assets of USD118 billion, serving 17 markets with over 1,000 branches.

11) Idea #8: Malaysia Inc. v3.0 – rebalancing the role of State and Markets

a) Malaysia Inc. v3.0 – perhaps it’s best to provide a short economic history recap.

Around 1990, then Prime Minister Tun Dr Mahathir Mohammad, around the time

of the launch of Vision 2020, fl oated and subsequently implemented the concept

of Malaysia Inc. Th is essentially meant a partnership between the public and

private sectors in economic development where economic imperatives (growth,

equity) and fi nancial and corporate objectives (profi ts, shareholder value) could

be achieved together. Th e early to mid-1990s saw this being implemented with



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great fervour; privatisation, building of mega infrastructures, development of

capital markets including the bond and sukuk markets, and the rise (and in many

cases, then fall) of owner-entrepreneurs. Much got built, growth was breakneck,

but there were also some excesses and eventually some collateral damage.

Th ere were lots of causes and effects though that’s the subject of a separate talk

altogether.

b) As we well know, the Asian Financial Crisis of 1998 put a screeching stop to that

phase of Malaysia Inc. and a new Malaysia Inc. version 2.0 saw a big change in

terms of crisis management and stabilisation measures, with institutions taking

centre stage. Some of these changes include the introduction of Danaharta,

Danamodal, Corporate Debt Restructuring Committee (“CDRC”), banking

consolidation, National Economic Advisory Council (“NEAC”), and selective

capital controls. Big and fast was replaced by right sizing, restructuring and

recapitalisation.

c) Th at second phase, as I call it, started 17 years ago. In hindsight, that was the

fi rst part of the post crisis response – to stabilise fi rst. Th en there is the part of

restructuring. It is in that context that the GLC Transformation Programme took

off in 2004/2005, as essentially a restructuring phase of erstwhile troubled

companies such as Renong (now UEM), Celcom (now part of Axiata), Bank

Bumiputra (now part of CIMB) and MAS (which is now MAB, undergoing a

complete overhaul via the MAS Recovery Plan which we launched in August

2014). In hindsight and with some foresight then, this was the end of version 2.0

and the start of version 3.0.

d) As it turns out, the start of Malaysia Inc. version 3.0 also coincided with the

thinking and then the launch of the New Economic Model in 2009, while also

bringing together work around the GLC Transformation Programme that started

in 2005, the regionalisation work that started around then as well, the economic

corridors work that started in 2006/2007 and the new initiatives arising out of



20

the economic stimulus packages of 2009. Th is involved investments into newer

industries and areas such as Iskandar Malaysia, leisure and tourism, life sciences,

healthcare, technology, creative industries and so on. More pertinently, it involved

a rebalancing on the role of state capitalism, to fi nd the right balance between

state and markets, between public and private sector. We actively pursued a

policy of divesting non-core and non-competitive assets, of collaborating and co-

investing with the private sector and to work with the Government to try and get

regulatory arrangements to be more effi cient in critical sectors such as electricity,

telecommunications and SEZ or corridor development.

e) Th e current economic uncertainties have also seen the Government initiate

efforts to address the impact of fi nancial turbulence in the global markets on

Malaysia’s economy. Th is includes a 10-man Special Economic Committee

unveiled in August and which has fi ve Khazanah Board members on board. In

support of the related proactive measures to strengthen the fundamentals of

the economy announced by the Government in September, Khazanah decided to

accelerate and increase domestic investments over the immediate and medium

term in several key sectors, on the basis of those that provide higher domestic

economic multipliers, boost job creation, support local content, increase prospects

for foreign exchange receipts, and enhance public goods and inclusiveness.

12) Idea #9: Innovation and Entrepreneurship

a) Innovation is a much bandied about word but its importance can never be

stated enough, especially in the face of disruptive ideas and technologies.

Joseph Schumpeter highlighted the “creative destruction” process in which

new technologies, new kinds of products, new methods of production and new

means of distribution make old ones obsolete, forcing existing companies to

quickly adapt to a new environment or fail. Firms need to be constantly vigilant

against “disruptive innovations.” Better, faster and cheaper technology has

brought competitive intensity to an entirely new level as new entrants can start

and gain scale with stunning speed while using little capital, as WhatsApp did.



21

To survive, companies need to be proactive, they need to experiment, without

fear of failure, in order to gauge what works in the new marketplace.

b) Th e way we see it, innovation at the national level provides the opportunity

to improve living standards by innovating out of the middle-income trap. To

seize that opportunity, we believe a multi-pronged approach is necessary,

one that takes into a number of key factors that include boosting research

and development (“R&D”) by newly-created institutes, providing avenues for

knowledge exchanges and trend-spotting, creation of more innovation spaces

and platforms such as incubators, accelerators and bootcamps, plugging

funding gaps, targeted divestments to assist capable entrepreneurs to scale

up. Ultimately, whether or not we can engender a robust innovation economy

hinges upon our ability to balance our desire for stability and security with

the dynamic change that innovation brings. Th e future is no longer about the

survival of the fi ttest, but the thriving of the most agile, those who can reinvent

and refresh faster.

c) When we decided to open one of our fi ve overseas offi ces in the United States

in 2013, we chose not the fi nancial centre of New York but the technology and

innovation centre of the United States, and indeed the world, in San Francisco

and the Silicon Valley. One of our most successful investments to date has

been Alibaba.com through our Beijing offi ce. Similarly we are fi nding that

successful innovation and internet companies are popping up all over the world

and we have been making investments in markets as diverse as China, South

East Asia, North America, Europe, India and indeed back home in Malaysia. Th e

technology scene has gone truly global.

d) Concomitant and closely related to the innovation agenda is to help support

and promote the development of entrepreneurship. Th is may seem odd coming

from an institution such as Khazanah, but on the contrary, Khazanah has many

levers and has deployed a variety of strategies to help support entrepreneurship



22

from vendor development programmess at our companies such as Tenaga,

Telekom Malaysia and UEM, to strategic divestments via earn outs such as Time

dotCom, and supporting entrepreneurial businesses in sectors as diverse as

creative industries, agriculture and technology.

13) Idea #10: Inclusion and sustainability

a) It is clear to us that long-term investments should not just be about fi nancial

returns, but also about taking into account ethical and lasting value creation.

Th e New Economic Model calls for a high-income economy that is inclusive

and sustainable as the way forward so that each citizen appropriately shares

in the wealth created. Inclusive institutions, and we hope to be seen as such,

strive to reduce inequality and promote social inclusion. In doing so, there

is also a challenge to track and measure the economic and sustainability

value of investments being undertaken, by quantifying the holistic impact

of investments beyond fi nancial returns. Khazanah is doing work (Project

Chronos) which attempts to measure what we call “True Value” of our investee

companies – beyond the market value (i.e. what the market ascribes), beyond

the intrinsic fi nancial value (an internal valuation our team does as an active

investment house) towards covering whether the company is value generating

or value destroying from the standpoint of external and stakeholder factors such

as the environment, staff and industrial harmony, economic multipliers such as

job creation, technology and knowledge formation, development of a supplier

base, CR and so on. As we’ve said, we defi ne stakeholders to encompass both

today’s generation and future generations including those not yet born.

b) In essence, we are determined to identify and execute more inclusive

investments, such as affordable housing, fi nancial inclusion, and frugal

innovation. One example is our investment in 8990 in Philippines, which

primarily caters to the housing demand of Philippines’ lower income population

in a fast-growing economy. Th e investment provides a potential avenue to

foster know-how sharing that could benefi t affordable housing development in

Malaysia and more broadly in the region. We also have been active in investing



23

in the sustainable development sector including investments in renewable

energy and energy effi ciency.

c) Th e establishment of Yayasan Hasanah is also part of our commitment to

deepening and expanding our value distributive and corporate responsibility

initiatives. Yayasan Hasanah was created as a result of the “Khazanah-Hasanah”

concept of dual value creation and value distribution roles, with Hasanah being

an integral component of our efforts to build true value by ensuring that the

factors of inclusivity and sustainability complement Khazanah’s investment

activities.

14) Idea #11: Talent development, Culture and a Learning Organisation

a) I deliberately left the eleventh idea towards the end. We could not have done

all of the above and more if we were not able to have this and indeed, all of

the above rests on the shoulders of the great talent and the wonderfully

challenging yet nurturing culture that has emerged at Khazanah and our key

companies and initiatives.

b) Early on, I told my Board that “Sirs, you want me to do not only the fl ying

trapeze but with triple somersaults too. Apart from safety nets, I need great

acrobats as given the wrong actors, let alone clowns I could cause a hell of a lot

of damage.” Th ankfully, they backed me and while we did not pay 80th or 90th

percentile pay, we did manage to agglomerate an outstanding bunch of mostly

Malaysian talent, mostly young or youngish (then at least). Th ey were and are

an incredible bunch. Totally committed, worked impossible hours, took pay cuts

(some even 80% pay cut!) I could not have asked for a better founding team

and we were not so experienced, but we made it up with great teamwork, great

commitment, and great perseverance.

c) Over time, the pioneering fervour of hard work and long hours thankfully

moderated somewhat and as we grew, it gave way to more systems but

thankfully we retained the excitement and fervour and an almost collegiate



24

yet challenging culture that we have today. It is diffi cult to describe fully until

one has experienced it, but if I may summarise two anecdotes or principles

that have found their way into Khazanah folklore. One is the Elephant Rule –I

actually have a little stuffed elephant sitting on top of a spider phone in my

meeting room: basically it is saying it is the only elephant in the room. It also

says that there are no taboos in our discussions, that the outcomes of meetings

are never predetermined upfront, and that collectively we try and fi nd the right

answers and that dissent, properly done, is indeed an obligation. Th e second is

the Five-Minute Rule, that means that the only way to do this work at Khazanah

is we are always either fi ve minutes away from being sacked or fi ve minutes

away from resigning – both ways on a matter of principle of course. Well, 11

years later, for better or for worse, we are still here!

d) If I could also share a bit of our investment process, a “trade secret” of a core

process of Khazanah. It involves seven so-called gates with the last one

being our Board. Th is is hellish for some, but by and large it’s a highly critical

component of our work. I believe its robustness lies not in being agreeable but

actually in its diversity of views and its challenge. Th e process allows or even

demands for as many views as possible within the deadlines set. Among the

key ingredients is a requirement for every proposal, to have a proposing director

and a reviewing director, further peer review through a transaction review

committee and then through me, the EXCO and Board. Actually even before

we start originating and prospecting for deals, a clear strategy and investment

framework would have already been formulated via an initial sector study, duly

updated twice a year at least.

e) Th is sector or regional strategy in itself has gone through the same multiple

gate process ending with the Board. All along the way, we record all dissenting

views and we fi nd that the dialectic and challenge process either kills deals

or it makes it that much more robust. We think this is a key to whatever we

have achieved to date and indeed our numbers point to that. Th ankfully, a very



25

high percentage in investment terms - about 80% of the 121 new investments

totaling RM65.3 billion made over 10 years to the end of 2014 – have either

not lost money or have posted positive returns over the holding period.

Alhamdulillah.

f) Indeed at the heart of our work I believe is a strong commitment towards

knowledge development and knowledge management, building essentially a

learning organisation. From the creation of our Khazanah Research Institute,

to our fl agship knowledge events such as the Khazanah Global Lectures and

Khazanah Megatrends Forum, to active and ongoing pipeline of publications

and continuing collaboration and commitment with universities, think tanks

and knowledge institutions around the world and locally, including programmes

such as this, we believe we are quite deeply committed to building a learning

organisation at Khazanah.

15) Idea #12: Institutionalisation, integrity and good governance

a) Th e twelfth and last idea I wanted to highlight is the one that is still a work-

in-progress and indeed like any dynamic organisations will remain so. Th at

idea is the need to institutionalise, to build the organisation on the strong

foundations of integrity and good governance in addition to the strong

performance. Indeed, this could well prove to be our biggest challenge to

ensure that what we have done, whatever gains or even whatever mistakes are

captured into a learning organisation, embedded in its bones and body as an

institution. Indeed, at Khazanah, knowledge development holds a particularly

special place, and our work on knowledge events and lecture series, a knowledge

management system, publications and case studies are such critical enablers

to institutionalise our body of work and indeed to develop future generations of

our staff and of our leaders.

b) Indeed if we are able to do this, to institutionalise well, we would have followed

the great tradition of great Malaysian economic institutions such as Bank



26

Negara, Securities Commission, Petronas, Danaharta, Pemodalan Nasional

Berhad (“PNB”), and Employees Provident Fund (“EPF”) and so on and in the

process rise to the call of a nation that was in need of a transformation towards

our dream of 2020 and beyond. We believe we have made some progress but

we also know that we have some way to go. It is this recognition that led us

to institute an active programme to institutionalise with many sub-initiatives

and projects. Indeed, if we started with the mantra to execute or be executed,

we need to cement this chapter with the notion of to institutionalise or be

institutionalised!

c) And institutionalise we must, as only that can help to cement all the other

eleven ideas that preceded it. We wrote in the inaugural Khazanah Report

that strong nations are built on strong institutions and that only with such

institutions can we hope to deliver on our mandate consistently, with high

quality and with repeatability.

16) In closing… in the realm of ideas, to continue to build true value

a) So what’s next then, in a world where markets and economies are at odds

with each other? Is it not both supremely ironic and a sign of the times that

markets are particularly vulnerable to economic recovery? Th is is not supposed

to happen and not what the likes of the classical investment guru, Benjamin

Graham taught us and not even what the CFA papers taught us. How do we

explain this except by the seeming fact that there is a very large disconnect

between what the markets want and what the economy and the people need?

Between high asset prices driven by low interest rates and high, some say very

high (as in on steroids) liquidity, and the need for real and not just fi nancial

economic activity of more jobs, more high-quality jobs, more mobility in

society and narrowing the income, access and wealth gaps, in a proper and just

manner?

b) Th ese are the big issues of our times and Malaysia, in this regard, is no

different. A cool analysis confi rms many of these trends; in particular, of



27

a need to be more inclusive and more sustainable and not just in pursuit of

purely growth in income objectives alone. As stated before, and stated here

again (lest we forget), all three – growth, inclusivity and sustainability – are

concurrent, not competing, objectives of our New Economic Model. As a matter

of sequencing, we may well need to continue focusing on growth and value

creation as we have, but as a nation, we will also need to focus more on the

other tripartite objectives.

c) Th ankfully, while there are indeed many challenges, we are entering this next

phase with much wind in our sails. Our portfolio and fi nancial position has

never been stronger; we have built a not-insubstantial body of experience and

track record, culture, people and capability and networks. Although there are

many ominous clouds globally, we remain very much entrenched in a region

and in Malaysia with many growth and economic fundamentals going in our

favour. We have identifi ed areas where we need to strengthen and focus on in

defence, but we also have much momentum in driving various areas of growth

and offense. In this regard, for Khazanah and our companies, our mandate and

approach since 2004 of a more holistic approach, of “Building True Value” ought

to, theoretically at least, hold us on fi rmer ground.

d) So, there we have it, we submit the twelve ideas that are shaping Khazanah

in our quest to help build true value. I have tried to classify the Twelve Ideas

further into three categories as you can see here – three ideas pertaining

to our Mandate, six ideas to do with Value Creation and three ideas around

Governance. Mandate, Value Creation and Governance, or in another way to view

it, the process of building true value through doing the right things, right, and

in the right way. I hope all this has given a taste of the kind of thinking that is

shaping our work and in the limited time today that I have been able to give

at least an outline of each idea, where each one deserves to be the subject of a

whole lecture in itself. Indeed, I intend to cover and develop this further, each

and every idea over twelve further lectures on this CEO Faculty Program over the



28

next two to three years and to do this at 12 different universities, including UTM

in Skudai at some stage. Insha’Allah.


e) In closing, I have tried to represent our story as mostly a story of ideas

executed. To be clear, this is not a full and comprehensive list. Nor are the ideas

particularly original, or that the ideas that worked they say have many parents

and the ones that don’t are orphans. More importantly as I refl ected on what

“war stories” that I needed to speak on, I am just sharing a pattern of hopefully

both a thinking and then a doing organisation just trying to do its bit to help in

the drive to transform a nation as we make the last climb up to 2020.

f) In my welcoming message from Th e Khazanah Report 2012, our inaugural

report issued in 2013, I highlighted that the rallying cry of “Building True Value”

was both an aspiration and a promise for us. Th ankfully, as demonstrated, it’s

also been in large parts at least, our delivery to date. Alhamdulillah. But lest

we forget, we also highlighted that it’s no coincidence that the three words,

Building True Value, is also in the present perfect continuous tense. Our

project is indeed a work-in-progress and I thank you all once again – investors,

investees, and those managing and driving those investments for continuing

with us on this journey.

g) I thank you for your attention and I have benefi ted in preparing and making

these remarks as I hope you have too. Th ank-you.

Azman Hj. Mokhtar

Kajang, 10 December 2015



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