This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 14, 2020 - December 20, 2020

The Selangor government will focus on the digitalisation of the state’s economy, as evident in the Selangor Budget 2021 announced on Oct 30.

Of the RM2.32 billion allocated for the budget, about 15% will be funnelled into the state’s digitalisation agenda, totalling RM369 million. In fact, the budget allocation for the agenda makes up about one-third of the state’s entire development fund.

This is in sharp contrast to the RM50 million allocated for the SMART Selangor Initiative in 2020, during the previous budget announcement.

Kamarul Nizam, head of digitalisation at Menteri Besar Selangor Inc (MBI Selangor), explains that the Covid-19 pandemic is a key reason the state government decided to allocate more money to digitalisation.

“The catalyst for this change is the Movement Control Order (MCO), owing to the Covid-19 pandemic. People are unable to interact physically because of the movement restrictions, and one way for businesses to circumvent those restrictions is through digitalisation,” says Kamarul.

“It is now common knowledge that Covid-19 has accelerated the digitalisation process by at least five years. We have pushed for a higher allocation towards digitalisation simply because there is a need for it. There is an existing market pain point, and we are trying to alleviate the pain point though our role as a state government.”

MBI Selangor is a corporate body that administers assets and investments of the state government. It also played a role in formulating the Selangor Budget 2021, and has conceptualised some of the initiatives that will be rolled out in the state.

One of these initiatives is the introduction of the Selangor Innovation Fund, to which RM100 million has been allocated to spur the growth of start-ups in the state through venture capital investments.

Meanwhile, RM130 million has been allocated towards Selangor Advance, a supply chain financing service for small and medium enterprises (SMEs) affected by the Covid-19 pandemic, which will help improve liquidity and cash flow.

There are also digital-related initiatives such as expanding 5G network coverage, promoting the growth of the e-sports industry, and the Rakan Digital Selangor initiative, where digital ambassadors are deployed to encourage the elderly and micro-businesses in digital adoption.

Soffan Affendi, head of the financial and economic cluster at MBI Selangor, tells Digital Edge that digitalising the economy will help achieve several goals set out by the state government, with the main objective being the generation of a new source of income.

He explains that most of the digitalisation initiatives in the new budget are centred on creating more employment and business opportunities, which will translate into more income and corporate taxes.

It is also looking at profiting from capital gains through investments made via the Selangor Innovation Fund. Through this fund, the state government will invest in local start-ups and provide them with access to the market. The valuations of these companies are expected to grow exponentially over time, during which the state government will exit its investment positions and take profit.

“One of our challenges is to find new sources of revenue without disrupting the economic ecosystem in the state. During the planning stages, we were also concerned about competing with the private sector and are mindful of our role as a state government,” says Soffan.

“With these considerations in mind, we found that, when private companies and state governments have their objectives aligned, investing in these companies will provide the best value in terms of the use of income.

“When it comes to investments, you would have various segments and industries to consider. But, based on the current situation, we foresee that the digital economy is the best market to invest in. Thus, it serves as the starting point for many of the state’s initiatives.”

Soffan adds that a large portion of the funds for these investments are derived from Selangor government-linked companies (GLCs) that are looking to secure investment returns.

He is quick to point out, however, that the state government has many other non-financial objectives to consider, such as reducing unemployment rates in the state. Achieving zero unemployment has proved difficult with the size of the state budget, so it is focusing on becoming a business enabler, rather than creating employment directly.

These initiatives are also part of the state’s push towards achieving a “smart state” status in the Asean region by 2025, where technology is leveraged to enhance the state’s socioeconomic prospects while creating more high-value opportunities for businesses and investments.

Coming from a venture capitalist background, Kamarul also understands the concerns that start-ups have towards investors that cannot provide support beyond monetary investments. He explains that the state government will also provide start-ups with market access to develop a virtuous cycle of value creation.

“In terms of strategy, we have the state government coming up with all these digital initiatives. Implementation-wise, some of the subsidiaries or the GLCs themselves will have the strength and resources to carry out these initiatives,” says Kamarul.

“But, in terms of digitalisation, especially the technology part, the GLCs can partner with local start-ups and even incumbent tech providers. Coupled with the Selangor Innovation Fund, it will create a virtuous cycle, where the value created from these start-ups will flow back to the government and be redeployed into other initiatives.

“Alternatively, we could develop these technology solutions ourselves. However, not only will it take too much time and resources, it will also mean we are competing with the private sector.

“Start-ups want to gain access to the market and look for a partner that can enable them to create value. On the other hand, we are looking for investment opportunities and for ideas and technologies needed to execute government policies. It is a win-win situation.”

According to Soffan, one of the biggest hurdles to implementing these digitalisation initiatives is that many micro-businesses still suffer from inertia in their digital transformation journey.

He cites, for example, the Selangor e-Kitchen initiative implemented during the first MCO. Its aim is to provide small hawker stall owners affected by the Covid-19 pandemic with an online e-commerce platform, ensuring compliance to standard operating procedures (SOPs) and giving them easy access to food delivery platforms.

It is estimated that 33,000 hawker stall owners in Selangor were affected during the peak Ramadan season, but the e-Kitchen initiative could support only up to 400 stalls.

Soffan says there was initial concern that supporting all 33,000 merchants would be a huge undertaking, but the state government soon discovered that onboarding the first 400 merchants alone was a difficult process.

“Among these businesses, there is strong resistance towards change, and it is difficult to gain their trust to adopt a new platform. To a certain extent, they are more willing to tough it out in their current situation than adopt a new channel,” he adds.

“So, at that point, we changed our strategy and had each of our staff physically meet and onboard these merchants in person. What we found was that, once these merchants were onboarded, they became very loyal and had strong stickiness towards the new platform.

“We then tried exploring whether this phenomenon was happening in other sectors of the economy, such as the gig economy. While the degree of the mental block may differ from one segment to another, the underlying reaction was still the same. This is also why we are placing such importance on providing businesses with access to the market instead of just providing capital funding.”

Although the new budget is centred on promoting the growth of the digital economy, Kamarul believes these initiatives will have a ripple effect on the other sectors of the economy.

Instead of competing with other industries, he says, the digital economy will form the bedrock that will enable other businesses to expand their own capabilities and possibilities through digitalisation.

“Because Selangor is the economic powerhouse of Malaysia, all eyes will be on us during the implementation of our initiatives. If we manage to promote digitalisation while reducing unemployment, we hope to create a domino effect that will spread to the other states and the whole country,” says Kamarul.

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