This article first appeared in digitaledge Weekly, on September 14 - 20, 2015.

With 1Malaysia Development Bhd (1MDB) in the news over  governance issues and its high debt level, the emergence of Selangor’s new strategic investment arm, Darul Ehsan Investment Group Bhd (DEIG), has attracted negative publicity, inviting comparisons between the two.

Selangor’s Menteri Besar Inc (MBI) chief operating officer Soffan Affendi Aminudin, however, assures that DEIG will not take on hefty borrowings as its subsidiaries, which are state government-linked companie, have sufficient cash reserves.

“1MDB is a new company, had money injected into it and borrowed more money to buy new things. For DEIG, MBI has existing investments that just need to be reorganised, and to reorganise, we need a platform — and the platform is DEIG,” says Soffan.

DEIG, he adds, has a priority to not only consolidate and manage the state’s existing assets but also look for new strategic investments that can create value for the state.

“In terms of existing loans from these state government-linked companies, we just need to put them in order and  make sure they will have an optimum capital structure. This also means that all the cash  trapped at the subsidiary level will be brought up to DEIG.”

Soffan explains that once the consolidation is done and the state has managed to unlock its assets, DEIG will not compete with the private sector. Instead, it will form joint ventures with the private sector to expand its investments. DEIG will utilise its existing assets such as land, which does not require cost or borrowings, while the private sector will fund the businesses under such partnerships.

Under MBI, there are 12 groups of companies that will be consolidated as subsidiaries of DEIG, which is wholly owned by MBI.

They are Kumpulan Semesta Sdn Bhd, Permodalan Negeri Selangor Sdn Bhd, Communication Corp Sdn Bhd, Invest Selangor Bhd, Kumpulan Darul Ehsan Bhd, Rantaian Mesra Sdn Bhd, Yayasan Warisan Anak Selangor Sdn Bhd, Yayasan Dar Al Qard Al Hasan Selangor Sdn Bhd, Bukit Beruntung Golf and Country Resort Sdn Bhd, Pendidikan Industri YS Sdn Bhd, Tourism Selangor Sdn Bhd and MSNS Holdings Sdn Bhd.

This is not including the extended web of subsidiaries.

The 12 groups are involved in various sectors such as construction, mining, water, education, property and waste management.

“All of these assets will be under DEIG. The next thing to do is to have an optimal capital structure because all these companies have ample cash, but we can’t take it out due to certain issues, like retained earnings aren’t enough, or profits aren’t enough to dish out as dividends to the state. There are a lot of technical issues that still need to be resolved,” Soffan says.

The 12 groups, he adds, have accumulated cash reserves of RM180 million and assets totalling RM6.3 billion based on pro forma consolidated audited accounts as at December 2014, and not RM30 billion as claimed by Budiman Mohd Zohdi, the secretary of Selangor Barisan Nasional (BN) assemblymen.

Former Selangor menteri besar Tan Sri Abdil Khalid Ibrahim too has expressed concern over the transparency of DEIG, which will take over the role of MBI in managing the investments held under the 12 group of companies.

However, current Menteri Besar Mohamed Azmin Ali has has explained that DEIG will have the best governance structure as well as checks and balances practised in the corporate industry.

Asked why DEIG is not a statutory body but a private company, Soffan points out that DEIG is no different from Malaysia’s investment arm Khazanah Nasional Bhd, which is a private company owned by the Ministry of Finance Inc.

However, to set up a private company through the Companies Commission of Malaysia (CCM), MBI’s CEO Raja Shahreen Raja Othman and Soffan had to register the company under their names, as the rules state that people must incorporate a company.

“DEIG was formed by the two of us as promoters; we were given the mandate to form the company at RM1 each. After the incorporation, we had in July given the shares to MBI, making it the owner of DEIG. We don’t have any shares in DEIG anymore but still sit on the board.

“Note that as of now, DEIG has no balance sheet yet. It’s still a special purpose vehicle (SPV) ... we haven’t injected any of the assets into it yet because we are still trying to strategise what is the best way to put these assets in as DEIG’s subsidiaries. But we intend to start injecting them in the first quarter of next year,” Soffan explains.

He adds that MBI is still studying the transfer of assets from the subsidiaries to DEIG, taking into account such issues as tax impact, group structure and the various sectors involved, among others.

“For instance, let’s talk about property — we have about four companies right now that are in property. We have two options whereby we may create an SPV under DEIG called DEIG Land that will hold the four companies, or select one of them as a champion and consolidate the assets of the others under it. But now, everything is still under MBI,” he says.

With all of Selangor’s assets under DEIG, MBI will be handling the corporate social responsibility (CSR) portfolio for the state.

“When I first joined MBI in December last year, I asked the staff what the group’s objective was. They told me MBI is a non-profit organisation, whereas it is the state’s administrator. MBI has been in place since 1994, and it’s now 2015.

“With that kind of mindset, it’s hard to change the DNA of MBI, but it’s okay, they are good in certain matters like managing CSR, so we let it be that way. While MBI focuses on CSR, DEIG, which is wholly owned by MBI, will recruit professionals to look after the state’s investments,” says Soffan, who was the chief financial officer of Alam Maritim Resources Bhd before joining MBI.

On governance issues, Soffan says that DEIG — like Khazanah, which is what it aspires to be — will have investment, tender, remuneration, audit and financial committees. The members of these committees will comprise government representatives and independent parties.

The Select Committee on Government Agencies, Statutory Bodies And State Subsidiary Companies, state public accounts committee and state audit committee as well as the Auditor General will have access to DEIG’s financials.

“On top of that, there will be a rule for MBI to improve submission of accounts and perhaps, a report to the committee probably twice a year,” says Soffan. He adds that MBI is currently mulling over the idea of starting to publish an annual report next year.

Note that MBI’s accounts have not been audited since the administration of former  menteri besar Dr Mohamed Khir Toyo. Pakatan Raykat took control of the state from BN in the 12th general election in 2008.