GovernmentLinked Companies GLC Transformation Programme Malaysias Journey Mohd

Government-Linked Companies (GLC) Transformation Programme: Malaysia’s Journey Mohd Izani Ashari, Executive Director Special Projects Office World Bank Workshop on State Owned Enterprise (SOE) Reform 15 Sep 2016 | 2 pm Kuala Lumpur | 8 am Harare presentation via video conference © All Rights Reserved. This material is confidential and proprietary to Khazanah Nasional Berhad. No part of this material should be reproduced or published in any form by any means, nor should the material be disclosed to third parties without the consent of Khazanah.

1. About Khazanah 2. The GLC Transformation Programme a. Background b. The Programme c. Results d. Learnings e. Moving forward 2

Our Role as the Strategic Investment Fund of the Government of Malaysia § Manage certain commercial assets held by the Government § Undertake strategic investments in new industries and geographies § Catalytic role in driving various strategic industries and national initiatives in Malaysia § Drive shareholder value creation LEADING STRATEGIC INVESTMENT HOUSE THAT CREATES SUSTAINABLE VALUE FOR A GLOBALLY COMPETITIVE MALAYSIA ACCOMPLISH STRATEGIC VISION AND MISSION 1 2 3 4 LEGACY INVESTMENTS GLC TRANSFORMATION NEW INVESTMENTS HUMAN CAPITAL MANAGEMENT STREAMLINE, REPAIR, RESTRUCTURE PORTFOLIO INCREASE SHAREHOLDER VALUE, STRATEGIC VALUE NEW STRATEGIC SECTORS AND GEOGRAPHIES ACTIVE DEVELOPMENT OF HUMAN CAPITAL FOR THE NATION BUILDING CAPACITY: IN TALENT, SOCIAL CAPITAL, FINANCIAL CAPABILITIES, PROCESSES, KNOWLEDGE & INFRASTRUCTURE CORE VALUES: INTEGRITY, DILIGENCE, TEAMWORK, PROFESSIONALISM, MUTUAL RESPECT FOUNDATION: A FOCUS ON LONG-TERM NATION-BUILDING EXECUTE STRATEGIC PILLARS GET FOUNDATIONS RIGHT, BUILD CAPACITY

Khazanah Nasional in Summary Strategic Investment Fund of the Government of Malaysia Number of employees: Net Worth Adjusted (NWA) Realisable Asset Value (RAV) RM 150. 2 (as at 31 December 2015) b 108. 9 RM Core Investments 452 As at 31 Aug 2016: b No of Investee Companies: (as at 31 December 2015) >80 Our Footprint: Financial Services Telecommunications Property Power Aviation Healthcare major companies No. of Offices 7 2008 Khazanah Nasional Consulting (Beijing) Company Limited 2008 Khazanah India Advisors Private Limied 2013 Khazanah Americas Inc Note: RAV: Market value of all equities, securities ad cash held. Where no market price is available, a conservative estimate of value is used. NWA: RAV less total liabilities and adjusted to measure value created Source: The Khazanah Report 2015. Based on audited numbers as at 31 Dec 2015. 2013 Khazanah Turkey Regional Office 2016 Khazanah Europe Investment Limited RM 74. 7 b Worth of investments made since 2004 4

International Presence: 5 offices around the world, with increased investee companies’ presence globally RAV by domicile companies Note 1: An estimate of attributable value according to the countries where investee companies have operations Source: Khazanah analysis RAV by geographic exposure 1 5

1. About Khazanah 2. The GLC Transformation Programme a. Background b. The Programme c. Results d. Learnings e. Moving forward 6

History and evolution of GLCs 1969 Maybank becomes government owned 1972 LTAT established 1957 1979 Sime Darby is Malaysianised 1987 Jabatan Telekom Corporatised 1983 Industrialisation and moving up the value chain 1951 EPF established 1962 LTH established 1978 PNB established 1970 Launch of New Economic Policy (NEP) Malaysianised GLCs Value adding to Malaysia’s Natural resources 1992 Malaysian Airport and Postal Department privatised 1997 Rapid economic growth and privatisation 1985 Proton launch first model 1981 Launch of Heavy Industrialisation Programme 2002 MAS widespread asset unbundling exercise 1999 Bank Bumiputra merger with Commerce Bank Financial Crisis 1994 KNB began operations 1994 Recovery and restructuring GLCT Programme 2001 Financial Sector Masterplan announced 1990 Lembaga Letrik Negara Corporatised Providing Essential Public Services 2005 2000 1998 -2001 Danaharta Asian Financial Crisis established 2000 TM takeover of Celcom 2001 Dana Saham takeover of Renong Recapitalised and Restructured Recovering from the Crisis Financial Institutions Becoming internationally competitive 7

GLCs are major contributors to the National workforce GLCs account for around Approx. % contribution to Bursa’s total Market Capitalisation GLCs 40 Public listed GLCs Telecommunications GLCs Non-GLCs Transportation Tun Abdullah Ahmad Badawi’s Keynote Speech during the GLCT Programme launch on 14 May 2004 Source: GLC Transformational Manual, July 2005 1 of the national workforce Approx. % to Companies listed at Bursa Malaysia Significant part of the economy Mission critical service provider 5% Snapshot in 2005 when we started the programme Non-GLCs Banking & Financial Services Energy 8

Post Asian Financial Crisis, GLCs had to be transformed and a programme management approach was adopted Why GLCs need to be transformed? 1. Underperforming compared to the larger Malaysia market 2. Ineffective deployment of capital/labour compared to its peers 3. Providing mission critical services that grow and shape the economy Why a need for a programme? 1. 2. 3. 4. More assurance of achieving outcomes Coordinated critical mass sharing Deliberate performance pressure Facilitate improved communications 9

GLCT aspired to create several regional champions by 2015 GLC Starting Point Domestic champion [All GLCs by 2015] Regional champion [~5 GLCs by 2015] Global champion v 5. 0 v 4. 0 v 3. 0 v 2. 0 v 1. 0 GLCs Majority of Current GLCs Examples of Metrics for Success: Comparable to Top Domestic Peers Performance (e. g. Profitability, Growth, Market Share) Comparable to Top Regional Peers Scope (e. g. Geography, No. of Markets) Scale (e. g. Revenues) Comparable to Top Global Companies Capabilities (e. g. Operations, branding, etc. ) GLC Board & Mgmt. to determine appropriate level of aspirations Resilience (e. g. against systemic and non-systemic risks) 10

1. About Khazanah 2. The GLC Transformation Programme a. Background b. The Programme c. Results d. Learnings e. Moving forward 11

We conducted a 6 month study to develop the GLCT Programme – findings and recommendations were documented in the GLC Transformation Manual 5 Lenses on Best Practices: GLC Transformation Manual (1) Company transformation case studies, e. g. Telefonica, Petronas, Shell-Malaysia (1) Over 100 interviews conducted (2) Transformation experience in other countries, e. g. NZ, UK, China, Indonesia, Singapore (2) Detailed benchmarking of GLC performance (3) Stock-take of previous GLC transformation initiatives launched (3) Leading corporate governance practices, e. g. Intel, Yale (4) Major pension funds, e. g. Calpers, Hermes (5) Leading Private Equity firms, e. g. 3 i Deep diagnosis of Malaysian context: (4) Review of relevant Malaysian laws, policies, and guidelines • Living binder • Not a cookbook • Complementary to existing initiatives 12

Scope of GLC Transformation Programme: Driven by Putrajaya Committee On GLC High Performance (PCG) PCG Khazanah is Secretariat § § Prime Minister (Chair) Finance Minister II Gov. / Mo. F Officials GLIC CEOs GLICs Lembaga Tabung Angkatan Tentera (LTAT) KWSP Manages employees’ retirement funds Strategic investment fund of the Government Custodian of armed forces’ retirement funds Manages Muslim community savings for pilgrimage Enable Bumiputera community to participate in nation’s wealth (Trust Fund) (Close End Fund) (Trust Fund) G 20 GLCs TH Plantations Berhad GLIC = Government Linked Investment Companies 13

GLCT Programme had 3 Underlying Principles, 5 Policy Thrusts and 10 Initiatives to guide it 3 Underlying Principles 1. Performance focus 2. National building 3. Governance, shareholder value and stakeholder management 5 Policy Thrusts Policy Thrust 1: Clarify the GLC mandate in the context of National Development Policy Thrust 2: Upgrade the effectiveness of Boards and reinforce the corporate governance of GLCs Policy Thrust 3: Enhance GLIC capabilities as professional shareholders Policy Thrust 4: Adopt best practices within GLCs Supported by 10 overarching themes of initiatives (now commonly referred to as coloured books) Policy Thrust 5: Implementing the GLCT Programme 14

GLCT Programme was a 10 -year journey 5/2004 2005 Phase 1: Mobilisation, Diagnosis & Planning 14 months 5/2004 1/2005 “ 2004 PCG Measures” formed § KPI-PLCs § Performance contracts § Board composition reform § Revamp of Khazanah § GLC leadership changes 2006 2007 Phase 2: Generate Momentum 12 -17 months 2010 Phase 3: Tangible Results 2 -5 years 7/2015 Phase 4: Full National Benefit 5 -10 years onwards June 2011 GLC Open Day 29 July 2005 GLCT Programme and Transformation Manual officially launched § Policy Guidelines § Ten 2005/06 Initiatives 7 -9 August 2015 GLCT Graduation & GLC Open Day Outcomes: § Diagnosis of GLCs conducted § Determination of Policy Principles § Initial 2004 Initiatives launched § 2005/06 Initiatives implemented § Full roll-out in place § Key policies endorsed and executed upon § Early fruits of sustainable improvements § Tangible & sustained benefits across GLCs § Visible benefits to all stakeholders, e. g. customers, vendors, employees § Large scale strategic and financial changes made § Key changes to Boards § Several regional champions § Most GLCs performing at par with competitors 15

10 Transformation Initiatives (the Coloured Books) ü ü Starting point for transformation Provides common language across various sector/industries Provides air cover Best practices 16

Programme management via GLCT Manuals, Progress Reviews and Stock-Takes, Graduation Report and reflections 2005 July Transformation Manual 2006 April GLCT Scorecard 2006 December Progress Review (Stock-take #1) 2007 March Interim Progress Review 2008 March Progress Review 2009 March Mid-Term Review (Stock-take #2) 2010 March Progress Review 2011 April Progress Review 2013 May Progress Review 2014 June Progress Review 2015 August Graduation Report 2015 August Voices 2007 December Progress Review 2012 May Progress Review 17

1. About Khazanah 2. The GLC Transformation Programme a. Background b. The Programme c. Results d. Learnings e. Moving forward 18

G 20 delivered strong financial performance over the past 10 years Total Shareholder Return grew… 11. 1% p. a. Market Capitalisation (RM b) grew… 386 2. 9 x 134 14 May '04 …from 14 May ‘ 04 to 28 July ’ 15, tracking the broader KLCI. Net Profit (RM b) up… …or RM 252 b from 14 May ‘ 04 to 28 July ’ 15. (Market Cap all-time high of RM 431 b was recorded on the 7 Apr 2015) …on average from FY 04 to FY 14. Economic Profit (RM b) up… Headline KPIs (%) 26. 2 14 May '04 -3. 2 9. 9 FY 04 1 -Jan-00 FY 141 2 -Jan-00 …or 10. 2% p. a. from FY 04 to FY 14. (Close to the all-time high of RM 26. 3 billion recorded in FY 2013) 11. 0% p. a. 28 July '15 1. 0 2. 6 x Return On Equity hit… 7 Apr '15 72 76 54 64 72 67 77 65 4. 2 FY 052 …from FY 05 to FY 14 45 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 45% headline KPIs achieved in FY 14. 1. 2. FY 14 extraordinary break-up basis adjustments due to the restructuring of MAS have been excluded to provide a fair view of operational performance Economic Profit started being tracked since the official launch of the GLCT Programme in FY 05 Note: In G 20’s TSR & market capitalisation computation, UEM Sunrise (TSR only) & UEM Edgenta (previously known as UEM Faber) are used as a proxy for UEM Group Berhad while MAS has been excluded due to its delisting Source: G 20 annual reports, G 20 submissions to PCG Secretariat, Bloomberg and PCG analysis 19

The GLCT Programme has provided economic and social benefits to all stakeholders RM 108. 6 b RM 62. 7 b G 20 dividends paid (FY 04 to FY 14) G 20 taxes paid (FY 04 to FY 14) Customers Employees At least 285 international and local awards won by G 20 from 2004 to 2014 Top 5 Most Admired Companies (2009) Best Telecom Group (2009, 2010, 2011, 2012, 2013, 2014) Gold Award for Customer Relationship Management (CRM) Implementation in Contact Centres (2011) Fixed Broadband Service Provider of the Year (2012, 2013, 2014) Best Customer Service Provider, Asia (2014) Bank of the Year, Malaysia (2010, 2012, 2014) Best Private Banking Service, Malaysia (2014) Islamic Issue Category (2014) Starmine Asia Industry Analyst Award (2013, 2014) …ultimately benefiting the rakyat Frost & Sullivan Malaysia Excellence Award for Pharmaceutical Company of the Year (2014) World’s Top 5 Best Airport (40 -50 Million Passengers Per Annum Category) (2013, 2014, 2015) The Skytrax World Airline Awards – 5 Star Rating (2005, 2006, 2007, 2009, 2012, 2013) Vendors & Suppliers 373, 627 employed by G 20 in 2014, of which 225, 050 are Malaysians RM 4. 0 b spent by G 20 on training & development from 2004 to 2014 3, 781 non-executives benefitted from participation in G 20 upward mobility schemes (UMS) since its launch in 2013 Society At least RM 98. 2 b 66, 583 RM 6. 0 b worth of business provided to G 20 suppliers in 2014 suppliers have been with provided business opportunities by G 20 in 2014 RM 1. 8 b 1, 307 spent on GLICs and G 20 corporate responsibility initiatives and endowments from 2004 to 2014 spent on G 20’s vendor development programmes (VDPs) in 2014 vendors benefitted from participation in G 20 VDPs in 2014 Source: G 20 annual reports, GLICs and G 20 submissions to PCG Secretariat, PCG Secretariat analysis 6, 458 low-income families benefitted from Yayasan Sejahtera from 2009 to 2014, funded by G 20 and other companies 184, 052 Students benefitted from 326 G 20 adopted schools under the PINTAR programme from 2007 to 2014 4, 589 unemployed graduates trained under GEMS & SL 1 M by G 20 from 2009 to 2014 and a further 6, 900 committed by GLICs and G 20 in 2015 20

GLICs and GLCs catalysed nation building through their 5 roles in the New Economic Model (NEM) Selected transactions/projects over the past few years 21

GLICs and GLCs also contributed to other national development initiatives Source: G 20 submission to PCG Secretariat, G 20 annual reports, PCG Secretariat analysis 22

1. About Khazanah 2. The GLC Transformation Programme a. Background b. The Programme c. Results d. Learnings e. Moving forward 23

GLCT Programme 2005 – 2015: 10 achievements A perspective 1. Completing unfinished business – post-1998 Asian Financial crisis 2. Transforming erstwhile underperforming GLCs – successfully reversing decades of underperformance – significant improvement in competitive positions 3. Superior financial performance and prudential risk and financial management 4. Better distribution of returns – dividends and taxes 5. Better corporate governance: Doing the right things, in the right way 6. Development of human capital and leaders 7. Inclusion, stakeholder delivery and corporate social responsibility (CSR) 8. Leaders in restructurings, transformative transactions and innovative financing 9. Internationalisation and strategic returns 10. Catalysing national development 24

GLCT Programme 2005 – 2015: 10 gaps and challenges A perspective 1. Unevenness - outliers in the Programme. 2. Stagnation and risk of relapse - flat earnings, diminishing ROE and lower KPIs achievement, difficult to sustain a high level of performance let alone outperformance for long periods. 3. More challenging business and external environment – External and domestic economic and socio-political environment. Increased protectionism, excessive liberalisation incl. TPPA. 4. Limitation of scope - could not cover the whole universe of GLCs. 5. Limited impact on industry restructuring in certain sectors – e. g. automotive, semiconductors and airlines. 6. Crowding-out vs. crowding-in – getting the balance right, divest non-core assets, collaborate with the private sector 7. Gaps in catalysing entrepreneurship - numerous programmes through VDPs, carve-outs, partnerships. More work is being undertaken under Bumiputera Empowerment Agenda (BEA) programmes. 8. Talent, leadership and culture – beware of complacency and hubris, potential crowd-out of scarce managerial and potentially entrepreneurial talent. 9. Gaps in inclusion initiatives – limited impact on gender and race inclusiveness. 10. Innovation capacity deficit 25

1. About Khazanah 2. The GLC Transformation Programme a. Background b. The Programme c. Results d. Learnings e. Moving forward 26

Tougher External Environment and New Challenges A. GLCs are operating in a tougher external environment i. The global economy is increasingly volatile and still undergoing post-crisis adjustments ii. The performance bar has risen iii. New disruptive innovation changing old ways of doing business iv. Shift towards greener and more sustainable business practices v. Greater demand to assist with nation building and stakeholders needs B. GLCs need to overcome new and existing challenges i. Softening financial and operational performance ii. Increasing complexity of the next growth phase iii. Heightened pace of globalisation, liberalisation and regulations iv. Complexity of operating across many different geographies v. Maintaining a focus on talent and human capital management vi. Hubris and complacency the unseen enemy 27

Towards 2020 & beyond A. Delivering high performance in the next five years and beyond – GLCs to become world class companies and global champions – Strive not only to meet but set global standards – Embrace leading business practices to become global champions B. Helping to build and shape the nation – GLICs and GLCs to continue executing their five roles in NEM – GLICs and GLCs to continue supporting and particularly shaping other national priorities – GLCs must continue to grow with inclusiveness and sustainability C. From instituting good governance to building strong institutions – Strong institutions to ensure the spirit of the Programme continues beyond 2015 and help the nation meet its 2020 ambition D. Establishing a successor entity to sustain the Underlying Principles of the GLCT Programme – From past surveys, many GLICs & G 20 Chairmen and CEOs felt that the network effect created by the Programme should continue after the Programme. This resulted in the idea of creating a successor entity to continue the Programme spirit, help shape and contribute to Malaysia’s 2020 ambition and to foster business collaboration among members 28

Thank You Visit our website at www. khazanah. com. my © All Rights Reserved. This material is confidential and proprietary to Khazanah Nasional Berhad. No part of this material should be reproduced or published in any form by any means, nor should the material be disclosed to third parties without the consent of Khazanah. 29