Navy ignored on littoral combat ships, RM1b cost overruns - PAC report

 

The Public Accounts Committee (PAC) has issued a report highlighting how the Royal Malaysian Navy's view was ignored by the Defence Ministry and Boustead Naval Shipyard Sdn Bhd (BNS) in the procurement of littoral combat ships (LCS).

This was among the reasons there was a huge overrun in cost amounting to RM1.4 billion in the RM9 billion contract which was awarded to BNS in 2021, according to the report.

"The navy's view as an end user was ignored by the Defence Ministry and BNS in the implementation of the LCS project," it said.

The report pointed out that the ministry initially chose the Sigma design for LCS in May 2011 but two months later it decided to change to the Gowind design, from the same French manufacturer of the Scorpene submarine.

"The decision to change to the Gowind design was made on July 11, 2011, following the recommendation brought by BNS to the defence minister (Ahmad Zahid Hamidi) on July 8, 2011," it said.

Zahid helmed the Defence Ministry between 2009 and 2013.

Then navy commander Abdul Aziz Jaafar told PAC proceedings on July 29, 2021, that "something is gravely wrong" when he spoke of the LCS design change, according to the report.

The PAC also identified that the decision to rope in both Contravest Advanced Devices Sdn Bhd (CAD) and Contravest Electrodynamics Devices Sdn Bhd (CED) into the equipment purchase process caused the failure of the LCS project.

"BNS appointed CAD and CED to purchase equipment from the original equipment manufacturer. This caused the purchase cost to multiply," the report added.

CAD and CED are joint ventures between BNS and Rheinmetall Air Defense AG. BNS has a 51 percent stake while Rheinmetall Air Defense AG has 49 percent.

Boustead Naval Shipyard’s financial problems

"Due diligence was carried out but failed to detect BNS' financial problems. BNS' financial position is weak and critical due to abuse of power," the report added.

"As of 2018, BNS' debt to the original equipment manufacturers stood at RM801 million while the total loan from financial institutions amounts to RM956 million," the PAC report read.

"Even until now, the detailed design has not yet been finalised by the government and BNS. This has resulted in the continuous release of the variation order (VO) and exposure to opportunity for manipulation," said the report.

PAC also found that part of the payment made was not used in the procurement of LCS but RM400 million was used by BNS to settle the bad debt of another old project, namely the New Generation Patrol Vessel (NGPV).

"The terms of the contract were weak and not in favour of the government," the PAC report read.

The PAC also found there was a total inventory worth RM1.7 billion and about 15 percent was obsolete.

BNS was awarded the job in 2011 in a direct negotiation and RM6 billion was paid as of 2020 but it missed the targeted delivery date of 2019.

According to the contract, BNS should have delivered the first ship in April 2019 and two ships in February and March 2020 respectively.

While noting that the ministry can impose liquidated damages for late delivery payment after 12 months, the PAC found that the ministry was not seeking damages from BNS as of June 2020.

The PAC urged the MACC to immediately take enforcement action on all findings in the report.

"Prosecution should be expedited," stressed the PAC.

"The ministry needs to review all options and determine the best option in the LCS project to ensure public funds are spent responsibly."

The PAC also recommended the defence ministry present a progress report on the LCS project every three months to the PAC until the LCS project is completed.

MACC detained CEOs

Despite missing the deadline in delivering the LCS, the cabinet in April 2021 agreed for Boustead Group to continue with the LCS project.

In November 2020, BNS’ parent company Boustead Heavy Industries Corporation Bhd (BHIC) lodged a report with the MACC on the possibility of irregularities in the LCS project.

Two company CEOs were investigated and detained by the MACC on suspicion of misappropriation and corruption through payments made to three companies overseas.

Last month, Deputy Defence Minister Ikmal Hisham Abdul Aziz said the MACC concluded its investigation into the LCS procurement.

"Charges have been recommended and it is now for the attorney general to decide the next course of action," said Ikmal.

Former defence minister Mohamad Sabu urged the government to declassify the Special Investigation Committee on Public Governance, Procurement, and Finance report, which was headed by then auditor-general Ambrin Buang, on the government’s procurement of the LCS. - Mkini