RM9 bil LCS fiasco simplified
IN 2007, Boustead Naval Shipyard Sdn Bhd (BNS) — a unit of Boustead Heavy Industries Corporation Bhd (BHIC), which in turn is controlled by the Armed Forces Fund Board or LTAT — sought the support of the Economic Planning Unit (EPU) in the Prime Minister’s Department and the then defence minister Datuk Seri Najib Razak for a programme to build six littoral combat ships (LCS) at its Lumut dockyard. Aside from making sure the Malaysian Navy is suitably equipped, BNS said the programme would support activities and enhance the capabilities of the dockyard, and also enable it to continue with its vendor development programme for 2,000 Bumiputera suppliers. After several years of discussions between BNS with the EPU, ministries of finance (MoF ) and defence (Mindef) and the navy, in March 2011, the go-ahead was given to launch the programme at a cost of RM9.13 billion through direct negotiations with BNS. The six LCS are supposed to be delivered in stages, with the last one in 2023. To date, not a single one is ready although the government has paid BNS RM6 billion. BNS also needs additional funding of a few billion ringgit — on top of the original price tag of RM9.13 billion — to complete all six LCS which are currently in different stages of construction.
Problem 1: the choice of LCS
In May 2011, Mindef, then helmed by Datuk Seri Ahmad Zahid Hamidi, agreed to the Sigma design of the LCS by a Dutch firm and the combat management system (CMS) from French firm Palanise. The choice of Sigma and Palanise was also that of the Malaysian Navy (TLDM) as the end user of the LCS. But two months later in July, Mindef abruptly changed its mind following intense lobbying by BNS to opt for the Gowind design and SETIS CMS — both from France. The Gowind design is by France’s Naval Group, formerly DCNS, which also built the controversial Scorpene submarines in 2002 for Malaysia. Investigations into alleged kickbacks in the €1.2 billion deal are still ongoing in France.
The Mindef U-turn was met with strong objection by the then navy chief Tan Sri Abdul Aziz Jaafar, who wrote 10 letters, including to then prime minister Najib, Zahid, as well as to the Chief Secretary to the Government and the secretaries-general of MoF and Mindef. The thrust of his objection was that the choice of design should be decided by the end user, viz the navy, and not by the contractor BNS, and that Gowind and SETIS were unproven. But his protests were ignored and BNS proceeded with Gowind and SETIS.
The anger and frustration he felt was revealed when Abdul Aziz, who retired in 2015, testified to the Public Accounts Committee (PAC) in July, 2021.
Following are excerpts from his testimony:
“The letters have been archived. We archived to ensure that it will be available for reference, and I would not be blamed for the failure to perform in my job as the chief of the navy.
“We were fighting a losing battle. Right from the start, it was not right already as Boustead (BNS) was given leeway to choose what was right for themselves.
“Penipuan (cheating), manipulasi (manipulation), and I put it in the letters, it is recorded. I reported all those ... but I was not powerful enough, maybe, and they were too powerful, maybe. They were too powerful.
“The design by the Dutch, the Sigma is already a proven design.
In fact, it is now already operational in a few countries ... That was a loss of opportunity. They were very willing to work with BNS, but why we stayed with the French? I do not know. We had bad experiences dengan French, especially the submarines. We find that the French here does not fulfil their promises. We have got big issues now.”
The big disagreement was between Abdul Aziz, as the then sitting navy chief, with the chairman of BNS Tan Sri Ahmad Ramli Mohd Nor, who was a former navy chief (1996-1998). This was alluded to by Zahid in his testimony to PAC when he was asked about the change from SIGMA to Godwind. Here are excerpts:
“There was a clash of personalities in TLDM at the time. The executive chairman of BNS was also a former navy chief. He knows about the needs of the end user. In this case, it was my view that it was the chairman who had the widest knowledge on maritime matters...”
Problem 2: selection and role of two German contractors
BNS appointed two companies as the main contractors for the project — Contraves Advanced Devices Sdn Bhd (CAD) and Contraves Electrodynamics Sdn Bhd (CED). Boustead Heavy Industries Corporation Bhd (BHIC) held the majority 51% stake in both companies while Germany’s Rheinmetall Group held the remaining 49%. According to the testimony by forensic auditor Alliance IFA (M) Sdn Bhd, the JV agreement was lopsided, with BHIC virtually conceding decision-making and management control to the minority partner.
BHIC management and auditor had no access to documents of CAD and CED, and the banking mandate approved by CAD’s board was drafted in a way that signatories representing Rheinmetall had full authority to transact any business without involvement of BIHC’s representatives on the CAD board. There are also allegations that CAD made and were paid double claims of RM537 million.
Alliance IFA executive director Prabhant Kumar said the BHIC board of directors led by chairman Tan Sri Lodin Wok Kamaruddin had agreed to such terms against the interest of BHIC. He told the PAC:
“Evidence suggested that CAD was used as a vehicle to — this is very important — to minimise transparency and to avoid the scrutiny and detection by the procurement team, the steering committee, and the internal audit of BHIC ... to avoid these three people, the scrutiny of the procurement team, the steering committee — because (BHIC) is a public-listed company. So, they have all these things in place you know, how to avoid it. CAD will be the vehicle... by entering into such a contract that does not allow them to enter and to look into the details and the nitty-gritty of the business, which has been taken by them (CAD).
“A total of 12 LoAs (letters of award) including VOs (variation orders) were issued to CAD/CED, valuing approximately RM3.3 billion, being 38% of the total value of the contract. The involvement of CAD resulted in a much higher cost than expected and provided an umbrella to hide the actual cost.
“I would like to tell you based on my 20 years of investigative experience, whenever manipulation is required to be done in a given contract, variation order is the biggest culprit, and that is what we have seen in this whole episode.”
Problem 3: BNS/BHIC was run by two men bypassing oversight
According Prabhant Kumar of Ailliance IFA, decisions at BNS/BHIC were made by BNS chairman Ahmad Ramli, who was also BHIC managing director, and its director of the LCS programme Anuar Murad, often bypassing consideration from other senior executives.
“If we look into the management structure of BHIC ... Laksamana Madya Tan Sri Dato’ Seri Ahmad Ramli bin Mohd, he was the MD. David William Berry was the executive director. Datuk Ir Yahya bin Hashim, Anuar bin Murad, Ahmad Nordin who was taking care of the finance and accounts, Siti Naim binti Jamaluddin (legal), and Khalid bin Mohd (head of supply chain management).
“Now, amongst these seven ... most of these decisions were taken and signed by the number one (Ahmad Ramli) and number four (Anuar Murad). The rest, they had hardly any important role. Ahmad Nordin bin Mohamad who was chief financial officer, he should have raised the flag, but he failed to do that. Similarly, (the) head of Legal Department because they said that most of the things first used to be done by them, then it used to come to (their) table. For (them) just to fill up the blanks.
“I had interviewed Khalid bin Mohd almost for about 20 hours to understand and he opened layer after layer which explained the lack of transparency, the influence of Anuar bin Murad, rejecting all the suggestions, overruling the procurement committee’s decisions, and so on and so forth...”
BHIC chief executive Sharifuddin Md. Zaini Al-Manaf (who was appointed in April 2020) weighed in on the same matter in his PAC testimony in December 2021, saying that the purchase of OEM assets via CAD had created problems and led to much higher costs.
“Truth is there is no problem with local contractors. The main (problem) was the appointment of a joint venture (JV) company Contraves ... the setting up of Contraves itself raises questions. Why must we buy OEM assets through CAD? Why couldn’t we buy direct?
“The setting up of CAD was unclear as to the reason and the approval process. When we go to CAD, the price might have been higher by three or four times for no reason.
“I have asked MACC to investigate CAD. Problem is as a contract, they were legally appointed. As for invoices, we have to pay what is invoiced. From a commercial point of view, it appears there was no wrongdoing ... willing buyer willing seller, unless MACC can show proof that apart from prices that are three four times higher and there is [a] money trail to certain individuals. MACC has to help us to prove it.”
What next?
On Aug 10, Prime Minister Datuk Seri Ismail Sabri Yaakob said the cabinet had decided that the Special Committee on Governance Investigation, Government Procurement and Finance’s report on the LCS project, chaired by former auditor-general Tan Sri Ambrin Buang, would be made available to the public. The cabinet also wants to declassify the forensic audit done by Alliance IFA, subject to clearance by the Attorney-General’s Chambers and the auditor-general.
On Aug 11, MACC issued a statement saying it has completed its probe, recommended charges that should be made to the AGC and was waiting for a decision.
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