Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on August 15, 2022 - August 21, 2022

Controversial defence company Boustead Naval Shipyard Sdn Bhd (BNS) is certain of completing at least two of the six littoral combat ships (LCS) it was contracted to build on one condition — that the government continues with the disbursement of the remaining sum allocated for the RM9.1 billion project.

All parties, including Defence Minister Datuk Seri Hishammuddin Hussein, are confident that the first two vessels will be ready for sea trials in 2024 after the government starts to release the remaining RM3.1 billion budgeted for the project.

According to the proceedings of the Public Accounts Committee (PAC), the government’s stamp of approval and its commitment to continue funding the purchase are crucial for BNS. The ship builder needs RM1.5 billion to resume the LCS project. The funds are to be used to pay off banks and creditors.

The fates of Boustead Holdings Bhd and its ultimate parent company, the Armed Forces Fund Board (LTAT), are also tied to the LCS project. Both entities cannot afford BNS to fail as it would trigger cross defaults on all loans of both companies.

Considering the implications to LTAT, it is easy to fathom why the Cabinet in April this year gave its approval for the project to continue. Boustead Heavy Industries Corp Bhd (BHIC), the parent company of BNS, will announce more details in time to come.

If the government releases the remaining RM3.1 billion and BNS delivers LCS 1 and LCS 2, it would mean that the cost of completing the first two ships would be an estimated RM4 billion each.

This is a far cry from the RM1.5 billion estimated for each vessel when the project was awarded in October 2010.

It is said that BNS would need another RM4 billion to complete the remaining four vessels. How the company will raise the financing is left to be seen.

Assuming that BNS raises the additional RM4 billion and taking into account a variation order of RM2.6 billion, the cost of the six LCS is likely to exceed RM15 billion, a staggering amount. It works out to a cost overrun of more than 60% above the amount initially budgeted for, not to mention the delays in delivery.

Based on the proceedings of the PAC, BNS is hoping for a “soft loan” to raise the money. The other option it has is to raise money from the capital markets.

Banks would be wary of extending loans to BNS, unless it secures new orders from the government to build ships and, most importantly, makes a profit. In the current situation, the probability that BNS can secure loans is very low unless there is some kind of guarantee from LTAT. The other option is for the government to extend the “soft loan”.

A question that arises is whether it is worth putting more money into the LCS project. Perhaps the government should put the project on hold and look at other options that do not involve BNS.

The existing batch of people heading BNS, Boustead and LTAT consist of new faces. However, there is no certainty that they can ensure a different outcome in terms of delivering the LCS.

The current set of people managing LTAT and companies under it are professional managers. They — and the Minister of Defence — have all expressed their commitment to ensuring that the navy gets the ships according to a new schedule. Hishammuddin has even stated that he has been in touch with his French counterpart to ensure that they give their full cooperation to complete the job.

However, these professional managers and the minister himself can be replaced after the next general election, which is not too far away. What happens after that? Will the LCS project continue to be delayed and incur higher costs?

If that happens, the problem will once again be left to the government to find a solution.

BNS’s track record in delivering projects within cost and time is not that great. Although it has the monopoly to maintain, repair and build ships for the navy, it has required government assistance previously in mega projects.

This happened prior to 2005, when the company was under Tan Sri Amin Shah Omar Shah’s PSC Industries Bhd (PSCI). He took over the shipyard in Lumut from the government in a privatisation exercise.

BNS was then known as PSC-Naval Dockyard Sdn Bhd (PSC-NDSB), and it was given the mandate to complete six offshore patrol craft for RM4.9 billion. PSC-NDSB failed to deliver even a single vessel and Boustead Group took over the company. The project was changed to the building of new generation patrol vessels (NGPV). That was one bad precedent.

In 2007, the Auditor General’s report revealed that the NGPV project had incurred a RM1.85 billion cost overrun, which translates to 38% above the budgeted amount. Furthermore, according to a PAC report, the delayed vessels had drawn a litany of complaints from the navy after they were delivered.

What this shows is that it is not enough that the shareholders and professional managers of government-linked companies such as BNS are changed. There do not seem to be improvements in the way the company operates and delivers the products to its client, namely, the government.

What is worse is that it is not only defence projects that are riddled with delays and cost overruns. They blight many government projects, from roads to railways and buildings. 

The contractors generally pin the blame on the client — the government — and tend to get away with it by obtaining variation orders and getting extensions of time to complete the job without having to pay penalties.

What is baffling is that the same contractors are given additional funding and a new mandate to complete the jobs that they failed to deliver in the first place.

Most of the jobs are awarded through direct negotiations to well-connected companies. The latest example is the Rapid Transit Link project connecting Bukit Chagar in Johor Baru and Woodlands in Singapore, which was awarded to little-known Adil Permata Sdn Bhd. The terms of Mass Rapid Transit Corp Sdn Bhd’s award of the contract to Adil Permata in 2020 remain obscure.

In most instances, the government has no choice but to incur extra costs to complete projects. But does it need to keep old companies that have failed to deliver and throw new money into them?


M Shanmugam is a contributing editor at The Edge

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