LCS Fiasco: Defence Minister and Prime Minister at Point of Award must be Charged for such Grave Losses of Public Funds

10 AUGUST 2022

A report by the Public Accounts Committee (PAC) outlining the flagrant and embarrassing mismanagement of funds leading to expenditure totalling RM6 billion in the procurement of littoral combat ships (LCS) – with nothing to show for it – is damning. This entire saga demonstrates how deeply corrupt the public procurement system is up to the highest levels of government, and the complete failure of institutions to provide necessary oversight. 

The Center to Combat Corruption and Cronyism (C4 Center) expresses its outrage at this state of affairs and demands for those responsible to be charged and held responsible. 

In December 2011, Boustead Naval Shipyard Sdn Bhd (BNS), received a letter of award from the Ministry of Defence to design, construct, equip, install, commission, integrate, test, conduct trials and deliver six Second Generation Patrol Vessels LCS (Frigate Class) at a contract value of RM9 billion through direct negotiation. BNS is a subsidiary of Boustead Heavy Industries Corp Bhd (BHIC), which is itself a subsidiary of Boustead Holdings Bhd (BHB) – the Malaysian Armed Forces Pension Fund (LTAT), a statutory body, is a majority shareholder of BHB. Hence, BHB a government-linked company under the purview of the Ministry of Defence. 

The severity of financial mismanagement and malpractice that emerged from this project as revealed in the PAC report is staggering. Chief amongst the report findings include that:

  • Even from the very get-go, the terms of the contract were weak; 
  • Over RM6 billion had already been paid to BNS even though not a single ship had been delivered; 
  • There were cost overruns of RM1.4 billion; 
  • 15% of inventory estimated to have cost RM1.7 billion has already been declared obsolete.

Moreover, multiple questionable decisions on the part of the government were identified to have led to the ultimate failure of the LCS project: 

  • The appointment of both Contravest Advanced Devices Sdn Bhd (CAD) and Contravest Electrodynamics Devices Sdn Bhd (CED) into the equipment purchase process greatly increased costs; 
  • The “due diligence” carried out failed to detect BNS’ financial problems, wherein BNS was forced to use a portion of the procurement funds to settle bad debts accrued from previous project by a separate company, PSC Industries Bhd; 
  • BNS’ financial position is weak and in a critical state due to abuse of power; 
  • The design of the LCS was decided on against the recommendations of the Navy and have not been finalised yet to this day.

These issues have only been a brief portrayal of the vast improprieties that have taken place under this project, made all the more shocking considering that this is not even the first defence deal that BNS has squandered. However, the question still remains: who is responsible for this?

Currently, Ministers former and serving are engaged in a drawn-out blame game in order to divest themselves of responsibility now that the scandal has been made public. The spotlight has inevitably shone on Ahmad Zahid Hamidi, who was occupied the Minister of Defence position between 2009 and 2013 – between that time, BNS submitted its “letter of intent” on Oct 16, 2010, and received its “letter of award” on Dec 16, 2011 according to the PAC report. 

The contract with BNS took effect on Oct 3, 2013 after Zahid had already vacated the Minister of Defence seat, but the indisputable fact remains that he was overseeing this project when the contract was first signed – a fact Zahid is attempting to deny.

Najib Razak, who held the dual role of both Prime Minister and Minister of Finance when the LCS procurement project was first taking place, has also come under scrutiny for his role in the project – Najib himself denies any involvement, but the responsibility to account to the loss of public funds remains deeply wanting.

The French defence firm DCNS (now known as Naval Group) are once again named and strongly implicated, suggesting that they had full prior knowledge of the LCS project even before BNS was appointed as the main contractor.

DCNS was one of the key players in Najib’s other sordid Scorpene submarine scandal that emerged in 2002 – DCNS were contracted to deliver two Scorpene-class submarines; it was later found that they sent refurbished versions that could not even dive in Malaysia’s tropical waters. 

It was reported from French documents that kickbacks of RM570 million were sent to Perimekar Sdn Bhd and other shell companies that were all controlled by Razak Baginda, a close associate of Najib at that time. Najib himself was the Minister of Defence and had appointed Razak to oversee the procurement of the submarines with DCNS, and demanded heavy bribes for high level meetings involving his presence. 

Following investigations, the former CEO, Chairman, and President of DCNS as well as Razak himself were indicted by the French Court for offences related to bribery, corruption, and misappropriation of assets. It must be said here that the Malaysian Anti Corruption Commission (MACC) has still remained silent on this scandal, speaking to its inadequacy regarding transboundary corruption and its supposed independence in nabbing powerful individuals involved in corruption.  

These connections revealed here, all of which have previously been covered by C4 Center, are disturbing and demonstrate the ways in which the rot of corruption from years past still continues to plague us. Whilst it is easy to get lost in the sheer complexity of the scandal before us, at its core, this issue is about how RM 9 billion in taxpayer money extracted from Malaysians were promised away. More specifically, corruption proliferates when public procurement is not transparent, and when matters of “national security” are used to further obscure oversight.

With that, C4 Center makes the following demands:

  • For Najib and Zahid to be held to account and charged for their serious misgivings and mismanagement leading to huge losses of public funds. This is critical in order to restore public trust in the system;
  • For Hishamuddin to gracefully resign and accept equal blame for making false assurances of the LCS delivery during his time as Minister of Defence;
  • For the former Minister of Defence under the Pakatan Harapan government to clarify why no action was taken during his tenure;
  • For the Malaysian Anti-Corruption Commission (MACC) to release its investigation findings;
  • For Boustead officials to be held gravely responsible – the entire company must be fully audited and investigated for misappropriation of funds and for using money from the LCS project to bailout another company;
  • For Parliament to debate the matter of defence procurement urgently, taking urgent steps to ensure proper safeguards and checks on national security-type procurement done in secret;
  • For the incumbent government after the next General Election to enact a Public Procurement Act that upholds accountability and transparency in accordance with the goals already outlined in the National Anti-Corruption Plan.

END OF STATEMENT

Issued by:

Center to Combat Corruption & Cronyism (C4 Center)

For further enquiries, please contact:

[email protected] 

012-379 2189 / 03-7660 5140

Website: https://c4center.org/

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