Report: Defense Ministry ignored navy chief in warship contract

A newly declassified government report found that the Ministry of Defense ignored concerns raised in 2011 by Malaysia’s then-navy chief about potential malpractice involving a contract to build six warships for his fleet – the nation’s most expensive-ever military contract.

The 9 billion ringgit (U.S. $2 billion) contract to build the half-dozen littoral combat ships is now the focus of a public controversy because not a single ship has been delivered to port since the ministry gave the job to the Boustead Naval Shipyard (BNS), a government-owned shipbuilder, in 2014.

The 108-page document, which was declassified this week, is the report of a government investigation into the construction project.

The report noted that the ministry rejected a recommendation by Adm. Abdul Aziz Jaafar, the navy chief, for the warships’ design and went ahead with one suggested by Boustead.

The report said the design was changed to the Gowind design on July 11, 2011, three days after BNS proposed the change to the Defense Ministry.

“Quoting the statement by Tan Sri Abdul Aziz, chief of Navy at that time, the decision was seen as ‘something is gravely wrong,’” the report said.

Since then, the government has spent about 6 billion ringgit (U.S. $1.36 billion) without receiving any of the five combat littoral ships scheduled for delivery this month.

“The government should have listened to the Navy’s advice as it is the end user,” said Mohamad Imran Abd Hamid, president of Royal Malaysian Navy Veterans Association.

While Abdul Aziz recommended a Sigma-designed ship, the Navy was forced to accept a Gowind-designed vessel. Navy officials said the Sigma design has been used by the Indonesian Navy where it has a proven service record.

“Sigma was a proven design based on the corvette class of warships, which has similarities to a frigate-class ship design,” Abd Hamid told BenarNews.

The report by the Special Committee on Governance Investigation, Government Procurement and Finance also expressed concern over the alleged lack of comprehensive due diligence by the Ministry of Defense regarding BNS’s financial status. It noted the company had only 130 million ringgit ($29 million) in paid capital when it was awarded the contract.

“The paid capital is less than 2 percent of the total cost of the project. The ratio showed the company’s financial capability is not equal to the project value. The government will be exposed to high risk if BNS fails to complete the project,” the report stated.

An analysis of BNS’s financial statements between 2014 and 2018 showed the company suffered losses in three of the five years.

The committee reported that BNS cash flow problems caused delays in payments to suppliers. As a result, the suppliers refused to send raw materials and equipment, leading to a work stoppage at the shipyard.

In the report’s summary, the committee proposed that the government continue with BNS as a contractor, but that steps be taken to ensure the project is completed on a new schedule and with no overruns.

BNS officials did not immediately respond to BenarNews requests for comment.

Declassification welcomed

Muhammad Mohan Abdullah, president of Transparency International Malaysia (TI-M), an anti-corruption watchdog group, said his organization applauded the government’s move to declassify the report.

“What we want is that those accountable for this fiasco should not go unpunished. This is taxpayers’ money and there must be accountability from the top to the bottom,” he told BenarNews on Friday.

Responding to the report’s financial concerns, Mohan said failure to conduct due diligence on the main contractor reflects poorly on the government.

He said it was not clear that at the time the contract was signed in 2014, that BNS had enough working capital to finance the project to meet deadlines for completion.

Last week, officials invited journalists to the Boustead Naval Shipyard dock in Lumut, Perak state, where they were shown one of the ships under construction.

Wong Kah Woh, chairman of the parliament Public Accounts Committee, recently submitted his bi-partisan group’s 250-page report for parliamentary debate after a two-year investigation of the project.

“The result of the proceedings found that the LCS project was awarded to BNS through direct negotiations, with the government paying 6.083 billion ringgit, but that not one LCS ship had been completed despite the original schedule stating that five ships would be ready to be handed over by August 2022,” Wong told reporters at the time

On Wednesday, Wong welcomed the declassification of the government report and said he was waiting for the forensic audit of BNS financial records to be made public as well.

Meanwhile, Barjoyai Bardai, an economist at Universiti Tun Abdul Razak, urged government critics to wait for investigation results to be revealed by the relevant authorities.

“One by one, it will be revealed just like 1MDB, so we just wait,” he told BenarNews, referring to the missing billions from state development fund 1Malaysia Development Berhad that has led to corruption charges against former Prime Minister Najib Razak, his wife Rosmah Mansor, and other officials.