This article first appeared in The Edge Malaysia Weekly on August 15, 2022 - August 21, 2022

BOUSTEAD Naval Shipyard Sdn Bhd (BNS), the company that has failed to deliver the littoral combat ship (LCS) project on time and within cost, held the “rights” to build 15 patrol vessels for the Royal Malaysian Navy.

In 2017, however, the government terminated the “rights” accorded to BNS, following its dismal performance in relation to the LCS project.

According to LCS programme director Captain (Ret) Azhar Jumaat, BNS had appealed to the government to revive the “rights” to build another 15 patrol vessels, but it has been unsuccessful so far.

“So far, BNS has appealed but the government has not restored the ‘rights’. The matter is still being discussed together with other proposals, taking into account the issue of confidence that the government has in the company’s capabilities at the moment,” Azhar had told the Public Accounts Committee last December.

BNS’s “rights” to build the patrol vessels can be traced to its privatisation exercise in 1995. Then, PSC Industries Bhd (PSCI), a company controlled by Tan Sri Amin Shah Omar Shah, had privatised the naval dockyard in Lumut for RM300 million. The privatised entity was renamed PSC-Naval Dockyard Sdn Bhd (PSC-NDSB).

The Royal Malaysian Navy’s objections at that time to the privatisation of the dockyard were swept aside.

In return, for privatising the dockyard, PSC received an award from the government to build 27 offshore patrol vessels (OPVs) for an estimated RM30 billion then. In 1998, PSC-NDSB was awarded a contract to build the first batch of OPVs for RM5.35 billion.

Soon after the contract was awarded, PSCI ran into financial problems. Almost RM1 billion in transactions between December 1999 and January 2002 at PSC-NDSB level could not be accounted for, according to the Auditor General’s report in 2007.

Boustead group took over PSCI in the second half of 2005. By end-2006, the government had to inject another RM1.4 billion into the contract, which was then known as the New Generation Patrol Vessel (NGPV) project, thus increasing its value to RM6.75 billion.

By then, the dockyard had been renamed Boustead Naval Shipyard Sdn Bhd.

Of the six patrol vessels, two were built in Germany while the remaining four were constructed in Malaysia. By 2006, the navy had taken delivery of the two vessels. But there was a litany of complaints.

The last of the six NGPV ships was delivered in 2010 — some 13 years after the government awarded the contract.

But BNS was still saddled with a liability of RM400 million from the NGPV contract, and it was settled in 2014 from payments that were meant for the LCS project.

Apart from RM400 million from the LCS project used to settle debts incurred by BNS for the NGPV project, RM1 billion was used for works that were not part of the original scope under the project. It included a RM305 million IT system based in Cyberjaya and an additional cost of RM700 million BNS incurred from the change in design of the LCS vessels.

The LCS project has stalled since 2018, following financial problems at the BNS level, which was also the year that saw a change in government.

According to statements by key executives of BNS and the Armed Forces Fund Board (LTAT) to the Public Accounts Committee (PAC), BNS requires RM1.5 billion to pay off creditors and banks to resume the project. In addition, it needs to raise RM4 billion to complete the construction of the six LCS.

In April this year, the Cabinet gave the green light for the LCS project to continue. Previously, Cabinet approval was subject to BNS fulfilling certain conditions.

Among them was BNS firming up a plan to raise the RM4 billion required to complete the job and that the detailed design be finalised. Another condition was that all remaining payments allocated for the project would go straight to vendors and suppliers.

BNS executives have said that the remaining payment of about RM3.1 billion is enough to complete the first two LCS. The remaining RM4 billion is required to complete the remaining four LCS.

Previously, in a bid to raise money to complete the LCS project, BNS had proposed a RM53 billion contract to maintain the vessels for 30 years. The Cabinet rejected the proposal and gave BNS a three-year maintenance contract instead.

Assuming the Cabinet had awarded the 30-year maintenance contract, BNS could have easily raised the RM4 billion required to finish the LCS. But would it have run into financial problems again in delivering the services?

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