This article first appeared in The Edge Malaysia Weekly on April 17, 2023 - April 23, 2023

BOUSTEAD Naval Shipyard Sdn Bhd (BNS) is understood to have reached an agreement with its contractors Contraves Advanced Devices Sdn Bhd (CAD) and Contraves Electrodynamics Sdn Bhd (CED) over the RM9.13 billion contract awarded in 2011 for the building of six littoral combat ships (LCS).

According to the term sheet sighted by The Edge, BNS will pay CAD roughly RM464.33 million (based on the prevailing exchange rate last Thursday) as the settlement amount.

The term sheet states that the parties (CAD, CED and BNS) hereinbelow agree to execute a settlement agreement with a view to achieve, among others, the objectives including to enable BNS to resolve commercial issues with CAD and CED in relation to the Royal Malaysian Navy Littoral Combat Ships (LCS) Programme. “For avoidance of doubt, CAD and CED will not be providing BNS with any technical questions and/or any technical assistance for the LCS Programme,” it adds.

CAD, which wholly owns CED, is a 51:49 joint venture between BNS and German defence outfit Rheinmetall Air Defence AG.

In October last year, CAD and CED sued BNS for outstanding payments and a declaration that the contracts are not void two months after BNS terminated the letters of award in August 2022. The two contractors are the recipients of 12 letters of award (LOAs) from BNS for the procurement, engineering, integration and supply of equipment and weaponry for the six LCS.

It is understood that BNS had terminated CAD and CED as intermediaries of the project as the termination would allow BNS to negotiate directly with the relevant original equipment manufacturers (OEMs). The terminations came amid allegations of misconduct, illegality and fraudulent dealings in relation to the LOAs issued to the contractors, in the wake of the Public Accounts Committee (PAC) report on the LCS project delays and cost overruns.

According to BNS shareholder Boustead Heavy Industries Corp Bhd’s (BHIC) filing with Bursa Malaysia, the other defendants named in the suit by CAD and CED are BHIC and its wholly-owned subsidiary BHIC Defence Technologies Sdn Bhd (BHICDT).

The suit further named two BHICDT directors Dr Salihin Abang and Vice-Admiral Datuk Syed Zahiruddin Putra Syed Osman as defendants. Salihin is a nominee director at CAD and CED, while Syed Zahiruddin is a nominee director at CAD.

In the latest development, the term sheet dated March 2023 indicates that the settlement amount will be remitted in the exact currencies as stated to CAD and CED. The full sum is to be settled no later than June 30, 2025.

The settlement amount stands at RM222.53 million, €40.77 million, £3.78 million and SEK55.94 million (Swedish krona), which comes to a total of RM464.33 million based on the prevailing exchange rate last Thursday.

It was stated, however, that the term sheet would lapse should all parties fail to form a settlement agreement within 30 days of the day of execution.

BNS is a member of the beleaguered Boustead group, which is controlled by armed forces fund Lembaga Tabung Angkatan Tentera (LTAT).

The flagship Boustead Holdings Bhd holds a 68.85% stake in BNS, while its listed subsidiary BHIC has 20.77% equity interest. The other shareholders of BNS are LTAT with a 10.38% stake and Minister of Finance Inc with a single golden share in BNS.

The settlement amount casts a spotlight on the financials of BNS shareholders. The settlement coincides with LTAT’s sale of a 4.95% stake in Affin Bank Bhd for RM221.74 million to State Financial Secretary Sarawak. Besides, LTAT is taking Boustead Holdings private at 85.5 sen per share.

Since the announcement of the privatisation exercise, LTAT has raised its stake in Boustead to 74.796% from 59.42%. LTAT’s takeover offer, which will cost RM703.25 million, values Boustead at RM1.73 billion.

Boustead Holdings owns 65% of BHIC, which was responsible for the running of BNS.

In its financial year ended Dec 31, 2022, BHIC suffered a net loss of RM21.55 million from RM141.76 million in revenue. In FY2021, it chalked up a net profit of RM15.19 million from RM149.19 million in revenue.

At end-2022, BHIC had cash balances of RM26.35 million, while its short-term borrowings and long-term debt commitments came to RM182.74 million and RM63.28 million respectively. During the year, the company amassed an accumulated loss of RM181.41 million.

To recap, BNS bungled a RM9.13 billion contract to build six LCS awarded in 2011. The first of the six vessels had been slated for delivery in April 2019, but the first ship was only 44% completed at the end of August last year, while the others were between 0% and 35% completed. The government has forked out RM6.08 billion, or 66.59% of the total contract cost, to date.

In February, Defence Minister Datuk Seri Mohamad Hasan told the Dewan Rakyat that the cost of the LCS project would remain at RM9 billion even though the number of vessels procured had been reduced to five from six previously. He explained that the cost remained the same due to the many variation orders and escalation of costs.

Last month, Prime Minister Datuk Seri Anwar Ibrahim said in parliament that the government had to find out who caused the delay in the LCS project.

“My instruction is that although there is prosecution, it is not enough because the scandal was [on a] large scale ... Leakages occurred, so there must be follow-up action,” he said in reply to a supplementary question.

The Malaysian Anti-Corruption Commission (MACC) has told the public that it will call more witnesses, locals and those from abroad, to give statements on the investigation into the LCS project. Chief commissioner Tan Sri Azam Baki gave his assurance that no party would be protected in this probe.

“I got information from the investigating officer that many more witnesses will be called to testify, not only in the country but also involving those from abroad. I will not reject anyone [from giving statements], whether VIPs or ministers involved in this case. All will be called to ensure that the investigation of this case can be carried out,” he was quoted as saying by Bernama on March 16. 

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