This article first appeared in Forum, The Edge Malaysia Weekly on October 16, 2023 - October 22, 2023

The taxpayers’ bill to prevent Boustead Holdings Bhd (Boustead) from dragging down Lembaga Tabung Angkatan Tentera (LTAT) exceeds RM5 billion. And nobody can say with certainty if this will be the final amount for repairing the damage to the fund as it strives to put itself on a firmer footing.

The biggest cost to taxpayers is the completion of the littoral combat ship (LCS) project, which requires an additional RM2.1 billion from the government’s coffers.

The second largest portion for LTAT is in the form of a government guarantee of RM2 billion to take over Boustead Plantations Bhd (BPlant). To be fair, the current management of LTAT helmed by Datuk Ahmad Nazim Abdul Rahman had a market-driven solution to its immediate financial needs but was stopped by the government.

The third major component of liabilities that will fall on the government is the takeover of Boustead Naval Shipyard Sdn Bhd (BNS), the company that was given the RM9.13 billion mandate to undertake the delivery of six LCSs in 2013.

Without BNS in its books, Boustead and LTAT will be relieved of huge financial uncertainties as the project is now due to be completed in 2029 and nobody can say for sure that it will be delivered within cost.

The Ministry of Finance (MoF) is taking over a BNS that faces a trust deficit. The company had accumulated losses of RM982 million as of the end of last year and loans of RM624 million. The government has forked out RM6 billion since 2013 and not a single vessel has been completed.

BNS has a poor track record. Privatised in 1995 to former corporate figure Tan Sri Amin Shah Omar Shah, it has often hogged the limelight for all the wrong reasons despite landing the choicest naval projects.

Boustead took over from Amin Shah in 2005 following financial problems in BNS. Some 11 years after the takeover, nothing has really changed. Hence the need for the MoF to take over the company to facilitate its restructuring and for the completion of the LCS project.

LTAT is asset-rich but light in cash flow. More than 75% of its assets are illiquid and in investments that do not provide it with the desired returns. This makes it difficult for LTAT, which manages RM9.3 billion in assets, to give the desired returns of 5%.

Since March 2018, LTAT and Boustead have seen several changes at the helm. But no one was prepared to take action to rebalance the fund’s portfolio.

To compound matters, almost 38% of LTAT’s investments are with Boustead and its related companies that are struggling under debts of RM7 billion.

Under Ahmad Nazim, LTAT finally embarked on a restructuring by taking Boustead private and selling a 65% stake in BPlant to Kuala Lumpur Kepong Bhd (KLK).

But the deal with KLK was stopped at the last minute after an offer to buy out the minorities of BPlant at RM1.55 per share was announced.

Who stopped the deal and what was the reason? Was it politically unacceptable or were valuations too low?

Somebody in Putrajaya should explain instead of allowing people to keep guessing the answers to these questions.

Prime Minister Datuk Seri Anwar Ibrahim and Defence Minister Datuk Seri Mohamad Hassan had said that the government would give LTAT a RM2 billion guarantee to take over BPlant. But nobody has offered a reason for that abrupt U-turn on the deal with KLK.

The irony is that, had the government’s intervention into Boustead been made known much earlier, LTAT may not have needed to privatise Boustead and could have taken over BPlant at less than RM1.55 per share.

First, Boustead conducted a competitive bidding exercise to get the best price for BPlant. BPlant was hovering at less than 70 sen and had net tangible asset (NTA) of RM1.30. In the end, LTAT had to match the best price from a competitive bid that was higher than the NTA.

Second, had the government given LTAT the RM2 billion months ago, it could have restructured Boustead and its debts of RM6.8 billion without having to privatise the company at a price that was grossly unfair to minorities.

LTAT privatised Boustead at 85.5 sen when its intrinsic value was double that.

Just like how there has not been any logical explanation for aborting the BPlant-KLK deal, the government has so far not offered any reasons or punished those responsible for the colossal mismanagement of the LCS project.

The amount needed to complete the five LCS vessels is now RM11.22 billion, an increase from the RM9.13 billion in the initial contract inked in 2013. The new delivery date has been extended by 83 months from 2023 to the end of 2029.

The new mandate is to build five vessels instead of six as in the initial contract.

Despite the additional budget, reduction in the scope of work and extension of time, the government is far from being off the hook with regards to the LCS project.

The potential for the project to incur cost overruns as it progresses cannot be ruled out. The detailed design for this project has not been firmed up yet although it is already 10 years since it started. According to the latest report unveiled by the Public Accounts Committee (PAC), it will only be done by August 2024.

Without the detailed design, there is no certainty that the vessels can be delivered within budget.

Abdul Nazim is practical in ensuring that LTAT and Boustead dispose of their interests in BNS.

As much as LTAT can take pride that it is the pension fund for the Armed Forces personnel and should manage defence-related projects, it has a pathetic track record in managing such projects and moreover, those responsible have gone unpunished.

LTAT and its companies’ record in managing construction projects and plantations is also appalling. Pension funds such as LTAT are not cut out for such businesses.

The latest details emerging from the PAC’s report on how badly the LCS project had been managed are mind-boggling.

Responding to a question from the PAC, key officials said that the key stakeholders did not monitor the progress, especially from 2016 onwards. Even the MoF, which has a golden share in BNS, took its eye off the LCS project when it should have taken a keen interest as billions of ringgit are involved.

Will the project implementation be any different going forward?

Apart from the MoF taking over BNS, the Royal Malaysian Navy (RMN) has appointed a new director general for the LCS project. First Admiral Franklin Jeyasekhar Joseph, an engineer by training, was appointed in November last year. But having said that, the RMN has always appointed persons with engineering backgrounds to take care of their interest in the LCS project. Whether the changes will make any difference is left to be seen.

M Shanmugam is a contributing editor at The Edge

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