LCS report: Mindef's governance weak
SHAH ALAM - The Investigating Committee on Procurement, Governance and Finance (JKSTUPKK) has found that the Defence Ministry's (Mindef) administration for the contract to supply the Royal Malaysian Navy (RMN) littoral combat ships (LCS) was weak and certain clauses in the contract failed to protect the government's interest.
The committee's report also revealed the weaknesses in Boustead Naval Shipyard Sdn Bhd's (BNS) management and its critical financial constraints.
"The weakness of the clauses in the contract and BNS had led to the delay in the implementation of the construction of the six ships.
"The delay by the government and the company to finalise some of the components, had affected the overall performance of the project implementation and will contribute to the increase in costs and delay in the delivery of the LCS," according to the report which has been declassified and published in the Public Accounts Committee's (PAC) portal on Wednesday.
According to the report, the involvement of members of the administration in the early stages before the contract was signed also resulted in the design, components and equipment required by RMN as the end user to be set aside.
The costs were expected to be increased to RM11,145 billion.
Meanwhile, JKSTUPKK also expected the cost of construction for the six LCS will continue to increase following the change of the main equipment which involved implications like additional time needed to deliver the ships.
"Based on the BNS letter dated July 16, 2019, the completion of the six ships required an additional cost of around RM1.4 billion which comprised direct cost of RM58.4 million and an indirect cost of RM1.35 billion due to the change of equipment and implementation schedule.
"The indirect cost involves the extension of the basic design, design authority, equipment delivery schedule, warranty, insurance and financial costs as well as other resources. "This brings the estimated total cost of the project to RM11.145 billion," according to the report.
Meanwhile, JSTUPKK also listed two recommendations on the direction of the supply of the six ships to the government on whether to continue or terminate the contract with several matters that needed to be considered.
Among the proposals stated in the event the contract was to continue was that that BNS and the RMN LCS project team needed to immediately finalise change in equipment which were the Integrated Platform Management System (PMS), Decoy Launching System (DLS) and the application for contract extension.
The government also needed to strictly control the progress payments to BNS so that financial resources would only be used to finance the construction of LCS and avoid payments made to other parties with no relation to the project.
"Cost-benefit analysis should be carried out as the estimated cost will increase beyond the ceiling limit of the project amounting to RM9.128 billion. To prevent the cost from further increasing, the government needs to consider whether to proceed with the construction of all six LCS or reduce the number according to the impact on cost and time.
"If the government wants to terminate the contract, Mindef will have to comply with the clauses contained in the contract and to consider several matters, among others the BNS cash flow position on May 31, 2019 which was weak. BNS has debts in nine banks and BHB of RM956 million and debts to suppliers and OEMs amounting to RM801 million.
"The government should also consider the impact on the development of the defence industry and the economic chain in relation to the project, especially the development of the Manjung district as a Malaysian Maritime Centre," the report stated.
