This article first appeared in The Edge Malaysia Weekly on November 14, 2022 - November 20, 2022

KOREA Aerospace Industries (KAI) has emerged as the front runner to secure a RM4 billion contract to supply the Royal Malaysian Air Force (RMAF) with 18 light combat aircraft (LCA), according to sources familiar with the outcome. However, the award is said to have triggered an investigation by the Malaysian Anti-Corruption Commission (MACC), following a complaint by one of the unsuccessful bidders.

The anti-graft body is understood to have opened a case file on the matter based on documents and text messages sighted by The Edge.

MACC declined to comment when contacted.

Meanwhile, caretaker Defence Minister Datuk Seri Hishammuddin Hussein assures that the contract is being handled professionally by those responsible for the multi-billion ringgit deal.

“I am only a caretaker minister now. I am not sure of the details, but let the ministry do their job and they will do it professionally. When the time comes, it will be announced,” he tells The Edge.

The case centres on the international open tender that was called for the procurement of one squadron of military aircraft (18 planes) by RMAF in October 2021.

On July 25, The Edge reported that allegations of impropriety in the award of the contract had surfaced. Hishammuddin told The Edge then that the disgruntled parties could report their unhappiness to the MACC.

Six international bidders with their respective local partners, representatives and consultants took part in the open tender, which concluded last year.

The six are China National Aero-Technology Import & Export Corp, which makes JF-17 B fighter jets; KAI which manufactures the FA-50 fighter jets; Italy’s Leonardo with its M-346 planes; India’s Hindustan Aeronautics Ltd (HAL) which makes Tejas fighter jets; Turkey Aerospace Industries (TAI) which produces the Hürjet; and Russia’s Rosoboronexport with its MiG-35 multirole fighter and YAK 130/M 346 FA.

It is understood that Leonardo has pulled out.

The Edge contacted KAI’s local representative Mohd Iswandi Mohd Sharif, who confirmed that the success of its tender submission for the FA-50 Block 20 to the Ministry of Defence appeared “positive”.

“We finished the physical evaluation and are awaiting official announcement. It seems ‘positive’,” he tells the Edge.

According to the local partners of the other international bidders, some were notified in writing by the defence ministry that they were unsuccessful in their tender submission.

In an official letter sent by the ministry on Oct 1 that was sighted by The Edge, one bidder was told to collect tender deposits in the form of a bank guarantee. Interestingly, the letter was sent out to unsuccessful bidders after parliament was dissolved on Oct 10.

Caretaker Defence Minister Hishammuddin on Oct 27 said that the price negotiations with tendering companies for the LCA procurement had been completed, and that they were awaiting the Ministry of Finance’s decision to approve the contract award.

Hishammuddin is the Barisan Nasional (BN) candidate for the Sembrong parliamentary seat in the 15th general election (GE15) on Nov 19.

Questions have been raised by the aggrieved bidders as to why a caretaker government had approved a defence contract, as it does not have the legitimate mandate to exercise such a function.

“Once parliament is dissolved, no major purchases and mega projects can be undertaken by the interim government. Is the expedited process to procure the FA-50 and bypass other tender bids attempts to avoid further public scrutiny?” a local consultant to one of the international bidders, Datuk Lau Kong Cheng, asks.

He claims that officials responsible for evaluating the tender decided on one bidder without undertaking vital OEM (original equipment manufacturer) facility/plant visits to all the other shortlisted bidders to carry out a proper verification, evaluation and comparison process.

“This now looks like an attempt to speed up the procurement of the FA-50 and ignore OEM visits to all three initially shortlisted aircraft,” says Lau, who adds that KAI’s FA-50, India’s Tejas and China’s JF-17 B fighter jets had been shortlisted by RMAF.

Other sources claim that the contract recipient was favoured despite not meeting all the critical requirements set by the end-user.

The RMAF had laid out five main criteria to be fulfilled by the fighter jet manufacturers. They are the delivery of the LCA on a staggered basis over 36 months after the contract is signed, air-to-air refuelling capabilities, the ability to deploy beyond visual-range missiles, 30% local content and supersonic performance.

The dissatisfied bidders claim that the evaluation process for the first international open tender for military aircraft appeared to be unfair.

“It appears the evaluation process of each tender is opaque. If that was the case, they could have initiated a G2G negotiation directly with the preferred party, instead of calling for an open tender. The main reason anyone would call for an open tender is to gain assurance of the best value for money; it increases competition and gives everyone a fair chance to compete for the contract,” says a source close to the matter.

It is understood that there are now ongoing direct negotiations between the Ministry of Finance and the FA-50 bidder for commercial and technical changes to the original bid submitted in 2021.

“It seems that FA-50 [manufacturer] has changed their pricing and technical specifications in the ongoing direct negotiations. The current LCA procurement is not a direct negotiation but an open international tender,” says the source.

Lau adds that typically, when bidders submit their offers, they spend a significant length of time and amount of money to demonstrate in their tenders how they will satisfy the end-user’s evaluation criteria and requirement.

However, the complaints from the bidders could result in the risk of reputational damage for the government in the long run.

“The selection of such an important and high-value military system (multi-billion project) without vital verification, evaluation and comparison visits to all shortlisted LCA OEMs goes against all proper tender and procurement processes,” Lau points out.

Although there is no law on what a caretaker government can or cannot do, the awarding of contracts after the dissolution of parliament is a definite no-no.

A caretaker government is not allowed to make new expenditure commitment other than of a routine kind, or enter into a significant government contract, says Institute for Democracy and Economic Affairs (IDEAS) CEO Dr Tricia Yeoh in a statement commenting on a caretaker government’s limitations and responsibilities.

“In short, a caretaker government’s primary duty is to handle only administrative affairs until the formation of a new government. It does not have the privilege or power to pass, sign, undertake any agreements, contracts and/or pledges, be it at the domestic or international level.

“It should refrain from passing any major policy that may affect the country in the long term. This includes making new political appointments or making any major procurement or budgetary decisions. Its actions must be governed by the principles of responsibility, rule of law and necessity alone,” says Yeoh.

A defence industry analyst says multi-billion ringgit contracts as costly as RM4 billion will be up for review once a new government steps in. However, should the caretaker government be re-elected in GE15, then a review of the award is unlikely.

“It all really depends on who wins. However, if this is going to be a legacy-led contract by the previous government, then the country’s taxpayers may have a problem in hand,” says the analyst.

“We have seen before how contracts awarded in 2018 were thoroughly reviewed by the incoming government. But that happened because there was a massive shift in who occupied Putrajaya.”

The Pakatan Harapan (PH) government, which came into power for the first time in 2018 after a landslide victory against BN, reviewed and renegotiated 121 projects during its 22 months in office.

The 121 infrastructure projects valued at RM13.93 billion were offered through direct negotiations and limited tenders previously by the BN government.

In Budget 2023, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the defence ministry would get a total allocation of RM17.4 billion.

He said RM4 billion was allocated for the procurement and maintenance of armed forces assets and RM118 million for the maintenance of Rumah Keluarga Angkatan Tentera (RKAT), while RM47 million has been allocated for two additional field hospitals in Kluang and Kota Kinabalu to face any national disaster.  

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