This article first appeared in Forum, The Edge Malaysia Weekly on August 8, 2022 - August 14, 2022

The Public Accounts Committee (PAC) report on the huge cost overrun incurred in the littoral combat ships (LCS) job is only one of many investigations into government procurement and construction projects.

There are several procurement projects probed by a high-level committee headed by former auditor-general Tan Sri Ambrin Buang. However, only a few have been brought to the attention of the PAC so far for further action.

The investigations into the LCS project started sometime in July 2018, after the Pakatan Harapan coalition took over Putrajaya.

The then prime minister, Tun Dr Mahathir Mohamad, handed Ambrin a mandate to head a Special Investigative Committee on Procurement, Governance and Finance (Jawatankuasa Siasatan Tadbir Urus, Perolehan dan Kewangan Kerajaan or JKSTUPKK). The task of the committee was to investigate government procurements and improve on the procedures. The committee handed its reports to the cabinet.

The first probe by the committee was on the Ministry of Defence (Mindef), which came at the behest of Mohamad Sabu, the minister at that time.

This should not come as a surprise as defence contracts are shrouded in secrecy and tendering of procurement is not common. After Mindef, Ambrin’s committee went on to investigate major contracts and procurement jobs in other ministries as well.

Some of the investigations opened by the high-level committee are still kept under wraps for reasons unknown.

Every year there is a report from the auditor-general which highlights shortcomings in government procurement and projects. The report however, does not go into details.

The investigations by Ambrin’s team drill right down to the details. They name people who had made questionable decisions and companies that benefitted from government jobs. The PAC takes it further by calling in the persons involved in the particular project and obtaining more details on how it all went wrong.

For instance, in the LCS proceedings, the forensic audit reveals how decisions were made by a foreign joint-venture partner in which Boustead Naval Shipyard Sdn Bhd (BNS) has a 51% stake. The forensic audit pointed out two names that were primarily responsible for all the decisions taken at BNS and in the joint venture in relation to the project.

An auditor appointed to conduct a forensic audit disclosed how the agreements were lopsided and contracts were awarded even before the detailed design of the ships were firmed up, making variation orders (VOs) necessary. The forensic audit revealed how key people in charge of finance and legal matters were reduced to just following orders without raising red flags.

The high-level investigative committee also investigated the Automated Enforcement System (AES) project that was under the Ministry of Transport. The report was sent to the PAC for further investigation.

In November last year, the PAC unveiled its report, which highlighted the compensation paid to two companies for a concession project that was not completed. In 2015, Lembaga Tabung Angkatan Tentera, together with Boustead Holdings Bhd, paid RM555 million to take over Beta Tegap Sdn Bhd and ATES Sdn Bhd in a convoluted deal.

In August 2018 and in 2019, the government paid a total of 668.9 million in two tranches to LTAT and Boustead to relieve them of their stakes in the two companies. This is because the finances of Boustead and LTAT were already stretched, putting pressure on their obligations to declare handsome dividends for the benefit of soldiers.

There were many other reports prepared by the committee headed by Ambrin. However, there is little information in the public domain on what other projects it investigated and why the findings were not handed to the PAC for further action.

The government spends more than RM70 billion per annum on procurement and projects. It is big business for the private sector.

The government can be late in payments but it never defaults. In fact, on numerous occasions, it advanced more money than was due for the actual work undertaken on certain projects.

Each government department and agency has its internal auditors. However, the internal auditor reports to the head of the department or ministry, which in most instances is the secretary-general or director-general. The “bosses” in the ministry have the powers to act on the report of the internal auditor.

But in most instances, the internal audit report is reduced to a mild version of what it should be so as to not offend the head of department, who is probably implicated in the report.

The rules allow for internal auditors in departments and agencies to lodge their reports directly to the auditor-general if their heads of departments do not act on them. But no reports were sent directly to the auditor-general.

This weakness in the structure of the internal audit team and their lines of reporting eventually resulted in their functions becoming non-relevant. The reports just become documents marked as “no further action”.

This is very different from the situation in listed companies where the internal auditor reports directly to the audit committee, which comprises board members. The audit committee is compelled to act on the reports and even seek the assistance of the external auditor.

The reasons for the huge cost overruns and delays in government projects are largely due to poor planning, resulting in VOs and lopsided agreements that are not in favour of the client — which is the government.

These are the broad reasons why the LCS project is a major failure although it was touted as being aimed at moving the capabilities of the Royal Malaysian Navy to a new level. The government has forked out RM6.1 billion out of a RM9.1 billion contract to build six ships. The award was given in 2010 but so far, none of the ships has been delivered.

The first signs of trouble started when the contract was given to BNS, a company controlled by the Boustead Group, without any tender being called.

BNS formed a joint venture with Rheinmetall Air Defence (RAD) to handle the building of the six LCS. According to a forensic audit, although BNS had a 51% stake in the joint venture with RAD holding 49%, management control was left with the latter.

Effectively, a joint venture controlled by a foreign company called the shots for the Royal Malaysian Navy’s most prestigious project.

Then, there was a change in the design even though there were objections from the Royal Malaysian Navy. Subsequently, contracts were awarded even before the detailed design for the six ships were firmed up.

Those awarded the contracts quickly went about undertaking the procurement of materials without taking into consideration the fact that the detailed design had not been firmed up. Eventually, that resulted in VOs for the LCS project.

The investigations by Ambrin and his team would include many more instances where public funds were abused blatantly. For this reason, the files should be declassified and handed to the PAC for further action.

M Shanmugam is a contributing editor at The Edge

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