This article first appeared in The Edge Malaysia Weekly on August 29, 2022 - September 4, 2022

THE secretive nature of defence procurements appears to have provided the perfect cover for financial mismanagement and corruption, which came to the public’s knowledge in the 1990s.

As a mid-size country in a relatively peaceful region, Malaysia has generally not prioritised defence spending compared to other areas, including healthcare and education, or keeping a lid on living costs through subsidies.

Nevertheless, successive governments have continued to procure defence equipment to upgrade the capability and operational readiness of the armed forces, particularly since the 1990s, when the country embarked on several major defence procurement programmes.

Unfortunately, as the recently exposed financial scandal involving the littoral combat ship (LCS) project shows, defence procurement has been so massively mismanaged that Malaysians do not get value — never mind the best value — for their tax dollars.

Even worse, the siphoning of funds from defence needs puts the country’s sovereignty at risk.

The following is a handful of procurement scandals that have greatly disadvantaged the country while enriching a select few who have evaded accountability and responsibility.

The New Generation Patrol Vessel (NGPV) project was to be Malaysia’s first step into naval modernisation but instead became one of the best-known defence procurement scandals of the past three decades.

It all began in 1991 when the Royal Malaysian Navy’s shipyard in Lumut was privatised by the government and sold to a consortium led by Penang Shipbuilding and Construction Sdn Bhd (PSC) for a reported sum of RM300 million.

PSC was a subsidiary of PSC Industries Bhd, a company controlled by then politically well-connected Tan Sri Amin Shah Omar Shah. The naval dockyard was then known as Naval Dockyard Sdn Bhd, or PSC-ND.

Apart from PSC, which held a 40% stake in PSC-ND post-privatisation, other shareholders were Perstima Industries Sdn Bhd (30%), Lembaga Tabung Angkatan Tentera (15%), Suria Barisan Sdn Bhd (8%) and Permodalan Perak Bhd (7%).

At the time of privatisation, the government planned to procure a total of 27 NGPVs to replace ageing patrol vessels and expand the fleet, phasing out the existing 18.

The NGPV was based on the Meko 100 design by German naval engineering group Blohm + Voss.

The budget for the whole programme was RM24 billion, but it did not meet expectations as only a total of six vessels were procured and completed before the government scrapped the programme.

This was because seven years after the contract had been signed for the first batch of six vessels, none had been completed.

The original cost of the six NGPVs was budgeted at RM5.35 billion and the programme was cancelled by the government because of the delays as well as PSCI’s inability to complete the first six vessels due to the financial difficulties that it faced.

PSCI’s financial statements as at Dec 31, 2004, showed that it had accumulated losses of RM131.6 million while its total current liabilities exceeded total current assets by RM892.02 million.

The group had also defaulted in repayment of loans and other bank borrowing facilities, amounting to RM654.99 million as at the date.

PSCI had to dispose of its stake in PSC-ND to Boustead Holdings Bhd to settle some of the debts it owed. After several boardroom tussles, Boustead took control of PSCI, which became Boustead Heavy Industries Corp Bhd (BHIC), while PSC-ND was renamed Boustead Naval Shipyard Sdn Bhd (BNS).

BHIC and BNS managed to complete the six NGPV that were in various phases of completion at the Lumut dockyard, but only after the government injected another RM1.4 billion into the project, pushing the cost up to RM6.75 billion.

In 2007, while the NGPVs were being completed and delivered by BNS, the government was planning to embark on another batch of patrol vessels, then known as the Second Generation Patrol Vessels (SGPV) — Littoral Combat Ships (LCS) programme.

In 2007, BNS and Datuk Seri Najib Razak — who was defence minister at the time — discussed the construction of six LCS. In January 2008, the Ministry of Defence (Mindef) applied to the Ministry of Finance (MoF) to issue a letter of intent (LoI) to BNS for the LCS project.

Owing to budgetary constraints and other technical issues, however, the issuance of the LoI was postponed to October 2010, by which time the defence minister’s post was held by Datuk Seri Ahmad Zahid Hamidi.

The Economic Planning Unit had earmarked a budget of RM9 billion for the six vessels, with RM5.96 billion to be allocated under the 10th Malaysia Plan (2011 to 2015) and the balance of RM3.04 billion under the 11th Malaysia Plan (2016 to 2020).

On May 26, 2011, the navy held a briefing with Mindef on the design and equipment of the LCS, and selected the SIGMA design by Dutch naval engineering group Damen Schelde.

Zahid initially agreed to the choice. By July 11, 2011, however, he had had a change of heart and insisted on the Gowind design by the French Naval Group (DCNS) on the advice of BNS. BNS subsequently issued a LoI to DCNS to begin the process for the conceptual design and design review.

Laksamana Tan Sri Abdul Aziz Jaafar, the navy chief at the time, was insistent that the SIGMA design was better suited for the navy’s requirements. However, his objections and pleas to both Mindef and then prime minister Najib fell on deaf ears.

BNS then continued with the Gowind design with DCNS for the LCS project. Between December 2011 and January 2014, MoF paid BNS a total of RM1.3 billion as down payment on the RM9 billion contract.

In June 2014, the government finalised the LCS contract and agreed to pay BNS RM1 billion per year over the period from 2015 to 2019.

The rest of the payments would be made between 2020 and 2023.

Even though the government had paid BNS a total of RM5.94 billion, up to May 2019, only 53.29% of the programme had been implemented against the scheduled 74.73%. At the time, BNS was 23 months behind schedule in the construction of the LCS.

On July 16, 2019, BNS proposed that the contract value of the six LCS be increased by RM1.42 billion. BNS also proposed that the delivery of the first vessel, KD Maharaja Lela, be deferred to February 2022, compared with April 2019, according to the original contract.

The delays and proposal for an increase in contract value prompted the Pakatan Harapan government to undertake an investigation into the overall management of the project.

According to the declassified report prepared by the Special Investigation Committee on Public Governance, Procurement and Finance on the LCS, BNS’s financial performance was weak, with accumulated losses of RM462 million in 2018, and a negative equity of RM332 million.

As at May 31, 2019, BNS’s total creditors stood at RM801.11 million, with the LCS project accounting for RM733.55 million. As at May 31, 2019, the company had total debts of RM956.86 million.

Apart from its weak financial position, the overall management of the contract by Mindef was poor, the committee observed.

On Aug 16 this year, Tan Sri Ahmad Ramli Mohd Nor, the former managing director of BNS, was charged with three counts of criminal breach of trust in relation to the LCS project, involving the fraudulent approval of payments amounting to RM21.08 million to three companies, without the requisite approval from the BNS board.

He pleaded not guilty.

Around the time that the NGPV was being constructed in the early 2000s, the government decided to purchase two Scorpene submarines from DCNS of France and Navantia of Spain for €1 billion.

Armaris, a joint venture between DCNS and Thales — a defence system contractor based in France — was to be the prime contractor for the sale, while Navantia would serve as a design and industrial contracting partner.

Thales then swapped its direct investment in Armaris for a stake in DCNS in 2007. Since 2011, Thales has held a 35% stake in DCNS, which had been renamed Naval Group.

In 2006, allegations of corruption relating to the submarine deal emerged, following the murder of 28-year-old Mongolian model and interpreter Altantuya Shaaribuu by two officers of the Special Branch of the Royal Malaysian Police, Azilah Hadri and Sirul Azhar Omar.

Both Azilah and Sirul previously served as bodyguards of Najib, who was defence minister between 1990 and 1995, and again between 1999 and 2008.

Azilah and Sirul Azhar were found guilty of the murder of Altantuya.

Sirul Azhar sought refuge in Australia, while Azilah is in death row at the Kajang Prison, waiting for his sentence to be carried out.

In 2006, Abdul Razak Baginda — a close associate to Najib and the lobbyist for the submarine deal — was charged with abetting the murder of Altantuya, but acquitted in 2008 after the prosecutors could not establish a prima facie case against him. However, incriminating statements emerged against Razak Baginda during the hearing of a civil suit case brought by Altantuya’s father, Dr Shaaribu Setev.

During the hearing, Supt Tonny Anak Lunggan, the investigating officer in the murder of Altantuya, said on Nov 3, 2016, DSP Gan Tack Guan had contacted him by phone to inform him that a police report had been lodged by Altantuya at the Tun HS Lee police station at 1.08pm on Oct 19, 2006.

Tonny testified in court that in the report, Altantuya mentioned that if something were to happen to her, the police should look for Razak Baginda.

Altantuya was Razak Baginda’s girlfriend and acted as a French translator for Perimekar Sdn Bhd, the company controlled by him.

Upon hearing that Perimekar received €114 million (then RM570 million) in commission from the submarine deal, she reportedly harassed Razak Baginda and Najib for a share of the commission.

On Oct 18, 2006, the remains of Altantuya were found in a forested area in Shah Alam. She had been blown to pieces with C4 explosives, which can be obtained only with the permission of the defence minister.

While no charges were brought in Malaysia over the alleged corruption in the deal, the office of Naval Group in France was raided in 2010.

Numerous documents that supported claims of illegal payments and established a possible link between the murder of Altantuya and the commissions were seized by the French authorities, which subsequently launched an investigation.

In 2016, Najib and Razak Baginda were named by the French magistrates as likely bribe recipients and the focus of the investigation. The latter was placed under formal investigation in August 2017. The Malaysian government, then under the leadership of Najib, denied any corruption was involved.

Former Thales International Asia head Bernard Baiocco and former president of DCNS International (Naval Group) Dominique Castellan are also under formal investigation in regard to the commissions paid.

Razak Baginda admits receiving €30 million, but maintains that it was for his lobbying services and that no monies were paid to government officials.

In April this year, a French judge charged Thales with complicity in bribery over the submarine deal. According to AFP, which broke the story, a total of nine defendants, including Thales, were charged in France. They included Philippe Japiot, former chairman of DCN International, and Jean-Paul Perrier, a former Thales CEO, along with two other former executives. The investigations were completed in January this year. All four deny any wrongdoing.

The Malaysian government has consistently maintained that the contract was free of corruption.

While there been no updates on the procurement of three offshore patrol vessels (OPVs) for the Malaysian Maritime Enforcement Agency (MMEA), the writing on the wall points to a delay in the project, given that the contractor of the project — TH Heavy Engineering Bhd (THHE) — fell into Practice Note 17 (PN17), or financially distressed status, in April 2017.

Surprisingly, however, Mindef and MoF still saw fit to award THHE a RM738.9 million contract for the supply of the OPVs to MMEA.

The contract was awarded to THHE Destini Sdn Bhd — a 49:51 joint venture (JV) between THHE and Destini Bhd — in January 2017.

The initial schedule was for three OPVs to be delivered in 2020 on a staggered basis. After an 18-month extension by the government, however, they are now slated for delivery this month.

However, this seems like an optimistic target.

For the first quarter of its financial year ending Dec 31, 2022, THHE suffered a net loss of RM5.58 million on the back of RM394,000 in revenue. Its cash and cash equivalents amounted to only RM8.48 million, while it had short-term debt commitments of RM151.87 million and accumulated losses of RM645.33 million.

In April 2021, Destini sold its stake in THHE Destini to THHE for RM121,131.

The mismanagement of Malaysian defence procurements does not end with the purchase of navy vessels — the army is also not immune to it.

Take, for example, the RM300 million contract for the supply of six MD530G light scout attack helicopters.

Ordered in 2016 to fulfil the army’s Aviation Unit needs for light scout attack helicopters, following the Lahad Datu incursion by armed insurgents, the helicopters never made it to Malaysia as per the original contract.

According to news reports, the terms of the contract, which was signed in November 2016, stipulated that the helicopters were to be delivered in two batches between 2017 and 2018.

In the end, the six Little Birds, as the helicopters are known, made it to Malaysian shores only early this year.

The contract was awarded in 2015 to a company called Halaman Optima Sdn Bhd for RM321 million. The deal was announced by then defence minister Datuk Seri Hishamuddin Hussein in January 2016.

In 2017, Destini — the same company that formed the JV with THHE for the OPV contract before selling it back to the latter — acquired a 70% stake in Halaman Optima from Datuk Harrison Hassan and Datuk Roslee Mohamad Robat for RM5.5 million.

It is unclear who Harrison and Roslee are, and how they managed to clinch the RM321 million contract to supply the helicopters.

By June 2019, Mindef had already paid more than RM112.65 million as initial payment for the helicopters, which still had yet to be delivered by then. This led Mindef to lodge a report with the Malaysian Anti-Corruption Commission (MACC).

According to a Bernama report in June 2019 — citing sources in Mindef, which was then led by Pakatan Harapan’s Muhamad Sabu — the terms of the purchase agreement did not safeguard the interests of the government. It included clauses such as “the contract is valid for two years, or until the local company appointed as the agent successfully delivers the helicopters”.

The approval for the procurement of the military assets was also not done according to set procedures, said the sources, who alleged that the contract was approved without any military specifications — a mandatory requirement for the purchase of military assets.

In July, Law Minister Datuk Seri Wan Junaidi Tuanku Jaafar said the Attorney-General’s Chambers had decided to take no further action over alleged corruption in the purchase and delayed delivery of the helicopters.

In May 2019, two top executives of a unit of DRB-Hicom Bhd, Defence Technologies Sdn Bhd (Deftech), were arrested by the MACC in connection with a graft probe of a RM17 million defence contract.

According to news reports, between 2014 and 2017, the suspects were alleged to have received hundreds of thousands of ringgit from several companies in relation to the award of the contract to supply equipment for the Deftech AV8 Gempita and ACV-300 Adnan armoured combat vehicles.

The two types of armoured combat vehicles are produced by Deftech in Pekan, in collaboration with the Turkish defence company FNSS.

MACC had said then that it would be making more arrests in connections with the case. The agency has made no further announcements so far, however, regarding the investigations.

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