Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020

THE construction of six littoral combat ships (LCS) for the Royal Malaysian Navy (RMN) by Boustead Heavy Industries Corp Bhd (BHIC) has been beset by delays. The Ministry of Defence awarded the project to BHIC in 2011 and at least two vessels should have been built by now.

The government is mulling a move to salvage the project, either by instructing BHIC’s shipbuilding arm Boustead Naval Shipyard Sdn Bhd (BNS) to complete two vessels, or to have them completed by the Naval Group of France through a deed of assignment.

The Naval Group, formerly known as DCNS, is the owner of the Gowind 2000 corvette design, which the LCS is based upon. The group is also the technological partner for BNS for the LCS programme, but it is not involved in the construction of the vessels, as the government wanted the project to be built entirely in Malaysia.

What caused the delays?

According to industry sources, the delays stem from BNS’ inability to come up with a good schematic design plan for the construction of the vessels. The schematic plan must be detailed and take into consideration all aspects, from engineering to work flow, so that the construction phase can be done smoothly.

“The project faced multiple delays because they [kept making mistakes and encountering problems] while constructing the ships, and then they had to go back to the [drawing board],” says an industry insider, who has undertaken jobs for the Malaysian Armed Forces, including procurement and maintenance and repair.

BHIC did not respond to questions from The Edge on what caused the delays.

Last Monday, Senior Minister (Defence) Datuk Seri Ismail Sabri told parliament that the LCS programme was facing delays and cost overruns, and that the government was considering salvaging the programme, as well as imposing fines on BNS.

He said two of the six LCS units should have been delivered to the RMN, but until July 31, no vessel had been completed, and that the overall status of the entire project stood at 56.67% completed, as opposed to the original schedule of 85.73%.

This means the project is facing a delay of 29.06% or 31.1 months.

In terms of individual vessels, five are under construction, with the highest completion level at 59.79%, while construction has not started on the remaining vessel, said Ismail. He added that a special committee had been tasked to review the entirety of the project, including from the perspective of integrity.

The report on whether to continue or terminate the project will be presented to the Cabinet in the near future, he added. Ismail also acknowledged that a report has been filed with the Malaysian Anti-Corruption Commission (MACC) to investigate the project delays and cost overruns.

The delay is not the first. In 2019, then minister of defence Mohamad Sabu said the government would fork out an additional RM1.4 billion to complete the project, having paid RM6 billion prior to that.

BHIC admits that the programme has been facing delays.

In its 2019 annual report, chairman Tan Sri Ramlan Mohamed Ali said the group was working hard to deliver the ships and was focused on reducing its operational costs and completing the projects in accordance with the specifications.

In the same report, CEO Sharifuddin Md Zaini Al-Manaf said the construction of the LCS, a “first-in-class” ship, came with huge challenges that the group continued to discover and manage.

“For the LCS programme, we have had to face a series of challenges over the past few years. The learning curve for the project team has been very steep. We have had to build our capabilities while delivering key project milestones in carrying out the project.

“This proved to be achievable but very challenging,” he said.

He added that the group had to accommodate variation orders, some of which had an impact on cost and time.

“We have engaged and will continue to consult with various stakeholders to obtain the final approval for these variation orders. Given the scale and complexity of the LCS programme, it is not unusual to have variation orders involving the ship design and equipment.”

BHIC recorded a loss after tax (LAT) of RM116.6 million for the financial year ended Dec 31, 2019 (FY2019), on the back of RM168.9 million of revenue. The losses stemmed from lower maintenance, repair and overhaul (MRO) activities for both the defence and commercial segments and higher impairments of RM57.9 million.

The group’s results were compounded by negative contribution from associates amounting to RM57.7 million, as well as higher finance cost of RM16.9 million in FY2019, primarily due to the drawdown of borrowings for working capital purposes, it said in its 2019 annual report.

“Our associates’ results were impacted by adjustments made pursuant to changes in the Malaysian Financial Reporting Standard 15 (Revenue from Contracts with Customers) and cost overruns in the LCS programme.

“However, the profits from the progress of the LMS (Littoral Mission Ship) Programme helped cushion the associates’ results. MRO works undertaken by the associates for seven RMN vessels in FY2019 were carried out on time and at cost,” says Sharifuddin when commenting on BHIC’s FY2019 results in the annual report.

Not only is the LCS programme is in limbo following Ismail’s statement, but BNS itself has also been having a difficult time.

On July 3, BHIC announced that BNS had been served with a winding-up petition by MTU Services (Malaysia) Sdn Bhd. In the petition, MTU alleged that BNS owes it a total sum of RM56.04 million for equipment supplied and services provided.

A check with the Companies Commission of Malaysia shows that BNS had sizeable revenue but made huge losses. In 2018, BNS recorded net loss of RM255.55 million, on the back of RM1.073 billion of revenue.

BNS is majority-owned by Boustead Holdings Bhd, which has a 68.84% stake. BHIC owns a 20.8% stake in BNS through its direct subsidiary Perstim Industries Sdn Bhd. The remainder is owned by Lembaga Tabung Angkatan Tentera (LTAT), with the Ministry of Finance holding one share.

Looking back at BNS’ history, how it came to be part of the Boustead group was also due to the failure of a contractor in delivering navy vessels.

BHIC was created in 2005 when the government forced a merger between Boustead’s commercial shipbuilding companies with Penang Shipbuilding and Construction-Naval Dockyard Sdn Bhd (PSC-ND), after the latter failed to deliver the New Generation Patrol Vessels (NGPV).

PSC-ND was part of the stable of companies owned by entrepreneur Tan Sri Amin Shah Omar Shah. In 1998, the government awarded the contract for the construction and commissioning of six offshore patrol vessels to PSC-ND as the prime contractor, using the Blohm + Voss MEKO 100 model.

The contract cost was around US$270 million per vessel. The NGPV programme was to replace RMN’s ageing patrol boats that had been in service since the 1960s. A fleet of 27 vessels was envisaged to be commissioned into service with the RMN.

By 2005, the Public Accounts Committee had brought up the issue of delays in the delivery of the six NGPVs. It was found that PSC-ND required additional funds of around RM120 million to complete the programmes.

It was also reported that 40 vendors were owed RM180 million by PSC-ND.

These issues and the fact that the programme risked being a total failure forced the government to step in and reorganise PSC-ND, with Boustead taking a 37% stake. With Boustead as the largest shareholder, it merged PSC-ND with its own commercial shipbuilding business to form BHIC.

BHIC managed to complete the four vessels contracted to be built at the Lumut dockyard by PSC-ND, with deliveries starting in 2006.

Meanwhile, although the LCS programme has been beset with delays, BHIC did manage to deliver the LMS programme on time to the RMN. However, this is because the LMS was not built by BHIC, but instead built at the Wuchang shipyard in China by its partner China Shipbuilding and Offshore International Co Ltd.

Of the four ships under the LMS programme, two have been completed, with one — KD Keris — commissioned and put into service with the RMN. The other completed vessel, KD Sundang, was to have been commissioned in April, but that had to be postponed to October, due to the Covid-19 pandemic.

 

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