This article first appeared in The Edge Malaysia Weekly on August 22, 2022 - August 28, 2022

WITH Boustead Naval Shipyard Sdn Bhd’s (BNS) weak financials, it is a wonder that the ailing company was even tasked with the RM9.13 billion Littoral Combat Ship (LCS) development project.

The recently declassified report of the Special Investigation Committee on Public Governance, Procurement and Finance, or Jawatankuasa Siasatan Tadbir Urus, Perolehan dan Kewangan Kerajaan (JKSTUPKK), on the procurement of six LCS states: “The investigation committee found that a comprehensive due diligence was not undertaken by the Ministry of Defence on BNS, and based on this information, BNS’s ability to undertake the building of the LCS [vessels] is very doubtful.”

The report also says: “To accommodate cash flow and finance the construction of the LCS [vessels], BNS secured loans from banks and its parent Boustead Holdings Bhd. Until May 31, 2019, BNS’s debts totalled RM956.86 million (comprising short-term borrowings of RM354.96 million and long-term borrowings of RM601.9 million). RM50 million was obtained from Boustead Holdings … An analysis of the debt ratios found a worrying trend.”

BNS is 20.77%-controlled by Boustead Holdings Industries Corp Bhd (BHIC), 68.85% by Boustead Holdings, with armed forces fund Lembaga Tabung Angkatan Tentera (LTAT) having 10.38%. Boustead Holdings, meanwhile, controls 65% of BHIC.

While the details of the financial institutions involved in providing BNS with loans were blacked out in the declassified report, industry sources say the top three lenders are Malayan Banking Bhd, development financial institution Bank Pembangunan Malaysia Bhd and Affin Bank Bhd, accounting for close to RM612 million, or 64% of BNS’s total debts.

Affin Bank is part of the same group as it is 33.08%-controlled by LTAT, and 20.85% by Boustead Holdings.

Much of these issues came to light after the Public Accounts Committee (PAC) earlier this month issued a report on the RM9.13 billion LCS procurement by BNS and questioned the lax management and lack of governance, and how the government has sunk in RM6.08 billion with nothing to show.

JKSTUPKK sheds more light on the issues at BNS. The government approved RM1.35 billion, or 14.95% of the contract value of RM9.13 billion, as an advance to BNS. According to the Ministry of Defence’s files, four advances were made to BNS, the first two being RM500 million, and the following two to the tune of RM200 million and RM164.9 million.

According to the report by JKSTUPKK, the advance of such large amounts from the government is unusual. And BNS was only required to obtain a bank guarantee of RM500 million for the first advance, and exempted from securing any bank guarantees for the remainder RM836.9 million in advances from the government.

Government regulations have it that the maximum advance for a project is pegged at 25% of the project value or RM10 million, whichever is less, which raises the question of how RM1.36 billion was dished out to BNS.

BNS, according to the report, is said to have sought RM1.8 billion, or about 20% of the contract value, in advances from the government.

“This [need for such high advances] proves that the company [BNS] had limited financial capacity to undertake this procurement,” the report says.

How BNS obtained the RM1.36 billion advance with its weak balance sheet is questionable. For its financial year ended December 2018, it suffered an after-tax loss of RM252.38 million on the back of RM1.06 billion in revenue for its financial year ended December 2018 (see table).

As at end-2018, BNS had total assets of RM1.62 billion and total liabilities of RM1.96 billion, of which RM1.26 billion, or 64.28%, were current liabilities, or due within a year. During the year in review (FY2018), BNS’s current assets were pegged at RM1.23 billion.

For the year in review, BNS had accumulated losses of RM461.9 million. And its operating costs for FY2018 was an astronomical RM1.32 billion.

According to the report, LCS project progress reports indicate that financial mismanagement and cash flow issues at BNS resulted in a delay in payments to suppliers, causing the construction of the ships at the dockyards to come to a standstill. Until end-May 2019, BNS owed creditors RM801.11 million, of which RM733.55 million, or 91.67%, was a result of the LCS project.

The report adds that the negotiations to finalise the cost of the contract between BNS and the Ministry of Defence was unrealistic and long overdrawn. To finalise the RM9.13 billion contract value, as many as four rounds of negotiations were held between BNS and the Ministry of Defence.

The negotiations commenced on Oct 15, 2012, with BNS’s price tag for the six LCS at RM10.52 billion. After the fourth round of negotiations on July 10, 2013, or nine months after cost discussions commenced, the price was knocked down to RM9.13 billion.

When the idea for BNS to build six LCS was pitched in 2007, the selling points were to reinforce the Royal Malaysian Navy’s armada, enhance the capabilities of BNS’s shipyard and give its vendor development programme — involving 2,000 Bumiputera suppliers — a shot in the arm.

None of this happened. The six LCS were supposed to be delivered on a staggered basis, with the first ship in 2019 and the final one in 2023.

Yet, despite the government’s injection of RM6.08 billion into the LCS project, BNS has yet to deliver even the first vessel, which is only 44% completed. Four of the other six vessels are at various stages of completion, between 16% and 35%, while work on the sixth ship has yet to commence.

The whole fiasco is ironic as BNS was known as PSC Naval Dockyard Sdn Bhd in the late 1990s, and was a unit of publicly traded PSC Industries Bhd (PSCI), a company controlled by then high-flying businessman Tan Sri Amin Shah Omar Shah.

In September 1998, PSCI was awarded a RM5.4 billion contract to build six offshore patrol vessels (OPVs) for the navy — part of a larger deal to build 27 OPVs for RM25 billion.

PSCI bungled up the RM5.4 billion OPV contract, however, and fell into the cash-strapped, Practice Note 17 category. Boustead Holdings, led by LTAT (which controls 59.42% of its equity), was the white knight, taking 65% equity interest in PSCI and restructuring it into BHIC.

It was recently revealed by the PAC report that RM400 million of the RM6.08 billion sunk in by the government was used to settle PSCI’s long-standing debts.

With its chequered history and weak balance sheet, how BNS secured such a large, lucrative and important contract is anybody’s guess.

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