This article first appeared in The Edge Malaysia Weekly on April 3, 2023 - April 9, 2023

THE spotlight was on Datasonic Group Bhd last week, after Minister of Home Affairs Datuk Seri Saifuddin Nasution revealed in parliament in a written reply to a question raised by Bagan member of parliament Lim Guan Eng, that seven out of nine contracts the company had secured from the ministry were through direct negotiations.

The contracts, worth a total of RM1.1 billion, were awarded between 2016 and 2022. They include the extension of the passport chip supply contract.

Datasonic — which has been in limbo as the new government has yet to raise the passport supply quota to cope with rising demand — explained that most of the public contracts secured through direct negotiations, as mentioned by the home minister, were initially awarded through open tender.

Datasonic cites the supply of the polycarbonate-based national identity card (MyKad) in 2012 as an example. It secured the contract through an open tender, after beating its competitors in terms of quality and price, the company says.

“This helped the government to enjoy significant savings. It has also helped to resolve the past quality issues, such as [the] card body splitting, high failure rate of reading the MyKad chip and so on.

“With the polycarbonate construction and the provision of a Tier 1 highly secured chip equipped with our new operating system, the rejection rate was significantly reduced, with significant cost savings to the government,” Datasonic said last Friday in a statement.

In 2022, the government awarded Datasonic a 12-month contract for the supply of the MyKad as part of its plan to transition to a new design and technology. The company explains that due to the nature of the project, going through a long tender process might not have been effective and timely.

“Therefore, we were engaged through a direct negotiation process. It has been a common practice that our price negotiations always result in a 5% to 10% price reduction. Through this procurement practice, the government is paying a lower price for a reliable vendor with assured product quality,” says Datasonic.

The company points out that the direct negotiation approach proved beneficial for both parties during the pandemic, as the government was able to ensure that the supply chain was not affected while providing top-notch security features for its citizens.

Datasonic also says that its involvement with the passport project started when it secured the contract to supply the passport polycarbonate data page, and the personalisation thereof, in 2012 through open tender.

It explains that it won the contract through an “innovative value proposition” of zero capital expenditure with the government only paying for passports successfully personalised and issued to the public (pay-per-good-passport-issued).

Nonetheless, it managed to expand its contract scope from supplying only the polycarbonate data page for the passport to also supplying the chips. “It is a natural progression that the chip, which was embedded in the back cover of the passport, be migrated into the polycarbonate data page,” it says.

In 2015, Datasonic proposed to the government to supply the chips and undercut its predecessor by 15%. This was then followed by the contract to supply the passport booklet, which the group secured through direct negotiations.

During the Covid-19 pandemic, Datasonic was granted an extension of its passport chip supply contract. It says the previous government gave the extension at the time to minimise the impact of the Movement Control Orders during that period.

“The contract (original supply contract) was meant for 2.5 million chips per year. However, between March 2020 and March 2022 ... [we received] only 10% of the order ... from the government as compared to the ordinary years. The whole production line was jobless,” says Datasonic, noting that it estimated it would take about 6½ years to reach its supply ceiling of 12.5 million.

Nonetheless, sources tell The Edge that the Immigration Department has used up almost all of the 12.5 million chips as per the December 2015 contract with Datasonic, which was extended in Nov 18, 2021, for 24 months to Nov 30, 2023.

It is understood that when the contract was extended, the number of chips to be supplied was not increased.

“There was a huge surge in demand for passports in 2022, and the supply was used up faster than anticipated. Already, some centres, especially in Borneo, have experienced a shortage of passports,” says an Immigration Department officer who declines to be named.

When contacted by The Edge to find out how many of the 12.5 million units of passport chips had been delivered as at end-March 2023, Datasonic said it was reaching the contract supply limit, without divulging the details.

“We are working with the government for a renewal or extension to avoid a disruption,” it said.

The source reveals that previously, Datasonic only had to deliver 200,000 units of passport chips per month to the Immigration Department. However, the department ordered 250,000 in January 2023 and 300,000 in February and March 2023, the source says.

“Based on the current forecast of deliveries of the chips, the contract will reach its supply ceiling by May. Without a contract, Datasonic or any other supplier would not be able to supply the chips to the Immigration Department for passports,” adds the source.

Nevertheless, Datasonic confirms that it has been working with the government since the end of last year to secure the chip supply until November 2023, when its contract ends.

The security document producer highlights that the post-pandemic global supply chain is volatile and cannot be taken for granted. “Many materials, especially chips, are customised with specific country profiles due to security reasons. The manufacturer produces upon receiving an order … We have been taking proactive action to make material orders ahead of schedule, even when the official order has not been approved.

“So long as this is under our contract period, we [will do] our best to avoid the adverse situation you mentioned. We experienced the passport shortage crisis back in 2016; none of the parties, be it the public, government or the vendors, benefited in that situation,” says Datasonic.

Currently, there are still about four million expired passports, according to the company’s estimates.

Apart from the contract to supply passport chips, Datasonic also supplies the Immigration Department with passport documents, as well as the polycarbonate bio­data page, making it the sole contractor that produces the Malaysian passport. The total value of the three passport contracts is RM844.23 million.

Datasonic has also secured the contract to supply the foreign worker identification cards, called i-Kad, for 36 months starting Nov 1, 2022, worth RM140 million.

The group was also awarded the contract to supply raw MyKad, MyTentera and MyPoca identity cards and consumables worth RM50.12 million from Feb 15, 2022, to Feb 14, 2023.

Datasonic benefited from the surge in demand for passports last year. In the nine-month period ended Dec 31, 2022 (9MFY2023), the group registered a net profit of RM53.67 million, compared to a net loss of RM3.12 million in the preceding period.

This came on the back of a 192% higher revenue of RM239.8 million during the period compared with RM82.09 million in the preceding financial period. The higher revenue was derived from the larger supply of smart cards, passport and personalisation services during the period, the group says.

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