NOW that the cabinet has decided to resume the littoral combat ship (LCS) project with the Boustead Group staying on as the contractor, great pains must be taken to ensure the project does not fail a second time. Otherwise, it would incur the curses of 136,000 serving military personnel, the real stakeholders in the scheme of things.

At all levels of project governance – Putrajaya, Mindef, Armed Forces Fund Board, Boustead Holdings, Boustead Heavy Industries Corporation (BHIC), and Boustead Naval Shipyard (BNS) which is also the project contractor – there must be change in the way things are done. Doing the same thing over and over again and expecting a different result is insanity, and Albert Einstein would agree.

Let’s revisit some of the major problems of the past, foremost of which lies in the variation orders, which led to protracted negotiation, procrastination on the part of the then defence minister in agreeing to the project extension of time (EoT), obtaining bank loans to cover cost to pay vendors, more procrastination on the part of ministers after the change of government, which led to ridiculous cost overrun.

Simply put, had the stakeholders stuck to the original plan and the original specifications of the LCS, today all six ships would have been built and delivered.

The problem started when the navy insisted on three major changes to equipment systems that were crucial to ship design – more than three years after designing, work, and materials-take-off had commenced. Work had stalled to allow for redesigning, engineering recalculation, and re-procurements. Obviously, this entailed additional costs that escalated with each month of delay.

Until early 2018, the EoT could not be approved while the cost of the variations was still under negotiation. The change of government in May the same year caused further delay.

Meanwhile, there was an unfair accusation of cost overrun. Cost overrun implies the contractor is inefficient.

A variation order has implications of budget overrun exceeding the RM9 billion allocated, and it should be appropriately termed as such. Work could not proceed without Mindef and the Finance Ministry first approved the variation orders. In the meantime, BNS had to service its loans with vendors chasing for payments.

While the work stalled, monthly fees of up to six figures had to be paid to the French consultants to stay idle. Local engineers, managers, technicians, and highly skilled workers had to be paid too while indecisive politicians procrastinated. Many were paid tens of thousands a month doing nothing since work came to a halt.

Going forward, the revival of the LCS project has to begin with a new management and project team. Renegotiations make take place with sub-contractors, suppliers, vendors, and the French consultants. All will need to be persuaded to take a haircut.    

Maintaining the status quo has many advantages. The same project sub-contractors will be able to continue work efficiently and more promptly without being held back by the long learning curve facing a newly appointed replacement. BNS has a ready workforce that is experienced in the work.

With project funds forthcoming, BNS and BHIC should be able to obtain bridging finance from banks to pay off some debts and to motivate sub-contractors to resume work. Creditors and parties that initiated the winding up petition against BNS will now have reason to reconsider their debt recovery action, allowing time indulgence for payments from the government to flow through to pay debts owing to them. 

The resumed LCS project is likely to be profitable. Hence, both BNS and BHIC that have taken in the variation orders costs in past financial years but not permitted to recognise a single ringgit of revenue, will see a bonanza profit beginning this year. 

Both companies would be able to write back the provisions they made on the LCS Project. BHIC will also have a basis to write back their write-off of their investment stake in BNS. They should also be able to look forward to writing back the significant provisions that they made in recent years on the LAD (liquidated ascertained damage) for the submarines contract. They have recently been awarded further contracts for the submarines.

The LAD claim is not entirely the fault of these contractors who have proven to be reliable and proficient in their work. It is certainly not the KPI of the government to make unfair profit by penalising the contractors more so as they are owned by LTAT.

With this new lease of life, and given the opportunity for vindication, the new team in BNS and BHIC must tighten up management and prove that they are worthy of their pole position in the Malaysian armament industry. Slippages, inefficiencies and any malpractice whatsoever that occurred in the past must not be tolerated going forward. – May 13, 2021.

* Captain Dr Wong Ang Peng is a researcher with an interest in economics, politics, and health issues. He has a burning desire to do anything within his means to promote national harmony. Captain Wong is also a member of the National Patriots Association.