The Littoral Combat Ship Project: How It Went Wrong, Explained

In 2011, the government under Najib Razak's administration, approved the Navy’s request for six littoral combat ships or LCS in a deal worth at least RM9.13 billion. It was the most expensive defence contract in history. Ahmad Zahid Hamidi was then minister of defence. 

In 2013, the contract was awarded to Boustead Naval Shipyard Sdn Bhd (BNS) without an open tender being called.

More than 8 years later none of the ships have docked on the shores of Lumut. The delivery of the ships was delayed from 2017 to 2019. While five ships were supposed to be delivered by August 2022, the PAC have found that the completed detailed design of the ships is still yet to be seen, even though 66.64% (or RM6.083 billion) of the RM9 billion has been paid to BNS.

Investigations by the Public Accounts Committee into the RM9 billion project show red flags; from Boustead Naval Shipyard, a company in a critical financial state; unheeded advice from the Royal Malaysian Navy, who did not get to choose the design of the ship that they would be using; and a middleman, who marked up the project cost by up to 4 times. On 11 August 2022, the MACC handed over its investigations on the project to the Attorney-General Chambers, with recommendations of charges to be filed against individuals linked to the project.

In this post, we break down the PAC's investigations into the LCS project.

1. What is an LCS, and why do we need it? 

The LCS, short for Littoral Combat Ship, performs a wide range of missions including patrolling and threat deterrence such as surface warfare, anti-submarine warfare, etc. 

Procuring the LCS is also in line with concerted efforts over the past two decades to modernise the navy. This agenda is outlined in the #15to5 Transformation Programme which aims to reduce the use of 15 different classes of ships to only 5 in order to build an efficient fleet.

In 2011, the Royal Malaysian Navy (RMN) Chief Laksamana Tan Sri Dato’ Sri Dr. Abdul Aziz Jaafar stated that the navy badly needed the LCS because it had “surface and undersea” capabilities unlike smaller offshore patrol vessels (OPV).

2. Payment made, but where’s the ship?

RM6.083 billion (66.64% of the total contract) had been paid to BNS. As of August 2022, five ships should’ve been delivered. Till today, no vessel was delivered.

Payments for the ships were made based on the progress of items sourced, rather than the progress of the project itself. The progress of payments exceeded the actual progress of the first vessel by 21.1%, according to the PAC.

3. Government ignored BNS red flags

Because BNS was suffering losses, the government approved an advance payment worth RM1.36 billion which subsequently delayed the contract’s signing.

This went against the Treasury Circular Bill 5 which states that only 25% or RM10 million (whichever is lower) should be paid as advance payment. The Finance Ministry under Najib’s purview however made an exemption for the LCS project.

The PAC also noted there were telling signs that BNS’ financial performance was in a critical state due to abuse of power. Here’s a simple summary:

• Losses suffered by BNS in 2015, 2016 & 2018 totalled RM462 million

• BNS’s loans from financial institutions totalled almost RM1 billion

• Other debts BNS had accrued were more than RM60 million

• BNS’s LCS-related debts were worth about RM733 million

• • BNS’s failure to pay 164 OEMs triggered a stop work order in April 2018 (*OEM: Original Equipment Manufacturers). 

4. A ridiculous side agrement 

After negotiations between BNS and MINDEF, the total value of the project was capped at RM9.128 billion by the Economic Planning Unit (EPU). In order to comply with that cap, BNS had to remove some items, one of which is a RM121 million Integrated Logistics Support (ILS) system.

However, the PAC found out that a separate agreement was signed between BNS and MINDEF for the ILS segment which was previously taken out. This contract was signed outside the scope of the LCS project, using MINDEF’s budget. 

Hence, the estimated total value of the project became RM9.728 billion, instead of the initial RM9.128 billion.

"Again, the government or MINDEF signed another side agreement with BNS, whereby this ILS was again being put into the project. And this round, not at the cost of RM121 million, but at the cost of RM600 million, which is fourfolds of the original price," YB Wong Kah Woh, Chairman of the PAC tells BFM's Morning Brief.

5. Why need a middleman? 
   

The LCS project had many parties involved, including middleman company Contraves Advanced Devices Sdn. Bhd. (CAD), a joint venture between Rhenmetall Air Defence AG (RAD) and Boustead Naval Shipyard (BNS).

Due to a weak contract that BHIC’s board of directors agreed to, Rheinmetall fully managed CAD. This prevented internal audits from being done on CAD, while Rheinmetall could conduct business transactions without consulting BHIC. 

PAC found that “the involvement of CAD resulted in a much higher cost than expected”. BHIC CEO, Sharifuddin Md Zaini Al-Manaf also questioned CAD’s role in his PAC testimony, claiming that it caused project costs to mark up 3-4 times. 

According to the PAC report, CAD has received 12 Letter of Awards totalling RM3.3 billion.

6. “Something is gravely wrong.” 

The Royal Navy of Malaysia wanted to use the Dutch Sigma-design and Combat Management System (TACTICOS) that had a proven track record and is cheaper to integrate. Defence Minister Dato’ Seri Zahid Hamidi gave the greenlight for this on May 26, 2011. 

But in less than two months, Zahid changed his mind on July 11, when BNS recommended to switch to the Gowind-class design from France’s Naval Group. The PAC report noted the decision to change the design took just three days after the recommendation was made on July 8. RMN did not agree with the decision. 

Naval Group was also the contractor for two Scorpene-class submarines that Malaysia acquired in 2002 when Najib was defence minister. 

Zahid has denied responsibility for the design switch in his PAC testimony, stressing that it was BNS’ responsibility instead as they would’ve consulted the navy’s views as end-users. 

This runs contrary to MINDEF Procurement Division secretary, Ahmad Husaini’s statement, which confirmed that MINDEF had indeed approved the design change. The proposal was also endorsed by the Finance Ministry under Najib’s helm. 

7. There’s still no final detailed design! 

BNS still owes Naval Group RM198 million. Without the payment, the design cannot be finalised as Naval is responsible for designing the ships. Without a final detailed design, more delays will happen as variation orders (VO) have to be constantly issued to contractors to tell them, “hey, there’s a change in plans! ;)”

To date, 3 VOs have been issued. One of which includes the Integrated Platform Management System or IPMS, which MINDEF approved without consulting RMN. 

8. A poorly managed project 

Delays involving the final detailed design led to an additional cost of RM50 million a month, just to extend the warranty of parts that were already bought.

Equipment that had been procured totaling RM1.7 billion were kept in the store; of which an estimated 15% are about to become obsolete and outdated, especially the electronics.

The PAC report found that there were cost overruns totalling RM1.4 billion, here is a breakdown:

• RM400 million to pay off BNS’ debts from an old project (New Generation Patrol Vessel) 

• RM305 million for a shore integration facility, software integration facility, etc. that was not included in the initial LCS scope  

• RM700 million was due to cost overrun by BNS that exceeded the ceiling under the LCS contract

9. What about the ship launch in 2017? 

In 2017, BNS invited Perak’s Sultan Nazrin Muizzuddin Shah and Raja Permaisuri Tuanku Zara Salim for the launching of the first LCS (KD Maharaja Lela), even though the vessel was far from operational. Then defence minister, Hishammuddin Hussein was also present.

Former BNS director of the LCS project, Azhar Jumaat confessed that the company had put up a “temporary mast” to make the ship look good for the event before taking it down again. The PAC was told that the mast cost BNS RM400,000. 

Azhar Jumaat also defended that a “launching” ceremony is part of a regular industry practice for navy warships. In a PAC proceeding, Sharifuddin bin Md. Zaini Al-Manaf, CEO of BHIC states that this was a "waste of money to do it just for show."

"It is a waste of money to do it just for show. That is my view. There is no point, and it did not serve any purpose. It does look nice, and it may give an impression that the vessel is more beautiful than what it was meant to be. It was the cost that BNS had to absorb. But it was not meant to mislead anyone lah."

What are your thoughts on the LCS project?