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Defence Procurement in Malaysia: A Way Forward?

By Ng Sze Fung

Malaysia has seen problems in its defence procurement in recent years. Once a new government is installed after the general election, it should follow through with reforms to improve transparency in the process of acquiring new military hardware.

Ahead of the 15th General Election in Malaysia, the government and the opposition should revive the issue of defence procurement given the recent issues which have transpired. Just under two months ago, Malaysians became aware of another multi-billion ringgit scandal involving the Royal Malaysian Navy’s (RMN’s) second-generation patrol vessel, or better known as the littoral combat ship (LCS) project. The Malaysian Parliament Public Accounts Committee (PAC) reported that the country’s largest defence procurement with a value of RM9 billion for the six LCS vessels was riddled with problems.

In 2022, the Ministry of Defence (Mindef) has been allocated a budget of RM16 billion whereas in 2021, the budget allocated to Mindef was RM 15.86 billion. This accounts for 4 per cent to 6 per cent of the total federal government expenditure annually over the past decade). Still, the spending relative to total expenditure should not distract Malaysians from the billions of ringgit spent on the defence industry alone.

The latest LCS issue involves an RM9.2 billion contract. The contract is an enigma: 67 per cent of the contract value has been disbursed, but not a single vessel has been delivered. The contract was awarded to Boustead Naval Shipyard (BNS) after direct negotiations between Mindef and the company. It was subcontracted multiple times, including to French company Naval Group (which was Malaysia’s infamous contractor for two Scorpene-class submarines in 2002). The deal is now under a formal corruption probe by the French authorities.

The PAC uncovered many problems associated with the LCS procurement. The RMN had preferred to go with the Sigma-class ships based on a more practical Dutch design. But this view was ignored. In addition, the contract terms were weak and unfavourable to the government and the cost overruns totalled up to RM1.4 billion.

The LCS saga — together with other scandals surrounding the New Generation Patrol Vessels, Scorpene-class submarines and Offshore Patrol Vessels for the Malaysian Maritime Enforcement Agency underscores the dire nature of Malaysia’s defence procurement process. The LCS saga should serve as a wake-up call for political parties to strive for a more transparent and effective procurement system. As much as it is an opaque issue due to the bureaucracy, the LCS issue has made more parties aware of the possible corruption and leakages happening with the public funds. Therefore, they have every right to be concerned about what happens next.

An agenda should be set on what reforms will be undertaken to make Malaysia’s procurement system more transparent. Greater expediency should be given to the recommendations made by the inaugural Defence White Paper launched on 2 December 2019. With regard to transparency, the paper mooted the role of the Parliamentary Special Select Committee on Defence and Home Affairs in exercising oversight towards issues related to defence and security. The Committee should exercise the powers as the Governance, Procurement and Finance Investigation Committee (JKSTUPKK) which was established by the Pakatan Harapan (PH) administration in 2018 to investigate leakages and embezzlement of funds in the government.

After the formation of the new government post-election day on 19 November 2022, the incoming Prime Minister and the Defence Minister should go through with the plan to form a Defence Investment Committee to prevent and avoid irregularities in the procurement of assets by Mindef. The setting up of the Committee was among the recommendations in the Defence White Paper which was considered for implementation by the government prior to Parliament’s dissolution on 10 October. This is in light of the LCS project that warranted the updating of procedures in awarding construction contracts.

Apart from that, Strategy 3.1.4 of the National Anti-Corruption Plan 2019-2023 tabled by PH advocates for the introduction of legislation to regulate procurement activities. Indeed, a Government Procurement Act is needed to revise the outdated procurement regime in Malaysia. Currently, there is no specific legislation that governs the procurement process. Government procurement processes are governed by treasury instruments issued by the Ministry of Finance (MOF). But the instruments do not have any force of law. Legislations which apply to certain aspects of government procurement are such as the Financial Procedure Act 1957 which controls and manages the public finances of Malaysia. The Government Contracts Act 1949 provides for the making of contracts on behalf of the Federal Government and respective State Governments.

The Government Procurement Act should ideally outline a transparent procurement process along the lines of the United Kingdom’s Procurement Bill 2022-2023. This Bill makes it easier to scrutinise procurement decisions where there is, for example, a tender notice at the commencement of the procurement procedure, a contract award notice before (instead of after) entering into a public contract and information about the contract after it has been concluded.

The Procurement Bill 2022-2023 also contemplates the possibility of investigations into whether a contracting authority is complying with applicable procurement legislation. This is complemented by information gathering powers and the right to publish the results of an investigation, including any recommendations made. Contracting authorities receiving such recommendations must give due regard to them. Indeed, if the investigations are mandated by the proposed Government Procurement Act which adopts these provisions, it would be a more certain check and balance on the executive compared to investigations being launched at the behest of political leaders.

The defence procurement process in Malaysia needs to be revamped to avoid fostering an environment which allows corrupt practices to occur. Should a PH administration be elected into government, it is almost certain that they will continue with the legacy of the reforms detailed in the Defence White Paper. According to its Shadow Budget for 2023, PH has also called for a Government Procurement Act to be enacted to prevent corruption and abuse of power. A more reformist government would be able to remedy the defects in Malaysia’s procurement process and adapt Malaysia to the rapidly evolving security landscape.

– Published in Fulcrum on 3 November 2022.

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