'Defence intermediaries are a recipe for corruption'
SKK Kuek & Nigel AwPublished: Nov 20, 2011 9:15 AM | Updated: Nov 20, 2011 12:50 PM
INTERVIEW The requiment for foreign companies to join venture with local enterprises in Malaysia for military defence sales creates an environment ripe for corruption, according an international expert on transparency of defence procurement.
INTERVIEW The requirement for foreign companies to join venture with local enterprises in Malaysia for military defence sales creates an environment ripe for corruption, according an international expert on transparency of defence procurement.
Speaking to Malaysiakini in an interview, Transparency International UK (TI-UK) Defence and Security programme director Mark Pyman (right) said such a system was not uncommon globally but was “fraught with danger”.
“It is not a very competitive exercise so it’s very easy for the pricing to be poor. It is very easy for those deals to be used as a mechanism for corrupt payment or influence,” said Pyman, who was a former chief financial officer for international oil and gas giant Shell.
He was referring to instances where such an arrangement has led to the actual price of procurement becoming grossly inflated, with the local joint-venture setting up pseudo-companies to reap huge amount of commissions.
This scenario is visible particularly in Malaysia, the most infamous being the procurement of two Scorpene submarines signed by the Defence Ministry in a RM7.3 billion contract with France’s DCNS and Spain’s Navantia.
It raised eyebrows after local consultancy company Perimekar, set up just shortly before the deal, received 130 million euros (RM500 million) in alleged commission.
However, the Defence Ministry has insisted that the handsome payment was for ‘coordination and support services’ for the deal.
‘Global track record is corruption’
“Our view is if you are going to do this, based on the record of most of the rest of the world, you will get a lot of corruption-related problems, so you must be very sure to set high standards for transparency,” said Pyman.
This includes introducing strong anti-corruption measures for the companies, making public the companies’ information and only allowing joint-ventures with credible and experienced companies, he said.
Acknowledging that governments of the world had justified such joint-venture as a means for technology transfer and to nurture the local industries, Pyman says that it is not always true.
“For example, South Korea had this practice for a while and they found it worked very badly.
“What happened was you develop a local company to produce wings for fighter planes, but when the fighter planes order ended, the company asked the government for subsidies, it just did not do what it was suppose to.”
Some countries, he adds, have found such an arrangement to be so problematic they have decided to discontinue it, with Greece and Portugal being the two countries that scrapped the system this year.
On the norm for Malaysian senior military men to be appointed as directors or senior managers in the private sector shortly after they have retired, Pyman said it was essential that a time lapse condition is put in place before they can be appointed.
“If senior military or defence officials go immediately into a private sector company, he is in possession of commercially sensitive information and you would expect there would be a time lapse to lose commercial value of his or her knowledge.
“You would often find that to be one to two years in many administrations,” he said.
Such practice is prone to corruption as senior military officers may grant certain private companies favours in exchange for positions in the company after retirement, on top on accusations of cronyism and nepotism as companies helmed by such officers are sometimes favoured by the government.
“To ensure value for money is to ensure competition... The final question if indeed there is some kind of improper promise of somebody in the government going into a military company, saying we’ll reward you for favours, if it’s competitive, it’s just that much harder to do.”
‘Open tender for most contracts possible’
Competition, says Pyman, can be achieved through open tender, but approximately 50 percent of Malaysia’s defence contracts is done through direct negotiation, a method susceptible to corruption.
“Somewhere around 30 percent (done through direct negotiation) would not be a surprising percentage, 50 percent is high,” he said, adding that some contracts listed as open tender may in fact be direct negotiation after all other candidates are disqualified as they do not meet the necessary procurement specifications.
Noting that national secret as often been used to justify direct negotiations, Pyman said: “I think if we're speaking about a typical defense acquisition budget, I would guess about 70 percent of it can be completely open (tender), 10 percent without any doubt at all is complete close, and we can argue the 20 percent in between.”
On top of intra-national transparency measures Malaysia can take, Pyman advised the Malaysian government to participate in the United Nations Arms Trade Treaty (UNATT) due to be finalised July next year.
Acknowledging that the treaty has a political intention of determining who arms are sold to, he pointed out it also introduces a global regulation against corruption, such as the diversion of arms to countries not sanctioned by the treaty through corrupt means.
Related stories
Part 1: Najib urged to include defence transparency in GTP
Part 2: Parliament's first step - clean up defence deals
Speaking to Malaysiakini in an interview, Transparency International UK (TI-UK) Defence and Security programme director Mark Pyman (right) said such a system was not uncommon globally but was “fraught with danger”.“It is not a very competitive exercise so it’s very easy for the pricing to be poor. It is very easy for those deals to be used as a mechanism for corrupt payment or influence,” said Pyman, who was a former chief financial officer for international oil and gas giant Shell.
He was referring to instances where such an arrangement has led to the actual price of procurement becoming grossly inflated, with the local joint-venture setting up pseudo-companies to reap huge amount of commissions.
This scenario is visible particularly in Malaysia, the most infamous being the procurement of two Scorpene submarines signed by the Defence Ministry in a RM7.3 billion contract with France’s DCNS and Spain’s Navantia.It raised eyebrows after local consultancy company Perimekar, set up just shortly before the deal, received 130 million euros (RM500 million) in alleged commission.
However, the Defence Ministry has insisted that the handsome payment was for ‘coordination and support services’ for the deal.
‘Global track record is corruption’
“Our view is if you are going to do this, based on the record of most of the rest of the world, you will get a lot of corruption-related problems, so you must be very sure to set high standards for transparency,” said Pyman.
This includes introducing strong anti-corruption measures for the companies, making public the companies’ information and only allowing joint-ventures with credible and experienced companies, he said.
Acknowledging that governments of the world had justified such joint-venture as a means for technology transfer and to nurture the local industries, Pyman says that it is not always true.
“For example, South Korea had this practice for a while and they found it worked very badly.
“What happened was you develop a local company to produce wings for fighter planes, but when the fighter planes order ended, the company asked the government for subsidies, it just did not do what it was suppose to.”
Some countries, he adds, have found such an arrangement to be so problematic they have decided to discontinue it, with Greece and Portugal being the two countries that scrapped the system this year.
On the norm for Malaysian senior military men to be appointed as directors or senior managers in the private sector shortly after they have retired, Pyman said it was essential that a time lapse condition is put in place before they can be appointed.“If senior military or defence officials go immediately into a private sector company, he is in possession of commercially sensitive information and you would expect there would be a time lapse to lose commercial value of his or her knowledge.
“You would often find that to be one to two years in many administrations,” he said.
Such practice is prone to corruption as senior military officers may grant certain private companies favours in exchange for positions in the company after retirement, on top on accusations of cronyism and nepotism as companies helmed by such officers are sometimes favoured by the government.
“To ensure value for money is to ensure competition... The final question if indeed there is some kind of improper promise of somebody in the government going into a military company, saying we’ll reward you for favours, if it’s competitive, it’s just that much harder to do.”
‘Open tender for most contracts possible’
Competition, says Pyman, can be achieved through open tender, but approximately 50 percent of Malaysia’s defence contracts is done through direct negotiation, a method susceptible to corruption.“Somewhere around 30 percent (done through direct negotiation) would not be a surprising percentage, 50 percent is high,” he said, adding that some contracts listed as open tender may in fact be direct negotiation after all other candidates are disqualified as they do not meet the necessary procurement specifications.
Noting that national secret as often been used to justify direct negotiations, Pyman said: “I think if we're speaking about a typical defense acquisition budget, I would guess about 70 percent of it can be completely open (tender), 10 percent without any doubt at all is complete close, and we can argue the 20 percent in between.”
On top of intra-national transparency measures Malaysia can take, Pyman advised the Malaysian government to participate in the United Nations Arms Trade Treaty (UNATT) due to be finalised July next year.
Acknowledging that the treaty has a political intention of determining who arms are sold to, he pointed out it also introduces a global regulation against corruption, such as the diversion of arms to countries not sanctioned by the treaty through corrupt means.
Related stories
Part 1: Najib urged to include defence transparency in GTP
Part 2: Parliament's first step - clean up defence deals
View Comments0