Mismanagement and delays in the construction of six high-tech offshore patrol vessels (OPVs) have already pushed up the cost by a whopping RM1.4 billion to RM6.75 billion - and the final cost may be even higher.

The 2006 Auditor-General's Report tabled in Parliament last Friday revealed a number of serious issues with the Defence Ministry's handling of the project.

Two problem-ridden vessels were delivered to the Royal Malaysian Navy last year, while the rest are under construction - exceeding the deadline for delivery which was set at April this year.

Auditor-General Ambrin Buang was particularly scathing of the government's decision in January this year to approve an increase in construction costs - each of the four remaining vessels will require an additional RM350 million to complete. The initial cost of each was RM843 million.

"The Audit Department could not find the justification for the additional RM1.4 billion in the contract," said Ambrin, who described the overall management of the construction of the six vessels as "not properly done".

He attributed the main reasons for the delay in completion to the inexperience of the contractor, whose track-record comprises the building of trawlers and smaller police boats, as well as the company's financial problems.

The contract - initially set at RM5.35 billion - was awarded to PSC-Naval Dockyard Sdn Bhd - a subsidiary of PSC Industries Bhd owned by Amin Shah Omar Shah - in 1998. The company was renamed Boustead Naval Shipyard Sdn Bhd in August last year.

The AG also warned of other weaknesses which have exposed the government to the risk of additional losses.

Up to last December, for example, the Defence Ministry had paid RM4.26 billion in advance to the contractor, although the value of the physical works completed up to then on all six vessels was only RM2.87 billion.

Making matters worse is that the contractor now requires another RM2.2 billion to meet its obligations, but has only RM832.92 million in the kitty based on the original contract amount.

The AG further said the government had released a big proportion of the RM4.26 billion upon 'confirmation of order' for equipment and systems, rather than upon delivery.

"A visit by the Audit Department showed that only part of the equipment and systems had been received while the delivery dates for the rest are still under discussion with the sub-contractor," said Ambrin.

If the items cannot be located in the inventory, the government may required to re-purchase the equipment, he said.

Another shocking revelation is that 14 progress payments amounting to RM943.46 million to the contractor between December 1999 and January 2002 could not be audited as the payment vouchers and supporting documents were missing from the defence ministry's records.

Losses add up

It gets worse. The two completed vessels - respectively delivered in June and July last year - arrived after a two-year delay due to technical and financial difficulties.

Even then, they were found to be riddled with defects and, therefore, could not be fully optimised.

The AG discovered they respectively had 100 and 383 incomplete works and items at the point of handing over. There were 298 complaints over the operations of the vessels.

"The Defence Ministry will have to make sure the contractor completes the outstanding works and items, as well as settles (the ministry's) claim of RM1.09 million (reimbursement of handover costs) immediately since the warranty period for the first two vessels will expire in June and July 2007 respectively."

(Handover costs refer to such items as cost of transport, meals, accommodation and harbour acceptance tests, to be borne by the contractor. In this case, the shipyard pleaded shortage of funds and the ministry provided material assistance valued at RM1.09 million.)

The AG further estimated that the government can claim at least RM214 million as penalties for the late delivery. Last November, however, the cabinet decided to waive the penalties at the request of the shipyard.

Ambrin was also dissatisfied with the quality of monitoring by the project steering committee - led by Deputy Prime Minister and Defence Minister Najib Abdul Razak - and an executive management committee chaired by top ministry officials.

He said both committees had only called for meeting at the early stage of the project.

Ambrin urged both the finance and defence ministries to give "serious concern" to implementation in order to avoid the weaknesses being repeated in the remaining vessels, and urged that a joint committee comprising both ministries be set up.

The powerful parliamentary Public Accounts Committee (PAC), which has been investigating the matter since last 2005, had estimated that the delay would lead to an additional RM200 million being paid. Last year, it asked the ministry to decide whether to proceed with the deal.

PAC chairperson Shahrir Abdul Samad, when contacted yesterday, repeated that the government has to decide on its next course of action, adding that the committee would meet with the AG soon to discuss the issues raised in the report.

DAP secretary-general Lim Guan Eng had yesterday urged Najib to show leadership by example since the latter had reportedly told relevant government agencies to respond to issues raised in the AG's report.