THE OTHER SIDE OF THE STORY (PART II) – RM6 BILLION NAVAL VESSEL PROJECT

This is the second part of my response to comments made by Tony Pua on his blog entitled Purchase of 6 Naval Vessels up from RM6 billion to RM9 billion.

SPARING THE ADJECTIVE – DIRECT RESPONSE TO TONY PUA’S COMMENT

Tony Pua had stipulated that the Ministry of Defense must explain the cause of the sudden increase of RM3 billion in the purchase of 6 naval vessels. I can understand his concern regarding the escalation of the cost but the object of my repugnance is his manipulation of the information regarding the LCS in his blog.

He mentioned, “The US owns 2 of these ships - USS Independence and USS Freedom while Malaysia is seeking to acquire 6 of these LCS.”

It is not a well-guarded secret that the US Navy has only commissioned 2 LCS ships but there is more than meets the eye about these LCS. Currently the US Navy has 7 more of this LCS in production (USS Fort Worth, USS Coronado, USS Milwaukee, USS Jackson, USS Detroit, USS Montgomery and the latest being USS Little Rock). It is part of their larger plan to replace 30 FFG-7 Oliver Hazard Perry Class frigates, 14 MCM Avenger Class mine countermeasures vessels and 12 MHC-21 Osprey Class coastal mine hunters with 55 Littoral Combat Ships. The US Navy estimates the total acquisition cost for 55 LCS sea frames (the term navy uses to refer to basic ship without any modular mission package) are USD37 billion (RM116 billion) which will run through 2030. I don’t expect Tony to know the details of the US Navy LCS program but his ignorance does not give him the liberty to put positive spin on abysmal US Navy shipbuilding record.

Tony wrote “it has come as a shock when Boustead announced on Bursa Malaysia that the contract which was just signed last week is now valued at RM9 billion or 50% higher that what was approved earlier this year by the Government.”

The most important thing for us to know is – there is no simple or universally agreed model for predicting the cost of designing and building a warship. The reason for this is there are too many independent variables that affect the final cost. For me to explain the economics of buying complex weapon system is beyond the scope of this response. Therefore, the US Navy LCS Program serves as the best example to illustrate the complexity of finalizing cost for any warship program.

In January 6^th 2006, the US Navy stipulated that the LCS was to cost no more than USD220 million (RM691 million) each, plus adjustments for inflation and other factors. However in January 28^th 2008, the Navy amended the cost cap to USD460 million per ship (RM1.4 billion) with no adjustments for inflation. Then, in 28^th October 2009 the Navy had decided to adjust the cost to USD480 million per ship (RM1.5 billion), which includes provisions for adjusting the figure over time to take inflation and other events into account. As at December 2010, after taking inflation into account the cost of LCS is at USD538 million (RM1.7 billion) per ship. This is an escalation of cost of more than 100% from initially projected. In this narrow sense, Malaysia is far better off in estimation than our American friends. Even with the additional RM3 billion and with a small quantity Malaysian LCS is much cheaper than the US LCS.

Tony also mentioned this “Boustead Naval Shipyard, previously known as PSC Naval Dockyards which delivered the previous 6 naval patrol vessels at RM6.75 billion or 26.2% above the original contract price of RM5.35 billion. The ships were also delivered only after a 2 year delay and hundreds of defects.”

My first reaction to this information he supplied was “WOW – for a company guided by the government with little experience in building naval ship this is an achievement that merits a standing ovation!”  I had come to this reaction knowing for a fact that we did better than a country with 30 years of experience in building scores of warships, which includes aircraft carrier, destroyer and submarines. When the United States Navy embarked on LCS program on 1^st November 2001, it was heralded as the dawning of an innovative, low-cost era in Navy shipbuilding. On the contrary, it has turned into a case study of how not to build a combat ship. The USS Freedom was delivered to US Navy fleet after 5 years delay with USD400 million (RM1.3 billion) over its original cost estimate. To make matter worst it was commissioned with none of its robotic ready for combat. USS Independence was running at 220% over-budget with the total cost for the ship of USD704 million (RM2.2 billion). Ultimately, there were nearly 600 significant engineering changes affecting nearly all parts of the ship. The bills per ship soared to USD531 million (RM1.7 Billion) more than double the original bill of USD220 million (RM692 million). It does not take a genius to realized 2 years delay is better than 5 and 26.2% above the original contract price is lower than an over budget of 220%.

Last but not the least Tony Pua’s also commented “As Defense expenditure in Malaysia remains highly opaque, with Malaysia ranked "medium to low" in transparency by Transparency International, we continue to call for a Parliamentary Oversight Committee to review and approve defense expenditure as practiced in all developed countries.”

I had offered the benefit of my thoughts on the intricacies of Defense Industry in my article entitled INFORMATION FALLACY. Therefore the focus of my response this time will be on matters pertaining to Naval Shipbuilding. The view I offer is for the readers to make their own conclusion on the viability of the comments made by Tony Pua.

Australia’s naval shipbuilding is based on Single Shipbuilding Entity Model which means only a single shipyard would provide the government with all of its naval procurement, repairs and upgrades needs for the life of the contract. The decision to adopt this model was made after a long and extensive study that reveals competitive bidding for shipbuilding would in the future place a significant cost on the Australian government.

The benefit of this model is that a single supplier is likely to achieve better scale and utilization rates than two or more suppliers. The stability of single supplier would encourage the retention of highly skilled labor, which in turn would lower the training and costs on additional projects. By using the same shipyard for repairs and upgrades government could take advantage of a the skills attained during construction phase which would increase labor efficiency. Simply put, same people that built it would be the ones effecting repairs and upgrades. Finally the single entity model would make contract tendering less expensive and time consuming, as it would involve only one company. In the long run the government saved money and was able to lower the cost of naval shipbuilding.

Students of Defense Economics understand all too well, that the reason naval shipyard around the world was able to maintain itself was only through extensive use of government subsidies, which in some cases are in excess of 40 percent of the cost. The incentives are offered for variety of reasons. One motive is job protection and the strategic importance of shipbuilding industry. Some governments, such as the US have stated that assured access to shipbuilding facilities is matter of national security.

The diversity of example I supply demonstrates that Malaysia is not doing something out of the norm. We are simply benchmarking the global naval shipbuilding standard, which is practiced not only in Australia, but the same model has been adopted by Canada, France and Germany with slight variation. The strategic interest in maintaining a viable naval shipbuilding is important to the country; hence our government is simply implementing the most economical way to preserve the industry. In short, it was the making a virtue of necessity. 

TONY I HOPE YOU ARE TUNE IN

The title of Tony’s blog is Philosophy Politics Economics for Family & Friends, For Community & Country. Your family and friends may tolerate being manipulated by you but I can’t stand when someone is trying to manipulate the country and its people by using political rhetoric to make his lies truthful. This alone, to me, is an act of treason. My personal advice to you Tony is that you should stop making comments on matters that is beyond your bailiwick and just stick to issues that is not a stranger to you. You must also try your very best to persuade yourself not to attempt useless acts of heroism. I know this is difficult as a career politician but you must try so that we can honor you one day as a patriot not despise you as an opportunist. People don’t have to like you Tony, but it is vital you get their respect in order for you to be heard. And ultimately you must be prepared to put what you perceive to be the common good of the nation before your own political self. That is you as an individual take second place to the interest of the nation as a whole not vice versa. The comments I made about you are not baseless; I am an avid reader of your blog and find many of your comments are just attempts to give an appearance of solidity to pure wind.