Malaysia's UMNO Scandals

For weeks, just in time for Malaysia’s United Malays National Organization’s annual general assembly which opened this week, the party has been embroiled in an embarrassing scandal involving a 2007 government decision to spend RM300 million (US$94.3 million)to establish a national feedlot corporation to slaughter as many as 60,000 cattle annually under Islamic halal dietary requirements.

The scandal seems emblematic of a long series of such situations that imperil Prime Minister Najib Tun Razak’s vow in April 2010 that the government "can no longer tolerate practices that support the behavior of rent-seeking and patronage, which have long tarnished the altruistic aims of the New Economic Policy.”

The National Feedlot Corporation, as it is known, has never slaughtered 10 percent of the projected total and has since scaled back its target to 8,000 head but hasn’t been able to meet that target either. Worse, the company has been losing millions of dollars every year – while pouring funds into an RM10 million condominium in Kuala Lumpur, among other things, and spending RM800,000 for overseas travel and entertainment.

The scandal is doubly embarrassing because the agreement to establish the National Feedlot Corporation, made when Abdullah Ahmad Badawi was prime minister, went to the family of Shahrizat Abdul Jalil, the Minister of Women, Welfare and Community Development and head of the women’s wing of Umno. Her husband, Mohamad Salleh Ismail, is the chairman. Her three children are respectively the chief executive officer and executive directors of the company. None had any experience in cattle production or beef supply prior to the establishment of the company.

The report of the NFC’s operations was contained in the 2010 report of Malaysia’s Auditor General, which was delayed for weeks before it was finally released. The scandal has generated tensions inside UMNO, with some reformers demanding that Shahrizat be forced out of her job as minister. However, the leadership has circled the wagons to protect her. In particular, Muhyiddin Yassin, the deputy prime minister, has said there was no case to be brought against her. Muhyiddin was the agriculture minister in 2006 when the project was approved. Others who have come to her defense are Abdullah Badawi and his son-in-law, Khairy Jamaluddin, the head of the UMNO Youth Wing.

The National Feedlot scandal is said to have the potential reformers worried because party operatives thought they had the Selangor electorate turned around and that they could take the state back from the opposition Pakatan Rakyat in national elections expected to be called early next year. However, Asia Sentinel has been told, the refusal to hold anybody to account in the feedlot scandal could well turn the tide back against them, especially as other patronage scandals continue to bubble up.

The depth and breadth of the scandals also calls into question moves earlier this year with Najib launching a series of programs to develop bumiputera, or ethnic Malay companies, including allocating an RM2 billion fund for development. In the 2012 budget, Najib also announced the government would allocate RM200 million to guide 1,100 high-performing bumi companies with the potential for listing on the Kuala Lumpur Stock Exchange. Critics are concerned that the patronage system will continue unabated. The current UMNO general assembly was hoped to provide a dramatic backdrop for Najib to win back disaffected Malay voters.

For decades, this patronage has involved highway construction and defense contracts and a variety of other government arrangements with UMNO cronies in a plan formulated by former Prime Minister Mahathir Mohamad. His ambition was to create a cadre of 100 super-rich bumis who in turn would help rural Malays into prosperity under a konsep payung, or umbrella concept routed through UMNO, much the way he envisioned driving the country into industrialization through massive projects. However, many of the companies eventually collapsed and are being supported by government institutions such as Kazanah Nasional, the country's sovereign investment fund, or the Employee Provident Fund.

Contained in the same 2010 auditor general’s report, for instance, is a passage on the decision to privatize a 77-km stretch of highway from Senai to Desaru on Peninsular Malaysia’s southeastern coast. The land acquisition turned out to have doubled, from RM385 million to RM740.6 million, with the road surface described as “undulating.” The project completion “was not in accordance with specifications, causing damage to the road surface and endangering road users.” The company failed to complete construction within the stipulated period of the contract. However, the construction agreement didn’t specify damages in the event it wasn’t completed. Required maintenance is described as “unsatisfactory.”

The company that won the RM1.7 billion contract is Ranhill Corp. Sdn Bhd., which has long been described as UMNO-linked. It is partly owned by Lambang Optimia Sdn. Bhd. Both are headed by Hamdan Mohamad, described as Malaysia’s “water baron,” who operates several utilities and power companies. He was one of several ethnic Malay businessmen who followed former Prime Minister Mahathir Mohamad’s vow to take Malaysian companies overseas. Another shareholder is YPJ Corp. Sdn Bhd., an arm of the Johor State Government, and yet another appears to be UMNO itself, which owns a minority share through an account at Public Bank Bhd., according to records. Ranhill has had a lackluster two to three years, capped by disaster earlier in 2011 when its Libyan operations were caught between the Muammar Qaddafi forces and those of the Libyan rebels aided by NATO air strikes.

Also, earlier this year, Deftech, a wholly-owned subsidiary of DRB-Hicom, won a contract without an open tender to produce and deliver 237 eight-wheeled armored personnel carriers to the Ministry of Defense. DRB-Hicom is 55 percent owned by Etika Strategi Sdn. Bd., which is wholly owned by billionaire Syed Mokhtar Al Bukairy, one of Mahathir’s targeted bumiputras and a man who is extremely tight with UMNO. Opposition member Tony Pua complained on the floor of Parliament that the average price of RM29.4 million for each unit compared unfavorably with a Portuguese Army purchase of 363 similar vehicles for the equivalent of RM4.4 million each from the Swiss MOWAG CmBH Corp, Malaysia is paying a 6.6-fold increase over the Portguese purchase. Saudi Arabia, he said, bought 724 such vehicles for the equivalent of RM9.9 million from General Dynamics Land Systems-Canada, with Malaysia paying almost three times as much Government officials said the contracts don't compare with each other and that the government is getting more equipment, maintenance, etc. for its money.

“Further research has revealed that DRB-Hicom will be acquiring the AWC technology from a Turkish company – FNSS Defence Systems Inc which manufactures the Pars 8x8 AWV models,” Pua said. “With this deal, Malaysia will be its first foreign customer for this vehicle. What is perhaps of greater alarm is the fact that FNSS has announced that they have sold 257 units of Pars 8x8 AWVs to Malaysia for approximately US$600 million or RM1.83 billion or only RM7.1 million per unit,” Pua said in a prepared statement -- considerably different from what the Malaysians said they bought the vehicles for.

Pua also complained about the cost of six offshore patrol vessels from Boustead Naval Shipyard Sdn Bhd at RM1 billion each in the aftermath of another total fiasco. The Auditor General, in a 2007 report tabled in Parliament, alleged that a contract to build naval vessels given to PSC-Naval Dockyard, a subsidiary of Penang Shipbuilding & Construction Sdn Bhd, which was owned by another UMNO crony, Amin Shah Omar Shah.

PSC-Naval Dockyard, which was taken over by Boustead, contracted to deliver six patrol boats for the Malaysian Navy in 2004 and complete the delivery in 2007. Those were supposed to be the first of 27 offshore vessels ultimately to cost RM24 billion plus the right to maintain and repair all of the country's naval craft. But only two of the barely operational patrol boats had been delivered by mid 2006. There were 298 recorded complaints about the two boats, which were also found to have 100 and 383 uncompleted items aboard them respectively.

The original RM5.35 billion contract ballooned to RM6.75 billion by January 2007. The auditor also reported that the ministry had paid out RM4.26 billion to PSC up to December 2006 although only Rm2.87 billion of work had been done, an overpayment of Rm1.39 billion, or 48 percent. In addition, Malaysia’s cabinet waived late penalties of Rm214 million. Between December 1999, according to the Auditor General, 14 “progress payments” amounting to Rm943 million despite the fact that the auditor general could find no payment vouchers or relevant documents dealing with the payments.

The auditor general attributed the failure to serious financial mismanagement and technical incompetence stemming from the fact that PSC had never built anything but trawlers or police boats before being given the contract. Once called “Malaysia’s Onassis” by Daim Zainuddin, Amin Shah was in trouble almost from the start, according to a report in Singapore’s Business Times in 2005.

Eventually Boustead PSC was born out of the Royal Malaysian Navy’s dockyard facilities which were to provide ship repairs and maintenance services. Under the corporatization program advocated by the Malaysian Government, the dockyard was set up as Limbungan TLDM, a wholly owned government company. It has modern facilities to meet the maintenance requirements of the Royal Malaysian Navy fleet, from hull repairs to major overhauls and from radar refitting to weapon systems refurbishment.

The six patrol boats have now cost five times what the Royal New Zealand Navy paid for its patrol vessels, bought at only RM210 millon each (NZ$90 million) from BAE Systems, the second largest global defense company.

The irrepressible Raja Petra Kamarudin in early November found that the Philippines was buying Hamilton-class patrol ships from the US that would be deployed to the West Philippine Sea area to secure the country’s natural resources. The latest one is to be transferred by the first or second quarter of next year, to guard energy projects in Malampaya off Palawan.

“Malaysia is going to buy six patrol boats at a total cost of RM6 billion or RM1 billion per patrol boat. Of course, Malaysia’s patrol boats are going to be far advanced and more sophisticated than those of the Philippines who paid only RM31.5 million for theirs,” he wrote. “The Philippines’s patrol boats can only patrol the waters. Malaysia’s patrol boats can…well…patrol the waters.”