Malaysia Takes On Corruption - Still Struggles To Control Offsets

DEFENSE NEWS

05/05/08

Malaysia Takes On Corruption - Still Struggles To Control Offsets

BY WENDELL MINNICK

KUALA LUMPUR — Voters’ anger about corrup­tion is forcing the Malaysian government and its Ministry of Defense (MINDEF) to institute transparency and anti-corruption policies that could revolutionize the way the military pro­cures arms and equipment.

But a near-vacuum of policy on offsets and lo­cal arms brokers continues to hamper the mil­itary and local defense industry.

Malaysia’s annual defense budget for 2006 was $2.9 billion, or 2.4 percent of GDP, up from 1.6 billion, or 1.7 percent of GDP, in 2000.

When Malaysia buys foreign defense goods or services, sellers must provide offsets worth 50 percent of the deal. Up to half of the offsets may take the form of “countertrade,” or agreements to purchase Malaysian goods, under a policy in­troduced in 2005.

For example, the $972 million purchase of three French Scorpene-class submarines in 2002 was partially paid for with $274 million worth of palm oil.

This countertrade is encouraged by MIN­DEF’s Malaysian Defence Industry Council (MDIC), set up in 1999 to coordinate develop­ment of the local defense industry.

“Malaysia should utilize her rich natural re­sources to trade for defense products and equipment, besides the direct offset programs. This countertrade arrangement should also in­clude any purchasing of services from any for­eign countries,” the MDIC said in its 2005 Defence Industry Blueprint.

Yet countertrade decreases the opportunity for Malaysian defense firms to benefit from off­sets — a problem that is exacerbated by a dearth of government coordination on such ef­forts.

“Since 1980, the Malaysian MINDEF has un­dertaken a substantial number of diverse high­value weapons procurements,” said Ron Matthews, deputy director of the Institute of Defence and Strategic Studies, S. Rajaratnam School of International Studies, Singapore. “Off- sets have invariably been tagged to these pro­curements, but in an ad hoc and uncoordi­nated manner. There was little oversight, lit­tle understanding of the complexities of the offset machinery, and little strategy with re­spect to the long-term development of an in­digenous base.” Matthews said MINDEF pursued its offset requirements “in isolation from the broader imperatives of the Ministry of Industry.” The most troubling aspect has been “the almost total absence of policy to provide a template for consistent and appropriate technology transfer requirements,” he said.

The jury is still out on the 2005 offset poli­cy, Matthews said, but noted it has been crit­icized for not specifying what systems would best increase the combat power of Malaysia’s arms.

Bottom line, he said: “Malaysia has a poor record in defense exports and suffers limited defense-related R&D expenditure. Offsets have done little to remedy these weaknesses.”

Moreover, offset deals are often cut by lo­cal brokers, not government officials. Malaysia requires all foreign military goods to be purchased through local representatives.

“The issue with local agents is sometimes these guys are fly-by-night: They just come in and they don’t know anything about the in­dustry,” one MINDEF official said. “They are just there to make a few percent commission and then they leave.” Such agents often wreck offset goals “because they think offsets eat into their share and sometimes they don’t see the need for in­dustrial participation,” the official said. “So they will try and muscle in and take away the offset factor. They want to keep their com­missions high. It destroys the indigenous de­fense industry.” Since such agents are paid only when Malaysia buys foreign arms, they work to en­sure that MINDEF does not buy local.

“There is a huge complaint within the in­dustrial community,” the MINDEF official said. “They do have expertise locally to de­velop certain products or offer certain serv­ices. They can do certain equipment, but the specifications are always spelled out in such a nature that favors foreign companies. Inter­estingly, Korea is buying jet propulsion from Malaysia, but we don’t use it. The military buys foreign all-terrain vehicles, but don’t buy them from the local-based DEFTECH, which builds civilian and military vehicles.”

Change in the Air

However, things appear to be changing for the better. Since the March 8 elections, in which voters angry about corruption and eth­nic-preference policies handed Prime Minis­ter Abdullah Ahmad Badawai’s National Front coalition its worst loss in 40 years, the gov­ernment has shifted on corruption, trans­parency, due process and legal procedures.

On April 21, Malaysia announced the Anti­Corruption Agency (ACA) would be turned into an independent commission outside the control of the prime minister’s office. Re­named the Commission on Anti-Corruption, the new corruption body will issue an annual report on graft, implement new policies to protect whistleblowers and witnesses, and add 5,000 employees to bring the total to 7,000.

“The government, especially the prime min­ister, is now taking issues seriously,” the MIN­DEF official said. “He is talking about trans­parency, he is talking about good governance, he is talking about processes, and he is seri­ously talking implementation issues. While we have the policies, we have to implement these down the line.” MINDEF will be looking more closely at procurement processes and acquisition strat­egy. Already, MINDEF is conducting more open tenders and fewer direct negotiations and restricted tenders.

“If we look at industrial growth within the defense industry sector, there is an empha­sis now on the inclusion of local content,” the MINDEF official said. “And within various committees within MINDEF, there is a par­ticular requirement that if there is expertise within the country, we should give emphasis to the local company to build the indigenous capability.”

Gear Hodgepodge

Malaysia’s military has a hodgepodge of equipment that looks more like a United Nations peacekeeping mission than a mod­ern network-centric, streamlined military.

“We do buy from various sources and buy in a small numbers. We have difficulty of quantity. We have difficulty integrating the system, and we have issues with logis­tics,” the MINDEF official said. “There is a serious discussion going on between the three services on creating interoperability and looking at how these systems can be integrated, and I think they are having messy problems on that.”

The Malaysian arsenal includes fighter jets from Russia and the United States, tanks from Britain and Poland, ships and submarines from Britain, France, Ger­many, Italy, South Korea, Sweden and the United States. Equipment currently being delivered includes 48 Polish PT-91M Pen­dekar tanks that even the Poles no longer buy and 18 Su-30MKM fighter jets traded for a Russian space trip for Malaysia’s first astronaut.

The MINDEF official said such purchas­es are often justified as a way to balance trade with the vendor countries.

“We fail to pay attention to things like whether equipment is needed by the armed forces and whether it meets the armed forces’ technical specifications,” the offi­cial said. “Because when you go down and talk to the guys on the ground, they say, ‘We don’t need Polish tanks.’ So this is where there is a serious mismatch be­tween political ambitions and what the users actually require.”