The news about cost over run for Sime Darby Energy ‘jewel project’, the Bakun Dam was out in the MSM today. The accumulated losses is RM 1.7 billion, which is the same contract sum calculated when the original award was given in 2010.

Starbiz has the report:

Wednesday May 5, 2010

Sime’s Bakun losses balloon to RM1.7bil

By RISEN JAYASEELAN
risen@thestar.com.my

PETALING JAYA: Sime Darby has incurred around more than RM1bil in total cost overruns from carrying out the civil works contract for the Bakun hydro-electric project, sources said.

One estimate puts the total cost overrun figure in the region of a whopping RM1.7bil, almost the same size as the Sime Darby’s actual Bakun contract of RM1.8bil that it had secured back in 2002.

When contacted, Sime Darby did not deny or confirm this.

In an emailed reply, the company merely said that it had made provisions to the tune of RM130mil for its share of the cost overruns in the Bakun project.

The discovery of the more than RM1bil cost overrun in the Bakun project is believed to be among the findings of the special taskforce within the group that was set up late last year to probe losses in its energy and utilities division.

The taskforce is also looking into the reasons for the cost overruns and whether there were lapses in internal audit and whether other improprieties occurred.

It is understood the Government has agreed to reimburse Sime Darby for around RM700mil, leaving Sime Darby with around RM1bil to be dealt with, by some estimates.

Sime Darby’s energy and utilities division recorded an operating loss of RM110mil in the second half of its financial year ended Dec 31, 2009, compared with a profit of RM56.3mil previously. But within this division, its oil and gas and engineering divisions’ losses alone totalled RM201mil.

However, Sime Darby said this loss was due to overruns from another project, namely its RM2.1bil Maersk Oil Qatar (MOQ) project.

“Sime Darby recognised a project loss for MOQ amounting to RM210mil (including the impact of foreign exchange losses). As a result, the oil and gas segment recorded losses of RM201mil in 1HFY2010,” it said in the email to StarBiz.

Assuming the cost overruns have taken place in the Bakun project, the group will still need to deal with a significant amount of provisioning or expensing, which could seriously dent its profits for FY2010.

When asked if Sime Darby will be providing or expensing any amounts this year arising from the Bakun project, Sime Darby said: “As part of its disclosure obligations, Sime Darby regularly reviews its portfolio of projects and if required, makes provisions in accordance with the Group’s accounting policies.”

Assisting the taskforce in its findings were specialists from external accounting, legal and engineering firms, sources said.

To recap, Sime Engineering, a unit of Sime Darby, was awarded the civil works for the Bakun project in September 2002 at a fixed lump-sum price of RM1.8bil. It has been reported that Sarawak Hidro Sdn Bhd has approved a variation order for RM700mil for the Bakun project. Sime Darby did not confirm or deny this.

“As with all such construction projects of this nature, we have received periodic payments and agreed claims from the Government. In the past, some cost overruns were incurred due to increase in material costs and variations in design but these have been dealt with,” Sime Darby said in the email reply.

Sarawak Hidro is a wholly-owned subsidiary of the Ministry of Finance Inc Malaysia and entrusted to develop and manage the Bakun project since May 2000.

Sime Darby had yet to reply to questions posed to it by StarBiz yesterday afternoon.

But in Sime Darby’s press statement when announcing its first-half results, president and group CEO Datuk Seri Ahmad Zubir Murshid said that there were issues with the energy and utilities division.

“We have faced several challenges with the oil and gas business unit especially with operational efficiency and project management. Nevertheless, with a new management team on board, measures have been taken to increase operational efficiency and improve our project management capabilities,” he had said.

A change in leadership at its energy and utilities division had taken place recently, following the resignation of Datuk Mohamad Shukri Baharom

Mohamad Shukri was replaced by Hisham Hamdan, who was previously the executive vice-president for group strategy and business development.

Sime Darby has also said it has been taking steps to prevent a repeat of the cost overruns, including reviewing and re-evaluating systems and processes in the division.

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This is the second major blunder SDE is facing, with regards to really huge losses. First that struck attention was the RM 800 million losses in the scandalous Qatar project.

This just to show how incompetent those guys who were entrusted to manage the division. Full clean up must be done and those responsible for these debacles must accept and that they had caused great injustice to the company and division. Some heads must be chopped to ensure that the division will not go into wrong and disastrous futile direction.

PM Dato’ Seri Mohd. Najib Tun Razak, who is also the Finance Minister must instruct a full blown investigation really fast. Sime Darby Bhd., now a huge conglomerate when Synergy Drive Sdn. Bhd. amalgated the three largest plantation and property based PLCs, Sime Darby Bhd., Guthrie Bhd. and Golden Hope Bhd. to the largest merger Malaysia and South East Asia capital market ever saw.

Sime Darby is also one of the mainstay for investments of Amanah Saham Baru and Amanah Saham Nasional unit trust holders. In the past, Sime Darby is one of the major contributor for ASB’s generous dividends pay out annually. The continuous slide of Sime Darby profitability will affect the ASB and ASN in the medium term.

Sime Darby’s blunder is not a good example for PM Najib to woo foreign capital and debt market investors and punters into the Malaysian corporate scene. In fact, it would be counter productive to the ‘New Economic Model’ ambitious agenda to transform Malaysia into a high value economy when the largest listed company keeps falling into ‘bad venture pits’. Of course, the audit must also look into possibilities of ‘hanky panky’ in the procurement of materials and services, which is the major factor of the cost over run.

Two consecutive huge losses must be bad for morale and confidence. Probably it is time that ‘people restructuring’ should take place. They say “Fish gets rotten from the head”. Obviously the perils that  SDE faces today is considerably due to poor management and probably controls. Since its spring time here in the northern hemisphere, the ‘clean up’ should be across the board. There are considerable Malaysians, which include professional Malays with vast MNC exposure to assume positions in the board rooms and management.