Cost over run at Sime Darby...again!

The Star report on May 6, 2010:

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.


Note: Al-Fatihah to my former Golden Hope colleague Azlin Ariffin who died a few days ago while carrying out her duties and also to the worker who suffered the same fate at Sime Darby's St Helier Estate a few days ago. Both were Class One deaths.