Neither the Republic of China Navy nor a single local bank could have foreseen in October 2014 that a multibillion New Taiwan dollar Ministry of National Defense contract to build six minesweepers awarded to Ching Fu Shipbuilding Co would one day become a massive financial scandal.
No one could have expected a scandal that could prove to be a devastating blow to the nation’s indigenous shipbuilding and upgrading efforts.
If the ministry could have made more of an effort to ensure that Ching Fu followed the contract’s requirements, provided more supervision on a regular basis of the ships’ construction, given all the necessary information to creditor banks in a more timely fashion, and if the banks had been more cautious in their credit investigation and loan approval procedures, the company would have had a lot less leeway to provide fraudulent receipts and forged documents from overseas shell companies to obtain billions in loans from nine state-run banks between 2014 and last year.
However, it is too late for such a wish list. The nine creditor banks, led by First Commercial Bank, last week announced that Ching Fu had defaulted on a NT$20.5 billion (US$677.1 million) syndicated loan by failing to honor its terms.
The banks said their maximum losses could reach NT$12.5 billion, although the figure could be reduced to NT$4.5 billion if the ministry continued with the project — either with Ching Fu or other shipbuilders.
Of course, Ching Fu should be held accountable for the dire situation it faces and those responsible for its alleged loan fraud and illegal transfers of funds, if proven, punished. Banks should also face penalties for the shortcomings in their procedures and internal controls.
However, the ministry must also be held accountable. One major question is how and why Ching Fu, rather than the more competent CSBC Corp, Taiwan (CSBC) was awarded the contract three years ago.
The Legislative Yuan’s Finance Committee last week voted to form a special task force to investigate the potential collapse of the contract and the Executive Yuan has said it would investigate the role of the ministry and First Commercial Bank in the contract.
However, a key question is whether the banks will take over the financial management of Ching Fu to maintain its operations and stave off its bankruptcy.
The nine banks, supply-chain firms and the nation as a whole would face risks if Ching Fu goes bankrupt, but it is debatable whether it would be more effective for the shipbuilding project if Ching Fu remains solvent and continues with the project.
It is also questionable whether other shipbuilders are willing to take the contract if Ching Fu goes under.
However, it is unlikely that the banks would want to reduce their participation in the nation’s indigenous shipbuilding program, even if the situation continues to deteriorate, or to see their loans to Ching Fu written off as bad debts.
Regardless of whether the government decides to throw a lifeline to Ching Fu at the last minute, it should work hard to address public concerns, contain the situation and mete out punishment to those who deserve it. It is also important that the government continues with building the minesweepers to ensure national security.
As a self-sufficient domestic defense industry has strategic implications for both national security and economic development, the Ching Fu case should serve as a lesson for the government’s indigenous submarine program, which by its very definition will be far more challenging than the minesweeper program.
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