MiG deal crash lands on government
15-07-2007 - The Sunday Leader
By Dilrukshi Handunnetti
SLAF buys products rejected by a TEC in 2000
End User Certificate issued to third party
No performance bond or bank guarantee
Designated party not registered with British MoD
Unit cost a staggering US$ 2.462 million
Damning evidence has now surfaced to establish that the four MiG Flogger-D fighter-bomber aircraft purchased by the government in 2006 at a staggering US$ 14,676,000 included three units rejected by a SLAF technical evaluation committee in the year 2000, with incumbent Air Force Commander Air Marshal Roshan Goonetileke as chairman, having ruled against the purchases.
What is further damning is a unique contractual condition that stipulated that the all important End User Certificate should be issued to a third party defying all norms and procedures of government to government contracting, and that too to a London based company that is not even registered with the British Ministry of Defence.
Buying life expired aircraft
To make matters worse, not only has Sri Lanka purchased outdated, life expired aircraft by paying stupendous amounts in 2006, but the money has also been transferred to a designated third party with no bank guarantee or performance bond, the latter being waived off by the Sri Lankan Ministry of Defence, purportedly for the reason that this was indeed a government to government transaction, giving rise to a series of questions about the entire deal.
To top it all, the aircraft that are no longer in production and hence facing serious depreciation in value, have been purchased at US$ 2.462, 000 a unit, way above the purchase price when Sri Lanka purchased her first four MiGs seven years ago.
Purchase ruled out in 2000
For a start, three of the four purchases made in 2006 were ruled out in 2000 by the SLAF TEC. The rejected aviation products were offered in two different (parts) offers. The three MiG 27 aircraft that were so rejected bear serial numbers 8371534688, 83712518044 and 83712518009.
It now transpires that instead of making it a government to government transaction, the contract recognised a third party referred to as 'designated party' - a London- based company named Bellimissa Holdings Ltd., which was authorised to collect the payments on behalf of the seller, Ukrinmash, a subsidiary of a Ukrainian state company named, UKRSPETSEXPORT, Ukraine.
Deal steeped in controversy
The entire deal, steeped in controversy and tainted with allegations of corruption contains many a shocking truth and raises serious questions about the manner in which the Sri Lankan defence authorities have sought to answer the island's growing air defence requirements.
As much as there cannot be any plausible explanation to SLAF's procurement of three aircraft that were overruled by the SLAF TEC when the incumbent commander was the TEC chairman, the deal defies explanation as to why Sri Lanka committed itself to a contract that is favourable only to the seller and not to the buyer.
For here is one contract, sacrosanct to the air defence of a nation, yet comes without a bank guarantee or a performance bond. It now appears that neither factor was considered worthy when one of the most important procurements were made by the SLAF last year.
Cardinally important requirements overlooked
When perusing the SLAF procurement history, it is an established fact that both the performance bond as well as a bank guarantee have been considered cardinally important except in one instance. The SLAF procurement history records one instance when this significant requirement of a bank guarantee was waived off - when the SLAF purchased C 130s from the British Ministry of Defence at which point the government of UK issued a letter to the Sri Lankan government guaranteeing the approval of a bank loan.
In stark contrast, there is no such bank guarantee issued by the Ukraine government with regard to the four MiG 27 M purchases, that gives rise to the important question as to how the Government of Sri Lanka (GoSL) released funds to a company named Belimissa Holdings in the UK without even voicing any concerns.
Bellimissa Holdings Ltd., on the other hand, is a company that needs to be looked into. It is not registered with the British Ministry of Defence. It also cannot be traced in anyway through even an internet search.
It of course has a so-called office in London housed on the 2nd Floor, 145-157, St. John Street, London ECIV4PY, which has been included in the contract with the SLAF.
Who authorised payment?
The pertinent question here would be to find out as to who authorised that payments be made to a designated party - in this case a dubious company named Belimissa Holdings Ltd., for it is a sacred practice to ensure that military equipment purchases of this magnitude be essentially government to government contracts that do not entertain third parties.
Another salient question is whether SLAF ever paused to even verify the credentials of this company that is not registered with the British MoD, and not even possible to trace through a comprehensive internet search. Hence its track record as defence equipment provider/facilitator remains totally unknown. Further, did the Attorney General authorise the terms of this contract?
Ambassador's warning unheeded
It further transpires that not only has Sri Lanka hastily purchased obsolete aircraft manufactured in the early '80s and hence considered life expired after 25 years since manufacture, but also how the warnings of Sri Lanka's Ambassador in Russia, Udayanga Weeratunga in October 2006, not to issue an End User Certificate in a manner that might place the defence procurements in the hands of illegal or terrorist organisations, went unheeded. It is obvious that Weeratunga's intention was to secure the said certificate for the GoSL and prevent it from reaching any other hands.
According to top SLAF sources, an End User Certificate is of utmost importance in military purchases. According to procurement officers, it is a certificate that seeks to prevent military purchases from reaching the wrong hands. 'They could reach Hamas, al Qaeda or even the LTTE,' an officer commented.
Compounding matters is the fact that there is no guarantee of spare parts offered for a period of 10 years in 2000, that makes the contract significantly one-sided.
Complaint to Bribery Commission
The entire MiG 27 deal, to date, remains quite questionable, with two government dissidents, Mangala Samaraweera and Sripathi Sooriyaarachchi having complained to the Permanent Commission to Investigate Allegations of Bribery and Corruption. For here is one deal that has a chequered history.
As already stated, Sri Lanka has purchased MiG 27s on an earlier occasion as well. Offers were made in two batches in 2000, including three out of the four MiG 27s purchased last July. It is perhaps a quirk of fate that three out of the four purchased in July 2006 belonged to the lot rejected by the then TEC seven years ago.
Unit price escalates
The financial consideration of the MiG 27s is of utmost importance. When the four MiGs were purchased in the year 2000, each unit cost US$ 1.75 million. When a second batch of two MiGs was next offered for purchase there was a price decrease. The quoted unit price then was US$ 1.06 million. But years later in 2006, the unit price was as high as US$ 2.462 million.
It now transpires that Sri Lanka has gone ahead and purchased three aircraft that were considered unsuitable by the SLAF as far back as seven years ago. How the life expired aircraft may strengthen Sri Lanka's air defence is a question worth raising.
This also means that the first four MiGs purchased through contract No. SLAF/2000/6/AIR dated 20.05.2000 cost the state a total of US$ 7.00 million only. The second offer was for US$ 3.2 million, given the drop in the purchase price. It is from these two offers that Sri Lanka selected her first four MiG aircraft.
Obsolete aircraft purchased
What is really strange is why Sri Lanka had to purchase four aircraft that are considered obsolete, no longer in production and needs a life extension at a total cost of US$ 9,848 million with each unit costing US$ 2.462 million?
There are some other aspects to be considered in evaluating these purchases as well.
In the year 2000, when the first batch of procurements was made, the four aircraft on offer were as follows: aircraft bearing serial numbers 83712531385 (manufactured on 26.05.1982 with 746.33 flying hours available and 18 years old), 83712534657 (manufactured on 24.02.1983 with 745.40 flying hours available and 17 years old), 83712534709 (manufactured on 25.03.1983 with 746.33 flying hours available and 17 years old) and 8371253877 (manufactured on 1.01.1984 with 744.07 flying hours available and 16 years old).
The second offer included 83712520013 (manufactured on 13.05.1981 with 848 flying hours available and 19 years old), 83712545237 (manufactured on 07.06.1984 with 848 flying hours available and 16 years old) and a MiG 23 bearing serial number 49065315 (manufactured on 22.06.1984 with 529 flying hours available and 16 years old.)
By the time Sri Lanka procured her second batch of MiGs to add to the SLAF fleet, three out of the four aircraft had reached 25 years of age which means they are considered 'technically dead.'
The 2006 procurements include aircraft bearing serial number 83712534688 (manufactured on 10.03.1983 with 850 flying hours available and 24 years old), 83712518044 (manufactured on 03.04.1981 with 850 flying hours available and 26 years old), 83712518022 (manufactured on 23.11.1980 with 850 flying hours available and 27 years old) and 83712518009 (manufactured on 28.11.1980 with 850 flying hours available and 27 years old). The first two aircraft had been overhauled as far back as 1989, and the other two in 1991, making the risk factor high and the value, correspondingly much less.
Technically dead aircraft
This brings us to another concern which is also of importance. Those well versed in aviation technology will vouch for the fact that a MiG needs to be overhauled every seven years. After 25 years, it is generally considered a dead aircraft though the life span of a MiG is stipulated to be 25 years, with extensions being possible provided there is significant investment in technical improvement.
The proof of this fact can be found herein. On September 8, 2000, Director, Ukrinmash, P. P. Stvchishyn wrote to Director, Aeronautical Engineering, Air Commodore O.D.N.L. Perera where he stated that service life for aircraft MiG 27 and MiG 23 UB type was 25 years. Its extension upto 30 years and more was possible by specialists of Mikoyan Design Bureau in cooperation with Lviv Aircraft Repair Plant, it added.
The letter further added that service life between overhauls of MiG 27V and MiG 23UB is seven years. The letter contains a particular undertaking which is missing in the 2006 contract. The 2000 letter offered a minimum guarantee period of spare parts delivery for MiG 23 UM as being 10 years. There is no such clause in the 2006 contract, making Sri Lanka once again the loser.
Outdated aircraft fight escalating war
It does not take a rocket scientist - in this case an expert in avionics, to grasp the truth that by purchasing the old aircraft to fight an escalating war based on the principle of quick purchases at any cost, the defence authorities have put the valuable lives of military pilots at stake in addition to losses incurred in monetary terms.
According to the proposal for MiG Flogger D Fighter-Bomber Aircraft Manual 2006, the MiG 27 (NATO reporting names Flogger - D and J) and Indian Air Force name Bahadur (Valiant), is designed for action against stationary and mobile, ground and sea enemy units. They have not been used in combat actions (excluding Afghanistan).
Irrespective of all of this, on July 07, 2006, the Ministries of Defence, Public Security, Law and Order, wrote to SLAF Commander Air Marshal Roshan Goonetileke granting approval for the purchase of four units of overhauled MiG 27 M aircraft, the overhaul of three units of MiG 27 M, and one unit of MiG 23 UB, of the SLAF.
Letter on behalf of Gotabaya
The MoD letter by Chief Accountant R.A.C. Gunatilleke, on behalf of the Defence Secretary Gotabaya Rajapakse, stated that authority was thereby granted to purchase the four MiG 27M aircraft subsequent to completion of overhaul with four R29B-300 engines, and to entrust a major overhaul of three MiG 27M aircraft and one unit of MiG 23 UB aircraft of the SLAF fleet from and to Messrs. Ukrinmash, Ukraine, applicable under the government to government transaction, at a total negotiated C & F cost of US$ 14,676,000 as indicated.
Shocking sentence in letter
This letter contained a shocking sentence announcing the reasons for waiving off the vital requirement of a performance bond. It said: 'As requested by the supplier, due to the fact that the offer is on G2G basis as approved by the cabinet of ministers on March 01, 2006.'
But this statement is false and a fabrication as well, as a government to government contract does not encourage third party involvement and fails to recognise designated parties who may (not) qualify to obtain the End User Certificates.
Payment to designated party
As such, the four aircraft were obtained at a total cost of US$ 9,848,000, the overhaul of three aircraft of the same making at US$ 128,000, and freight paid separately by TT transfer seven days prior to delivery against bank guarantee that amounted to US$ 700,000. The total cost was calculated to be US$ 14,676,000 and the contract was sealed shortly thereafter, on July 26, 2006.
According to Contract No. SLAF 2006/7/AIR (Order No. J45001) for the purchase of four aviation products, the contract brought in a third party, referred to as designated party to which payments were to be made as per contractual terms.
Accordingly, the buyer was SLAF Commander, Air Marshal W.D.R.M.J. Goonetileke of Colombo, Sri Lanka, and the seller was Ukrinmash, a Ukrainian state foreign trade and investment firm and a subsidiary of the state company 'UKRSPETSEXPORT' of Kiev, Ukraine, represented by its Director, D. A. Peregudov.
The contract also recognised an unregistered British company named Bellimissa Holdings Ltd., as the designated party to which payment had to be made, represented by M. I. Kuldyrkaev. The contract provided the purported company's address to be Bellimissa Holdings Ltd., 2nd Floor, 145-157, St John Street, London ECIV4PY.
More importantly, clause 3.1 of the contract stipulates that all payments are to be made by the buyer to Bellimissa Holdings Ltd., the designated party in US Dollars.
What is more scary is the inclusion of clause 3.2 which stipulates that an irrevocable and divisible letter of credit was to be effected by the buyer within 14 days of signing the contract and the issuance of 'End User Certificate by the buyer to the seller and/or designated party.'
Clause 23.1 of the contract also stipulates that 'The buyer and the seller are aware that a third party, Bellimissa Holdings Ltd., referred to as the 'designated party' in the contract shall be involved to provide the finances in executing this project.' 'All payments in relation to this contract, including direct payments pertaining to freight charge (except freight cost for air transportation of the first three units of the aviation products) was to be irrevocably assigned and paid to the designated party in consideration, obtaining the finance package as per contract. This shall include naming the designated party as beneficiary in the L/C.'
This brings us to the other serious concern, the issue of the End User Certificate raised by the Sri Lankan Ambassador in Russia, Udayanaga Weeratunga.
Importance of End User Certificate
Worried about the negative possibilities, Weeratunga on October 13, 2006 wrote to SLAF Commander, Air Marshal Roshan Goonetileke with a copy to Purchasing Officer, Air Commodore T.M.P.D. Tennakoon, wherein he urged that the End User Certificate should be issued only in the name of the Government of Sri Lanka.
Weeratunga's letter emphasised that at his (ambassador's) request, the Ukrainian government has enforced a new special regulation with effect from October 1, 2006 for the Ukrainian companies that are involved in defence supplies/services to Sri Lanka.
'According to the new regulation, those companies have to get confirmation on the authenticity of the End User Certificate issued by the buyer, via the diplomatic mission of Sri Lanka in Moscow. This regulation will apply to all pending supplies.'
Weeratunga also stressed why he introduced such a stipulation. 'My request was made with the purpose of avoiding illegal/terrorist organisations importing defence items from the Ukraine.'
He added: 'The State Services of Export Control that issues export licenses to suppliers, hereafter will not issue licences without confirmation from this mission on the authenticity of the End User Certificate issued by the relevant buyer of Sri Lanka.'
The Sri Lankan Ambassador adds, 'Therefore please send me the copies of End User Certificates issued in respect of all pending supplies/services from Ukraine.' What has happened is certainly mind boggling.
Given the knotty issues involved, it would be appropriate for SLAF to answer as to how three of the rejected aviation products became productions of purchasable quality to the SLAF in 2006. That too by Air Marshal Roshan Goonetileke who in the year 2000, in his capacity as TEC chairman rejected the same, but thought it fit to purchase them in great haste through a designated party to boot and at a higher price six years later.
Defence authorities query
Defence authorities have now raised queries as to how foolishly such purchases of aviation products that require life extensions have been made and how such outmoded products would jeopardise the lives of trained pilots who may risk their precious lives due to irresponsible decision making by the defence authorities.
And instead of making it a government to government contract, why it also brought in a third party as a designated party is altogether baffling as well. These are questions the SLAF should answer, given the fact that it is evident that they have indeed been very liberal in spending the poor taxpayers' money in the name of aviation products that would serve no purpose whatsoever since all aircraft that require the all important life extensions are bereft of them.
Assessment of MiG 27
The MiG 27 Flogger D is no longer in manufacture. The Russian Air Force retains its MiG 27 aircraft in the reserve with only Kazakhastan, India and Sri Lanka continuing to use the outdated aircraft.
The Indian Air Force is phasing out MiG 27 with a locally designed aircraft Tejo.
A TEC appointed in 2006 that analysed the country's security situation, recommended the purchase of four more MiG 27s and the overhaul of existing ones, which is also questionable as a TEC is not mandated to do threat detections but to evaluate only technical aspects.
In contrast, according to a US government assessment of the SLAF military capabilities carried out in 2002, the US Pacific Command recommended against the further purchase of MiG 27. Its report recommended that SLAF required to develop ability to fly at night and that the acquisition of MiG 27 would prove only to be a drain on the resources.
Ukraine does not produce the said aircraft, but exports it through UKRSPETSEXPORT - a state company for the export of military products.