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The Situation Report

20th September 1998

Powerful interests behind huge arms deal with Chinese firm?

By Iqbal Athas

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When the Chinese cargo vessel "Gao Yang" steamed into Colombo Port on September 10 (Thursday), with a full load of military hardware, alarm bells rang in the security establishment.

The National Intelligence Bureau (NIB) warned the Ministry of Defence on the need to secure the ship and the lethal cargo. This was particularly in view of several formalities having to be cleared before the cargo was unloaded.

Navy personnel clamped down a tight security cordon around the ship.

Though the ship had docked into port on the eve of a weekend, there were hush hush moves. By Monday (September 14), formalities were cleared. That included the opening of a Letter of Credit for the cargo in favour of Bomtec, the controversial trading arm of China's People's Liberation Army (PLA). Hours later, unloading operations had begun supervised by heavily armed troops.

The move meant the Government had ignored protests by NORINCO (China North Industries Corporation) with whom it had an exclusive agreement (on a government to government basis) for defence procurements.

NORINCO is wholly owned by the Government of the People's Republic of China. In terms of a Government to Government agreement signed by Sri Lanka and China, the Ministry of Defence in Colombo, had agreed not to purchase military items contained in a list accompanied by the agreement from other sources.

The only exception is when NORINCO expressly informs the Ministry of Defence that it is not in a position to make available any items from the list in question.

The cargo vessel "Gao Yang", The Sunday Times learns, has arrived with military cargo worth over $ 9.5 million (or over Rs 636.5 million) For obvious reasons, The Sunday Times will not reveal the details of the military cargo except to say they are for Army, Navy, Air Force and the Police. The vessel had departed from the Chinese port of Dalin on September 1. A second Chinese cargo vessel, also loaded with military hardware, is due in Colombo in the coming week.

The Sunday Times reported exclusively last week how a hurriedly negotiated multi billion rupee defence procurement deal with a Chinese supplier has raised eye brows in the defence establishment and triggered off a minor diplomatic row.

The crucial question is how such a deal has been worked out when a government to government agreement for such procurements exists between Sri Lanka and China.

As The Sunday Times reported, the deal said to involve over US $ 80 million took shape after the arrival in Colombo of a delegation from People's Liberation Army's trading arm, Bomtec. It was led by Col. Jhang Zhang. Thereafter a three member team from the Sri Lanka Army flew to China.

Besides NORINCO's protest, controversy over the deal was heightened by the fact that Chinese leader, Jiang Zemin, clamped down a ban on the PLA or its trading arm doing any business. This was part of a nationwide anti corruption drive by the Beijing government. The Sri Lankan deal came after such a ban was made public.

The Government is yet to explain officially how the new multi billion rupee deal came to be brokered. The Sunday Times learns that powerful interests were behind the move, which disregarded a contractual arrangement between two sovereign governments. Commissions on the deal alone is said to run into millions of rupees. A similar deal for US $ 55 million in 1995 is also said to have yielded millions of rupees in commission to Sri Lankan arms dealers and their powerful backers.

The first agreement between NORINCO and the Government of Sri Lanka was signed in November, 1993 and expired on November 30, 1995. In terms of this agreement, NORINCO established a Bonded Warehouse in Sri Lanka to meet the requirements of the Ministry of Defence.

The PA Government extended the agreement for a further period of two years. Sri Lanka's Ambassador to China, R.C.A. Vandergert (a former Foreign Secretary) signed an agreement with NORINCO on May 22, 1998 to extend the original agreement. It is officially titled "2nd Extension for Agreement No 1."

Last week, The Sunday Times published the contents of a strongly worded letter sent to Mr. Vandergert by Gu Yongchun,Vice President of NORINCO. He said, among other things, that "To safeguard the dignity of the government-to-government Agreement is to safeguard the dignity of both the Sri Lanka Government and Chinese Government."

He reminded the Sri Lanka Government that NORINCO reserved the right to act according to Article 18 of the second extension of agreement No 1 and warned "it will surely hurt the feelings of both our sides."

The article in question refers to the settlement of disputes by arbitration. For this purpose, both Sri Lanka and China had agreed to a three member Arbitration Tribunal with the nationals of the two countries serving as members.

A third, it has been agreed, should be from another country but both parties have agreed that such a person should not act "as an Umpire."

The trio will decide by a majority of votes and their decision is to be binding on both sides.

The Sunday Times is now in possession of another letter from NORINCO which throws more light. Dated August 16, 1998, it is addressed to Chandrananda de Silva, Defence Secretary by Luo Xiang Dong, Deputy General Manager, Asia-Pacific Department of NORINCO. (See letter on this page)

Mr Luo points out that "according to the Agreement, MOD Sri Lanka shall not purchase the identical items in the lists appended to the Agreement which are supplied by NORINCO unless NORINCO informs MOD Sri Lanka that NORINCO is not in a position to meet the requirement of MOD Sri Lanka. And if MOD Sri Lanka requires products other than those in the lists appended to the Agreement, MOD Sri Lanka may enter into discussions with NORINCO for obtaining such requirements and further they may enter into any agreement regarding the prices and quantity."

He adds: "At meantime, it has been insisted by Sri Lankan Government that all security equipment shall be brand-new and be purchased directly from the manufacturer with the certificate of origin and year of manufacture.

"NORINCO will not be responsible for any unhappy thing happened to any used or second hand equipment purchased through any third party in China with possible lower prices.

"NORINCO is wholly owned by Chinese Government without private sectors at all and NORINCO is the only manufacturer of Arms, Ammunition, Artillery Guns and Armoured Vehicles etc. in China.

" Recently it has been said that Sri Lanka Army has sent a delegation to China for the purpose of evaluating security equipment not from NORINCO.

"We hope that this matter will not have any possibility of violating the existing Agreement between MOD Sri Lanka and NORINCO. And up to now we have not received any communication from MOD Sri Lanka, through the Ambassador of Sri Lanka in Beijing or directly to NORINCO, that MOD Sri Lanka has the reason to go to other parties to purchase the identical items signed in the Agreement.

"On the contrary, when I met Your Excellency and the MGO (Master General Ordnance) branch of Sri Lanka Army, I got that response that NORINCO's performance is quite satisfactory for meeting the needs of Sri Lanka Armed Forces.

"If MOD Sri Lanka needs other equipment which falls within the product range of NORINCO, though not signed in the Agreement, MOD Sri Lanka should discuss with NORINCO first, for NORINCO is the only manufacturer of such equipment in China.

"On a basis of government to government, MOD Sri Lanka and NORINCO China have co-operated successfully for decades. And such a good friendship has been maintaining between MOD Sri Lanka and NORINCO that when Sri Lanka Army expressed their need of generators, NORINCO donated to them 500 Nos 3kw/5kw generators of the value of Rs 17 million.

"We appreciate very much Your Excellency's leadership in signing and implementing the Agreement which is the ideal way to meet the needs of Sri Lanka in the current situation and we believe the dignity of the Agreement will not be harmed." The Sunday Times has learnt that the deal with Bomtec (PLA) has not come for scrutiny by a voluntary team that has been set up by the Government to screen procurements.

The team comprises General Denis Perera, a former Army Commander, Vice Admiral Asoka Silva, a former Navy Commander and Air Vice Marshal Pathman (Paddy) Mendis, a former Commander of the Sri Lanka Air Force.

The three member team has been helping the Ministry of Defence to review procurements for the security forces. There has been many instances where the Committee's role has been acknowledged as very useful.

Recently, the Committee at a meeting chaired by Additional Secretary to the Ministry of Defence, M.S. Wickremaaratchi, reviewed moves by the Sri Lanka Army to procure uniform material. A multi million rupee tender was awarded to a private party after ignoring a competitive bid made by State owned Salusala. The latter has not been considered on the grounds that it did not make available a bid bond a financial guarantee which bidders are required to make. It was pointed out that Salusala was a State concern and why the absence of a bid bond should be the only grounds for disqualification. It soon transpired that there was a ruling that State concerns did not have to provide a bid bond.

The Committee promptly recommended that the award should go to the most qualified bidder Salusala. That was a multi million rupee tender.

But, in this instance, where the deal is multi billion rupees, some questions remain a mystery. After last week's The Sunday Times exposure, some powerful sections of the military establishment even suggested that procurements be brought under the provisions of the ongoing censorship.

Unlike the previous censorship, the one imposed on June 5, this year, specifically leaves out the subject of procurements. When these regulations were delivered to the media, senior officials told Editors that they were free to expose corruption in procurements.

If that too is brought under censorship, the many shady deals that are going on will not surface. But the millionaires, both in camouflage and outside it, who are born out of these deals do surface. For they change their frugal lifestyles to one of ostentation. It would therefore be difficult to hide the whole truth to the whole world, no matter how long the censorship lasts.

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