Situation Report

4th March 2001

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Beijing-Colombo row over fast gunboat deal

Ten engineers and executives of the State owned China Xinshidai Company were in Italy, in January this year. They were discussing with Italian manufacturers the purchase of Gun Control Systems.

They were to be fitted to two brand new Shanghai Class Fast Gun Boats (FGBs) the People's Republic of China was to sell to the Sri Lanka Navy this year.

If the Gun Control Systems were from Italy, China Xinshidai Company was to obtain the main engines from Germany. A team was due to go there too, to examine engines of leading manufacturers with whom orders had been placed.

Major Zang Xianonan, the senior executive of Xinshidai was in Italy when his mobile phone rang. It was the Sri Lanka Ambassador to China, Bernard Goonetilleke, calling from Beijing. The veteran diplomat, known among his friends as Bab, was intervening to resolve a looming crisis between China and Sri Lanka over the FGB deal.

Despite all his efforts, there is a ding dong battle under way between Beijing and Colombo. This was after Vice Admiral Daya Sandagiri, Commander of the Sri Lanka Navy, who assumed office in January, this year, ordered that the deal be cancelled. It had been signed by none other than his predecessor, Vice Admiral Cecil Tissera.

Efforts by Ambassador Goonetilleke to resolve the controversy were not successful. If payment of money for the FGBs was the problem and the Sri Lanka Government had difficulties, he was ready to negotiate. The cash flow problem the Government was facing, which had delayed the opening of many Letters of Credit for military procurements, however, was not the main issue. There were several others, and they appear to have surfaced only after Vice Admiral Sandagiri assumed office and took the decision to cancel the deal.

But the Xinshidai Company were adamant not to bow down and accept the cancellation order. Last month they sent a three member delegation to Colombo to meet Vice Admiral Sandagiri and discuss the matter. There was a lot of table thumping by the leader of the Chinese delegation, who warned that non-enforcement of a signed contract between Beijing and Colombo violated international norms. He said a refusal by Colombo would mean Xinshidai would raise issue at the highest levels of the Chinese Government. Since China was a very friendly country and the largest supplier of military equipment to Sri Lanka, such a move would have serious consequences.

But the Sri Lankan side held the view that the contract had not taken effect since the initial payment had not yet been made. Vice Admiral Sandagiri pleaded with the three member delegation to come down on the price agreed upon and entered in the contract already signed. When the meeting resumed for a second day at Navy Headquarters, the Chinese side had offered to make a concession a reduction of US $ 10,000. It was rejected. The amount was a sheer drop in the ocean compared to the prices involved.

The Sunday Times today reveals exclusively the details behind the latest FGB deal. It highlights how the absence of checks and balances in military procurements is costing the nation billions of rupees. Many procurement deals involving billions of dollars or millions of rupees have been highlighted in the past, all in the public interest. Despite this, many a person who became a billionaire or millionaire, both in uniform and outside it, have gone scot free. The deals had included controversial procurements by the Sri Lanka Navy last year and the years before.

One such glaring instance was the contents of the Situation Report in The Sunday Times of January 2, 2000 headlined "Fishy boat deal amid New Year war fire." The report revealed how the Sri Lanka Navy had entered into a deal to purchase two Fast Missile Vessels from Israel.

One of them was INS Komemiut (manufactured in 1980) and INS Moledet (manufactured in 1979). Both vessels were over 20 years old. They have now been named SLNS Nandimitra and SLNS Suranimala respectively. Although there were offers from other suppliers to sell new vessels at a lower or competitive prices, the Sri Lanka Navy paid over US 26 million (Rs 2236 million) for these old vessels which were re-furbished.

No sooner The Sunday Times made the revelations, there was a flurry of activity. Barely 24 hours after the publication, a written warning was issued by the Competent Authority. The Sunday Times was warned for making the disclosures.

But by the end of year 2000, the Navy which had taken delivery of the two Israeli Fast Missile Vessels, had realised the futility of obtaining vessels which were 20 years old. The weapons systems were malfunctioning and reports of periodic defects in other areas were being identified. After representations to the supplier, an Israeli team flew down to Colombo to talk about rectifying defects.

Rectification of defects in vessels which had systems over 20 years old was not the only problem. It dawned on the Navy authorities that the large Israeli Fast Missile Vessels could not operate in the northern and north eastern waters the main operational areas of Sea Tigers without smaller Naval craft escorting them. They were found to be too big and thus vulnerable to attack.

That was not only in the case of the Israeli Fast Missile Vessels. Even the Indian built INS Saryu, a Sukhanya class Offshore Patrol Vessel constructed in 1989 in India, had the similar problem. It also required a fleet of smaller vessels, like Fast Attack Craft if it were to operate in northern and north eastern waters.

Renamed SLNS Sayura, the former Indian Navy's OPV was to be the platform from which the Navy planned to operate its first Air Arm with an Indian built single-engined Chetak helicopter (French equivalent Alouette). It has now transpired that the Air Arm project is a white elephant. Vice Admiral Daya Sandagiri was highly embarrassed to explain the details to Government leaders. He had to confess that as Chief-of-Staff of the Sri Lanka Navy he was completely unaware of details concerning the purchase of Israeli vessels or the setting up of an Air Arm. He has had the first official briefing on the Air Arm project only after he assumed office as Commander. He complained he had been kept in the dark.

For both Vice Admiral Sandagiri and the Navy, the months ahead will be daunting. Some experienced officers are on courses whilst others have retired. The result at least three Rear Admirals are holding two different appointments each. Last Wednesday, (February 28) Chief of Staff, Rear Admiral A.H.M. Razeek and Rear Admiral H.R. Amaraweera, were retired after the Ministry of Defence rejected their appeals for extensions.

Rear Admiral Razeek was originally one of the aspirants for the post of Commander. He would have assumed the office of Chief of Staff on March 12 last year, which would have made him eligible to become Commander when Vice Admiral Cecil Tissera, went on retirement on December 31, last year. This was if the customary practice of appointing the next in line was followed. That was not to be.

But Daya Sandagiri, then Rear Admiral and Chief of Staff and Rear Admiral Terrance Sunderam, (Commander, Eastern Naval Area) had reached three years of service as Rear Admiral - the maximum period of service in the rank. The MOD first granted them extensions until September 12 and thereafter until December 31, last year. Soon after that, Daya Sandagiri was promoted to Vice Admiral and appointed Commander of the Navy. Rear Admiral Sunderam was called upon to retire. That was after serving ten additional months beyond the compulsory period of three years.

An appeal by Rear Admiral Razeek to serve eleven additional months, (as against the ten extended months served by Rear Admiral Sunderam), that too until he reached the retirement age of 55 years, however, was turned down by the Ministry of Defence.

He had confirmation that he would have to go on retirement only when he turned up at Navy Headquarters on March 1. A cup of tea with colleagues, a series of hand shakes and he was out. That was how the career of a Navy officer who had served the institution and the country for thirty years ended. A facility extended to one officer was denied to another.

That is the state of affairs in the Navy. It is in this backdrop that the controversy over the purchase of FGBs from China has arisen. I have been under considerable pressure, particularly from business interests, not to reveal details of the FGB deal.

The deal to purchase two Fast Gun Boats from the State owned China Xinshidai Company was signed in Colombo on November 20, 2000 by then commander vice Admiral Tissera and a representative of the Chinese firm. (Contract No. SB/449/189/12/4/00). The contract stipulated the following payment schedule: a down payment of US dollars 1,977,600 payable during the course of January, 2001. Further, a Letter of Credit for US dollars 7, 910,400 being 40 per cent of the contract value had to be opened during January, 2001.

In terms of the deal, the two Gun Boats would cost US dollars 19,776,000. In other words, each FGB would be well over US dollars 9.5 million. This is where the controversy begins.

The Sunday Times has learnt that Vice Admiral Sandagiri's rejection of the deal was on the grounds that the prices for the two FGBs was outrageously high. He has pointed out that it was only three years ago that similar FGBs were purchased, also from China. They had only cost around US dollars US dollars 3.4 million. The new FGBs were said to have modern equipment and advanced systems on board.

Yet, Vice Admiral Sandagari believes the cost in such an instance could not exceed a further one or two million dollars and certainly not as exceedingly high as over US dollars 9.5 million. He has explained to Government leaders that was why he ordered Commodore Abeykoon Banda, Director of Navy Supply and Secretariat to request Xinshidai not to go ahead with the construction of the two FGBs.

Whilst this is going on, there was speculation in business circles that persons involved in the deal had already received a commission amounting to US dollars 2 million (over Rs. 172 million). Even senior Navy officials were speaking of the matter but there is no official confirmation. It was also difficult to verify the veracity of this report.

Vice Admiral Sandagiri's adamant refusal to accede to the latest FGB deal is in view of the staggering cost, which he believes is unrealistic. But Ambassador Goonetilleke has argued that the contract (signed in November, last year) is between two state institutions. That constitutes a Government to Government deal.

Ambassador Goonetilleke is strongly of the view that the ongoing controversy should not damage the excellent relations that have existed between China and Sri Lanka. He is concerned about contracts being treated casually without concern for legal implications and the role state agencies have played.

The President of China Xinshidai Company, Chen Xiaozhong, has told the Government that the contract was signed after discussions and negotiations for nearly one year. He has said that the Navy Directors who participated in the discussions and negotiations were very happy about the FGB's, particularly due to the enhanced fire power, western made engines and credit facilities offered.

As one high ranking serving Navy source said, the deal which was shrouded in secrecy has become public only because the new Commander of the Navy (Vice Admiral Sandagiri) did not agree to pay an overwhelming sum . "Many such deals have gone through spawning billionaires and millionaires. Public funds have made this possible. But the public are in the dark," the source said.

Several irregular deals have been exposed. Many a mess in the security establishments have been revealed. Only one strong action has been taken the imposition of a censorship. Even that has failed to bury details of billion dollar deals that are plundering a nation's wealth whilst the public are called upon to face severe hardships. All in the name of winning a war. Only those dabbling in crooked deals are the winners.

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