Navy frigate deal: What we need to know

FILE: Senator Gringo Honasan (Photo: Gregorio Honasan/Facebook)

MANILA — The Senate on Monday, Feb. 19, will start its probe into the alleged controversies surrounding the PHP16-billion acquisition of two Philippine Navy frigates.

The investigation by the Senate Committee on National Defense and Security, headed by Senator Gregorio Honasan, as well as the Congressional Oversight Committee on the Armed Forces of the Philippines Modernization Act, seeks to determine whether the acquisition of the combat ships “promotes the goals of the modernization program and complies with pertinent laws”.

The investigation was initiated by opposition lawmakers in the Senate — Minority Leader Franklin Drilon along with Senators Francis Pangilinan, Paolo Benigno Aquino IV, Risa Hontiveros, Leila de Lima, and Antonio Trillanes IV —through Resolution No. 584.

It was filed in the wake of allegations that Special Assistant to the President (SAP) Christopher “Bong” Go endorsed a letter to the defense department regarding the project.

But what was the root of the controversy and how was Go’s name dragged into it?

The Frigate Acquisition Project (FAP) is one of the key pieces of the Armed Forces of the Philippines’ (AFP) modernization program, as it seeks to provide the country with the capability to deal with air, surface and sub-surface threats.

It will be armed with a variety of missiles and guns capable of defeating such threats.

The acquisition of the two frigates is widely seen as the first step to provide the Philippine Navy with modern and capable warships to protect the country’s vast maritime territories.

‘Done deal’

The FAP contract, which is worth almost PHP16 billion excluding the weapon systems and munitions, was initiated in June 2013 and was awarded during the time of President Benigno “Noynoy” Aquino III under then defense secretary Voltaire Gazmin.

On June 14, 2016, or during the waning days of the Aquino administration, the Department of National Defense’ (DND) bids and awards committee issued a resolution declaring South Korean shipbuilder Hyundai Heavy Industries Co. Ltd. (HHI) as the “most qualified” bidder and thereby dealt out the Issuance of the Notice of Award in favor of HHI.

On June 30, 2016, President Rodrigo R. Duterte was inaugurated as the 16th president of the Republic.

In September that year, then-appointed DND Secretary Delfin Lorenzana sent the Notice of Award, and shortly after being confirmed by the Commission on Appointments on Oct. 19, signed the FAP contract agreement with the naval shipbuilder.

The Notice to Proceed was issued to HHI on Dec. 13 of the same year.

But for the most part of 2017, the project was stalled at the Critical Design Review (CDR) stage after the Navy and HHI raised conflicting concerns on the combat management system (CMS) to be installed on the frigates.

The CMS is what most call “the brain of a naval combat vessel”, a computer and software system package that integrates all the sensors and weapons systems of the ship into a single system to assure “knowledge superiority” over potential enemies, shorten decision-making cycles, and execute rapid and accurate weapon engagement, especially during combat or security operations.

HHI, citing a provision in the contract, claims “sole right” to choose the CMS maker and selected fellow South Korean company Hanwha Systems as the preferred supplier.

On the other hand, former Philippine Navy (PN) flag-officer-in-command Vice Admiral Ronald Joseph Mercado said that the PN preferred the Tacticos system made by Thales of The Netherlands.

It is the choice for the CMS supplier that will be at the center of Monday’s Senate investigation.

In a privileged speech at the House of Representatives last Jan. 15, Magdalo party-list Rep. Gary Alejano claimed that the FAP project’s “design was altered from the original”.

He also accused HHI of surreptitiously inserting “disadvantageous” provisions, or “fine prints”, into the contract that the Navy leadership and Lorenzana were unaware of.

Alejano also questioned the choice of HHI over its main rival for the project, Garden Reach Shipbuilders and Engineers of India, which submitted a bid that is PHP700 million lower than the winning bidder.

Aside from this, there are claims that SAP Bong Go allegedly got involved in the choice of the CMS supplier.

SAP Go

The Philippine Daily Inquirer and online news outlet Rappler claimed that Go allegedly gave Lorenzana a “white paper” about the supplier to provide the CMS for the warships sometime in January 2017.

This document was passed on to Mercado with a marginal note, dated Jan. 12, 2017, signed by Lorenzana.

“To Admiral Mercado,” Lorenzana wrote on a post-it. “Ronald, This was given to me by Bong Go. Go over it and prepare a report/rebuttal to be submitted to the Pres.”

The Presidential Management Staff, which Go heads, also asked then Frigate Project Technical Working Group chairman Commodore Robert Empedrad to a meeting in Malacañang to discuss the CMS concern.

However, Go refuted sending the controversial document himself, while Lorenzana flatly denied Go interfered in the warships deal.

“My name has been unfairly dragged in this issue. I am not privy to the frigate transaction of the DND. I have never seen the controversial document that is alleged to have come from me, much less, handed the same to SND Lorenzana,” he said in a statement issued on January 17.

“In fact, I will resign if it can be proven that I intervened. It should be emphasized that the frigate project was already a done deal in 2016 during the time of former President Aquino,” Go added.

Lorenzana, Mercado and Empedrad likewise denied that Go intervened in the frigate project.

In a Radyo Pilipinas interview last Jan. 20, Mercado, cleared Go of any interference in the warships deal.

“Ilang beses kami na magkasama ni Secretary Bong Go, ilang beses kaming mag kausap. In fact, pag nag-escort ako kay President (Duterte) aboard foreign navy ships, gaya nung sa China, Pakistan, Japan, ni isang beses ‘di kami nag-usap tungkol sa Navy frigate project (Secretary Go and I have met and spoken to each other a number of times, such as when I escorted the President aboard foreign navy ships, such as those of Chine, Pakistan, Japan. But not once did we talk about the Navy frigate project),” Mercado said.

Malacañang also cleared Go of the allegations after conducting an internal probe.

“An investigation has been conducted and it has been found that the allegations of Rappler are untrue and unfounded,” Presidential Spokesperson Harry Roque said on January 18.

The DND later on announced that the alleged “white paper” originated from Hanwha, one of the proponents for the CMS which was post-qualified by the PN for the FAP.

Timeline in review

For a better perspective on what have transpired thus far regarding the frigate project, the Philippine News Agency (PNA) has obtained a copy of the chronological order of key events relating to the Frigate Acquisition Project.

June 7, 2013 – Former Defense Secretary Voltaire Gazmin signed Acquisition Decision Memorandum No. ‎‎2013-019 to initiate the immediate implementation of the acquisition of two brand new Frigates for the Philippine Navy with an approved budget of PHP18 billion.

Dec. 4, 2013 – The first stage bidding was conducted wherein six proponents were declared eligible by the DND Special Bids and Awards Committee (SBAC), namely: Daewoo Shipbuilding & Marine Engineering Co. Ltd. (DSME) – Korea; Hyundai Heavy Industries Co. Ltd. (Hyundai) – Korea; STX Offshore & Shipbuilding Co. Ltd. (STX O & S) – Korea; STX France S.A. – France; Garden Reach Shipbuilders & Engineering Ltd. GRSE – India; and Navantia SEP (Navantia) – Spain.

March 7, 2016 – The two lowest cost bidders were declared: Garden Reach Shipbuilders and Engineers (GRSE) with bid price of USD322 million or PHP15,047,704,000 (1USD = PHP46.732); and Hyundai Heavy Industries (HHI) with bid price of USD336,912,000 or PHP15,744,571,584.

April 30 to May 7, 2016 – GRSE was declared non-compliant to the financial requirements of the project as required by Section 23.5.2.6 of the Implementing Rules and Regulations (IRR) of RA 9184 or the Government Procurement Reform Act. Its Net Financial Contracting Capacity (NFCC) was found to be below the approved budget contract of PHP16 billion.

June 14, 2016 – DND Bids and Awards Committee declared HHI as the winning bidder and issued the Notice of Award in its favor.

Sept. 13, 2016 – DND Sec. Lorenzana sent a Notice of Award to Mr. Ki Yeong Sung with a corresponding contract price of PHP 15,744,571,584.00.

Oct. 24, 2016 – A contract agreement was signed by Sec. Delfin Lorenzana, Major Marlon B. Dayao, Comm. Robert A. Empedrad, Kisun Chung (Executive Vice President HHI) and Jae R. Kim (Senior Sales Officer of HHI’s Special and Naval Shipbuilding Division)

Jan. 11, 2017 – Col. Leonardo D. Dela Paz, chief of the DND’s Defense Acquisition Office, informed Mr. Ki Young Sund that the “Remarks on Makers” list are grossly disadvantageous to the PN and to the AFP/DND.

Feb. 8, 2017 – Mr. Ki Yeong Sung wrote a letter to the Defense Acquisition Office saying that HHI is entitled to choose HSC Naval Shield as the combat management system (CMS) for PN frigate, which is beneficial for both PN and HHI.

HHI said it can consider the CMS choice of the Navy if it is “willing to compensate USD9 million per ship which is aggregated sum of price difference for the system and service for installation, test and integration in our shipyard.”

April 1, 2017 – Vice Admiral Ronald Joseph Mercado wrote a letter to Lorenzana stating the opinion that “Remarks” provisions in the contract are grossly disadvantageous to the PN and to the AFP/DND, saying: “This remarks, if permitted, are akin to a buyer (PN/DND) with his/her own money being told by the seller HHI on what to buy.”

April 6, 2017 – Col. Dela Paz wrote a memorandum to Lorenzana, stating that the Thales offer, although compliant of the technical specifications, is not commercially competitive in view of the price difference of USD 14,050,000.00 as compared to the offer of HSC Naval Shield.

Commercial competitiveness is one of the requirements stipulated in the “Remarks” provision before the shipbuilder should consider the owner’s preferred maker.

April 20, 2017 – Dela Paz informed the Assistant Chief of Naval Staff for Logistics that Lorenzana has approved the recommendation for the continuation of the Frigate Acquisition Project with the HHI-selected maker of the CMS.

Aug. 10, 2017 – In a memorandum addressed to the AFP Chief-of-Staff, Lorenzana said it is improper for the PN, which had post qualified the HSC Naval Shield CMS, to declare it as non-compliant during the project implementation.

Sept. 14, 2017 – Hanhwa issued a Certificate of Conformance with respect to the request of HHI on the CMS and Link 16 on the new frigates of the PN.

Dec. 8, 2017 – Lorenzana sent a letter to Mr. Kisun Chung, EVP of HHI, informing them that the request for amendments to the contract Agreement of the Payment terms and Delivery Schedule of the 2 units Frigate Acquisition Project is approved.

Dec. 18, 2017 – Mr. Park Moon Yung, Senior VP of HHI, sent a reply-letter to Lorenzana, thanking him for the approval of the amendments to the Contract Agreement of the Payment Terms.

At present, the FAP is proceeding with the other technical specifications of the combat ships.

On Monday, several key personalities mentioned in the frigate project, including representatives from HHI, are expected to attend the Senate investigation to shed light into the issues allegedly hounding the warship deal.

Go and Lorenzana have both welcomed the investigation as the perfect opportunity to air their side so that truth will be finally known.

And come Monday, as the Senate investigation begins and due process takes its course, the real truth will surely come out.