Big fraud and billion-rupee scandal in latest MiG deal

Sri Lanka’s latest and largest military deal, the procurement of four MiG-27 ground attack craft and overhaul to seven others now with the Air Force worth over billions of rupees (or millions of dollars) has raised a number of questions, an investigation by The Sunday Times has revealed.

A contract between the Air Force (SLAF) on behalf of the Government of Sri Lanka and the Ukranian Government-owned firm Ukrinmarsh is touted as a Government-to-Government deal. Such deals are made to obviate the need to call for tenders to pick the lowest bidder. The widely accepted principle in these deals, referred to, as G-to-G, is the elimination of third parties or intermediaries who make fat commissions and become billionaires overnight.

In this instance, the contract signed on July 26, this year, identifies an offshore company, Bellimissa Holdings Limited registered in the United Kingdom, as the “Designated Party”. The cost of the four MiG-27s, freight and other charges will go direct to this company which the contract stipulates, “…shall be involved to provide finance needed in executing this project”.

A copy seen by The Sunday Times is titled “THE SRI LANKA AIR FORCE for and on behalf of the Democratic Socialist Republic of Sri Lanka and M/S STATE SELF-SUPPORTING FOREIGN TRADE AND INVESTMENT FIRM “UKRINMARSH” (subsidiary of ‘UKRSPETSEXPORT’) UKRAINE for…..”

The contract has been signed just one day before July 27, 2006 when Lanka Logistics and Technologies Limited, a wholly state-owned limited liability company came into being to procure all equipment and services for the armed forces and the Police. The emergence of this company was reported exclusively in The Sunday Times (Situation Report) of November 26. The formation of this company is the brainchild of Defence Secretary Gotabhaya Rajapaksa. He is determined to eliminate the role of third parties who have in the past become rich overnight in military procurements through dubious means. He wants to divert part of earnings of the new company for troop’s welfare.

The Sunday Times investigation revealed that this deal has been initiated via suave and diplomatic means by politically influential persons. An unsuspecting Ministry of Defence, it came to light, seems to be unaware of the fuller details and the deeper background. What is even more shocking is that the MiG-27s in question were left over from a fleet from which the Air Force carefully selected and purchased seven units earlier. This was on two different occasions. That was six years ago and the prices were much lower. And now, they have been contracted for at higher prices. Documents obtained by The Sunday Times show that the first was on May 25, 2000 when four MiG-27 ground attack aircraft were purchased for US $ 1.75 million (or about Rs 189 million) each. They were manufactured between 1982 and 1985. The second purchase was on October 24, 2000. In this deal, two MiG-27s were purchased at US $1.6 million (about Rs 172.8 million) each. One was manufactured in 1981 and the other in 1984. A MiG-23 UB trainer was procured for US $ 900,000 (or about Rs. 97. 2 million). This unit was manufactured in 1984.

The Sunday Times investigations revealed that the purchase price for the latest deal, four MiG-27s, is US$ 2,462,000 (or Rs 265,896,000) each. The total cost without freight works out to US $ 9,848,000 (or Rs 1,063,584,000). This is for the ground attack aircraft manufactured between 1980 and 1983, in terms of the contract.

The Sunday Times is in possession of documents to confirm that the Air Force concluded two previous deals for seven MiGs as pure commercial transactions. They were not classified as “Government to Government.” These purchases were made by the Air Force from DS Alliance Private Limited, a Singapore-based firm which offered a finance package. The aircraft were delivered by “Lviv State Aircraft Repair Plant” which is a “State Enterprise” under the Ukranian Ministry of Defence. Like in the latest deal, the supply of the MiGs came then through Ukrinmarsh via D.S. Alliance Pvt. Ltd.

The latest purchase of four MiG-27s (on July 26) involving Bellimissa Holdings as a third party is declared a “Government-to-Government deal”. Documents in possession of The Sunday Times show that the aircraft purchased from Ukrinmarsh are also being delivered by the same Lviv State Aircraft Repair Unit. That is not all. Under this deal, the Air Force has agreed (in terms of the contract) to pay higher prices for the MiG aircraft which they did not deem fit to procure earlier, according to documentary proof obtained by The Sunday Times.

A question that begs answer is why the Ukranian Government was unable to come up with a finance package to sell their aircraft that have been lying on the ground for six years. Bellimissa Holdings Ltd., The Sunday Times learnt, is a private company where some Cabinet Ministers in Ukraine are known to have a stake. It is also said to be strongly linked to the Singapore firm that supplied MiGs earlier. This offshore company based in London is said to have offered a two-year finance package. Payment in four instalments, in addition to the telegraphic transfer of freight charges in advance, is to be made through the People’s Bank. This will begin with the Air Force presenting the Airway Bill and the Factory Acceptance Certificate.

Making the situation worse, The Sunday Times investigation reveals, is the composition of the four MiG-27s now being procured. Two of these aircraft were offered to the Air Force by D.S. Alliance Private Limited in May 2000 at a cost of US$ 1.75 million (or Rs 189 million) each. The Air Force did not deem it fit to obtain them. But they are now being purchased at a cost of US $ 2,462,000 (or Rs 265,896,000) or by paying a further US$ 712,000 (or Rs 76,896,000), according to documents in possession of The Sunday Times.

A third MiG-27, also offered to the Air Force in October 2000, by DS Alliance Private Limited, documents reveal, for US$ 1.6 million (or Rs 172. 8 million approximately). Here again an excess sum of US$ 862,000 (or about Rs 93,096,000) has been paid for the same aircraft which was not deemed fit for purchase earlier. It is not clear how prices of old aircraft are higher when they should be lower as they age. Unlike antiques, they do not have a value as they become older.

The latest contract between the Air Force and Ukrinmarsh, through a third party (Bellimissa Holdings Limited), is in two parts. The first is for the purchase of four MiG-27 ground attack aircraft. The second is for the overhaul of three MiG-27 M aircraft and a MiG-23 UB trainer, all of them currently part of Air Force assets.

Another shocking, if not unconscionable, feature of this overhaul, The Sunday Times investigation reveals, were the costs. The fee for the overhaul of the MiG-23 UB trainer, according to the contract, is US$ 1.1 million or (Rs 118,800,000). Documentary proof obtained by The Sunday Times shows the cost at which the Air Force purchased this trainer in October 2000 was only US$ 900,000 (or Rs 97.2 million). Hence, it defies all logic that an overhaul is more costly than the purchase of a trainer MiG aircraft.

The Sunday Times spoke with a cross section of Air Force as well as other Government officials with regard to the latest deal. For fear of not being authorized to comment on the record, they spoke on grounds of anonymity. Almost all of them were of the view that the Ukranian deal should be fully investigated to ascertain whether the Ministry of Defence was misled. A Government official suggested that the mandate of a three member Presidential Commission of Inquiry now probing military procurements be extended to cover this deal.

They point out that this is both in keeping with President Mahinda Rajapaksa and his Government’s commitment to transparency in military procurements. It is this policy that prompted his appointment of Commissions to probe some previous military deals so corrective measures could be taken. That is to ensure that large sums of tax payer’s money is not skimmed off by third parties or intermediaries through kick backs on military procurements, they pointed out. Another claimed that there were lower offers from other parties to supply MiGs (also from Ukrinmarsh) but this could not be independently verified.