On German kickbacks and the corvette contract
The Office of the Public Prosecutor in Dusseldorf, Germany, is currently investigating various members of the German Frigate Consortium (GFC) for fraud, corruption, and tax evasion. These relate to the contract the consortium won to supply the South African navy with four Meko A200 corvettes in 1998/1999.
The German investigators claimed in a letter for assistance to Swiss authorities last year that the consortium had "paid considerable bribes to achieve the conclusion of the agreement." A total of $25m was paid out in kickbacks by Thyssen Rheinstahl Technik GmbH. $22m of this was paid to a letterbox company in Liberia called Mallar Inc., most of which "directly flowed to South African officials and members of cabinet." Another $3m, the investigators allege, was paid to the former chief of arms acquisition, Shamin "Chippy" Shaik, through another letterbox company, Merian Ltd in London.
The corvette deal had two interlinked components. The first involved the contract to build and supply the ship platforms, and the second involved their equipping with a combat suite. The primary focus of this article will be on the ship platform component. These bribery allegations raise a number of obvious questions: How was the existing procurement process suborned to ensure that the GFC got the contract? And what were the costs to the country of that particular result?
The navy launched Project Sitron in 1993 with the aim of replacing its clapped out fleet of ageing Israeli strike-craft with four patrol corvettes. The procurement process passed through the various normal stages. The deadline for tenders for the four corvettes closed on August 30 1994. There were five bidders - from Denmark, France, Britain, Spain, and Germany. The German consortium, which had been established earlier that year, was made up of Blohm+Voss and Thyssen of Hamburg. On December 23 Armscor announced that only "two of the five listed contenders for the naval patrol corvettes will progress to the next round of proposal refinement." These were Yarrow shipbuilders of Scotland, and Bazan of Spain.
Bazan had presented by far the best offer. The idea was that they would supply the ship platforms while the combat suite, which had been under development by the navy for some time, would be built and installed locally. The Spanish had also offered a substantial counter-trade agreement. African Armed Forces reported that, "The entire combat suite, helicopter avionics and tactical systems, all structural steel, piping hydraulic and electric machinery and switchgear, electric motors and fans will be South African sourced. The remainder will be traded against local products." (June 1995)
There were two cost estimates given for the purchase of the ships and their equipment with helicopters and a combat suite. The Mail & Guardian reported in January 1995 that "an Armscor official close to the negotiations with the overseas suppliers said the maximum cost would be R2,5bn for the whole programme including buying the ships, fitting them with armaments and electronics (done locally) and supplying them with helicopters." (Factoring in inflation and currency depreciation, this translates into about R4,7bn in 1999 rand values.)
However, in February Tielman de Waal, the managing director of Armscor, set out the approximate cost breakdown as R1bn for the ship platforms, R500m for the combat suite, and R200m for the helicopters - for a total of R1,7bn. The reason for the differential was that, in the latter case, the combat suite element was limited to a transfer of weaponry from the strike craft to the corvettes.
The last phase of the procurement process required the government of national unity cabinet to sign off on the contract with Bazan. In early May the chief of the armed forces, General Georg Meiring, and the chief of the navy, Vice-Admiral Robert Simpson-Anderson, briefed cabinet on the need for the corvettes, and on why Bazan had the best bid.
However, there was an orchestrated effort by the ANC component of cabinet to scupper the deal. The front page lead of the Sunday Times on May 14 1995 was headlined "Navy corvettes sail into a cabinet storm." The article was based on extensive briefings by ANC cabinet ministers against the purchase. Unnamed ministers had complained they had not been consulted. Minister of Trade and Industry, Trevor Manuel, had apparently told cabinet that he would "not tolerate being bypassed" on the counter-trade aspects of the deal.
Meiring and Simpson-Anderson were ridiculed for conducting their presentation like "encyclopaedia salesman" and for being unable to tell Transport Minister Mac Maharaj "who South Africa needed protection from." They had also, apparently, raised hackles "by saying that unless they were given the corvettes, the navy would not survive. This was felt to be a threat."
The Sunday Times also reported that as soon as the losing bidders had been informed of their rejection they had stepped outside the existing procurement process and begun aggressively lobbying the new ANC government.
In mid-January 1995 Deputy President Thabo Mbeki had visited Germany on an official state visit. The article reported that Jurgen Koopmann, the managing director of the German consortium, had expressed his dissatisfaction that "despite two assurances" from Mbeki "that the Germans were still in the race, Armscor had maintained Blohm and Voss's disqualification."
On May 17 The Citizen quoted a ministerial source as saying that the existing bid had been shelved and that "The tenders have been reopened. We are going to give the others another chance." Piet Groenewald MP had said that a representative of the German consortium had told parliament's defence committee that Mbeki had promised during his visit to Germany to reopen the tender process. "They said they had a letter from Mr Mbeki inviting them to apply again."
Shortly after that it was reported that a director of Thyssen, Christoff Hoenings, had telephoned a newspaper from Germany to say that Mbeki had told him and his directors in January that "the race is still open to all contenders." Mbeki had repeated this during a conversation with German Foreign Minister Klaus Kinkel.
(Both Hoenings and Koopmann are currently under investigation by the German public prosecutor in relation to the corvette contract.)
Joaquin Coello, vice president of Bazan, said that the bidding process had been very rigorous. "We played by the rules. We need to know that South Africa is a serious when it invites us to compete internationally for its business. We were extremely surprised to hear, after the competitors had been cut to a choice between us and Britain, that the process was open again. South Africa should stick to the rules."
President Nelson Mandela spoke on this issue in parliament on June 1 1995. He stated that the issue of defence procurement, and the purchase of the corvettes, would first have to be addressed in a White Paper. He also suggested that "originally it does not appear that the matter was well handled. I have letters from the presidents and premiers of the Nordic countries. Prime Minister John Major has been bombarding me with letters on this matter. The French and German Chancellor Kohl also want this contract. We have to handle this in a way that would satisfy everybody, and that would show that these tenders have been properly examined."
When Mbeki was questioned about his apparent interference in the tender process in parliament on June 13 1995 he suggested that the Spanish may have secured the contract through underhanded means:
"What happened in regard to this matter was that a number of countries that had tendered and not appeared on the final shortlist, raised various concerns about this process. I was personally very worried because a suggestion was being made that it may very well be that even as a new Government, we might have acted in a way that was not even handed. I communicated this to Armscor and to the leadership of the Navy and told them that under no circumstances could we allow a situation where anybody in the world carried the notion that we acted in a manner which was not even handed."
The navy learnt a very important lesson from the whole debacle. This was that henceforth decisions on procurement would be made primarily at the political, rather than the military-technical, level. If they wanted their equipment they would have to defer to political leadership on these matters. Captain JEG Kamerman, the head of naval procurement, told arms deal investigators in an interview in June 2001 that it was "clearly apparent to us" after 1995 that "we were only a bit player in this exercise. There were far more important political issues at stake of strategy and building a national consensus of defence and whether to acquire the ships in the first place and so on."
The corvette contract was re-launched in 1997 as part of a larger Strategic Defence Package Acquisition initiative. In May it was reported that the defence minister, Joe Modise, had "asked Deputy President Thabo Mbeki for money to buy four corvettes and several submarines for the navy after making unsuccessful attempts to wrest funds from the finance minister, Trevor Manuel." His appeal seems to have been successful for in June the cabinet approved the purchase of the corvettes along with other equipment proposed in the Defence Review. It was evident even then that these purchases would be something of a poisoned chalice for the military. The understanding was that there would be swingeing cuts to the defence budget in order to help pay for them.
On September 23 1997 the Department of Defence sent out Requests for Information (RFIs) to bidders in eleven countries. The navy proceeded to carry out a screening process on those companies which had responded to the RFIs on the corvette component of the deal. By the end of December 1997 it had short listed four bidders which met its basic technical requirements: Bazan of Spain, GEC Marine of the United Kingdom, the German Frigate Consortium, and DCN International of France.
Between January and February 1998 the navy held separate two day meetings with each of the remaining bidders. Then, on February 13 1998, Armscor issued a request for final offer (RFOs) to the four short listed bidders with the closing date being May 11 1998.
Each offer was meant to be made up of two components: the ship's platform and the combat suite. According to the RFO the price of the combat suite element was fixed at a maximum of R1470m and the contractor on that element "will be a South African industry consortium, wherein Altech Defence Systems (ADS) plays a leading role, co-responsible for the overall design, integration and supply of the Combat Suite element." (Between March 31 and April 3 1998 the navy held further one day meetings with Bazan, DCNI and GFC "in order to clarify any RFO issues.")
On May 11 1998 the German Frigate Consortium submitted their final offer, along with the other bidders. According to German investigators their $533m tender on the ship platform was priced to include $25m in kickbacks. Each bidder was rated for best value based on a formula combining Military Value, Defence Industrial Participation (DIP), National Industrial Participation (NIP), and a Financing Index. Their rating on each component was supposed to be assessed in isolation from the others.
The evaluation for military performance was carried out between May 12 and 29 1998 by a team led by Kamerman. Admiral Howell was the moderator and Chippy Shaik acted as the co-ordinator between the military, industrial participation, and financing evaluation teams.
According to the navy's evaluation the GFC's Meko A200 had a five percent better military performance than Bazan's 590B but at a 25% greater cost ($110m) on the platform. So, on military value, Bazan came out ahead. The naval board was presented with these results on June 18 1998 for ratification. On June 26 a report on the military evaluation was submitted to Shaik as chairman of SOFCOM (an ad-hoc committee established to oversee the process.) By the end of June it seems that the other evaluation teams had submitted their reports to SOFCOM as well.
The results were processed at a meeting of that committee on July 1-2 and then passed upwards, including to the Armaments Acquisition Council on July 13 1998. By this stage the Meko A200 had come out ahead of Bazan's 590B on the "best value" index.
The 590B had done better on military value, defence industrial participation and - according to the Auditor General - on the financing index as well. What swung it the Germans way was their National Industrial Participation offer.
Although both Bazan and the GFC had offered similar amounts of investment the Department of Trade and Industry gave the GFC double the score of Bazan on this measure. The 2001 Joint Investigation Team report noted [PDF] that the GFC was nominated the preferred bidder purely on the basis of this offer "despite the fact that NIP is not ascertainable in terms of achievability."
Thus, by mid July the contest over the corvettes had essentially been decided. They had somehow come out ahead on the best value ranking, and they enjoyed political backing. The navy was not unhappy with the results either. It looked like they were getting their ships at last and the more expensive ones as well. As Kamerman put it in his June 2001 interview: "We were very pleased, of course, because even though Spain won on value for money, the German ships were technically superior..."
According to Der Spiegel GFC managers travelled to South Africa on July 27 1998. "Following his return to Germany, the responsible Thyssen executive noted in a memo the nature of his confidential talks with Chippy Shaik. Among other matters, the $3 million bribe was allegedly discussed during the meeting. And indeed, in the same year a lobby agreement for that sum was forged with the front company Merian Ltd. in London. Ian Pierce allegedly acted as its representative."
The corvette contract progressed smoothly through various stages of approval. An ad-hoc ministerial meeting on August 31 1998, chaired by Mbeki, signed off on the decision to give the corvette contract to the GFC. On November 18 1998 the cabinet publicly named the GFC as the preferred bidder on the corvette contracts. Government would spend a total of R6001m on these ships, and R785,5m on four Westland Super Lynx maritime helicopters to go with them.
Kamerman stated (2001) that it was his impression that the GFC "understood that they were the preferred bidder [ahead] of time before 18 November. I cannot say that for sure, of course, but the signs were there that they knew that they were, if not the chosen, they were bloody [near], they were very close to the centre. There was a quiet confidence there..."
On September 15 1999 cabinet confirmed, following an affordability review, that "Four Patrol Corvettes from the German Frigate Consortium to replace the present ageing strike crafts, which are more than 30 years old." According to German prosecutors, on November 2 1999 Thyssen wrote to the chairman of the tax office of Duisberg-Hamborn to request that their intended bribe payments be written off against tax as "operational expenses." On November 25 they received a letter from tax office acknowledging the "fundamental deductibility" of the payments. (By this stage though this was no longer strictly legal and the German prosecutors claim that in order to secure this waiver Thyssen misrepresented certain facts.)
On December 3 1999 the South African government signed a contract with the GFC for the building of the four corvettes. The total cost had, by this stage, escalated to R6,9bn. The tender price was R5,4bn (€611m and R1,47bn) with various other expenses making up the rest of cost. This excluded the cost of the maritime helicopters which were purchased later. If they had been included the total cost would have been closer to R7,9bn.
South Africa started paying out on the corvette contract in April 2000. After the first payments went through $3m was allegedly kicked back to Merian Ltd. The other $22m was paid out to Mallar Ltd by October 2001. This would mean, in effect, that of every $10 the GFC received from the South African taxpayer during that period - through the foreign currency component of the deal - approximately $1 was paid back to South African politicians and officials in bribe payments.
The South African government purchased, through the 1999 arms deal, submarines that the navy did not expect and hugely expensive jet trainers and light fighters which the air force did not actually require. The navy had had a pressing need for patrol corvettes since the early 1990s. So, in this sense, these purchases were the most legitimate part of the whole deal.
Still, from this broad overview it is evident that, firstly, the original purchase was halted through direct political interference. And, secondly, political considerations (of one kind or another) overrode criteria of military value, price, and defence counter-trade, when it came to naming the GFC as the preferred bidder in 1998. There was also a fairly massive increase in price between 1995 and 1999 even factoring in the effects of currency depreciation.
However, in order to understand how the procurement process could have been manipulated - and the costs and consequences thereof - it is necessary to analyse, in far greater detail, the way in which the different bids were evaluated between May and July 1998.
To be continued...