New Angle To 12-Year MiG Deal Controversy
By C. A. Chandraprema , The Island Special Report , May 05, 2018, The Island
More than one and a half years after that revelation, on March 18, 2018 the Sunday Times in an article titled “MiG fraud: FCID finds startling new details” stated that it has been found that the agreement between UKRINMASH and the Commander of the Sri Lanka Air Force bearing number SLAF/2006/07/AIR is a fraudulent document and that in reality, UKRINMASH had an agreement with the Singapore based D.S. Alliance, which had supplied MiG-27 fighter jets to the SLAF in 2000 as well, and that D.S. Alliance Managing Director T.S. Lee was the main player behind Bellimissa Holdings. The most important allegation was that a total of USD 15,665,437 had been paid by the Sri Lanka Air Force to Bellimissa Holdings but that the agreements between D.S. Alliance and UKRINMASH for the supply of the same goods has been for USD 7,833,000 and that accordingly, the Sri Lankan government has incurred a loss of USD 6,831,344.
The EconomyNext website also carried an article titled “Sri Lanka’s MiG probe extends to Singapore, Australia” on April 28, 2018 making much the same assertions as the Sunday Times. These latest revelations have laid to rest the issue of who Bellimissa Holdings was. If the latter was a front company of D.S.Alliance, then its involvement in the transaction is perfectly above board because D.S.Alliance is a well known agent of UKRINMASH and it was they who sold the first MiG aircraft to Sri Lanka in the year 2000. There is no real issue in D.S.Alliance working through a front company called Belimissa Holdings in the 2006 transaction. Most Sri Lankan companies that engage in international transactions, do so though front companies and overseas accounts and there is nothing unusual in such a practice.
The question now is over the allegation that the SLAF paid USD 15.6 million to Bellimissa Holdings while, D.S.Alliance has paid only USD 7.8 million to UKRINMASH for the same hardware and services. Since we have no access to the purported contract between D.S.Alliance and UKRINMASH to see whether it has any connection with Sri Lanka as alleged, we will have to check by other means, the veracity of the story that the FCID has chosen to release to selected newspapers and websites. It has to be understood that even though international weapons deals may not take place in full view of the general public, there is a whole community out there that keeps close track of who is buying what and at what price. The weapons market is watched much more closely than the sugar or coal market.
Under observation by
international watchdogs
The Sunday Times claims that when FCID head DIG Ravi Waidyalankara, asked a senior official of UKRINMASH at a meeting in Kiev about the sale of MiG 27 fighter jets to the Sri Lanka Air Force, the latter had said “What sale? There has been no sale of any MiG-27 aircraft to Sri Lanka from us. There never was.” However, if the former had asked the same question from The Stockholm International Peace Research Institute (SIPRI) they would have promptly confirmed that there was indeed a sale of four MiG-27 aircraft by Ukraine to Sri Lanka in 2006 and they could have provided the dates on which the transaction took place and the price at which the goods were sold as well. If D.S.Alliance had bought MiG planes from UKRINMASH at half the world market price and made a killing by selling the same goods and services to Sri Lanka at a 100% profit, one can be certain that the story would have been all over the international defence industry websites. No country can be sold MiG planes at twice the market price without it being immediately noticed.
There are international groups that keep tabs on what kind of military hardware is being bought and sold on the international market. For example, the US based ‘Strategy Page’ website carried an article on December 27, 2006, titled “Second Hand MiG-27s and Kfirs Go To War” which reported that Sri Lanka has purchased an additional four second-hand MiG-27 fighter bombers from Ukraine, for about USD 2.5 million each. This defence industry website was very familiar with Sri Lanka’s air capabilities and they had further stated in that article that this is the second MiG-27 purchase, as six were bought in 2000, along with a MiG-23. They went on to say that since 2000, three of the MiG-27s have been lost, two to accidents (equipment failure while airborne) and one on the ground due to an enemy attack. These international groups are aware of even the minutiae regarding our air assets.
On December 30, 2010, the Stratagy Page website carried another article titled “A Satisfied MiG Customer Wants More” stating among other things that Sri Lanka bought MiG-27s largely because they were so cheap (about $2 million each, versus $3 million for a Kfir) and that Ukraine had lots of old, Cold War era, MiG-27 fighter bombers which were well worn aircraft, with only about a thousand flight hours left in them, but the Ukrainians were willing to sell them cheap, and, as a bonus, offer inexpensive refurbishment services, that would add 2-3,000 flight hours to the aircraft’s life…so Sri Lanka was able to get some proven combat aircraft at a fraction of what any alternatives (new or used) plane would cost.
On March 27, 2007, as the controversy regarding the MiG transaction unfolded, the Strategy Page website had its say on that subject as well in an article titled “What is this pre-owned MiG-27 worth?” The article went to say that “Sri Lanka, which has been at war with its separatist Tamil minority for over a decade, needed some easy-to-use, and easy- to-maintain, ground attack aircraft. Ukraine had lots of old, Cold War era, MiG-27 fighter bombers. “The major problem the anti-corruption crowd had was that it was difficult to put a fair price on these Cold War surplus warplanes. That said, Ukraine could have sold the aircraft for less, and still come away with a profit. These aircraft were headed for the recycling facility in a few years anyway. And the refurbishing contracts meant months of well paid work for hundreds of Ukrainians. The anti-corruption investigators could not find any decisive evidence of shady dealing. But the situation still left plenty of opportunity for payoffs. After all, Ukraine wasn’t the only country with pre-owned MiG-27s. In the end, however, Sri Lanka got its money’s worth. They defeated the Tamil rebels, largely because the air force now had a potent and reliable ground attack aircraft.”
What price did India quote?
According to both the Sunday Times and the EconomyNext website, the FCID has claimed that the actual cost of purchasing four additional MiG-27s and fully overhauling three MiG-27s, and one MiG 23 UB trainer was USD 7,833,000. Neither the Sunday Times nor EconomyNext has given us a breakdown and shown how much it cost to purchase four fully overhauled MiG-27 planes and how much it cost to get three MiG-27s and one MiG-23UB Trainer overhauled. Be that as it may, the question is, were any MiG-27 aircraft available on the international market for such prices? Back in 2000, the first four MiG-27 aircraft along with the accompanying ground equipment had been bought at a total price of USD 8 million (or two million USD per package) with a guaranteed service life of one year. Later that same year, another two MiG-27s were bought at USD 1.6 million each along with one MiG 23 UB trainer which cost USD 900,000. The latter three MiGs had a guaranteed service life of two years.
Spares costing USD 97,250 were also included. The cost of transporting all seven aircraft plus equipment to Sri Lanka had been USD 845,000. ) The total cost of the seven MiG aircraft bought in 2000 was thus around USD 13.5 million. By 2003, three of the seven MiG aircraft bought in 2000 had been destroyed and the remaining four had been grounded as their service lives had expired. On 22 April 2003, UKRINMASH had sent a letter of offer to the then UNP Defence Minister Tilak Marapone offering to supply four additional MiG-27 aircraft with a guaranteed service life of one year at USD 1,650,000 each or a total price of USD 6,600,000. That appears to have been the going market rate for MiG-27 planes with one year service lives. The life span of an aircraft is determined by the Time Before Overhaul (TBO) of the air frame and the engines. The optimum TBO for MiG-27 aircraft is 850 hours/eight years for the air frame and 550 hours /seven years for the engines.
In 2006, when four additional MiG- 27 aircraft were purchased, the cost of each aircraft was USD 2,462,000 and the cost of transporting the four planes to SL was USD 460,000. Thus the total cost of the four additional planes was USD 10,308,000. With the cost of fully overhauling the four older planes being USD 4,368,000; the total cost of the transaction came to USD 15,068,000. For that amount, all the eight planes brought to Sri Lanka were fully overhauled with the optimum TBO of seven to eight years mentioned above. The difference in the service life explains the difference in the prices between the MiG-27s bought in 2000 and 2006. The claim that the cost of purchasing four fully overhauled MiG-27s and getting three more MiG-27s and one MiG 23UB Trainer overhauled was only USD 7,833,000 also sits oddly beside the quotations received from three different parties to overhaul the three older MiG-27s and the MiG-23UB Trainer.
DS Alliance of Singapore, the company that had originally sold the first seven MiG aircraft to Sri Lanka had given the Sri Lanka Air Force a quotation in 2004 amounting to USD 4,949,380 to fully overhaul the three remaining MiG-27s and one MiG-23 UB trainer. This was without the cost of transporting the planes to Ukraine for the overhaul and bringing them back. Hindustan Aeronautics Ltd had quoted a price of USD 7,228,876 to overhaul the four aircraft (including a transport cost of USD 650,216). The quotation given by UKRINMASH in 2006 for the overhaul of these four MiG aircraft was USD 4,760,000 inclusive of the transport cost. The transport cost to take the four planes from Sri Lanka to Ukraine for the overhaul and to bring them back was fixed at a fairly low USD 240,000 by UKRINMASH because it was to be combined with the transportation of the four additional MiG-27s that were to be bought by the SLAF.
One notices that the price quoted by the Indian government owned entity Hindustan Aeronautics Ltd in 2006 just to overhaul the four older MiG planes is almost the same as the amount now being claimed as the price actually paid to buy four additional MiG aircraft with full TBOs and to fully overhaul four more MiG planes. The value of a MiG-27 manufactured in India under license was USD 3.67 according to figures presented to the Lok Sabha. There is really no worldwide market for MiG-27s as they are used by only two or three countries in the world including Sri Lanka and India. The latter is the biggest user of MiG-27s in the world given the fact that Russia and Ukraine too have long since phased that model out of their own fleets. So if quotations are obtained from India and Ukraine and the cheaper option is chosen that’s all that can be done in terms of looking around for the best price.
Older MiG-21s sold at
much the same rate
SIPRI data shows that during the period 2000 to 2006, Ukraine has sold MiG-27s only to Sri Lanka. However, in 2013, Ukraine contracted to sell five overhauled MiG-21s to Croatia and to overhaul seven other MiG-21s for a total price of USD 22 million. (For various reasons, the much older MiG-21s are still more popular than the less ancient MiG-27s.) As the Strategic Page website said, it is difficult to put a price on these ancient planes that are waiting to be scrapped if they are not sold. Yet some approximation can be arrived at by the fact that Ukraine sold four MiG-27s and fully overhauled three more MiG-27 planes plus a MiG-23UB Trainer to Sri Lanka for USD 15 million in 2006 and sold five much older MiG-21s and overhauled seven more MiG-21s for Croatia for USD 22 million in 2013. In this context, it is worth noting that the Strategic Page website reported in a story datelined April 23, 2016, that the other bid that had been received by Croatia back in 2013 for the supply of five overhauled MiG-21s and the overhauling of seven more MiG-21s was from Romania and their price tag for the whole package had been over USD 40 million!
The Strategic Page website says that “Since the 1990s Ukraine has established a reputation for supplying competently reconditioned Cold War surplus weapons at a good price. While Ukraine also has a reputation for corruption that sort of thing rarely extended to weapons exports because it was a primary source of foreign exchange.” The Sunday Times reported that D.A.Peregudov the head of UKRINMASH has been arrested by the Ukrainian authorities. This gives readers here the impression that he had been arrested over the sale of MiG planes to Sri Lanka. It is however unlikely that he was arrested for anything to do with Sri Lanka. The UKRINMASH official who handled the entire Sri Lanka project was the Deputy Director of UKRINMASH Genadii Studenikin. The latter had told the Prosecutor General’s Office in Ukraine that the tripartite agreement between the Sri Lanka Air Force, UNRINMASH and Bellimissa Holdings bearing number SLAF/2006/07/AIR signed on July 26, 2006, was a genuine agreement, and that he had signed it on behalf of D.A.Peregudov, Director of UKRINMASH. Studenikin had also confirmed that he visited Sri Lanka with a team from UKRINMASH and negotiated the contract with Air Force officers over a period of two days. He has stated that he met many officers of the Sri Lanka Air Force including the Air Force Commander when they visited Ukraine and several rounds of discussions about this contract took place in Ukraine as well. Studenikin had further told the Ukrainian Prosecutor General’s Office that he was involved in work relating to this contract over a period of about three years but he has not been arrested.
The FCID claims that there was never a contract between the Sri Lanka Air Force and UKRINMASH and that the purported tripartite contract between the SLAF, Bellimissa Holdings and UKRINMASH bearing No: SLAF/2006/07/AIR is a forgery. However, there are many other documents that will prove beyond doubt that the tripartite agreement between the SLAF, Bellimissa Holdings and UKRINMASH was indeed a genuine and binding contract.
1. On June 9, 2006, Air Force Commander Donald Perera wrote to UKRINMASH Director D.A.Peregudov a ‘letter of guarantee’ pledging that the contract for the supply of four MiG-27s and the overhaul of four other MiG aircraft will be signed before June 30, 2006. This letter guaranteed payment in terms of the UKRINMASH letter of April 26, 2006, and requested them to begin the overhaul of the planes without waiting for the contract to be signed in view of the possibility of the resumption of war in Sri Lanka. UKRINMASH had in fact started overhauling the aircraft on the strength of this letter and a team from the SL Air Force had been stationed at the plant in Ukraine to observe the overhaul process every step of the way.
2. When the Invoice for the purchase and overhaul of the MiG aircraft was sent by UKRINMASH to the Commander of the Air Force on July 31, 2006, it was specified that the Bank of Ceylon should open letters of credit in favour of Bellimissa Holdings Ltd.
3. The four MiG-27s that were going to be purchased from UKRINMASH in 2006 needed an ‘end user certificate’ so that the international community knows who will be using these weapons. The four MiG aircraft that were already in the possession of the Air Force and were to be overhauled already had their end user certificates issued in 2000. The End User Certificate No: SLAF/J-45001106 issued by T.M.P.D. Tennakoon, the Chief Purchasing Officer of the Air Force on July 15, 2006, states clearly that the Sri Lanka Air Force authorizes M/s Bellimissa Holdings Ltd to purchase from Ukraine four MiG-27 aircraft after overhaul and that the Sri Lanka Air Force confirms that the aircraft purchased from Ukraine are intended solely for use by Sri Lanka and will not be re-exported, sold, leased or transferred to any third party without the permission of the export control authorities in Ukraine.
Could such letters have been exchanged between Sri Lanka and UKRINMASH unless there was a genuine contract on which they were based? In addition to this documentary evidence, there are plenty of witnesses in the Sri Lanka Air Force and also in Ukraine who can testify to the fact that there was in fact a genuine contract between Sri Lanka and UKRINMASH and that they played a role in getting it implemented.
