MiG-27s bought at inflated prices

Rajapaksa govt.’s controversial MiG deal – Part I

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By C. A. Chandraprema-

In 2006, reports appeared in the print media about alleged irregularities in the purchase of four MiG-27s from Ukraine and the overhaul of four other MiG aircraft which were already in the possession of the Air Force. Since the change of government in January 2015, the new government has shown an interest in investigating the so-called ‘MiG deal’ and we have seen occasional reports in the media about the progress of the investigation. Back in 2006, the two most important allegations about this transaction centred around the difference in the price of the MiG-27s bought in 2000 and 2006, and the manner in which the payment was made. In 2000, the first four MiG-27 aircraft along with the accompanying ground equipment and spares had been bought at a total price of USD 8 million (or two million USD per package).

After some months, another two MiG-27s were bought at USD 1.6 million each. One MiG 23 UB trainer was also bought in 2000 for USD 900,000 and the cost of transporting all seven aircraft plus equipment to Sri Lanka had been USD 845,000. (The cost of the spares etc of the latter three aircraft were indicated separately in the second contract.) In 2006, when another four 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. One specific allegation made back in 2006 was that the MiG-23 UB trainer that was bought in 2000 for USD 900,000 had been overhauled in 2006 at a cost of USD 1.1 million with the cost of the overhaul exceeding the original purchase price of the plane. Furthermore, it was stated that the payment for the purchase of four additional MiG-27s and the overhaul of the Air Force’s four existing MiG planes in 2006 was not paid directly to UKRINMASH the state owned Ukrainian company supplying the aircraft but to a third party called Bellimissa Holdings Limited which was discovered to be just a front company.
The allegation was that the money may have been paid to an offshore company to skim off a part of it as commissions. Before MiG-27s came into use by the Sri Lanka Air Force from 2000 onwards, the Air Force used Israeli built Kfir fighter jets. However, the MiG-27s turned out to be far superior to the Kfirs in that the MiG-27s could carry a payload well over twice that of the Kfirs and they could be used in night time operations. The MiG-27 could fly low even at night with the use of electronic equipment. Furthermore, the MiG 27 was available ex-stock for immediate purchase, whereas Kfirs were not, and MiG-27s cost much less than Kfirs. All these factors made the MiG-27 the preferred aircraft of the Air Force after the year 2000. The Chandrika Kumaratunga government, which bought the first MiG-27s for the Air Force was voted out and a UNP-led government came into power in December 2001.
Air Force’s repeated requests
In the meantime, one of the MiG-27s bought in 2000 had been destroyed on 24 July 2001 in the LTTE attack on the Katunayake Air Force base and another had been destroyed on 18 August 2001 due to a flying accident. By 2003, the remaining MiG-27s had been grounded as their service life had expired and they needed to be overhauled. In this situation, the then SL Air Force Commander wrote to the then Secretary of Defence on 12 March 2003 recommending that four more MiG-27s be purchased. Quotations for the supply of four MiG-27s were called, but before the transaction could be proceeded with, the UNP government that had been formed in December 2001 was voted out at the 2004 April Parliamentary election. Thereupon, on 19 May 2004, the then Air Force Commander Donald Perera wrote to the Secretary of Defence of the new Chandrika Kumaratunga-led government recommending that four more MiG-27s be purchased.
He had also recommended to the new government that the offer made on 22 April 2003 by UKRINMASH (to the previous government) to supply four MiG-27s be accepted. However, the planes were not purchased by the Kumaratunga government, which was in power between April 2004 and November 2005 either.
In November 2005, Mahinda Rajapaksa was elected President. The Air Force Commander wrote to the new Defence Secretary Gotabhaya Rajapaksa on 25 January 2006 once again making the request that four more MiG-27s be purchased. By that time, another MiG-27 had been destroyed in a flying accident on 9 July 2004 and the Air Force was left with three MiG-27s and one MiG-23 UB trainer, none of which were airworthy. Thus, the 2006 purchase of four additional MiG-27 aircraft fulfilled a need that had persisted through three changes of government.
However, when the four additional MiG-27s were purchased in 2006, they cost USD 2,462,000 each, which was significantly higher than the prices paid in 2000. A perusal of the documents pertaining to the purchase of MiG-27s in 2000 and 2006 reveal the reason for the price difference. The MiG-27s bought for the Sri Lankan Air Force in 2000 as well as in 2006 were second hand aircraft. There was no such thing as a new MiG-27, because this model had long since been superseded by the MiG-29 and MiG- 31. What was available on the market were second hand MiG-27s with varying service lives. The longer the service life, the higher the cost. Jayanath Kumarasinghe the Director Aeronautical Engineering of the Air Force giving evidence before the Mt Lavinia District Courts in the defamation case filed by Gotabhaya Rajapaksa against The Sunday Leader said that when six MiG aircraft were purchased in 2000, they had been bought ‘as it is’ in the condition they happened to be, without being overhauled.
Two contracts were signed in the year 2000 for the purchase of six MiG-27 aircraft. The first contract which was signed on 25 May 2000 guaranteed a service life of ‘not less than one year’ or 750 hours and the engines were guaranteed a service life in excess of 500 hours and the aircraft along with the accompanying ground equipment and spares cost USD two million each. The other contract signed on 24 October 2000 was for the purchase of two MiG-27 aircraft and one MiG-23 UB trainer and the service lives of the air frame as well as the engines of the latter three aircraft were guaranteed for two years till 2002. The latter MiG-27s cost USD 1.6 million with the MiG-23 UB trainer costing USD 900,000. 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/8 years for the air frame and 550 hours /7 years for the engines. While the Time Before Overhaul in terms of flying hours is important, the decay caused by the passing of calendar time is equally important in the TBO formula, which is why the TBO of a plane is expressed in flying hours as well as calendar years.
Even if the plane does not fly at all after overhaul, it will have to be overhauled again once the number of calendar years are up. After an overhaul, the aircraft will have the same TBO as a new aircraft. It may be the case that an aircraft is overhauled and then put into cold storage without being flown until the TBO in terms of calendar years has lapsed. In such cases, the company would recheck the plane and do what is necessary to bring it back to the level of an overhauled plane. In such instances, what is important is the service life or TBO of the plane guaranteed by the seller in the contract. In 2000, the seller guaranteed a maximum TBO life of two years and the price of those aircraft were fixed on that basis. However, the contract entered into on 26 July 2006 between the Air Force and UKRINMASH for the supply of four MiG-27s and the overhaul of three MiG-27s and one MiG-23 UB trainer clearly states that the air frames of all the aircraft will have a service life or TBO of 850 hours/8 years and the engines 550 hours/ 7 years, with the MiG-23 UB trainer having an engine service life of 400 hours. Such a service life is equal to a new plane – hence the price tag of over USD 2,462,000 each.
Quotations from Singapore,
India and Ukraine
The reason for the price difference becomes clearer when comparing the quotations the Air Force received for the overhaul of the three MiG-27s and one MiG-23 UB trainer that had been bought 2000. In 2004, DS Alliance of Singapore, the company that had originally sold these aircraft to Sri Lanka had given a quotation for the overhaul of the four aircraft as follows. (The cost of the overhaul differed from one aircraft to another.)
USD 1,299,045
USD 1,333,445
USD 1,333,445
USD 983,445
(The prices quoted by DS Alliance were taken from a letter written by the Air Force Commander to the Secretary to the President and the transport cost was not indicated in it. However, since DS Alliance is a middleman for UKRINMASH, one may assume that their transport cost for the overhaul and return of these four aircraft would be at least the same as that quoted by UKRINMASH.)
In 2006, Indo-Russia Aviation Ltd a subsidiary of Hindustan Aeronautics Ltd had given a quotation to the Air Force for the overhaul of these three MiG-27s and one MiG-23 UB trainer as follows.
USD 1,951,352
USD 1,626,127
USD 1,626,127
USD 1,375,054
(Plus transport costs of USD 650,216)
The quotation given by UKRINMASH in 2006 for the overhaul of these four MiG aircraft were as follows.
USD 1,160,000
USD 1,200,000
USD 1,240,000
USD 920,000
(The transport cost for the overhaul and return of the four aircraft was fixed at a fairly low USD 240,000 by UKRINMASH because the transportation of these planes to and from Sri Lanka were to be combined with the transportation of the four additional MiG-27s that were to be bought by the SLAF.)
Thus, the UKRINMASH quotation for the overhaul of the Air Force’s four existing MiG aircraft was, in fact, the lowest bid received. Even the Indian bid for the overhaul was much higher than the UKRINMASH quotation. One of the specific allegations made about this transaction was that the MiG-23 UB trainer bought for USD 900,000 in 2000 had been overhauled in 2006 at a cost of USD 1.1 million, with the cost of the overhaul exceeding the original purchase price of the plane. However, it can be seen from the foregoing that the quotation received for the overhaul of this MiG-23 UB trainer from DS Alliance Singapore, was USD 1,299,045 and from India it was USD 1,951,352 which makes the UKRINMASH quotation the lowest at USD 1,160,000.
A comparison of the prices quoted for the overhaul of the four MiG aircraft would explain the price difference between the MiG planes bought in 2000 with a two year TBO and those bought in 2006 with a full eight year TBO. The prices quoted for an overhaul represents the cost to get each plane back into an almost new condition. According to the Contract No: SLAF/2006/7/AIR between UKRINMASH and the Air Force for the supply of the four MiG-27s and the overhaul of three MiG-27s and one MiG-23 UB trainer, all planes supplied or overhauled were guaranteed a TBO of 850 hours/8 years for the airframe and 550 hours/7 years for the engines.
Sujeewa Hendavitarana, a qualified aeronautical engineer, who was one of the first SLAF pilots trained in India to fly MiG-27s in 2006, giving evidence before the Mt Lavinia District Court, said that the MiG-27s that he had flown in India during his training had been in very poor condition and could not fly straight and were leaking oil. He had been the first to fly the MiG 27s that had been bought in 2006 and he told the court that figuratively speaking, the comparison between the MiG-27s that he had flown in India, and the MiG-27s acquired by Sri Lanka in 2006 was similar to that of bullock carts to Mercedes Benz cars.

Tomorrow: Involvement of a ‘front company’ in the MiG transaction

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