FF-150 BRP Jose Rizal - CMS Dispute
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.
Normally, contractors would specifically identify the systems they will install for the end-user, however, in this case, HHI provided the Philippine Navy two options which include top of the line and superior products or systems during the bidding. By submitting their bid for the project, HHI acknowledged that they can deliver the required items within the price specified by the Philippine government.
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.
After the AFP awarded the contract to HHI, the Korean company found means to circumvent the contract to use inferior products or systems that do not comply to the technical requirements of the Philippine Navy in order to reduce their building cost and maximize their profit. Among the issues that HHI and the Philippine Navy were contending was the specification for the Combat Management System (CMS) that will be installed in the two frigates. The CMS is a very important component of the frigate as it is considered as the “brain” of the ship integrating all the different systems on board the frigate. HHI insisted on using the Hanwha Systems Naval Shield while the Philippine Navy had chosen Tacticos by Thales Netherlands as their preferred CMS.
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.
On 11 January 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. On 08 February 2017 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.”
Om 01 April 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.” On 06 April 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.
On 20 April 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. On 10 August 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.
On 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. On 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. On Dec. 18, 2017 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.
On 25-29 September 2017, a workshop for the critical design review of the Frigate Acquisition Project was conducted. The result of this workshop was then presented to the steering committee headed by Undersecretary for Finance, Munitions, Installations and Materiel Raymundo DV Elefante On 6 October 2017, the Assistant Secretary for Acquisitions, Installations, and Logistics (ASAIL) received a copy of the Philippine Navy's position paper on the selection of the Combat Management System (CMS), which the Department studied. The Secretary instructed the AFP to proceed with the implementation of the project pursuant to the provisions of the contract with HHI.
All the bids and awards committee meetings in the DND are open, with third-party observers, such as members of the media, invited to attend. This is to show that our modernization process is aboveboard and we have nothing to hide. In addition, the Philippine Navy has been part of the acquisition process from Day 1, and it was upon their recommendation that the Secretary of National Defense approved the project.
It is the choice for the CMS supplier that was at the center of a Senate investigation. The Senate on 19 February 2018, started 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, sought 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.
In a privileged speech at the House of Representatives on 15 January 2018, 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 were claims that SAP Bong Go allegedly got involved in the choice of the CMS supplier. 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 headed, 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 17 January 2018. "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 20 January 2018, Mercado, cleared Go of any interference in the warships deal. "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. “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.
During the hearing conducted by the Senate committee on national defense and security 19 February 2018, the issues surrounding the Frigate Acquisition Project (FAP) for the Philippine Navy (PN) were discussed on national television. As to Farolan Mercado’s relief as flag officer in command (FOIC) of the PN due to insubordination: this was confirmed earlier by no less than Defense Secretary Delfin N. Lorenzana who stated that Mercado refused to carry out official orders from the DND regarding the FAP, resulting in undue delay of the project, and, ultimately, the secretary’s loss of his trust and confidence.
Mercado’s explicit preference for Thales Nederland’s Tacticos CMS went against Section 18 of Republic Act No. 9184 or the Government Procurement Reform Act, which does not allow the procuring entity or end-user to expressly state a specific brand or product in the technical specifications of a project.
The Navy’s Frigate Acquisition Project (FAP) is aboveboard and will be strictly completed in accordance to the country's procurement laws. This was emphasized by Department of National Defense (DND) Secretary Delfin Lorenzana in the 20 February 2018 Senate hearing on the frigate project. "The DND is ensuring that the procurement process for the frigates are done and completed strictly in accordance with our laws, namely, Republic Act 9184 or the Government Procurement Reform Act, and 10349 (the Revised AFP Modernization Program)," he added.
The FAP was dragged into controversy following reports over alleged preference for a particular brand of combat management system (CMS) which will be fitted to the two frigates. "Unfazed by all of the accusations, allegations, and malicious stories, we have come here today, at the gracious invitation of this august body, to shed light on the two aforementioned subjects of this inquiry and to present the facts," Lorenzana said. The DND is standing by Hyundai Heavy Industries (HHI)'s decision to use the Hanwha CMS for the two ships while former Philippine Navy flag-officer-in-command Vice Admiral Ronald Joseph Mercado was batting for the Thales Tacticos system.
The DND chief stressed that there appears to be a concerted effort by some to cast doubt on the acquisition project, the entire procurement system, and the people behind it, even calling for cancellation of the FAP contract. "The issues thrown against the frigate acquisition project is hurting the very institution that is tasked to defend our country from internal and external threats," he added.
Lorenzana also tagged Mercado as the person behind the deliberate attempt to delay or stop the FAP. "That Vice Admiral Mercado was insistent in his desire to enforce his will on the builder of the frigates, Hyundai, to install a specific brand of combat management system or CMS in the two frigates, which is clearly prohibited under our procurement law," the DND chief added. Also, Lorenzana pointed out the former PN chief, on many occasions, challenged and usurped his authority such as directing the owner’s team in South Korea; exerted his influence on the project management team and intervened in the processes and outcome of the project; and threatened to have the contract canceled if his preferred CMS was not installed.
"That the loss of trust and confidence of the Secretary of National Defense resulting from his actions leading to insubordination was the reason for his relief as flag-officer-in-command," the DND chief added. Also, Lorenzana earlier said it was Mercado who had the specification "Tactical Data Link 16" or the ability to transmit and receive data from various platforms in a bid to justify the preference for the Thales Tacticos CMS. "I didn't know there was this motivation that they have inserted when the technical specifications of Link 16 were done. Maybe, it's for Hanhwa's disqualification)," he added.
The DND chief added that this specification was not present in the original specifications. Also, Lorenzana said he has no objections to acquiring the Thales Tacticos CMS provided that adequate funds are allotted for it. The FAP has a contract of PHP18 billion including the weapon systems and munitions. Earlier, the DND chief said that using the Thales Tacticos CMS will shoot the price of the frigates by USD7 million per ship or USD14 million for the two vessels.
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