US embassy cable - 05ANKARA1557

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 001557 
 
SIPDIS 
 
STATE PLEASE PASS TO EUR/SE AND PM/DDTC 
 
E.O. 12958: DECL: 03/09/2015 
TAGS: MARR, MASS, MCAP, TU 
SUBJECT: ONEROUS TERMS OF TURKEY'S REISSUED ATTACK 
HELICOPTER TENDER MAY PRECLUDE AMERICAN PARTICIPATION 
 
Classified By: Ambassador Eric S. Edelman, reasons 1.4 (b) and (d). 
 
1. (C) SUMMARY: Eight years after Turkey issued its original 
attack helicopter tender and one year after it canceled that 
tender, the Turkish Undersecretariat for Defense Industries 
(Savunma Sanayi Mustesarligi or SSM) issued a new tender for 
up to 91 attack helicopters.  Three US companies -- Boeing, 
Bell Helicopter and Sikorsky -- received the request for 
proposal (RFP) for this estimated $2 billion project.  US 
defense industry reaction to the new tender -- which contains 
78 pages of Terms and Conditions (T&Cs) that must be 
unconditionally accepted; excessive technology transfer 
requirements; 60% offset obligation; a tight delivery 
schedule; and onerous liability clauses, including contractor 
liability for any government export control process or policy 
change that impacts the design or delivery schedule -- has 
been uniformly negative.  A number of company representatives 
have stated that the terms will be impossible to meet; 
however, none of the American contenders are likely to submit 
a bid.  We understand Bell executives will be seeking 
meetings with DSCA head LtGen Kohler and USMC Commandant Gen 
Hagee to complain about the tender.  Boeing officials predict 
that the requirement for interested firms to provide a costly 
production site survey and a helicopter flight test by the 
June 10 bid submission deadline would require companies to 
reveal soon whether they intended to play this out until the 
end.  End Summary. 
 
------------ 
TENDER TERMS 
------------ 
 
2. (C) SSM on February 10 issued a tender for the purchase of 
50 to 91 attack helicopters, with the initial ten to be 
purchased off-the-shelf and the remainder, in groups of 20, 
20 and 41 to be built as a combination of a foreign platform 
with significant local content (including a Turkish mission 
computer, weapons targeting and sight systems and electronic 
warfare system), as it comes on-line.  If all the options are 
exercised, the total contract value could equal around $2 
billion.  During SSM's March 10 Bidders' Conference, SSM 
Aviation Office Director Sedat Guldogan characterized the 
first 30 helicopters as firm orders, with the next 20 being 
fairly firm and the final 41 helicopters as "optional."  The 
tender was issued in three parts: T&Cs, Systems Design, and 
Offset requirements.  According to the rules of the tender, 
every page of the T&Cs (Note: the only section of the tender 
written in Turkish End Note.) must be initialed to indicate a 
firm's unconditional acceptance of all T&Cs up front in order 
for a bid to be considered. 
 
3. (C) The Attack Helicopter tender is the first tender to be 
issued under new standard contract terms developed by SSM. 
Sedat Guldogan, discussing the new contract at the Feb. 23-24 
Defense Industrial Cooperation (DIC) conference in 
Washington, said the new contract reflects SSM's lessons 
learned from past tenders, and represents a effort to 
simplify and streamline the T&Cs to ensure that all bids are 
for like items under the same terms.  Boeing officials who 
participated in the March 10 Bidders' Conference and who have 
worked with Turkey on past projects, however, called the 
tender far worse than any they've previously negotiated. 
Among the most onerous terms are the requirement for full and 
unconditional transfer of the complete system and subsystems 
Technical Data Packages (TDPs), transfer of rights to use the 
TDP to make modifications to the system, and required TDP 
updating for 35 years; preliminary home government 
authorization and/or license provision at the time of bid 
submission on June 10; corporate assumption of liability for 
performance risks associated with integration of a Turkish 
unique components into the airframe; and the unilateral right 
of SSM to seize the entire Performance Bond (6% of the total 
contract value) for deviations in T&Cs or program execution. 
Particularly onerous is the requirement for mandatory bond 
replenishment within 15 days of seizure. 
 
4.  (U) Beyond the T&Cs, the requirement for the first 
helicopter to be delivered eighteen months after the contract 
is awarded, and to provide a bid that reflects pricing for a 
helicopter that contains as yet unspecified (translation: 
undeveloped) local content makes calculating the bid 
difficult.  To ensure that it is covered for unanticipated 
component changes a company may artificially inflate its bid, 
which could render it un-competitive.  Additionally, 
companies are required to commit to offsets equal to 60% of 
the total contract price as offset work (to be provided 
through local production, training or technology transfer). 
This is beyond the 50% offset requirement established last 
November as the baseline for all new contracts. 
 
5.  (U) Adding to the legal concerns, in the event of a 
disagreement or dispute between SSM and the winning 
contractor, the Turkish-language version of the contract will 
be considered the legal version.  Additionally, the winning 
company must conduct any and all written communication with 
SSM regarding the contract in Turkish. 
 
 
------------------- 
BIDDERS' CONFERENCE 
------------------- 
 
6. (C) All six companies that took the tender (Italy's 
Agusta, German/French Eurocopter consortium, Russia's Moscow 
Helicopter Plant, US Bell Helicopter, Sikorsky, and Boeing) 
participated in the March 10 Bidders' Conference.  A South 
African company is also expected to participate in the tender 
but has not yet picked up the bid package, according to the 
local Boeing representative.  Foreign government 
representatives were not allowed to observe the conference. 
Participating companies were required to submit questions in 
advance.  SSM received over 100 questions, which it provided 
to conference attendees in writing, together with SSM's 
response.  In its responses, SSM clarified points of 
confusion but emphasized T&Cs were non-negotiable and 
underscored that any bid proposal that did not provide 
unconditional acceptance of all terms upfront would not be 
considered.  The only potential area of flexibility noted, 
according to Boeing, may be with regard to small technical 
design differences. 
 
------------------------------- 
US DEFENSE INDUSTRY PERSPECTIVE 
------------------------------- 
 
7. (C) Boeing and Sikorsky representatives separately 
expressed to PolMilOffs and Office of Defense Cooperation 
representatives their concerns with the tender and their hope 
that no firm, particularly no American firm, participates in 
the bid.  Boeing officials do not believe that any firm could 
honestly submit a fully compliant bid.  They calculate that 
Boeing could only achieve 57% compliance over all three 
categories of conditions.  While the company could currently 
comply with 70-78% of the system design terms, and, with a 
small additional amount of R&D, could increase that, it could 
not  reach full compliance.  Before the Bidders Conference, 
Boeing officials debated the possibility of submitting a 
non-compliant bid, under the assumption that no company could 
submit a fully compliant proposal, and therefore, SSM would 
be forced to choose the most compliant bid.  Undersecretary 
for Defense Industries, Murad Bayar, reinforced this idea. 
When told by the Ambassador that US firms would have 
difficulty submitting a fully compliant bid, Bayar encouraged 
them to submit a non-compliant one.  However, in the view of 
Boeing officials, Sedat Guldogan made very clear at the 
Bidders Conference that non-compliant bids would be rejected, 
wasting the $2-3M corporate investment required to compile 
the bid.  Boeing lawyers have also expressed a concern that 
submission of a non-compliant bid could provide SSM pretext 
to drawn down the required $5M bid bond.  Finally, Boeing 
estimated the costs of providing the required site survey and 
flight test at $500,000-$1,000,000, depending on which weapon 
systems SSM wanted demonstrated. 
 
8. (C) Boeing called the most burdensome conditions those 
that required the companies to take responsibility for their 
governments' action or inaction, including approval of 
licenses at bid submission and contractor liability for any 
change in export control policy that negatively impacted the 
production design or schedule.  According to Boeing, the 
strict US export control requirements put US firms at a 
distinct disadvantage to other foreign contractors.  Weighing 
the high cost of the complete bid submission process against 
the numerous risks, Boeing is unlikely to submit a bid.  To 
show good faith, however, Boeing executives promised to send 
a letter to SSM in the next several weeks enumerating the 
company's concerns and asking for a meeting to discuss them. 
Boeing didn't expect SSM to grant this request, but the 
company would be on record as having attempted to bridge the 
divide before it announced its withdrawal from the 
competition. 
 
9. (C) Sikorsky's local representative said his company took 
the tender primarily to show goodwill to SSM, in hopes of 
positively influencing SSM's decision on the purchase of 12 
Seahawks for the Turkish Navy currently under review, as well 
as consideration of additional Blackhawk purchases in the 
General Purpose Helicopter tender to be issued mid-year. 
While Sikorsky does not have an attack helicopter, the 
representative alluded to something in development and noted 
that Sikorsky could demonstrate its armed Blackhawk as an 
alternative to at least part of turkey's attack helicopter 
requirement. 
 
10. (C) COMMENT: Given the stringent tender terms and the 
lack of an attack helicopter to offer, post does not expect 
Sikorsky to see the process through to bid submission.  Bell 
Helicopter, which won the original attack tender in 1999 but 
lost it when the contract was canceled in 2004, recalled its 
resident American representative and maintains only a local 
representative in its Ankara office.  Bell officials who came 
to Turkey to participate in the Bidders' Conference left 
immediately afterward without approaching mission officials. 
Post understands, however, that the Bell CEO has requested a 
meeting with Lt Gen Kohler, Director of the Defense 
Department's Defense Security Cooperation Agency, and with 
Commandant of the U.S. Marine Corps Gen Hagee to express 
Bell's displeasure with the tender. 
 
11. (C) US defense companies that have dealt with the 
vagaries of doing business in Turkey for years uniformly 
consider this tender unachievable in its current form, and 
SSM's consistent mantra that the T&Cs are untouchable gives 
them little hope of working through the problem areas.  While 
all claim a desire to see foreign and US companies reject the 
tender across the board, no one wants to be the first to pull 
out, fearing that they will be left behind if others continue 
to play and manage to get SSM agreement to relax some of the 
terms.  If, however, they stay in the game, they will 
reinforce to SSM that their protests are hollow and that such 
one-sided contracts are acceptable.  END COMMENT. 
 
EDELMAN