US embassy cable - 05PRAGUE815

S E C R E T SECTION 01 OF 03 PRAGUE 000815 
 
SIPDIS 
 
E.O. 12958: DECL: 05/19/2015 
TAGS: MASS, PREL, BEXP, KCRM, EZ 
SUBJECT: TROUBLING SIGNALS IN LARGEST CZECH MILITARY 
PROCUREMENT 
 
 
Classified By: Political-Economic Counselor Mike Dodman for reasons 1.4 
 B+D 
 
1. (S) Summary:  The current $1 billion Czech Army tender for 
armored vehicles -- the military's largest procurement to 
date -- is designed to avert past problems with transparency, 
with PriceWaterhouseCoopers engaged to run the tender instead 
of the MOD's Armaments Directorate.  The two main declared 
participants in the tender are the Austrian Steyr (owned by 
General Dynamics) and the Finnish Patria.  A second GD 
subsidiary, Mowag of Switzerland, was considering competing 
until GD decided to go with only one of its firms.  DefMin 
Kuehnl has complained that this decision hurts the GOCR's 
goal of holding a "non-discriminatory tender."  Kuehnl and 
other MOD officials have pushed hard for inclusion of Mowag 
in the tender; Mowag has close business ties with the 
politically influential Czech arms trading firm Omnipol, 
which maintains strong influence with the MOD Armaments 
Directorate.  Of equal concern is a comment from a senior 
Czech Army officer that if Mowag does not participate in the 
tender, the contract could go to a firm without American 
ties.  On the other hand, National Security Advisor Kostelka 
has recommended that GD stick to its position and do what it 
believes makes sense. 
 
2. (S) Post has informed GD of the approaches from GOCR 
officials.  The decision of which firm to compete, and 
whether or not to have both GD subsidiaries in the tender, is 
one for the company to make.  Our concern is that the process 
remain fair and transparent.  We intend to use the 
Ambassador's upcoming meetings with new PM Paroubek and other 
senior officials to reinforce our expectation that this be a 
clean tender.  End Summary. 
 
-------------------- 
CR's largest tender was designed to be cleaner than the Gripen 
-------------------- 
 
3. (C) The tender for 234 eight-wheeled armored vehicles, 
worth 22 billion Czech crowns or approx. $1 billion, is the 
largest military procurement in Czech history, exceeding even 
the supersonic aircraft tender that was eventually won by the 
Swedish Gripen.  This tender has been under discussion for 
over a year, and was finally approved by the GOCR in April, 
with bids due on June 22.  In an effort to counter criticism 
about the overall lack of transparency in military 
procurement, and in particular the supersonic fighter tender, 
the Czech MOD has tried to make the current tender a model, 
engaging PriceWaterhouseCoopers to prepare the tender 
documents and handle the evaluation of bids.  Embassy's 
assessment is that PWC is doing a good job of preparing a 
transparent and open process. 
 
4. (C) The two firm bidders to date are Patria of Finland 
(owned by the Finnish Government and EADS), and Steyr 
Spezialfahrzeug of Austria, a subsidiary of General Dynamics. 
 The Swiss Mowag (Motorwagenfabrik AG) was also considering 
entering the competition.  However, General Dynamics, which 
through the General Dynamics European Land Combat Systems 
owns both Steyr and Mowag, decided that only Steyr would bid 
for this tender, citing the bad experience recently when the 
two firms competed against each other (and Patria) in a 
similar tender in Portugal.  GD also understands that Embassy 
advocacy efforts (in cooperation with the Austrian and/or 
Swiss embassies) would be hampered if more than one 
U.S.-affiliated firm is competing. 
 
---------------- 
Czech complaints 
---------------- 
 
5. (C) Czech Defense Minister Kuehnl first complained to 
Ambassador on March 25 that he was concerned by reports that 
Mowag would not take part in the tender.  Citing the MOD's 
strong desire that this be a fully competitive process, 
Kuehnl said the failure of Mowag to participate in the tender 
would weaken the competition.  He repeated the complaint in 
subsequent discussions with the Ambassador, and DATT and 
others have heard the same from others.  In a May 16 letter 
to the Ambassador (received May 19; faxed to EUR/NCE) Kuehnl 
recalls the well known USG position that Czech military 
acquisitions should be fully transparent and complains that 
GD's decision to compete only one subsidiary "is at variance 
with our aim to hold a non-discriminatory tender."  Kuehnl 
goes on to request the Ambassador's support in having "the 
highest possible number of potential bidders," noting the 
MOD's desire to chose from "the truly best products 
available, which Mowag's portfolio definitely represents." 
Embassy has shared the letter with GD and the Austrian 
embassy, with whom we have been coordinating on this tender 
for some time.  Ambassador responded to Kuehnl on May 23, 
noting that the USG does not direct the commercial decisions 
of private firms, and restating our expectation that this be 
a transparent tender. 
 
6. (S) During a private discussion with Ambassador on May 20 
on the margins of a meeting on other topics, Chief of the 
Czech General Staff Pavel Stefka said that he believes it 
would be a "problem for the GOCR" if the U.S.-connected 
company does not win the tender.  "We don't want the same 
result as the supersonic tender" said Stefka.  He added that 
it is the Czech military's consensus that Mowag produces a 
better vehicle than Steyr. 
 
------------------- 
Omnipol connections, BAe, and other behind-the-scenes activity 
------------------- 
 
7. (S) Allegations of corruption and favoritism in the 
controversial supersonic fighter tender centered around the 
Czech arms trading firm Omnipol, which maintains very close 
ties with the MOD Armaments Division and Deputy Defense 
Minister Kopriva, who is an appointee of the junior coalition 
partner, the Christian Democrats.  Omnipol is known to have 
had close links with Mowag, raising suspicion -- which we are 
not able to confirm or deny -- that they may be behind 
efforts to make sure that Mowag is included in the tender. 
 
8. (S) We understand that British Aerospace is also 
aggressively supporting the bid by its Finnish subsidiary. 
One potential new development is a bid under consideration by 
United Defense -- a U.S. firm owned by BAe North America.  If 
it entered the competition, this would put a stop to embassy 
advocacy for either of the GD subsidiaries, if the UDI bed 
were judged to be realistic. 
 
9. (S) There have been allegations that Czech firms that 
would provide maintenance and support for the new vehicle 
fleet are the real behind-the-scenes players, trying to 
influence the process one way or another.  These firms also 
maintain close MOD contacts, and include state-owned 
entities.  One Member of Parliament who closely follows 
military procurements supported this with his assessment to 
us the tender was, in fact, proceeding with the hoped-for 
transparency in the sense that the actual suppliers were so 
far behaving appropriately. 
 
10. (S) PM Paroubek's National Security Advisor (and former 
Defense Minister) Miroslav Kostelka, in a meeting with DCM on 
May 26, suggested that Deputy DefMin Kopriva is a protagonist 
for Omnipol, much as he was during the supersonic tender.  He 
faulted DefMin Kuehnl for not exercising more control over 
Kopriva, but gave assurances about PWC oversight and GD's 
right to compete as it decides without damage to Steyr, which 
he recognized has a good product.  (See septel.) 
 
------------------------- 
Next steps 
------------------------- 
 
11. (U) Embassy has kept GD informed of our discussions with 
the Czechs.  We have told the firm, as we have told the GOCR, 
that it is GD's decision which subsidiary or subsidiaries to 
compete.  We will calibrate our advocacy on behalf of U.S. 
suppliers based on the decisions of the firms.  (Note:  from 
our discussions with GD staff, we understand they remain 
reluctant to compete both subsidiaries in this tender, and 
that they recently turned down a request in another country 
to switch suppliers.) 
 
12. (C) Our primary concern at this point is with the 
process.  We will continue to make clear at all levels of the 
GOCR that we expect to see transparency in all stages of the 
acquisition.  Ambassador will stress this in his introductory 
call on new Prime Minister Paroubek, scheduled for June 9, 
and in other appropriate meetings.  DCM will follow-up with 
Kostelka and with Deputy DefMins Belcik and Kopriva; DATT and 
others will reinforce as appropriate. 
CABANISS