DND Secretary Delfin Lorenzana’s response to an open letter on the PH Navy’s frigate project

(Editor’s note: Below is the response of Defense Secretary Delfin Lorenzana to an open letter from Dr. Corazon PB Claudio that was published at Inquirer.net early this month. Claudio wrote a letter to Lorenzana to express her sentiments on the Frigate Acquisition Project of the Philippine Navy.)

CORAZON PE BENITO – CLAUDIO

President, Earth Institute Asia, Inc.

Unit 317 National Life Building

1100 Quezon City

Metro Manila, Philippines

Dear Dr. Claudio,

This is my response to your letter published 9 March 2018 on Inquirer.net, “Letter to fellow Ateneo MBA alum, DND Secretary Delfin N. Lorenzana.” But first, I’d like you to know that I really appreciate your concern and avowed love for the Philippine Navy.

I have to reply primarily to correct the misrepresentation of facts being perpetrated by VAdm Mercado and his supporters. Your letter proved just how successful they have been in this regard.  Please read on and tell me later who should apologize to whom.

I have always known the Philippine Navy as an excellent organization. It has garnered numerous awards and recognitions locally as well as internationally as you have enumerated in your letter. It must be pointed out, however, that these outstanding accomplishments were the result of the collective and cumulative efforts of our valiant sailors and marines, under the leadership of previous FOICs who preceded VAdm Mercado such as VAdm Alexander Pama, VAdm Jose Luis Alano, VAdm Jesus Millan, and VAdm Caesar Taccad, to name a few. It is, thus, unfair to attribute whatever gains the PN has achieved to one person alone. I have no doubt that Vadm Mercado had a sterling service in the Navy. What I am questioning was his actuations with regard to the Frigate Acquisition Project (FAP) from June 2016 to November 2017 which has, regretfully, tarnished his good record.

There is nothing wrong with the FAP contract.  All that needs to be done is for it to be implemented as is. I had our legal officers go over it before I signed it and again when VAdm Mercado raised the Combat Management System (CMS) question. I even had a private law firm go over the contract. They all came to the same conclusion: it is in order, in form and substance.

Let us go to the bone of contention – the CMS. These are the things I have derived from your letter which were also the same arguments of VAdm Mercado and Commo Villa during the Senate Hearing:

1. That due to the break-up of Hanwha-Thales partnership, there is only one CMS option left – Tacticosof Thales. You also stated that, “After the Hanwha-Thales dissolution, wasn’t VadmMercado correct in just focusing on Thales, which was the only CMS left legally in the contract? Hanwha-Thales is already non-existent, Hanwha System which Hyundai wants to substitute now, is not in the contract and is, thus non-existent legally in the FAP.”

This is the most egregious argument in this whole discourse. What are the facts? During the Submission and Opening of Bid Envelopes (SOBE), HHI submitted two Combat Management Systems. These are: Tacticos developed by Thales Nederland and Naval Shield Integrated Combat Management System (NSICMS) developed by Hanwha – Thales Company (HTC) of the Republic of Korea (which became simply Hanwha Systems in October 2016 when Thales and Hanwha severed their ties). The members of the PN Technical Working Group (PN TWG) verified, inspected and evaluated carefully the technical documents of Tacticos and NSICMS and the PN TWG affirmed that both CMS are compliant and both satisfy the technical requirements of the procuring entity, as stipulated in the bidding documents and were therefore “rated as pass” by the DND Bids and Awards Committee (BAC), as recommended by the PN TWG. Note that only their respective CMS were rated, not the companies themselves. As can be gleaned from above, the PN TWG did not rate Thales Nederland or Hanwha-Thales but their systems. When Hanwha-Thales broke up, the NSICMS remained with Hanwha. So, what disqualification was VAdm Mercado talking about? Besides, Hyundai would not be so foolish as to choose a non-existent sub-system.

Moreover, as clearly stated in the Post Qualification Evaluation Summary Report dated 14 June 2016, particularly on the aspect of the “Technical Proposal,” the DND-PN Post Qualification Team, of which VAdm Mercado was the Project Manager, affirmed that all sub-systems in the maker’s list are compliant with the technical requirements of the PN.

2. You also stated, “I just hope that when your negative feelings are gone, you will acknowledge that VAdmMercado was just doing his job to ensure compliance with the contract.”

Firstly, feelings had nothing to do with my decision to relieve him. It was based on hard facts alone.

Secondly, this misleading argument (purportedly to ensure compliance with the contract) was also used by VAdm Mercado during the hearing at the House of Representatives (HoR). In fact, he went further by saying that he was just protecting those involved in the contract from any problems later on. What a noble intention! But he is plainly and simply fudging the issue. If there is a person who wants the contract implemented according to our laws, it is no other than the signatory to the Contract and the Head of Procuring Entity (HOPE) – me, the SND. In fact, VAdm Mercado was interfering with the procurement process when he tried to force Hyundai to install his chosen CMS, which is a violation of the Contract.

VAdm Mercado and Commo Villa also argued during the Senate Hearing that when Hyundai agreed (during a workshop held in September 2016) “that the CMS shall be compatible with the Tactical Data Link 16 (TDL16), Hanwha’s NSICMS has been disqualified because only ‘Tacticos is compatible with TDL 16’ at that time.”

Likewise, VAdm Mercado, thru the Philippine Navy Project Management Team (PN PMT) submitted to the DND a position paper asserting that Hyundai must “show proof and objective quality evidence that the CMS is compatible with Link 16 being used by at least one (1) frigate or a similar type of naval vessel from the country of origin or being used by at least one (1) frigate each from two (2) foreign countries as part of the Critical Design Review (CDR).”

Again, this is purely and simply clouding the issue. What are the facts? The phrase “show proof and objective quality evidence that the CMS is compatible with Link 16” does not have any merit as far as the contract is concerned. Instead, the phrase “CMS shall be compatible with Link 16” was part of the contract under the Tactical Data Link (TDL) portion. During the one-week workshop held from 26-30 September 2016, the FAP TWG, chaired by then Commodore Robert A. Empedrad, AFP, requested HHI to include in the contract the phrase, “The CMS shall be compatible with Link 16” because the Armed Forces of the Philippines (AFP) plans to acquire TDL-16 sometime in the future. During the SOBE, this was not part of the technical requirements because what was initially required was just a space provided in the ship for the future installation of TDL-16. Acceding to the Navy’s request, HHI agreed to insert in the contract the phrase, “The CMS shall be compatible with Link 16” without additional cost. As agreed, HHI assures the DND that the TDL 16 will be integrated with the NSICMS before the delivery of the two frigates.  

On 14 September 2017, Hanwha submitted a Compliance Certificate to the Defense Acquisition Office (DAO) stating that its NSICMS is compatible with TDL 16, which should have put to rest the CMS/TDL 16 issue. Unfortunately, it did not because VAdm Mercado still insisted on Tacticos.

A lot of talk has also come out on the supposed superiority of Tacticos over the NSICMS. But the superiority of Tacticos is irrelevant to the FAP. The requirement of the Procurement Law (RA 9184) is for the PN TWG to rate competing systems as either PASS or FAIL. The Law did not say “choose the best product.” The PN TWG headed by VAdm Mercado himself rated both Tacticos and NSICMS as PASS. This is clearly indicated in the contract. Senator Recto’s statement during the Senate hearing, “Pagbigyan na natin sila sa kanilang gusto,” cannot be considered as this would exceed the authorized budget and therefore violate  RA 9184.

3. You also said, “Faced with these uncertainties, our PN Technical Team is right in choosing Thales Tacticoswhich has proven performance. Any other CMS that has not been well tested just increases the risk to our frigates.”Again, I refer you to Section 18, Revised IRR of RA 9184 – Reference to Brand Names: “Specification for procurement of goods shall be based on relevant characteristics, functionality and/or performance requirements. Reference to brand names shall not be allowed, except for items or parts that are compatible with the existing fleet or equipment of the same make and brand, to maintain the performance, functionality and useful life of equipment.”

Is the NSICMS a proven system? The PQ Team, when it post-qualified Hyundai, went aboard ROKS Jeonbuk (FFG 813), one of the most modern frigates of the Republic of Korea Navy commissioned in May 2015, which was the basis for the design of the PN frigates. The PQ Team observed that most subsystems installed onboard the vessel are locally made (indigenous products) by South Korea such as C-Star Missile by LIG Nex1, Main and Auxiliary Engines by STX-MTU and more importantly, the Naval Shield Integrated Combat Management System (NSICMS) by Hanwha. This validates that the NSICMS is indeed a proven design.   As a matter of fact, NSICMS has been installed in ROKS Daegu (FFG-818), the newest ROKN ship commissioned into service last 18 February 2018.

4. Dr. Claudio, I take umbrage of your dragging into this discourse the sacrifices of our sailors and marines in the field as if I don’t care about them. You have, actually, trivialized their deeds by connecting them with VAdmMercado’s relief. I know their sacrifices being a combat officer myself for most of my military service. They have nothing to do with this case and it was insensitive of you to drag them into this. VAdmMercado is not the Philippine Navy. As I said earlier, what I am questioning are his actuations with regard to the FAP during the last 18 months of his service. I am assuming from your letter that you have been talking only to VAdm Mercado. Talk to other PN officers and enlisted personnel, Dr. Claudio, because the reaction I got from some of them of his relief was, pardon the pun, “utter relief.”

Lately, a letter to Congressman Gary Alejano purportedly from Thales Nederland circulated online, disputing the price of the Tacticos CMS that was divulged by Hyundai. According to the letter, it is not true that the price of Tacticos is $7M/per ship. Again, this information is irrelevant to the FAP. Thales Nederland should have gone to Hyundai to air this concern because it has the sole obligation to choose and install a CMS that is compliant with the FAP technical specifications from the Navy.

Below is my statement during the HoR Hearing on 7 March 2018 which, unfortunately, was not broadcast live on TV:

1. CHAIRMAN, AS THE PRESENTATION OF RADM EMPEDRAD, THE FOIC, HAS SHOWN EARLIER, THE FRIGATE PROJECT WAS CONDUCTED ABOVE-BOARD AND SHOULD HAVE PROCEEDED AS SCHEDULED IF NOT FOR THE MEDDLING OF A CERTAIN INDIVIDUAL AND HIS STRANGE FIXATION ON A PARTICULAR COMBAT MANAGEMENT SYSTEM.

1. CHAIRMAN, DURING THE COURSE OF THIS PROCEEDINGS, WE WILL ESTABLISH THE FOLLOWING:

-THAT THE FRIGATE ACQUISITION PROGRAM IS ESSENTIAL TO OUR NATION’S TOTAL DEFENSE. THUS, THE PROJECT SHOULD NOT BE DELAYED;

-THAT THE DEPARTMENT OF NATIONAL DEFENSE HAS ENSURED THAT THE PROCUREMENT PROCESS FOR THE FRIGATES ARE DONE AND COMPLETED STRICTLY IN ACCORDANCE WITH OUR LAWS, NAMELY, RA 9184 (THE GOVERNMENT PROCUREMENT REFORM ACT), AND RA 10349  (THE REVISED AFP MODERNIZATION ACT);

-THAT IF THERE IS SOMEBODY WHO INTERFERED WITH THE FRIGATE ACQUISITION PROJECT AND CAUSED DELAY, THAT PERSON IS NO OTHER THAN THE FORMER FOIC- VADM RONALD MERCADO. HE IS, IN FACT, THE CAUSE OF ALL THIS MESS.

1. CHAIRMAN AND MEMBERS OF THE COMMITTEE, IN JUNE 2016 AFTER THE TWG ARRIVED FROM KOREA AND FINISHED POSTQUALIFYING HYUNDAI TO BE THE BUILDER OF OUR FRIGATES AND BEFORE I SIGNED THE NOTICE OF AWARD, VADM MERCADO TRAVELED TO PARIS AND FROM PARIS, HE MADE A SIDE TRIP TO THALES IN THE NETHERLANDS. THIS IS A VIOLATION OF THE PROCUREMENT LAW THAT PROHIBITS CONTACT WITH ANY PROPONENT BY MEMBERS OF THE TWG BEFORE THE NOTICE OF AWARD IS SIGNED. PERHAPS VADM MERCADO WOULD LIKE TO EXPLAIN WHY HE VISITED THALES IN THE NETHERLANDS.

ON 13 NOVEMBER 2016, VADM MERCADO BECAME THE FLAG-OFFICER-IN-COMMAND OF THE PHIL NAVY.

SOMETIME IN FEBRUARY 2017, HYUNDAI INFORMED THE DEFENSE ACQUISITION OFFICE (THE IMPLEMENTOR OF THE PROJECT) THAT IT IS CHOOSING NAVAL SHIELD OF HANWHA AS THE CMS TO BE INSTALLED TO THE YET TO BE BUILT PN FRIGATES. UPON KNOWING THAT HYUNDAI WOULD CHOOSE THE HANWHA NAVAL SHIELD OVER TACTICOS OF THALES NEDERLAND, VADM STARTED TO WORK FOR THE SELECTION OF TACTICOS. HOW DID HE DO IT?

FIRST, HE TRIED TO INFLUENCE THE PROJECT MANAGEMENT TEAM (PMT) LED BY THEN COMMO EMPEDRAD TO WORK FOR THE ADOPTION OF TACTICOS. WHEN BOTH COMMO EMPEDRAD AND MAJ DAYAO, THE LAWYER OF THE PMT RESISTED, EXPLAINING THAT IT WOULD VIOLATE THE CONTRACT, THEY WERE RELIEVED AND REPLACED IN MARCH 2017 BY CAPT VILLA AND LCDR ESTEBAN, RESPECTIVELY.

SECOND, VADM MERCADO DIRECTED THE PN OWNER’S REPRESENTATIVES WHO WERE SENT TO HYUNDAI IN KOREA NOT TO DEAL WITH HYUNDAI UNTIL THE CMS ISSUE IS RESOLVED. THE PN OWNER’S REPRESENTATIVES IS A TEAM OF NAVAL OFFICERS WHO ARE THERE (SOUTH KOREA) TO SUPERVISE AND MONITOR THE BUILDING OF THE FRIGATES. ONE OF THEIR FUNCTIONS IS TO WORK WITH THE HYUNDAI ENGINEERS TO FINALIZE THE CRITICAL DESIGN REVIEW (CDR) OF THE SHIP. THE CDR IS VERY IMPORTANT TO THE BUILDING OF THE SHIP. THE BUILDER CANNOT PROCEED UNTIL IT IS FINALIZED AND AGREED UPON BY BOTH SIDES. VADM MERCADO, THRU CAPT VILLA, PREVENTED THEM FROM PERFORMING THIS FUNCTION.

ACCORDING TO CAPT BARTOLOME, HEAD OF THE PN OWNER’S REPRESENTATIVES, IN A PERIOD OF 10 MONTHS (JANUARY – OCTOBER 2017), HE SENT MORE THAN 200 COMMUNICATIONS COMPOSED OF LETTERS AND DRAWINGS OF THE SHIP TO CAPT VILLA FOR GUIDANCE BUT HE RECEIVED NO REPLY.

SOMETIME IN SEPTEMBER 2017, THE HYUNDAI PEOPLE COMPLAINED TO THE DEFENSE ACQUISITION OFFICE THAT THE PROJECT COULD NOT MOVE FORWARD BECAUSE THE PN OWNERS REPRESENTATIVES REFUSE TO WORK WITH THEM TO FINALIZE THE CDR AND THAT THE PROJECT WAS BEING DELAYED. THE SCHEDULE FOR FINALIZING THE CDR WAS OCTOBER 2017.

THIRD, VADM MERCADO LIKEWISE STARTED TALKING PUBLICLY BEFORE NAVAL OFFICERS ABOUT STOPPING THE CONTRACT IF TACTICOS IS NOT ADOPTED AS CMS FOR THE FRIGATES. VADM MERCADO, IN FACT, CONFIRMED THIS IN A DND SENIOR LEADERS ROUND TABLE DISCUSSION HELD IN SEPTEMBER 2017. IN THAT MEETING, VADM MERCADO HAD A HEATED DISCUSSION WITH THE HEAD OF THE DEFENSE ACQUISITON OFFICE, DIR. DELA PAZ.  VADM MERCADO OPENLY SAID THAT IF THE TACTICOS IS NOT ADOPTED, HE WOULD HAVE THE CONTRACT CANCELLED. THIS WAS RECORDED IN THE MINUTES OF THE MEETING.

THE HYUNDAI COMPLAINT THAT THE PROJECT IS BEING DELAYED ALARMED ME, AS THE SIGNATORY OF THE CONTRACT AGREEMENT AND IMPLEMENTOR OF THE PROJECT. I FORMED A STEERING COMMITTEE TO LOOK INTO THE CMS ISSUE BROUGHT OUT BY VADM MERCADO.  THE COMMITTEE CAME UP WITH A MEMORANDUM STATING THAT THE CHOICE OF THE CMS WAS HYUNDAI’S AND IT WAS PROVIDED FOR IN THE CONTRACT. INSTEAD OF COMPLYING, VADM MERCADO CONTINUED TO INSIST ON TACTICOS, EVEN ARGUING THAT WHEN TDL-16 WAS INCLUDED IN THE BUILDING SPECIFICATIONS, THE HANWHA NAVAL SHIELD HAS BEEN DISQUALIFIED. ANOTHER MEMO WAS SENT DIRECTING THE NAVY TO STRICTLY ADHERE TO THE CONTRACT, BUT VADM MERCADO, TOO, IGNORED THIS. HE CONTINUED TO INSIST ON TACTICOS.

1. CHAIRMAN AND MEMBERS OF THE COMMITTEE, IT IS NOW MARCH (2018) AND THE CRITICAL DESIGN REVIEW IS NOT YET FINISHED. HYUNDAI HAS REQUESTED FOR ADJUSTMENT OF THE TIMETABLES OF THE PROJECT BY SIX MONTHS. I HAD TO ACCEDE BECAUSE THE DELAY WAS NOT CAUSED BY THEM BUT BY ONE OF US.  THIS DELAY WILL ALSO CONSEQUENTLY DELAY THE DELIVERY AND EVENTUAL UTILIZATION OF THE FRIGATES. FORTUNATELY, HOWEVER, WE HAVE NOT RECEIVED ANY REQUEST FOR PRICE ESCALATION.

IN SUMMARY, MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE, VADM MERCADO COMMITTED THREE OFFENSES IN CONNECTION WITH THIS PROJECT:

1. INTERFERING WITH THE PROCUREMENT PROCESS.HIS INSISTENCE ON TACTICOS OF THALES IS IN VIOLATION OF THE CONTRACT AGREEMENT AUTHORIZING HYUNDAI TO CHOOSE THE CMS TO BE INSTALLED. IT IS AGAINST RA 9184, THE GOVERNMENT PROCUREMENT LAW, TO INDENTIFY BRANDS OR EVEN TO HAVE CONTACT WITH PROPONENTS BEFORE THE NOTICE OF AWARD IS GIVEN. BY INVOKING, WRONGLY, THAT THE HANWHA NAVAL SHIELD HAS BEEN DISQUALIFIED BY THE ADOPTION OF THE TACTICAL DATA LINK 16, HE WAS, IN FACT, TAILOR FITTING A PRODUCT TO DISQUALIFY ANOTHER- ALSO A VIOLATION OF RA 9184.

2. USURPATION OF AUTHORITY.AFTER THE CONTRACT AGREEMENT WAS SIGNED, THE IMPLEMENTATION OF THE PROJECT HAS BECOME THE SOLE RESPONSIBILITY OF THE SECRETARY OF DEFENSE. THE DEFENSE ACQUISITION OFFICE (DAO) ASSISTS HIM. THE PROJECT MANAGEMENT TEAM AND THE OWNER’S REPRESENTATIVES, IN TURN, ASSIST THE DAO. BOTH THE PMT AND THE PN OWNER’S REPRESENTATIVES ARE ALL NAVAL OFFICERS BUT ARE WORKING UNDER THE SECRETARY OF DEFENSE. THEY REPORT DIRECTLY TO THE DEFENSE ACQUISITION OFFICE. THEY ARE NOT WORKING UNDER VADM MERCADO IN THIS PROJECT. THEREFORE, HE HAS NO BUSINESS ORDERING THEM WHAT TO DO AND WHAT NOT TO DO IN CONNECTION WITH THE FRIGATE PROJECT. IF VADM MERCADO HAD ANY CONCERNS ABOUT THE PROJECT, HE SHOULD HAVE COME TO ME. HE DID NOT, CHOOSING INSTEAD TO INTERFERE THRU THE PMT, THE PN OWNER’S REPRESENTATIVE AND THE SOCIAL MEDIA.

3. FOR IGNORING AND NOT COMPLYING WITH SEVERAL MEMOS FROM THE SECRETARY OF DEFENSE.

THOSE THREE REASONS ARE WHY VADM MERCADO WAS RELIEVED. I HAVE LOST TRUST AND CONFIDENCE IN HIS ABILITY TO LEAD THE PHILIPPINE NAVY. HOW CAN YOU CONTINUE TO HAVE CONFIDENCE AND TRUST IN A LEADER WHO INTERFERES IN A LEGALLY BINDING CONTRACT, USURPS YOUR AUTHORITY AND DEFIES YOUR ORDERS?

IN CONCLUSION, MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE, THERE IS NO ISSUE IN THE FRIGATE ACQUISITION PROJECT AND IT SHOULD HAVE MOVED SMOOTHLY EXCEPT FOR THE FORMER FOIC’S FIXATION AND INSISTENCE ON TACTICOS OF THALES NEDERLAND.

THE FRIGATE PROJECT WAS CONDUCTED ABOVE BOARD AND I WILL ENSURE THAT IT WILL CONTINUE THAT WAY UNTIL THE TWO FRIGATES ARE DELIVERED TO THE PHILIPPINE NAVY, IN ACCORDANCE WITH THE CONTRACT AGREEMENT.

THANK YOU!

After I delivered my statement, VAdm Mercado was also asked to give his statement. I was expecting him to refute and/or comment on my charges against him. But he did not. All he did was to state that he has served the Navy honorably in his entire career and that the Navy garnered several awards during his watch. Again, those are irrelevant to the issue at hand, as pointed out earlier.

During that same HoR Hearing, Congressman Danilo Suarez asked an innocuous question, “Admiral Mercado, do you know who the Thales Nederland representative in the Philippines is?” It was a simple question answerable by YES or NO. What did VAdm Mercado do? He looked around and said, “Your Honor, there are TWG members who are here and maybe they can answer your question.” The collective sighs and groans of people from the Philippine Navy behind me were palpable. They told me later that VAdm Mercado is, in fact, very closely acquainted with the Thales representative.

I rest my case.

Sincerely,

DELFIN N. LORENZANA

Secretary of National Defense

Republic of the Philippines