I have been closely monitoring the developments on the controversy surrounding the Philippine Navy’s (PN) purchase of two Frigates from Hyundai Heavy Industry (HHI) for the past couple of months, but held off writing a blog until I had gathered and studied enough information from news reports about it.
And now I think I have enough material to comfortably write about the topic, hence this blog. The controversy started to break out into the mainstream when just a couple of days before Christmas on December 19, 2017, Vice Admiral (VA) Ronald Mercado was relieved of his post as Flag Officer in Chief (FOIC) of the PN by the Department of National Defense (DND) Secretary Delfin Lorenzana.1
Initially no official reason was given for his relief, but over time details started to come out and eventually it was revealed that it had something to do with the choice of the Combat Management System (CMS) that was to be used on ships wherein the Navy’s Technical Working Group (TWG) (whose position Mercado fully supported) preferred one brand but HHI went with another instead, resulting in a lot of conflict between the two sides.
Accusations and counter accusations flew, and hearings on both houses were made to try to flesh out what happened and what could be done about it. The whole topic is quite complex, hence for this blog I will just focus more on the legality of the issue based on how I understood it and on the facts that are available.
The problem started when sometime around March 2016, HHI submitted two CMS during the Submission and Opening of Bid Envelopes (SOBE): One was the Thales Tacticos while the other one was the Hanwha Naval Shield (NS).2 At this point we don’t know why HHI submitted two CMS instead of just one, but they did, and the Navy accepted both systems for the SOBE.
Fast forward six months later around the end of September 2016, a month before the actual Contract Signing between the Philippine government and HHI, the TWG of the PN conducted a Technical Workshop with HHI to review the details of the Frigates that were going to be built.
’HHI Maker’s List’
During this workshop, HHI came up with a so-called “Maker’s List” which listed down the major systems of the ship, and in this list they used NS as the CMS. They also put a note at the bottom of the list which said, “…The final selection of maker to be Ship Builder’s sole right as long as the equipment/system shall fulfill the owner’s requirements in building specification and other design and build aspects …”3
The Legal Officer of the TWG, Colonel (Col.) Marlon Dayao then co-signed the Maker’s List along with a representative from HHI. Another member of the TWG though, Commodore (Cmdre) Sergio Bartolome said during the Senate Hearing that he opposed this provision, cancelled the workshop and vowed to raise the issue with the PN’s upper hierarchy.4 5
However, the FOIC at that time, Rear Admiral (RA) Caesar Taccad later said during the Congressional Hearing that he was not informed of this Maker’s List issue. How this came about … we don’t know as of now. But also in the same hearing, he did seem to agree in principle that HHI had the right to choose the subsystems because as he said, “… under the doctrine of privity of contracts, the government could only transact with prime contractors like Hyundai, and not the CMS supplier.”
Also during the same Congressional Hearing, a former Undersecretary of the DND Ernesto Boac supported HHI’s position when he said, to quote, “… subcontracting was the norm for any other modernization program which involves very complex systems …”6
So now we have the Legal Officer of the TWG, a former FOIC, and a former DND Undersecretary agreeing that legally HHI has the right to choose the subsystems. But those subsystems of course still need to meet the Technical Specifications that were set by the PN before the bidding.
The next month in late October 2016, the Philippine government formally signed the Contract with HHI for the purchase of the two Frigates. At this point RA Taccad was still the FOIC,7 but just a couple of weeks later in mid-November 2016, Taccad stepped down and was succeeded by VA Mercado.8
After a couple of months, in January 2017 the TWG under Mercado released its first documented opposition (or at least the first one revealed to the public) to the provision in the contract that allowed HHI to choose the subsystems, especially since HHI chose the NS as the CMS.9
Mercado gave his full support to the TWG’s recommendations on refusing the NS and insisting on the Thales Tacticos which HHI also submitted during the SOBE.10 The DND however disagreed with this as the Contract had already been signed, and they agree that HHI has the right to choose the subsystems as per our Procurement laws.
The conflict between the two sides continued on for the next couple of months until all hell started to break loose when Mercado was sacked by Sec. Lorenzana in December 2018. I won’t go too much into the other aspects of this case (at least not yet) as it is quite complicated. Perhaps I will break down into smaller pieces later for easier “consumption”.
’Why Two Systems?’
The biggest question for me about this case is why did HHI submit two CMS during the SOBE, and why did the Navy accept the dual submission? If HHI only submitted either CMS, or if the Navy insisted only one CMS for the submission, then this problem would have not have likely occurred at all.
For example, if HHI only submitted or if the Navy only accepted the Tacticos CMS, then there definitely would have been no problem later since it turned out that was what the Navy preferred all along.
If it was the other way around where only the Hanhwa NS CMS was submitted or accepted, then the Navy would have at least known from the start exactly which CMS HHI will be offering for the Frigates, and they would not have had a basis for comparing it to another CMS coming from HHI.
It’s possible that HHI was just hedging their bets by submitting two systems and that the Navy agreed with them at that time, meaning that if one system somehow failed or is not accepted for some reason, then the bid would still have another CMS that could be used.
I wonder though if there are any other reason aside from the one cited above as to why HHI felt the need to introduce two systems. We won’t know of course unless HHI speaks out, but so far they have been relatively quiet about the whole issue. They haven’t even gone out as much in public to actively defend their decision of using the NS, although that may be in part due to the language barrier also, as shown during the Senate Hearing.
One reason why Mercado and the TWG opposed the Hanwha NS could be that they felt shortchanged as to why HHI also offered the Thales Tacticos which they preferred, but then went on and chose the NS which they preferred less. And they may have a point there, I mean why would HHI freely offer two systems on their own during the SOBE?
As far as I know, nobody put a gun on their head to offer both systems, it was sort of understood the CMS would be “either-or” and they could go with either system.
But the same thing could also be said about the Navy: They weren’t forced to accept both systems, they could have just insisted on just one. The fact that they did allow both systems means they were open to both systems also.
However, if the end-user preferred one CMS which as is the case here, then perhaps HHI could’ve just given some leeway and went with that instead.
Another thing that bothered me about this issue is that the Navy actually had an opportunity to raise the problems about the project before the Contract was signed. Remember that Bartolome claimed that the issue with the Maker’s List came out a month before the Contract Signing, and that he was going to raise it with the Navy’s upper management then.
And yet Taccad claims no knowledge of the issue, and when the actual Contract Signing came, no issues whatsoever seems to have been raised about it, at least not publicly or in writing. I find it a bit strange that the Navy higher ups were not aware of any of the issues about the ships then.
The TWG composed of a group of people, and yet none of the Admirals were able to talk to any of them about any problems that might be happening under their own organization? This is not just a minor “Cafeteria Problem”, these Frigates are a flagship project of the Navy and the most expensive one thus far in their entire history.
Such a project you would think would be placed under a Scanning Electron Microscope (SEM) by the Admiralty to the point that any microscopic twitch of a problem would be immediately noticed.
If the issues had been raised, or if the issues had been raised strong enough (as strong as the succeeding opposition to HHI’s choice) before the Contract was signed, then it is likely that at the very least, the Contract Signing would have been delayed until all the problems were sorted out.
Or perhaps the entire project would have been cancelled altogether if a solution to the problems could not be found. It would have been easier to do so then because there was no active contract involved. Nothing was legally binding yet then, so nobody could go to court to sue the other. But the Contract had already been signed when the issues came out, making it very difficult to overturn.
I’m sure that there are a number of lessons that can be learned from this whole episode, but for me one would be to maybe make some improvements on the 2016 Implementing Rules and Regulations (IRR) of our Procurement Law Republic Act (RA) 918411 to sort out some of the gray areas of the law.
For example, I can’t seem to find any reference in the law as to how many systems can be submitted during the SOBE. So maybe one improvement would be that for complex systems, it could be emphasized that only one set of systems should be submitted during the bidding.
If that means that the bidding will fail, then so be it, just restart the bidding again. Any changes made in the IRR should be to improve the process, but at the same time a balance need to be set to keep the procedures from being easier to manipulate for unscrupulous reasons.
Another lesson for me is to maybe just skip the complicated bidding process altogether for such a complicated system such as a Capital Ship with all its nuances, and instead just go thru a Government to Government (G2G) procurement process.
The Philippine Air Force’s flagship project under the previous administration, the FA-50PH Fighting Eagle aircraft went thru a G2G process, and while it did have its share of problems also, they were relatively minor compared to what happened with the Frigates.
And I’d like to think that the reason for that is because it underwent a G2G transaction rather than a bidding process. The Air Force had another project, the first eight Bell 412EP Helicopters that was also done thru a G2G process under the previous administration and again it went thru fine.
The main problem that I see is that HHI initially dangled two systems including one that the Navy preferred more, but instead went with the one that the Navy preferred less. However, the Contract had already been signed, and legally it seems that they do have the right to choose the subsystems as per normal procurement practices for such complex systems wherein we only deal with the main contractor.
From the point of view of morale though, this left some in the Navy disappointed and frustrated of the choice. As of this writing, the project seems to be all systems go, with the Steel Cutting for the ships already done during a low-key ceremony last May 1, 2018.12
I do admit though that this controversy has been a bit of a downer for me about the whole project. I remember the time when it first came out that I was jumping up and down with joy whenever I heard any progress about the ships. But now, after all these controversies surrounding it, not so much anymore.
Anyway I hope that in time, the glamour of these ships will recover and we can be proud again as the country gets its first truly modern, brand new ships for the Navy.
Philippine Navy chief relieved from post,
DND Secretary Delfin Lorenzana’s response to an open letter on the PH Navy’s frigate project,
HHI’s Maker’s List,
Sen. Lacson’s Questions to Cmdre Bartolome and Col. Dayao during the Senate Hearing (Part 1),
Sen. Lacson’s Questions to Cmdre Bartolome and Col. Dayao during the Senate Hearing (Part 2),
Hyundai’s pick for frigate system ‘not bad for Navy’,
PH buys 2 new frigates from South Korea in P15B deal,
Mercado takes over as Navy Chief Taccad retires,
Philippine Navy January 4, 2017 Letter against the HHI Maker’s List,
Despite controversy, frigate project must push through–ex-Navy FOIC,
The 2016 Revised Implementing Rules and Regulations of Republic Act No. 9184,
Hyundai Heavy Industries to start construction of PH Navy’s frigate,