TURKS REORGANIZING MILITARY PROCUREMENT WHILE

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 002489

SIPDIS


E.O. 12958: DECL: 05/03/2029
TAGS: MARR PGOV PREL PINR TU
SUBJECT: TURKS REORGANIZING MILITARY PROCUREMENT WHILE
PLAYING HARDBALL WITH US COMPANIES


(U) Classified by Ambassador Eric S. Edelman. Reasons: 1.4
(b) and (d).



1. (U) This report contains sensitive business information.
Please protect accordingly.



2. (C) Summary: Undersecretary for Defense Industries Murad
Bayar told the Ambassador April 30 that, despite his own
efforts to limit the impact of EU-mandated reforms on his
organization, he was hopeful of simplifying Turkey's military
procurement bureaucracy by clearly delineating the roles of
the different organizations currently involved in the
process. On specific procurement programs, Bayar presented
an unyielding position toward two American suppliers, Bell
Helicopter/Textron (attack helicopters) and Sikorsky (Sea
Hawks),but a less-confrontational attitude toward General
Atomics (unmanned aerial vehicles -- UAVs). He hoped that
the attack helicopter buy might be decided within two weeks
-- a prediction we have heard numerous times over the years.
Bayar is an intelligent and savvy individual, but his
comments suggest that he is not interested in making the sale
of defense items to Turkey -- traditionally a frustratingly
slow and difficult process -- easier any time soon. End
summary.


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Restructuring Defense Procurement
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3. (C) The Ambassador called on Murad Bayar, the head of the
Undersecretariat for Defense Industries (SSM),on April 30.
In response to a question, Bayar downplayed the significance
of government reform legislation currently before the
parliament, terming it a "technical issue" for SSM. The bill
would eliminate independent undersecretariats except those
that report to the prime minister. SSM reports to the
Defense Minister. Bayar said the important thing was to
preserve SSM's civilian character, direct access to the
Defense Minister and independence, regardless of what its
name or his title would become. Continued access to the
ultimate decision making body on procurements, the Executive
Committee (consisting of the PM, CHOD and MOD),would be
essential. Bayar allowed that "others" may have plans for
greater integration of SSM's functions into the Ministry of
National Defense (MND),but "not me nor the government," he
said.



4. (C) That said, SSM was looking at how it interfaces with
the Turkish General Staff (TGS) and MND, according to Bayar.
Although a civilian procurement agency had been an experiment
when SSM was established in 1985, everyone including the
military accepts this now. But part of the reorganization
bill is the principle of one organization for one function.
Currently, MND and SSM spend about $1 billion/year each on
procurement for the military, with TGS and the services
themselves spending a total of about $0.5 billion. The
division of labor among the entities is not clear and they
need better defined roles, he continued. He agreed with the
Ambassador that some tension between operators and
procurement officials was a natural part of the process, but
he maintained that the military should restrict itself to
defining requirements and setting priorities, and stay out of
purely procurement issues such as company selection.



5. (C) Regarding SSM's budget, currently outside the normal
GOT budgeting system and financed with a number of "sin
taxes," Bayar acknowledged that this special budget was to be
phased out by 2007 in accordance with a previous package of
reforms passed by the current government. Beginning with the
2005 budget, SSM's new funding would need to go through a
system set up for "special income funds," giving parliament
visibility on SSM's spending. (Note: Finance Ministry
sources tell us that this procedure would apply only for the
2006 budget.) Bayar noted a number of exemptions to normal
budget procedures SSM would need, such as the authority to
commit to multi-year obligations, as well as the ability to
convert appropriated funds into foreign currency upon receipt
and to hold those funds until contract negotiations are
complete and payments begin. (Futures contracts would be
prohibitively expensive, he explained.) Bayar downplayed the
potential impact on the amount SSM would have at its disposal
in the future. He noted that the GOT "could" designate the
same level of revenues to SSM's budget as currently
contribute to it, although he allowed that in the end, the
government would have the final say in the amount spent on
military procurements.
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Everything is too Expensive
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ATTACK HELICOPTERS



6. (SBU) Bayar told the Ambassador that the ATAK program (to
procure attack helicopters) was his number one priority. The
Ambassador noted that he had been contacted by Bell
Helicopter, which was sending a team out to talk to SSM the
following week, and asked about the program's status. Bayar
said that he wanted to "resolve the short list." (Comment:
SSM is reportedly in discussion not only with Bell but also
the Russian firm Kamov that has partnered with an Israeli
concern in the ATAK competition.) The Executive Committee
would be meeting within the next two weeks and he expected
that it would either decide to go with one of the two
competing proposals, or to cancel the program and start over.
He noted several factors suggesting that the competitive
environment might be more favorable to Turkey now than six
years earlier when Bell and Kamov were selected:


-- Boeing is telling SSM that Apaches are now less expensive
than they used to be;


-- The Tiger attack helicopter was under-powered, but now has
a better engine;


-- Agusta had been eliminated from the competition for
political reasons (PKK leader Ocalan was hiding out in Italy
at the time) that no longer apply; and,


-- Russia recently bought a new helicopter from Kamov, not
the one proposed for Turkey, but this new model might be
worth considering.



7. (SBU) The Ambassador recalled a letter Bayar had sent to
ODC-Turkey the previous day demanding all software source
codes and USG approval of Turkish Industry performing all
system integration. It also requested helicopters be
provided without mission computers as these were to be
developed in Turkey either with or without the assistance of
Northrup-Grummon. The Ambassador noted that delivering an
aircraft without a mission computer was unprecedented and,
while it was primarily a US Navy issue to decide, he thought
it unlikely to occur, especially in two weeks, the deadline
SSM set. Moreover, if the program is canceled and re-bid,
American companies would be daunted by Bell's experience of
difficult negotiations and great expense over the past seven
years in vain. These seemed to be disincentives to competing
the project again. Bayar agreed that there were some
disincentives, but argued Turkey was flexible on the mission
computer. The important element was that Turkish industry
have the ability to completely manage the configuration of
the aircraft. With only the Marines and Turkey as major
customers, the number of units would be small and SSM was not
confident of Bell's ability to service the aircraft for the
20-30 years it would likely remain in Turkey's inventory.
The Ambassador and ODC-T Chief MajGen Peterson noted that a
major shift of USG policy on releasability was unlikely, with
the Ambassador commenting that if this were a blanket
requirement of SSM procurements, there would be very little
business SSM could do with American companies. Bayar denied
it was a blanket policy.


MAIN BATTLE TANKS



8. (SBU) Turning to main battle tank, Bayar conceded that the
current program is dead despite official statements saying
that company proposals were still being studied. He believed
the Land Forces Command (TLFC) would need to reexamine and
refine its requirement and then SSM would solicit new
proposals. Meanwhile, an Israeli firm was upgrading Turkey's
M-60 tanks and the GOT might buy some used tanks to meet
current needs.


UNMANNED AERIAL VEHICLES



9. (SBU) Bayar noted that the bids to provide Turkey with
UAVs were considerably over budget and "not doable." He
wasn't sure how to proceed, but was certain this program
would move faster than the tank procurement. MajGen Peterson
suggested that SSM approach TLFC about revising its
requirements in light of current technology. The result of
looking at tasks to be performed rather than units to procure
might be a realization that fewer units can do the job.
Bayar was receptive to this idea. He acknowledged that with
such a new and rapidly evolving technology, an off-the-shelf
purchase would result in current technology in the inventory
soonest; a protracted co-production program would likely
deliver technology eventually that was a generation or two
out of date.


SEA HAWKS



10. (SBU) As soon as Bayar raised Sea Hawks, the Ambassador
warned that extending the EXIM Bank helicopter guarantee
facility for that program had been politically difficult, and
if it were not used soon, it would likely be lost. Bayar
understood the need to use the credit line soon if at all,
but noted that Turkish Treasury objected to the terms and SSM
would likely need to work on them if EXIM credits were to be
used. (Turkish Treasury reportedly believes the window of
time between when the financing is provided and when it must
be repaid is too short.) However, Bayar continued, the two
sides are so far apart on price, that he had "minimal hope"
of moving forward. SSM staff had developed what they thought
the price should be based on a contract for the type of
aircraft six years earlier. When the Ambassador suggested
that the equipment had evolved over time and one should not
expect to buy today's technology at yesterday's price, Bayar
claimed the SSM price included consideration of technological
changes and Turkish unique configuration requirements.
(Comment: Subsequently, a Sikorsky representative informed
the Embassy that SSM had increased the number of aircraft it
had previously planned to purchase from 8 to 12, eliminated
the expensive simulators from the package, and demanded
Sikorsky provide a discount for the increased volume.
Turkish Navy sources told Sikorsky that they were unaware of
SSM's changing the requirements, and that the procurement
agency did not have the authority to do so on its own. The
representative expected his company to refuse to meet SSM's
demands.)


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The Bazaar Remains the Bazaar
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11. (C) Comment: Many American defense industry
representatives were favorably impressed with the
American-educated Bayar when they heard him speak at the
American Turkish Council conference in Washington last month.
He was seen as an intelligent person with business savvy --
someone whom might be serious about trying to fix the many
problems involved in doing business with SSM. As a former
career official of SSM and one of the original authors of the
ATAK RFP, he certainly understood the organization well.
However, feedback we have received from Bayar's performance
in private sessions with individual industries has been
almost universally negative -- making unreasonable demands on
terms and conditions and on price not unlike his
predecessors. Certainly, demands for complete release of
source codes and promises of an imminent decision on the
attack helicopter program are not new. It is hard to judge
whether Bayar's hard line on individual programs with the
Ambassador was part of the effort to drive down the offer
price of American companies or reflected real readiness to
walk away from years of negotiation with both Bell and
Sikorsky. In any event, it is clear that the early hope that
Bayar would make SSM easier to deal with is not going to be
realized, at least not anytime soon. End comment.
EDELMAN