U.S.-Involved Tender Dispute: Winning Twice Is Not Enough

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000125

SIPDIS

SENSITIVE
SIPDIS

STATE PASS DOC/ITA, USTR, USTDA, OPIC, EXIMBANK
USAID FOR ANE FOR D. WINSTON
MANILA AND LONDON FOR ADB, EBRD USEDS
TREASURY FOR USEDS TO IMF, WORLD BANK

E.O. 12958: N/A
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: U.S.-Involved Tender Dispute: Winning Twice Is Not Enough


Sensitive But Unclassified - Not for Internet Distribution. Contains
proprietary and confidential business information


1. (SBU) SUMMARY AND COMMENT: L-Systech, a Mongolian-South Korean
JVC, supported by an American consultant and vending U.S.-produced
solar power equipment, saw its winning of an US$8 million Government
of Mongolia solar-power equipment tender frustrated by the improper
and perhaps illegal behavior of the Mongolian Minister of Fuel and
Energy B. Erdenebat. Concerted efforts by the JVC, post, and
sympathetic individuals in the Ministry of Finance helped the JVC
win a smaller tender for US$6.5 million, but the Ministry of Fuel
and Energy continues to stall on the contract and the issuance of
funds. Post recommends that the upcoming TIFA talks be used to push
the Mongolian government to resolve this dispute and to review the
wider question of weakness in the Mongolian procurement system.
Septel notes that ongoing efforts to resolve this specific dispute
have uncovered problems with the GOM procurement system that may
threaten its financial stability and ability to deliver quality
projects on time and on budget. End Summary.

A Bright and Shiny Tender
--------------


2. (SBU) Just before the 2006 Thanksgiving Holiday, Ms. Grace
Roberts, one of Mongolia's Honorary Consuls in California, met with
CommOff regarding a troubled a solar power tender announced and
administered by the Mongolian Ministry of Fuel and Energy (MFE).
She and a consortium of three South Korean firms and their Mongolian
partners, L-Systech, had participated in and in early November
ostensibly won the US$8 million contract to provision some 50,000
rural herder families in Mongolia solar power equipment. The
government of Mongolia (GOM) was to pay for half of the cost and the
herders were to cover the remaining 50%, making the total value of
the program some US$16 million. According to Ms. Roberts, U.S.-based
solar power equipment manufacture Morningstar would sell the
equipment to L-Systech, and Ms. Roberts would receive a consultant's
fee for successfully assisting with the tender.


3. (SBU) So far so good, but upon the MFE Evaluation Committee's
(EC) announcement of contract award to L-Systech, MFE Minister B.
Erdenebat immediately annulled the result and urged the EC to award
the contract to a South Korean firm although its bid was
substantially more costly to the GOM than L-Systech's. Roberts
claimed that the Minister Erdenebat had some sort of improper
financial arrangement with the losing firm, but could not document a
precise relationship. Ms. Roberts and her Mongolian colleagues
attempted to resolve dispute on their own and, failing in that
effort, decided to ask for post's advice and support to move MFE to
reconsider its annulment. (Note: Minister Erdenebat is the head of
the Motherland Party, a small-time player offered three ministerial
seats in return for supporting the current Enkhbold government. The
party is often termed the "Erel Party," because of its close
affiliation with the Erel company, a gold mining, banking and
insurance firm headed by Eredenbat. Like recently-dismissed
ministers Jargalsaikhan and Gundalai, Erdenebat's tenure at his
ministry has been embroiled in charges of corruption and conflict of
interest, regarding proposed power plants and coal deposits,
hydro-electric projects being built by his firms, and environmental
degradation at his company's placer gold mines.)

Ministerial Mischief Surprises No One
--------------


4. (SBU) Commoff brought Ms. Robert's concerns to contacts at MFE
and the Ministry of Finance (MinFin). The MFE contact, a
long-serving staffer, did not disagree with claims that the current
minister might have acted improperly in this specific case. The
official opined that some problems were beyond his capacity to
solve. At MinFin, Ms. Kh. Mart (Director General of the Procurement
Policy and Coordination Department) was less circumspect, stating,
without elaborating, that she found Ms. Roberts's claims of
Erdenebat's improprieties completely credible. In the meantime,
Minister Erdenebat himself had gone public with his decision,
announcing in print and on TV that he had to cancel the results
because L-Systech was too small, that the firm's technology was
ill-suited to the task at hand, and that the firm was too recently
founded to be allowed to compete. Of course, Roberts and company

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rejected each of these points, noting that the EC had not only
approved their technical qualifications but had awarded them the
contract.


5. (SBU) Commoff then advised L-Systech to resolve the dispute
through MinFin's newly established Dispute Resolution System, in
which a panel of three professional evaluators selected by MinFin
and each of the disputants would attempt to arbitrate the dispute.
The results of the arbitration are not binding, as any of the
parties (except MinFin) may opt for judicial review at any time.
Mart welcomed our use of the new arbitration system and offered
frank assessments of the solar procurement issue. She disputed each
of Minister Erdenebat's claims that L-Systech was unsuitable, noting
that her division agreed with the EC's initial judgment that
L-Systech had satisfied all technical and financial requirements and
that Minister Erdenebat had no basis for his annulment. She stated
and showed us the official order in which Minister of Finance
Bayartsaikhan had directed MFE to honor the initial award, which
Minister Erdenebat had bluntly refused to do in direct contravention
of the procurement rules and law of Mongolia.


6. (SBU) On post's advice, Roberts contacted the Mongolian Embassy
in Washington, D.C., the Minister of Finance, the Prime Minister's
office, and the Ministry of Industry and Trade. Ms. Roberts told
Commoffs that the Mongolian Embassy had criticized her actions,
urging her avoid publicizing her troubles and not to tell the U.S.
Embassy anything about the event. The other GOM ministries murmured
sympathetically about MFE's irregularities, but the Enkhbold
government did nothing, as it has done in the face of most
ministerial misbehavior.

Try, Try Again
--------------


7. (SBU) In late November, Minister Bayartsaikhan announced that the
GOM would uphold the annulment on budgetary grounds. MFE had stated
that the budget available for the solar project was insufficient to
fund US$8 million in equipment, and MFE would re-tender the project
for US$6.5 million. Bayartsaikhan then officially informed
L-Systech that he concurred with MFE's assessment of its budgetary
woes and was forced to annul the results of the first tender and
support a second tender in line with available funds. He concluded
his letter by inviting L-Systech to join in the second tender.


8. (SBU) Commoff met with Mart on December 1, concerning the GOM's
decision. Mart confirmed that MFE had in fact seriously
miscalculated its budget and was within its rights to re-tender the
contract in line with actual funds on hand. However, she was
extremely critical of Erdenebat and his staff for not monitoring
their budget properly in the first place, stating without providing
examples that MFE had done this a great deal over the last year, as
had other unnamed ministries and agencies. She further added that
this sort of ministerial "incompetence" and rule breaking had led to
over thirty law suits in over as many tenders in 2006 alone,
involving tens of millions of dollars in disputed contracts.


9. (SBU) On December 11, L-Systech reluctantly agreed decided to
compete in Tender #2 and won again on December 13. Again, Minister
Erdenebat attempted to annul the results and transfer the contract
to the same higher-cost South Korean firm. He again cited
L-Systech's recent formation and "inappropriate" technology as
reasons for his decision. This time, however, MinFin bluntly
ordered MFE to honor the results of Tender #2, noting that the EC
had yet again ruled in favor of L-Systech on all counts and that the
Minister had absolutely no legal basis to cancel the results.
According to sources in MFE and Mart, several EC members had
remonstrated with Erdenebat, noting that he had his bite at the
apple, had failed, and should let this one pass because the
Americans and their Embassy were complaining too much.


10. (SBU) Since mid-December, problems have continued to plague the
contract, which presently is at an impasse. First, two losing
companies sued MFE, emphasizing Mart's claim that MFE's poor process
gives rise to law suits and frustrating, costly delays. MFE asserts
that it had to revise the contract, but has refused to give
L-Systech the revised contract. MFE demanded instead that the firm
supply the solar systems without a corrected, binding contract.

ULAANBAATA 00000125 003 OF 003


L-Systech won't manufacture and vend any system without a valid
contract in hand.


10. (SBU) With half a loaf, L-Systech grumpily accepts that we have
collectively salvaged something out of the debacle. Post will
continue to press the GOM to honor its obligations in this matter,
using the upcoming March TIFA talks to emphasize our concerns. We
also recommend that this dispute be used by USG TIFA participants to
make a wider, frank critique about how general weaknesses in the
GOM's procurement system are negatively affecting Mongolia's
reputation and business climate. Finally, Ms. Mart expressed
embarrassment and disappointment that a procurement system that she
had worked so hard to improve and had taken pride in had failed.
She offered to take Commoff through the evolution of procurement law
in Mongolia with an eye to alerting post to problems on the horizon
for GOM procurement. Results of these discussions are detailed in
septel.

Goldbeck