DEFENSE PROCUREMENT IN THE CZECH REPUBLIC: SHADY

C O N F I D E N T I A L SECTION 01 OF 04 PRAGUE 000147

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR/CE

E.O. 12958: DECL: 02/05/2019
TAGS: PREL PARR EZ KCOR MARR MCAPP
SUBJECT: DEFENSE PROCUREMENT IN THE CZECH REPUBLIC: SHADY
DEALS AND BIG DOLLARS

Classified By: Charge d,affaires Mary Thompson-Jones for reasons 1.4 (b
) & (d).

1.(C/NF) Summary: Czech Defense Ministry (MOD) procurement is
plagued by lack of transparency and remains an arena for
shady business deals. Successive governments seem to have
viewed MOD contracts as a way to reward themselves and their
political supporters with lucrative business deals, cheap
asset sales, and kick-backs. The latest controversial
contract for the light-armored vehicles suggests that
politicians appear able to manipulate the procurement process
by utilizing single source tenders, requiring the use of
preferred intermediaries, and paying higher prices than other
countries for similar items. Similarly, the ongoing case of
the barter/sale through EADS of redundant L-159 aircraft for
Casa C-295 transport aircraft may be yet another attempt to
circumvent an open, competitive tender. As in the notorious
2004 Gripen fighter aircraft procurement, the Czech
government has shown little political will to investigate
possible high-level corruption. The large Pandur contract and
the upcoming tender for new light armored vehicles will be
two key tests of the MOD's ability to successfully conduct
large procurements. Czech officials have taken some tentative
steps toward cleaning up the procurement system. However,
much more transparency is needed within the Czech MOD to
prevent politicians and defense officials from manipulating
the defense procurement process for personal and political
gain. End Summary.

Long History of Shady Defense Deals

2.(C/NF) Since the Velvet Revolution in 1989, the Defense
Ministry has had a long history of shady defense deals. Most
of the scandals have centered on cheap sales of redundant
military equipment and military bases to "preferred
companies," over-payment on contracts, and procurements from
questionable companies.

-- In 1993, the Czech Ministry of Defense purchased in a
single source contract parachutes from a company closely
connected to the government that had never produced
parachutes. One Czech soldier died using these parachutes.
Czech police investigated the purchase, but filed no charges.

-- In 1995, the Czech Army signed a contract for a new
information system. Although the American computer firm
Unisys won the initial competition, the then-Minister of
Defense Vilem Holan (KDU-CSL) nullified the tender. EDS
Digital won the new tender, but Unisys challenged the
results. Some politicians alleged that EDS-Digital paid a 50
million CZK (approximately USD 2.5 million) bribe to secure
the contract. These allegations were never investigated or
proven.

-- Eight former Czech military officers were charged with
fraudulently awarding 482 billion CZK (approximately USD 241
million) in contracts for renovating eight military airports
between 1997 and 1999. However, the Prague Municipal Court
dismissed the case due to the expiration of the statue of
limitations.

-- In 2003, the Czech Company Trade Fides received a contract
to protect the army,s ammunition dumps in exchange for 2.7
billion CZK (USD 135 million). In January 2008, Czech Police
arrested Miroslav Bena, the MOD,s Director of
Infrastructure, for accepting a one million CZK bribe
(approximately USD 50,000)for awarding this contract to Trade
Fides. The case still has not gone to trial.

Defense Budget: A Lucrative Arena for Manipulation

3.(SBU) With defense spending being the second largest budget
item after social spending, the MOD is a
potentially-lucrative arena for political manipulation. In
2008, the total defense budget was 54.2 billion CZK (around
USD 2.7 billion),or 4.9 percent of the total government
budget. In 2009, the defense budget will be 55.8 billion
crowns (approximately USD 2.79 billion) out of total
expenditures of 1,152 billion crowns (around USD 576
billion),or 4.8 percent of government spending. On average,
the MOD spends around 27.7 percent of its budget on
construction and procurement.

Dingo 2s: High Prices and Shady Intermediaries


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4.(C/NF) The Czech MOD's 2008 purchases of IVECO light
multirole vehicles (LMV) and Dingo 2 armored vehicles
epitomizes the MOD's flawed procurement system. The MOD
initially purchased four Dingo 2s without a public tender to
replace or supplement U.S.-provided Humvees in Afghanistan,
and then purchased approximately another 15 Dingo 2s and 15
IVECO LMVs, again through a sole-source purchase. Major
General Palenik, the current Director of Military
Intelligence (VZ) and the former commander of the Czech
Special Forces Military Police and former commander of Czech
Special Forces in Afghanistan, supported the purchase of the
Dingo 2s. However, some general staff officers have
complained that some MOD civilian officials forced them to
take the Dingo 2s. Press reports also indicate a high degree
of dissatisfaction with the performance of the Dingo 2s in
Afghanistan.

5.(C) Officially, the MOD purchased the Dingo 2s under a sole
source contract using VZ funds and purchase authority, due to
the "urgent need" for Czech troops to have these vehicles in
Afghanistan. However, given the long planning process
required for both the Czech military's Logar and Helmand
missions, the MOD could easily have used a competitive tender
process. In September 2008, First Deputy Minister of Defense
Martin Bartak faced an anonymous criminal complaint for abuse
of power for his role in the Dingo purchase. When asked about
the complaint soon after it was filed, Bartak said he was not
aware of it.

6.(C) The Dingo 2 transaction is not unique. According to
Transparency International (TI),between 2002 and 2004, over
90 percent of Czech defense procurements were done on a sole
source basis. After TI released its report, the MOD removed
most procurement data from its website.

7.(C) By November 2008, the Czech army had received the new
batch of Dingo 2s. Czech politicians and journalists have
raised serious concerns about the price for these vehicles.
The MOD reportedly paid approximately USD 2 million for each
vehicle. Other countries paid much less for the base vehicle.
The Czech Press reported that the Norwegians paid USD 385,000
for each of their 72 vehicles, and the Belgians paid USD
220,000 for each of their 440 Dingo 2s. Military experts in
Prague say that the greater volume of vehicles the Norwegians
and Belgians purchased does not explain the eight to ten
times difference in price.

8.(C) The difference in prices was never explained.
Journalists in Prague who follow military procurements
speculate that Bartak probably personally benefited from this
sale. One well-connected source involved in the defense
industry told the Embassy that MPI, the Czech intermediary
for the Dingo 2 purchase, paid 247,249,168 CZK (around USD
12.35 million) for the vehicles and then sold them for
499,867,390 CZK (approximately USD 24.9 million) to the MOD.
After subtracting the 19% VAT, MPI made a profit of
172,807,467 CZK (around USD 8.6 million),or 35%, on the
vehicles. MOD watchers therefore speculate that some of the
"excess profit" may have gone to Bartak and other officials.
However, one observer commented that, if he benefited from
the deal, Bartak would be too smart to leave any trace of his
involvement. Whereever the reportedly large profits ended up,
the lack of transparency fuels speculation about who
benefitted from this deal.

Two Key Tests: Pandurs and New Light Armored Vehicles

9.(C/NF) The MOD faces two key tests of its ability to
conduct large, competitive tenders: execution of modified
Pandur II contract and the purchase of light armored
vehicles. The Pandur contract has been controversial, even
during the tender process. However, the contract drew
additional scrutiny upon award, since the contract was signed
by former Defense Minister Karel Kuehnl in his final days in
office in June 2006. In the original contract, the Czechs
agreed to purchase 199 eight-wheeled Pandur II armored
personnel carriers produced by Steyr, a General Dynamics
European Land Systems subsidiary, through Defendia CZ, for
23.6 billion crowns (approximately USD 1.2 billion).
Nevertheless, the contract stood up to legal challenges in
court from Patria, which had lost out in the original tender.

10.(C/NF)In November 2007, the Czech MOD claimed that the
Pandur vehicles did not meet "the required specifications"
and declared the contract null and void. The Czech MOD,

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however, continued to negotiate a "modification" to the
contract with General Dynamics/Steyr, appearing to have an
interest in the delivery of a reduced quantity of Pandurs and
in avoiding litigation. During these negotiations, a General
Dynamics/Steyr representative alleged in a private
conversation with an Embassy officer that Bartak, who headed
the negotiations for the Czechs, engineered an opportunity
for Marek Dalik, a personal friend of Prime Minister
Topolanek, to solicit a bribe from Steyr. However, U.S.
Embassy Prague has no means to substantiate this allegation.
In March 2008, the Czech MOD and General Dynamics signed an
MOU for delivery of 107 vehicles, and a year later, on March
13, 2009, Steyer and the MOD signed a contract to deliver the
vehicles.

11.(C) The Czech MOD is now planning to conduct a tender for
an additional 108 light-armored vehicles this summer. Western
defense companies fear that the tender may be "pre-cooked" in
light of the earlier Dingo 2 deals. The original "emergency
purchase" was only for four Dingo 2s. When the MOD purchased
the additional Dingo 2s, it rationalized the decision to
outsiders with the argument that the Czech Armed Forces need
to stick with the Dingo 2 because they already had a number
in service and did not want to increase their training costs,
inventories of spare parts, and other associated costs. This
tender will be a major test of the MOD's ability to conduct
open tenders.

Well-Connected Intermediaries Stifle Competition

12.(C) The Dingo 2 and IVECO deals also raise serious
concerns about the use of well-connected intermediaries to
stifle competition. Under Czech law, all arms sales require
a license or the use of a Czech broker. Since the licensing
process is arduous and time-consuming, most arms sales are
done with the use of a Czech broker, primarily Omnipol and
MPI. As the Deputy Minister of Defense for Economic Affairs
from 1993-1998, the current Finance Minister, Miroslav
Kalousek, inserted the requirement to utilize intermediaries
into the defense procurement law. Omnipol's former chairman,
Richard Hava, is rumored to have close connections with
Finance Minister Kalousek and Jaroslav Kopriva, the current
Deputy Defense Minister for Armaments. MPI also appears to be
well connected. Its Director Michael Smrz reportedly has
close connections with Bartak and Jan Vidim, the Chairman of
the Defense Committee in the lower house of the Czech
parliament. With these strong connections within the
government, one official of a Western defense company said
that his company will only compete for contracts if they are
too low for MPI or Omnipol to be interested. The Czech
Parliament is currently debating a new defense procurement
law. However, there is little chance that this requirement to
obtain a license or use an intermediary will change in the
near term.

High-Priced Underwear, Black Funds, and the General Staff

13.(SBU) The one place where the Czechs have actually sought
to investigate and prosecute is the Czech General Staff's use
of the so-called "black funds" for personal gain. In November
2008, the Czech anti-corruption police revealed that the
former Chief of the Czech General Staff, General Pavel
Stefka, and other members of the General Staff spent 17.5
million CZK (approximately USD 875,000) on questionable
trips, entertainment, and mountain bikes. The funds were even
used to purchase underwear at 700 CZK (around USD 35) each
with "Forces Development Section of the General Staff"
written on the front. Twenty officers were discharged from
the army and charged with misuse of government funds in
connection with this scandal. The scandal even forced Major
General Ivo Zboril --the former Chief of the General Staff
Forces Development Section, who had been recently promoted
and appointed to the position of Head of the Military Office
of the President -- to retire early. In this case, Defense
Minister Parkanova personally dismissed the officers involved
and those with knowledge of this scandal. The case is
currently with the Prague Prosecutor,s Office, while the
defendants review their indictments.

Gripens: An Investigation Shelved

14.(SBU) The most notorious case involving defense
procurement in the Czech Republic remains the government's
decision to lease Gripen fighters. The Czech government first
planned to purchase 24 Gripen fighters in 2002 for 60.2

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billion CZK (approximately $3 billion),but decided to delay
the purchase due to that year,s devastating floods. In 2004,
the Czechs decided to lease 14 Gripens for a period of ten
years for 20 billion CZK (around USD 1 billion). OMNIPOL, one
of the companies involved in the controversial Dingo 2/IVECO
deal, served as the intermediary. There is widespread
speculation in the press and among military observers that
Saab/BAE paid around USD 60 million in bribes to secure the
lease. In 2005, Senator Michal Zantovsky (of the then-Civic
Democratic Alliance),currently the Czech Ambassador to
Israel, reported to the Czech police that his party was
offered 10 million CZK (around USD 500,000) in return for his
vote in favor of the deal. The Czech police investigated, but
shelved the case in late 2008 due to a lack of evidence.
Unlike the Czechs, British and Swedish authorities are
continuing their investigations, and Czech authorities are
reportedly cooperating with them.

L-159s and EADS/CASA

15.(C) The Czech MOD has been trying to dispose of a number
of redundant L-159 aircraft via a barter/sales deal with the
Spanish aircraft maker CASA. The Czech press has reported
that the MOD plans to swap five L-159s for one CASA C295M
transport aircraft and the outright purchase of an additional
three C-295Ms for 3.5 billion CZK (around $175 million). In
April 2008, Bartak signed a memorandum of understanding for
this barter/sale. (Note: Due to U.S. avionics in the
aircraft, any transfer of the L-159s requires U.S. approval.
End Note) The MOD reportedly plans to again use the
well-connected intermediary Omnipol in this deal. Some
observers and competitors like Alenia, the Italian aerospace
company, believe that the barter deal is yet another way in
which the MOD is avoiding an open, transparent competition
for badly-needed military transport aircraft (Note: The
3.5bn CZK cost associated with this deal is reportedly
approximately the same sum that Alenia was seeking for the
purchase of four Alenia C-27J aircraft, considered by many to
be a more suitable and capable
aircraft).

A Possible Move Toward Greater Transparency

16.(SBU) In 2007, Minister of Defense Parkanova gave the
Director of the Division of Assets, Jiri Kral, responsibility
for implementing a revamped electronic tender system, or
SEPO. SEPO will seek to reduce the ability of defense
ministry personnel or other individuals to manipulate
tenders. The system allows for companies to bid to supply
goods or services to the Czech military. The Ministry plans
to post on the SEPO website tenders for goods between 5,000
CZK (around USD 250) and 2 million CZK (approximately USD
100,000) and for services between 15,000 (around USD 7500)
and 6 million CZK (USD 300,000). The system will also bind
vendors to their prices. Kral hoped that approximately 25
percent of defense procurements will eventually use this
system. The system is working, but the number of procurements
on the site is quite low and most large contracts that
involve weapons systems cannot use this system.

17.(C) Comment: In 2007, Defense Minister Parkanova (KDU-CSL)
said that she would work to root out corruption in the
Defense Ministry. As a former justice minister, she could
have been well-positioned to undertake such an effort.
However, her political position was never strong, and she was
unable to establish good control over the MOD. Indeed, it
appears that it is First Deputy Minister Martin Bartak (ODS)
who really runs the ministry.

18.(C) Bartak figures prominently in many of the alleged
current procurement scandals at the MOD. Although Embassy
Prague is unable to confirm any of the allegations against
Bartak, the circumstantial evidence is considerable. Even
with a possible change in government in 2010, defense
procurement will likely remain murky. A new "Bartak" will
undoubtedly emerge to take advantage of the flawed
procurement process and a political culture that tolerates
under-the-table deals. As we pursue closer defense
cooperation with the Czech Republic, we must take into
account these concerns and seek ways to structure
procurements and contracts to increase transparency, minimize
corruption, and eliminate potentially lucrative conflicts of
interest.
Thompson-Jones