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(News Focus) S. Korean fighter competition fizzles out due to tight, inflexible budget

2013/08/21 12:17

By Kim Eun-jung

SEOUL, Aug. 21 (Yonhap) -- Boeing has narrowly edged out its two rivals in the bidding for South Korea's 8.3 trillion won (US$7.2 billion) fighter jet project with an affordable offer amid doubts by experts over Seoul's selection process that put too much emphasis on budget, rather than capability.

The Defense Acquisition Program Administration (DAPA) last week completed the months-long bidding for the country's largest arms procurement project by three major defense groups -- Boeing's F-15 Silent Eagle, Lockheed Martin's F-35 Lightning II stealth jet and EADS' Eurofighter Typhoon -- and is now preparing a comprehensive assessment on the jets to pick a model in a meeting of top military officials in mid-September.

The DAPA announced that one company came within Seoul's overall budget, noting that models exceeding the 8.3 trillion won ceiling cannot be selected as the winner, effectively leaving Boeing as the sole candidate for the project.

According to industry sources, Lockheed Martin's F-35, which is sold through the foreign military sales (FMS), surpassed Seoul's budget. EADS, which reportedly lowered the number of double-seater jets at the last minute to meet the budget, dropped out of the race as the DAPA refused to accept its proposal due to an arbitrary change to conditions that were previously agreed upon.

The agency said it will conduct a comprehensive evaluation with value-added analysis on price conditions without elaborating on details of the assessment criteria, sparking questions over the process.

Although Seoul has initially sought next-generation combat jets with radar-evading feature, military experts say the selection process put too much emphasis on meeting the budget ceiling, rather than capabilities of the new fighters.

"Procurement cost was one of the evaluation criteria, but it suddenly became a precondition for the procurement," said Shin In-kyun, a military expert who runs Korea Defense Network. "The evaluation should take into consideration into capabilities as well as prices for a fair competition."

   The price factor accounts for 30 percent of the total score for a comprehensive evaluation, while the pure procurement cost, excluding life-cycle maintenance and operation costs, occupies a smaller proportion of the selection process. However, the DAPA held its ground that meeting the budget limit is the most important requirement for the deal.

EADS said the DAPA first notified the bidders that the price factor accounts for 30 percent of the total score, but it later changed its stance and made meeting the budget limit the most important requirement for the deal.

"Not meeting the allocated budget was never mentioned as the only disqualifying and decisive factor, which has been announced at the latest stage of the negotiations," Christian Scherer, the chief sales officer and head of International Operations at EADS, said in a written interview with Yonhap News Agency. "We are open for any constructive discussion with DAPA."

   Despite reports that Boeing is the only valid candidate for selection, its rivals claim they still remain in the competition.

On Monday, Lockheed Martin said the competition is not over and that it will continue to work with the Pentagon for the remaining process of the acquisition, codenamed F-X.

"Lockheed Martin has not received an official notification from the Republic of Korea regarding the results of the price bidding for the F-X Program," the company said in a statement. "The F-X source selection process has multiple phases and we will continue to work closely with the U.S. Government as they offer the F-35 to Korea."

   EADS claim that its proposal did not violate the request for proposal (RFP) and continue to cooperate with the South Korean government.

EADS had submitted proposals that promise 45 one-seater aircraft and 15 two-seaters in past rounds of biddings, but it proposed only six two-seater aircraft, which are costly to produce, in the final proposal due to budget problems.

"I would like to stress that Eurofighter's intention has been to provide DAPA, to consider within its discretion, fully within the boundaries of the Request for Proposal (RFP), a bid package that would meet the declared essential budget," Scherer said.

The DAPA has also faced criticism for the long drawn-out process by conducting bidding sessions with a mix of direct commercial sales and the government-to-government deal.

Unlike the other two that make direct commercial sales, Lockheed Martin has offered a bid whose combined prices for each year from 2017 to 2021 exceeded Seoul's budget, according to industry sources.

The FMS condition requires a foreign government to pay the amount specified by the U.S. government for the F-35s at the time of payment.

"The contest unintentionally fizzled out," said Lee Hee-woo, head of a military research institute at Chungnam National University. "The bidders should compete till the end, but only one company remains in the competition."

   The bidding war in the past few months illustrated the heightened competition among the world's biggest defense groups as they seek to overcome drastic cutbacks in military spending in the U.S. and Europe.

The cheaper proposals by Boeing and EADS came after the DAPA announced that another failure in the bidding may lead to restarting the project from the beginning.

With some raising hope that Seoul may allocate more funds for the program, the DAPA on Tuesday said it has no plan to extend the budget and that a meeting hosted by Defense Minister Kim Kwan-jin will pick a contractor.

"The committee's role is to make a decision to accept or refuse a jet," a senior DAPA official said.

If the committee turns down Boeing's F-15 SE, Seoul has to start another project as any changes to the procurement project should receive approval from the finance ministry and the parliament.

If that's the case, the agency said all options will be considered, such as reducing the number of jets to be bought, buying the jets in installments and increasing the state budget.