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sreda, 30. julij 2014

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S E C R E T LJUBLJANA 000337 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
DEPT FOR EUR/NCE - SSADLE, PM/RSAT - DOWLEY 
OSD FOR NAJERA 
JOINT STAFF FOR FREEMAN 
COMMERCE FOR ITA - CRUSNAK 
 
E.O. 12958: DECL: 05/24/2017 
TAGS: MASS MARR MCAP ECON PGOV PINR PREL SI
SUBJECT: U.S. FIRMS STRUGGLE TO COMPETE AS DEFENSE 
ACQUISITIONS GROW CLOUDIER IN SLOVENIA 
 
REF: 06 LJUBLJANA 388 
 
Classified By: COM Thomas B. Robertson for reasons 1.4 (b) and (d) 
 
1. (S) Summary.  Nearly one year after the Slovenian Ministry 
of Defense (MOD) announced that Finnish defense contractor 
Patria won a 330 million USD (263 million Euro) contract to 
supply 135 8x8 armored vehicles to the GoS, the issue 
continues to dominate headlines amid allegations of cost 
overruns and non-transparency in the selection process. 
Opposition leaders forced a special session of Parliament in 
February and succeeded in gaining parliamentary authorization 
in March for an inquiry commission to review the purchase. 
The government coalition responded by creating a similar 
commission in April to review all defense purchases, 
including those made when the current opposition parties ran 
the government.  With dueling parliamentary investigations up 
and running and October 2008 parliamentary elections coming 
slowly into view, questions surrounding Slovenia's largest 
defense purchase in the 15 years since independence grow 
increasingly aggressive.  More troubling yet, the purchase is 
just the most prominent example of a defense acquisition 
process that is opaque, political, and increasingly 
inhospitable to U.S. firms.  While Slovenian military 
contacts continue a close and cordial relationship with their 
U.S. interlocutors at all levels, it is increasingly apparent 
that political influence from above is guiding the hands of 
officials making acquisition decisions.  End Summary. 
 
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ARMORED VEHICLE PURCHASE PLODS FORWARD AMID CONTROVERSY 
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2. (C) Since the Slovenian Ministry of Defense's (MOD) 
announcement on June 12, 2006 that Finnish defense contractor 
Patria won a 330 million USD (263 million Euro) contract to 
supply 135 8x8 armored vehicles to the GoS (reftel), post has 
followed months of simmering allegations beginning with 
complaints of non-transparency in the tender review and 
selection process, talk of significant cost discrepancies 
between the tender amount and what the GoS would eventually 
pay, disputes about how the quality of the two competing 
vehicles and the overall bids were compared, and allegations 
that (in a cost cutting maneuver) the contract allows for the 
delivery of vehicles that are not properly equipped. 
 
3. (C) Given that the losing (and only other) bidder in the 
controversial tender was a company with U.S. interest -- 
Slovenian defense company Sistemska Tehnika (ST), which is 70 
percent owned by Slovenia-based Viator & Vektor (V&V) 
and 12.7 percent owned by Austria-based Steyr-Daimler-Puch, 
which, in turn, is a wholly-owned subsidiary of the General 
Dynamics (GD) corporation -- COM has repeatedly raised 
concerns about the transparency and efficacy of the GoS,s 
8X8 deal with Patria (as well as other defense acquisition 
tenders involving U.S. bidders) at the highest level 
including Prime Minister Janez Jansa (June and December), and 
both former and current Chiefs of Defense Ladislav 
Lipic (June) and Albin Gutman (July and November). 
 
4. (C) Dozens of front-page newspaper articles, political 
cartoons, and opinion pieces questioned the GoS's choice of 
Patria.  Events held by the losing bidder ST to formally 
present its armored vehicle 8x8 -- the Krpan -- in 
manufacturing site Ravne na Koroskem and in Ljubljana further 
fueled the fire in mid-October, and resulted in a print 
advertising campaign from Patria -- the first time Slovenia 
has seen a public advertising campaign for weapons and 
military equipment -- calling the Krpan into question. 
 
5. (SBU) "Tough and merciless" negotiations (as described by 
Slovenian press) between the MOD and representatives of 
Patria and its local partner, Rotis, to sign a formal 
contract dragged on for over six months (from June 12 to 
December 19) before the parties agreed on costs, offsets, and 
 
the inclusion of Slovenian industry in the vehicles, 
production.  But signing the paperwork put to rest only one 
part of the controversy. 
 
6. (SBU) Another issue was the ongoing debate about where the 
Patria 8x8 will be built in Slovenia, with losing bidder ST 
owning the only active military vehicle assembly plant in the 
country (in Ravne na Koroskem).  Patria's local 
representative Rotis said that Slovenian home appliance 
manufacturer Gorenje (the lead subcontractor for the Patria 
deal despite its lack of a military branch) would ultimately 
be the manufacturer and assembler of the vehicles. Media 
reports in December highlighted rumors that ST owners Viator 
& Vektor (and its parent company General Dynamics) are 
considering selling ST or simply the assembly plant in Ravne 
na Koroskem to Gorenje, given that ST no longer has an 
interest in the production of 8x8 vehicles in Slovenia.  The 
move would effectively allow production in the same plant by 
the same workers as the ST bid called for, but under 
ownership of the preferred bidder.  Gorenje leadership said 
that acquiring ST was not in its plans, however the General 
Manager of Rotis Ivan Crnkovic said, in media interviews, 
that it would be a "winning formula for the Slovenian 
economy."  On January 31 Gorenje announced that it would 
build parts and assemble the vehicles at a Gorenje facility 
in the town of Sostanj, though Gorenje CEO Franjo Bobinac 
told media that Gorenje would not exclude the possibility of 
cooperation with other Slovenian companies, including ST. 
Media reports April 19 said that Gorenje had received 
building permits for a 9,000 square meter plant in Sostanj 
that would be operational by fall 2007, with the first 
Slovenian-produced Patria armored vehicle coming out sometime 
in 2008.  ST's new general manager announced February 20 that 
the company would split into two units, one military and one 
civilian, with the bulk of ST's future interests coming from 
the latter's production of consumer products.  There has been 
no further decision on the future of ST's Ravne na Koroskem 
military vehicle assembly plant. 
 
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PARLIAMENT HELPS MAKE PATRIA A HOUSEHOLD NAME 
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7. (C) Opposition leaders strongly stepped up criticism of 
the 8x8 armored vehicles purchase this spring calling an 
extraordinary session of Parliament on February 15 to discuss 
the matter.  The chief target of criticism continues to be 
Minister of Defense Karl Erjavec though he has steadfastly 
fought back critics and, thus far has withstood rumors that 
the deal will ultimately lead to his departure from the MOD. 
In a press conference called to respond to the move for an 
extraordinary session of Parliament, Erjavec reiterated that 
the deal was in conformity with the tender and the rules, 
that legislation allows members of Parliament to look at 
documents from the MOD, but that they must protect business 
secrets, that the whole episode is a political smear from the 
 
SIPDIS 
opposition parties, and that the media is to blame for 
stoking the fire of the controversy.  Before the session took 
place, the Parliamentary Defense Committee rejected every 
resolution opposition members had hoped to pass, including 
ones that said that Minister of Defense Karl Erjavec had 
knowingly misled the public about the price of the vehicle 
purchase and another that said the purchase was harmful to 
Slovenia.  The actual session was a highly politicized 
back-and-forth with opposition leaders repeating their 
criticisms of the deal and government coalition leaders, 
including Erjavec, refuting the criticism and highlighting 
the purchase's benefits for the Slovenian economy and for 
Slovenia's ability to contribute to NATO.  Several members of 
Parliament said the purchase was a return to past practices, 
and that non-transparent, even corrupt, practices were a 
regular occurrence throughout the history of the MOD.  They 
also seized on the fact that the director of Patria's local 
partner, Rotis, was an aide to Prime Minister Janez Jansa 
when he was the Minister of Defense. 
 
 
8. (SBU) March 30, opposition leaders succeeded in getting 
Parliamentary approval for an inquiry commission to look into 
the purchase.  Specifically, it is charged with determining 
if the tender for the vehicle purchase favored any particular 
bidder, what the exact details are for the purchase, and to 
investigate the responsibility of public officeholders in 
hindering oversight of the MOD and the Slovenian Armed 
Forces.  The coalition failed to expand the inquiry more 
generally to defense acquisitions, and thus decided to pursue 
a second inquiry commission to look at defense acquisitions 
deals in Slovenia from 1994 to 2007 (including the purchase 
of 6x6 armored vehicles, 155mm Howitzers, Pilatus turbo prop 
airplanes and a government jet, as well as the refurbishment 
of T-55 tanks) during the majority of which the current 
center-left opposition parties held the government.  The 
inquiry commissions were formally established in late April 
and began work in May.  They have yet to release any official 
findings and have no official deadlines. 
 
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GOS TALKING POINTS: PATRIA DEAL FAIR AND TRANSPARENT 
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9. (S/NF) Publicly and in official meetings with the COM and 
EmbOffs, government officials including Gutman and 
Jansa have consistently used one set of talking points, 
stating that it will stick with the Patria bid, that the 
Patria bid was superior in all areas of review (quality of 
product, cost, and commercial impact), that Sistemska 
Tehnika's bid was clearly inferior, that ST's poor 
performance was a result of poor preparation and 
overconfidence that it would secure the deal, and that the 
entire tender process was "by the book."  One notable 
exception was the (now retired) Commander of the Training and 
Doctrine Command, Brigadier Jozef Zunkovic (strictly 
protect), who privately told ODC Chief June 22 that the 
decision had been "political" and that the Patria was "not 
the vehicle we (i.e. the military) wanted."  Other senior SAF 
leaders close to the Embassy, including the generally affable 
and open Deputy Chief of Defense Alojz Steiner and former 
Chief of Defense Ladislav Lipic have been particularly tight 
lipped about the decision. 
 
10. (S/NF) In a December conversation with Jansa, COM asked 
about rumored forty percent cost overruns on the Patria deal 
and commentary that the GOS would have to do without key 
elements of the vehicle (including floatability and radio 
encryption) or reduce the number of vehicles purchased to 
meet the original cost limitations.  Jansa demurred and 
claimed not to have any information on the issue, saying that 
the issue was in Erjavec's portfolio and that it was his job 
to make sure everything transpired in a transparent matter. 
 
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ANTI-U.S. PERSPECTIVE GROWING AT THE MOD? 
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11. (C) The decision to purchase Patria's armored vehicles 
are only the most prominent example of the negative recent 
experiences of USG corporations competing for open defense 
contracts from the GOS.  In spring 2007, U.S.-based Cubic 
Corporation lost a two way competition to provide a tactical 
engagement simulation system as part of a broader combat 
training center project that is being heavily supported by 
the Embassy's Office of Defense Cooperation.  Post strongly 
advocated for the MOD to consider the benefits of purchasing 
from Cubic (via Foreign Military Sales) in order to ensure 
future training nteroperability with U.S. forces and given 
Cubic's overwhelming role as the leader in this market.  The 
USD 7 million contract was awarded to Swedish firm Saab in a 
deal that Embassy contacts have also identified as 
non-transparent and corrupt.  EmbOffs have also heard that 
the SAF are looking at alternatives for even the most basic 
defense purchases, including spare parts and maintenance for 
 
SAF Hummers. 
 
12. (S/NF) This seeming push away from American defense 
corporations came in line with the strange appointment of 
Marjan Senica to the post of Director General of the 
Directorate of Logistics (which also handles acquisitions) at 
the MOD in mid-2006.  Senica was previously the director of 
Slovenian corporation STO-Ravne, but was dismissed in 2002, 
after pressure from Embassy officials, because of his direct 
involvement in efforts to export military goods from Slovenia 
to Syria.  After a brief time in the position (during which 
the Patria deal was made), Senica moved to the deputy 
position in the directorate.  Embassy contacts say that 
Senica is pushing a generally "anything but American" 
ideology into the acquisitions office at the MOD. 
 
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COMMENT 
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13. (S/NF) Over the past year, post has closely followed 
allegations from mainstream media, political pundits, and 
internal and external observers of the MOD, with all parties 
reporting that the selection and negotiation process used by 
the MOD in the acquisition of the 8x8 armored vehicles was 
faulty.  At best, the selection and negotiation processes 
have lacked transparency, with the public still not receiving 
a detailed account of how GoS money is being spent, and what 
it is getting in return.  At worst, industry insiders tell us 
they suspect criminal actions, including bribes and major 
political party payoffs, in exchange for the lucrative 
contract.  Some have even suggested the vehicle purchase was 
a conduit for the filling of campaign coffers in advance of 
the first big test of the ruling coalition, parliamentary 
elections in 2008. 
 
14. (S/NF) According to a clandestine source with direct 
access to an empoloyee of Rotis, Prime Minister Jansa's SDS 
received more than 2.8 million Euro from Patria "under the 
table" as part of the deal for armored vehicles.  The source 
also noted that Sto Ravne had failed to offer a similar 
contributuion to Jansa's party. 
 
15. (S) Given the smallness of Slovenia, the familiar cast of 
characters surrounding the controversy is not all that 
surprising.  Nor is the fact that a "smoking gun" has not 
emerged because of Slovenia's complete lack of investigative 
reporting.  How the controversy will play out now that 
parliamentarians are on the case remains to be seen.  What is 
certain is that the political knives are out, and it is 
possible that this controversial defense deal may be the 
fight that frames the next few years of Slovenian politics. 
 
16. (S) Another consideration is Slovenian interest in 
furthering its ties in Europe and cementing itself into the 
European military industrial complex.  While Slovenian 
military contacts continue a close and cordial relationship 
with their U.S. interlocutors at all levels, it is possible 
that MOD leaders do not see "buying American" as particularly 
valuable in further enhancing the bilateral relationship. 
The decision to go with Finnish Patria was hailed by the 
Finns and was politically useful for a government that wants 
to burnish its credibility as the first among the newest 
members of the EU.  While the GOS urgently prepares to take 
the helm of the European Union in January, the very "Balkan" 
story of its defense acquisitions process reminds us that 
while Slovenia has come very far, there is still a ways to go. 
ROBERTSON

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