October 26, 2010 / 6:42 PM / 9 years ago

UPDATE 1-Canada deal for Boeing helicopters unfair-watchdog

* Sole-source C$4.9 billion deal broke government rules

* Finding has implications for C$9 billion jet purchase

* Government says its handling of the case was correct

By David Ljunggren

OTTAWA, Oct 26 (Reuters) - Canada’s decision in 2006 to award a sole-source C$4.9 billion (C$4.8 billion) helicopter contract to U.S. company Boeing Co BA.L broke government procurement rules, the country’s auditor-general said on Tuesday.

Auditor-General Sheila Fraser said the sole-source deal for 15 Chinook medium- to heavy-lift helicopters would only have been valid had Canada bought off-the-shelf aircraft. In fact, she said, the Defence Department had intended from the start to ask Boeing to make major modifications.

The decision to avoid a competitive tender “did not comply with the letter or intent of the applicable regulations and policies and, consequently, the contract award process was not fair, open and transparent,” Fraser wrote in a report.

The formal contract with Boeing was not signed until 2009. The delays pushed back the planned delivery date of the first Chinook from 2008 to 2010 and then to 2013.

Opposition parties gearing up for an election expected next year will use the report to attack the governing Conservatives, who only have a minority of seats in the House of Commons.

Fraser’s findings are particularly timely, since the government has just announced plans to award a C$9 billion sole-source tender to Lockheed Martin (LMT.N) for fourth-generation F-35 fighter jets.

“We expect to see a very rigorous justification for this choice of supplier,” she told a news conference when asked about the F-35, saying her team would investigate the deal.

In an unusual move, the federal ministry in charge of contracts disagreed with the audit. Public Works and Government Services said competing firms had had enough time to make submissions once they learned of the sole-source plan.

In fact, AgustaWestland — a unit of Italy’s Finmeccanica SpA SIFI.MI — did express interest after Ottawa announced it was planning a sole-source contract. Officials ruled out the firm, using criteria which Boeing had not been asked to meet.

Officials at National Defence told government spending chiefs in 2006 that the Chinook was the only helicopter that could meet Canada’s needs. This meant Public Works was entitled to award a contract without holding an open tender.

“It is evident that from the beginning, National Defence did not intend to procure an off-the-shelf Chinook but rather a modified one that included ... extended-range fuel tanks, an upgraded electrical system and aircraft survivability equipment,” said Fraser’s report.

The modifications increased the cost of each aircraft by 70 percent from the first quote Boeing gave Canada in 2006.

Fraser said the government should have announced in 2009 it was planning a second sole-source contract based on the final specifications and modifications worked out with Boeing.

“While this may not have affected the outcome, it would have enhanced fairness, openness and transparency,” she said.

Fraser also criticized the government for how it had handled the long-running saga of finding a replacement for the aging Sea King maritime helicopter fleet.

AgustaWestland initially won a contract to replace the Sea Kings in 1993 but the then Liberal government scrapped the deal. In 2004, it awarded a C$5 billion contract for 28 choppers to Sikorsky, a unit of United Technologies (UTX.N).

Sikorsky now wants more time to deliver the first of the helicopters, in part because of major modifications requested by Canada. The first one is now not due to be delivered until June 2012, compared with the initial undertaking of late 2008.

Canada wanted so many changes it had in effect “entered into an agreement with Sikorsky to develop a new helicopter”, Fraser said, criticizing Defence Department officials for underestimating the difficulties involved.

$1=$1.02 Reporting by David Ljunggren; editing by Peter Galloway

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