Greece’s U-214 Submarine Order: Default & SettlementMay 16, 2011 15:16 UTC by Defense Industry Daily staff
On Monday Sept 21/09, ThyssenKrupp Marine informed the Greek Minister of Defence that it was canceling “The Archimedes Project” contract for 4 U-214 diesel-electric submarines with Air-Independent Propulsion technology, because the government’s payments had remained underwater for too long. Accumulated payment arrears were over EUR 520 million (then $767 million), and so ThyssenKrupp and its subsidiary Hellenic Shipyards sought international arbitration, in order to recover some of the payments due under its contract.
That development was the just the latest chapter in a long and continuing saga. If the issue remained unresolved, or arbitration resulted in termination payments but no delivery, Greece might have found itself without a submarine force. Now, a resolution is close – but prosecutions may be equally near:
Greece’s Submarine Programs: Types and Travails
Greece currently fields 8 boats: 4 Glavkos class U-209/1100 boats commissioned between 1971-1979 (S110-S113), and 4 Poseidon class U-209/1200 boats (S114, S117, S118, S119) commissioned from 1979-1980.
In 1989, the Neptune I program began to upgrade the 4 Glavkos class boats. They received flank array sonar and significant electronics upgrades, including the ability to fire UGM-84 Harpoon anti-ship missiles. In 2002, Hellenic shipyards received the Neptune II contract for the “mid life” modernization and repair of 3 Poseidon class boats, which included cutting the hull and installing an 6.5m long Air-Independent Propulsion section, as well as hydrogen storage tanks for the AIP. Flank array sonar, electronics upgrades, an electro-optic mast with satellite communication capability, and Harpoon missile firing capability reportedly round out the upgrade’s major features.
No ship lasts forever, and that’s especially true of submarines. While Neptune II proceeded, therefore, the Greek government signed a contract in February 2000 for 3 of HDW’s new Type 214 submarines + 1 option. It was the first order for the new class.
Papanikolis (S120), the first-of-class U-214, was laid down in Kiel, Germany in February 2001 and launched in April 2004. In January 2005, HDW’s ThyssenKrupp Marine (TKMS) parent company bought Hellenic Shipyards near Athens, Greece, and invested heavily in modernizing it. Submarine work had already been underway since 2002, and Hellenic Shipyards built the next 3 Greek U-214 submarines: S121 Pipinos, S122 Matrozos, and S123 Katsonis.
Once the Papanikolis’ sea trials began in 2006, however, the Hellenic Navy found a host of issues with the new submarine. Poor performance from the AIP system that supplements its diesel engines for long underwater operations, problems with the ISUS combat system, poor surface seakeeping in high seas, and hydraulic system issues were among the major flaws reported. The Navy refused acceptance, leaving HDW to fix the boat.
HDW set to work on Papanikolis, but the submarine has been docked in Kiel since 2006 waiting for Greek acceptance. HDW says acceptance is now justified, as the defects have been fixed, but the Greek government refuses to accept the boat. It has raised other issues, such as the ad-hoc nature of several required modifications to avoid disassembling the boat, the number of sea trials that have consumed some of the onboard equipment’s operational life – and one rather more traditional reservation, which is not expressed but plays a role. Sailors are famously superstitious, and Papanikolis’ tribulations have given it a reputation as an unlucky boat.
In 2010, a provisional agreement was reached. Greece would accept the U214s, and would shift Project Neptune II from 3 upgraded Poseidon Class boats to 1 upgrade plus 2 new U214 submarines, giving Greece a total of 6 U214s.
Contracts & Key Events
Greek defense minister Evangelos Venizelos said that the pullout will not affect the delivery of the 4 U214 submarines that have been completed at Hellenic Shipyards. The deal in question is a substitution for the original Neptune II plan to overhaul 3 Poseidon Class boats, and add AIP propulsion sections (vid. Sept 15/10 entry). Greek MoD | Expatica.
May 3/11: Make that EUR 120 million, and now the figure comes from legal depositions. Ekathimerini:
“At least 120 million euros was paid in bribes by the German firm that struck a deal with the Greek government for the sale of four navy submarines, according to German court documents seen by Kathimerini… Two former executives of Ferrostaal, the Germany firm that was part of the consortium which won the contract, gave depositions in Munich concerning the kickbacks paid to secure the deal, which was worth just over 1.2 billion euros.”
March 28/11: Greece’s financial crimes squad (SDOE) delivers its report. Make that EUR 100 million in bribes:
“Politicians, civil servants, military officials and middlemen are thought to have been paid off as part of the deal. Sources said that probes into the bank accounts of some Greek shipyard unionists also revealed money that was unaccounted for. Last week, a prosecutor called 37 people to answer questions about bribery allegations…”
Many of the Greek U214 fleet’s custom features were reportedly inserted as a way of padding the bill, and allowing more under-the-table payments to be hidden. The revelations also spark a political controversy, as the current socialist PASOK government was in charge when the deal went down. Ekathimerini.
Feb 27/11: An investigation by Greece’s financial crimes squad (SDOE) has concluded that 3 former ministers, and several other public officials, should face prosecution for corruption. The allegations are that U-214 consortium partner Ferrostaal paid EUR 10 – 12 million in bribes to secure the EUR 1.26 billion deal.
The SDOE is due to deliver its findings to the Athens Prosecutor’s Office at the beginning of March 2011. Greek judicial authorities will then make a request to German authorities for details of the financial transactions involved, while asking for the bank accounts of all alleged conspirators to be frozen. Ekathimerini
Sept 15/10: It took a bit longer, but the first stage of an agreement is now in place. Greece will accept the U214 submarine Papanikolis. A contract to sell of Hellenic Shipyards to Abu Dhabi MAR is signed with government approval, but must be ratified by the Greek Parliament.
The 3rd part isn’t final yet. Instead of refurbishing 2 of the U209 boats under Project Neptune II, the Greek government wants to spend EUR 175 million more to convert that into a purchase of 2 more U214 submarines, a move that would keep Hellenic Shipyards open and working for a while longer. Agence France Presse via Defense News | AFP via Expatica | BYM Marine & Martime News | Capital.GR | Reuters.
March 11/10: Media reports quote Greek Defense Minister Evangelos Venizelos, who says that:
“We have reached a solution, which should be signed [March 18] and which protects the interests of the Greek navy as it means it will finally receive modern, functional submarines.”
Reports say that Greece will acknowledge receipt of the Papanikolis, then sell it to a third party. In return, TKMS will drop a compensation claim for breach of contract. Agence France Presse.
March 1/10: Greece approves the sale of Hellenic Shipyards from ThyssenKrupp Marine systems to Abu Dhabi MAR. The new joint venture will be led by ADM with 75.1% of the share capital of Skaramanga shipyard (HSY), with ThyssenKrupp Marine Systems retaining 24.9%. The move gives ADM something its October 2009 acquisition of large chunks of TKMS did not include: submarine construction capability.
ThyssenKrupp Marine Systems picked Abu Dhabi MAR in January 2010 as the preferred bidder for a majority stake; no details were disclosed, but TKMS had reportedly said in the past that the shipyards, which depend on Greek navy orders, would be sold at the price of one euro. TKMS reportedly received 5 bids for HSY, but found only Abu Dhabi MAR’s to be acceptable. Khaleej Times | Reuters.
Oct 21/09: Kathimerini reports that Greek Defense Minister Evangelos Venizelos held talks with ThyssenKrupp Marine Systems CEO Hans Christoph Atzpodien, in a bid to resolve the submarine issue. The basic framework of the deal appears to involve TKMS retaining the Papanikolis for resale, and the other 3 U214 submarines being accepted by Greece pending certain defined criteria. It adds:
“Sources said that ThyssenKrupp appears determined to quit its involvement in [Hellenic Shipyards SA] as early as next month, despite government concerns about the job losses that this might cause. There were, however, discussions between the two sides about how some private involvement in the shipyards could continue… An unidentified third country is reported to be interested in buying the [Papanikolis] and the two sides have agreed that selling it would be the best way out… The two men reportedly agreed that if the technical problems are ironed out, Greece will accept delivery of the remaining three submarines.”
Sept 21/09: ThyssenKrupp notifies the Greek Minister of Defense that it’s formally canceling the Project Archimedes U-214 contract, and says it intends to seek international arbitration for contractual damages.
July 2/09: ThyssenKrupp Marine receives a EUR 2.5 billion contract with Greece’s rival Turkey for 6 U-214 submarines, supplemented with Air-Independent Propulsion technology. They will be built at the military-owned Golcuk Shipyard near Izmit, using pre-built sections and equipment supplied by HDW, as well as Turkish electronics and items. Delivery is expected in 2015. Read DID’s “Turkey Subs” for more.
May 28/09: The Hellenic Navy’s Chief of staff, vice-admiral George Karamalikis, announces the future direction of Greece’s naval procurement. among these items, DefenceNET Greece reports that:
“The HN has decided to accept the 3 T 214 submarines that are being constructed in Greece but the first submarine of the PAPANIKOLIS class, that was build in Germany, is not going to be received by the Navy. Instead, a new submarine will be ordered, in order to fulfill the demand for 4 T 214 submarines.”
Feb 26/09: Greek U-209/1200 submarine HS Okeanos (S118) is re-launched at Hellenic Shipyards in Skaramangas, following a mid-life refit that added Air-Independent Propulsion. It is the first submarine to be re-launched under the Neptune II program. Source.
Appendix A: Contracts Under Water – Greece’s 2009 Default
Meanwhile, the other 3 submarines are reportedly complete now, or very close to it. Pipinos was launched in April 2007, Matrozos followed in 2008, and Katsonis was launched at the end of 2008. Not one of them has been accepted for service. Sources currently report payments to TKMS of almost EUR 2 billion, but accumulated payment arrears of EUR 524 million ($770 million): EUR 300 million claimed by Hellenic Shipyards SA, and EUR 224 million owed to HDW.
Greece is facing very large budget deficits, expected to grow to 6% of total GDP in 2009. By dragging the problem out, the government can delay payments and possibly create enough pressure to renegotiate the price. In January 2009, Greek Defence Minister Evangelos Meimarakis lent credence to this view when he said that he would try to renegotiate the submarine contract. In May 2009, there were rumors of a deal that would have Greece accept the other 3 submarines once Pipinos passes acceptance trials, while HDW would be left with Papanikolis and could resell it elsewhere.
TKMS’ filing and notification indicate that these options have all failed. “The Greek state has long ceased to honour its contractual obligations,” said TKMS’ release announcing its cancellation of the contract for default. Commerzbank AG analyst Dirk Nettling is even more succinct: the Greek government “can’t pay, won’t pay, or has other priorities.” As a result, a TKMS spokeswoman told Jane’s that “…continuation of the contract is no longer economically justifiable.”
The cancellation is also set to affect the Neptune II project to upgrade and refurbish Greece’s existing U-209 boats by adding Air Independent Propulsion systems. While S118 has been accepted and re-launched, Jane’s reports that this contract has also been canceled.
This leaves the Hellenic Navy with something of a problem. Submarines have a limited safe lifespan, in part because of the regular squeezing and release of water pressure on their hulls. The youngest Type 209s are already pushing 30 years, which is a long time. Very few submarines can safely last beyond 40 years in service, a milestone that even refurbished Neptune II project boats would reach in 2020.
Given a required lead time of several years from orders to fielding, and the issues that a sustained contract cancellation would raise with potential builders, Greece may find itself with a limited window of just a few years to work out a new submarine strategy and place an order. The alternative would be a submarine force that could face significant operational limitations – and perhaps even no submarine force at all.
A problem its rival Turkey would not have, since Turkey is set to begin inducting 6 of its own U-214 submarines, beginning in 2015.
Appendix B: Additional Readings & Background
Re: “Archimedes Project.” As most of our readers know, the ancient Greek scientist Archimedes is best known for Archimedes’ Principle: a body immersed in a fluid is subject to an upward force (buoyancy) equal in magnitude to the weight of fluid it displaces. He also invented the lever, the compound pulley and Archimedes’ screw, as well as weapons used during the war between Rome and his city of Syracuse. Archimedes was killed in that war, despite orders from the Roman general that he should not be harmed.
- DID – German Shipbuilding Restructured: UAE’s Firm Buys Blohm+Voss. TKMS also sold Hellenic Shipyards.
- TKMS Hellenic Shipyards – The Class 214 Program
- TKMS Hellenic Shipyards – Neptune II program
- GlobalSecurity – Type 209
- Defencenet.gr (May 27/09) [in Greek]
- Bosphorous Naval News (March 4/09) – Greek Naval News
- NTI – Submarine proliferation – Greece: Current Capabilities