Disconnect in Philippines over China deal

By David Llorito
Southeast Asia
Aug 24, 2007


MANILA - A US$329 million broadband infrastructure contract inked between the Philippine government and Chinese telecom giant ZTE Corp has raised critical questions here about the deal's lack of transparency and threatens to kick off a new round of political troubles for President Gloria Macapagal-Arroyo's already scandal-plagued administration.

The infrastructure deal involves the construction of an integrated Internet-protocol-based broadband network that would provide connected voice, data and video services for national, regional and local government agencies. The Export-Import Bank of China agreed to provide concessionary loans at 3% annual interest with a five-year grace period on the condition that ZTE is the exclusive supplier for the project.

In a dramatic twist, government officials recently disclosed that the actual contract - of which Arroyo was in attendance for the signing ceremony in China on April 21 - has since gone missing. The alleged misplacement of the contract - some officials have said the signed document was stolen from a China hotel - has raised allegations among opposition politicians and the media of possible official impropriety.

In part that's because the ZTE contract was priced higher than other competitive bids for the contract, including offers from Amsterdam Holdings Inc (AHI), a Philippine company in partnership with another Chinese firm, Huawei, and Arescom, a US telecommunications supplier. The Huawei deal proposed to build the same broadband network for $240 million, while Arescom's offer was reportedly $135 million.

Sources familiar with the negotiations say ZTE initially tabled a proposal for $262 million, which apparently was close to the bid made by AHI. Why the awarded contract was inflated to $329 million when the deal was finalized and signed in China is still unclear, the same sources say. So too is the added $500 million expense for a "cyber-education" component to the deal, which Arroyo reportedly wanted to maximize the utilization of the broadband network's capacity.

Technical experts have already raised critical questions about the cyber-education project's expense and viability. Nonetheless, Arroyo's government initiated the separate big-ticket project when the Chinese government indicated it would not finance the e-education component of the original broadband-network contract, according to minutes of a March 27 meeting of the government's Investments Coordinating Committee seen by Asia Times Online.

The document has prompted opposition speculation that the Chinese government - which has agreed to provide concessionary loans for both multimillion-dollar projects - may have dictated the terms of the deals, which when finalized were nearly three times the value of ZTE's original bid for the project.

That price inflation is bringing Arroyo's personal relations with Beijing under new scrutiny. Meanwhile, ZTE has not commented publicly on the deals and failed to reply to e-mailed questions from Asia Times Online.

The company recently sponsored an all-expense-paid trip for Filipino journalists to travel to Shanghai to witness the company's technological expertise.

Business backlash

The Philippine business community has openly questioned the government's decision to opt for the higher-priced Chinese bid.

"The contract appears to be highly questionable," said a joint statement of the Philippines' three major business organizations, namely the Management Association of the Philippines, the Makati Business Club, and the Financial Executives Institute of the Philippines. The influential Bishop-Businessmen's Conference also signed the statement.

"The country still lacks 41,000 classrooms, even as our constitution mandates that education should be the top priority in the national budget," the statement said. "In remote barangays and in quite a few municipios, access to water is still a basic need. The ZTE contract value of US$330 million could be spent in building 36,000 classrooms, or 6,000 rural health centers or 120,000 artesian wells."

ZTE competitors have made similar grumbles. Marinelle O'Santos, lawyer and spokesperson for AHI, said that as early as last December her company had offered an "unsolicited proposal" to undertake the project for $240 million at "no cost to the government" under the Philippine build-operate-transfer (BOT) law. She said AHI proposed to build the infrastructure backbone and transmission sites and provide all other technical and software support for the entire national network at rates "25% less" than other private telecommunications companies had offered. Philippine officials, on the other hand, have questioned the merits of the AHI and other bids.

"There's no such thing as a free lunch," Lorenzo Formoso, assistant secretary of the Department of Transportation and Communications (DOTC) and commissioner of the Communication of Information and Communications Technology Council, said in an interview. "If they [AHI] are serious about putting in a network, then they should put up the money where their mouth is."

Formoso said AHI, owned and controlled by businessman Joey de Venecia, son of the current of Speaker of the House of Representatives, doesn't have the funds or know-how to undertake and complete the project. He claimed AHI is requesting that the government grant it the contract through an "executive performance undertaking", which the firm would leverage to raise funds for the project in capital markets.

"They are going to borrow P10 billion [$214.6 million] at commercial rates, so you can imagine how much debt servicing that will be," Formosa said. "Plus they are going to enter a very competitive field and still give us a 25% discount. That doesn't add up."

Formoso said AHI proposed to set up a mobile-telecom network, which the government doesn't need because its coverage would be limited to urban areas. "They are profit-driven, so they want to concentrate on urban centers - which is not the right thing to do when you are in a missionary environment like the government," he said.

He also dismissed Arescom's proposal for allegedly using "obsolete technology", because it would include the use of expensive satellite-based technology. The ZTE proposal, Formosa asserted, is "superior" because of its greater coverage and advanced technology, which according to the plan will connect through fiber optics more than 25,000 government offices from the national level down to the local level.

Conflicting signals

Critics contend that Formosa's DOTC favored ZTE's bid from the outset, which is why the government allowed the company exclusively to modify its originally tendered proposal.

"The ZTE offer when they submitted in September 2006 was very modest," said O'Santos. "What was signed was totally different. It's vastly improved. It's actually a lot closer to our proposal. I have no beef with that. But they never allowed us the same courtesy that they gave ZTE to make adjustments to the proposals."

According to Emmanuel de Dios and Raul Fabella, economics professors with the University of the Philippines, the DOTC was able to favor ZTE over other proposals because the government did not specify its minimum technological requirements and commitments if the project were implemented via BOT. As a result, they said, government officials were able to fob off one proposal against another by merely citing one or the other technical details.

Sharper criticism of the $830 million projects is that they contradict current government privatization policy and will duplicate broadband services already on offer by private companies.

"The private sector has provided not one but two such backbones: the PLDT's [Philippine Long Distance Telephone Co's] loop-type fiber-optic backbone, which anchors the signal coverage of the entire country, and the Telecphil fishbone-type fiber-optic backbone, which is owned and employed by a consortium of telcos," said de Dios and Fabella in a recent paper critical of the ZTE deal.

"All smaller local telcos are hooked up to either of these two backbones. Even the local area networks of large government agencies are already currently connected to either of these backbones, for national and global connectivity," the academics wrote.

Top officials of the National Economic and Development Authority, which serves as the secretariat of the Investment Coordinating Committee that gave final approval on the national-broadband-network project, claim that the new network will "bridge the digital divide" between urban and rural populations.

Other government officials, however, have sent contradictory messages. Formoso said the network is in reality an "intranet" project, which will be used solely by government agencies and local government units, including about 50% of the country's barangays, the lowest unit of government in the Philippines.

Formosa estimates that the new broadband network will save the government close to P4 billion pesos ($89 million) a year on telecommunication services, including Internet, land-line and cellular-phone calls by government officials. At the same time, he also admitted that government will continue to rely on private telecom companies for certain cellular as well as bulk Internet services.

Arroyo has said more conservatively that the savings will be closer to P1 billion per year, as government agencies will still need to subscribe to private telecoms for communications outside the intra-government network, including when making calls to private companies and state agencies not covered by the to-be-built broadband network.

Those estimates may be overly optimistic, however. Calculations by economists with the University of the Philippines revealed that the government could even incur a financial loss over the life of the system. De Dios and Fabella contend that the government's projected savings of P27.75 billion over the project's 15-year life span is less than the P31 billion the system would cost over the same period. "The numbers ... simply fail to add up," the two independent economists concluded.

In retrospect, Arroyo initially opposed financing the new broadband network through Chinese concessionary loans and at first preferred a BOT scheme where private companies would shoulder the investment risk. Her unexplained about-turn in April, the alleged loss of the signed contracts in China, and the emerging hard questions about the network's economic benefits, fairly or unfairly, have generated widespread speculation about possible high-level corruption.

So far the government is undaunted by the allegations. "It's so easy to say [corruption], but could you prove it?" asked Formoso.

Yet time will tell: the new opposition-dominated Senate has promised to investigate the controversial deal, meaning Arroyo's post-mid-term-election headaches have already begun.

David Llorito is a researcher at the BusinessMirror, a Manila-based daily newspaper. He has more than a decade of experience in socioeconomic research, policy analysis and business-economy journalism in the Philippines.

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