ZTE overprice evident in Equipment, Services (1)

Senate Blue Ribbon Committee boss Dick Gordon is not about to hold one last hearing on the ZTE scam. So there’s no more chance to solicit, from telecom experts, comparative broadband prices that can prove gross overpricing. But there’s another way to show ZTE’s fraud. Senators need just study the Equipment and Services components of the contract.

To recount, the total ZTE deal is $329,480,941 (P16.5 billion). This consists of Equipment, $194,051,628; and Services, $135,429,313. (Today I will discuss the overpricing in Equipment; on Friday, that in Services.)

Equipment is further broken down into: Transmission, $87,083,904; WiMAX, $82,077,545; VoIP, $15,175,887; Data Center/NOC, $8,977,882; Freight, $649,626; and Transport Insurance, $86.774.

The sleaze is evident in the WiMAX portion, which includes:

• Base Station Modules, $4,186,728;

• CPE Subscriber Units, $46,105,696;

• Cables, 4,548,544; and

• Others, $27,236,577.

I had written about this in Feb. and Mar. 2008. A telecom exec, who couldn’t surface because tied to an official in the deal, first pointed out the obvious con. Then, others gave me a copy of the WiMAX subcontractor’s quotation to ZTE, which confirmed what the exec and everyone in telecoms know. The Wi-MAX gadgetry was overpriced at least 250 percent.

The WiMAX subcontractor was Alvarion of Israel, a pioneer in the technology. WiMAX is short for Worldwide Interoperability for Microwave Access, a system of beaming data over long distances, point to multipoint. It was the way the government planned to link up all local offices via 300 base stations and 25,488 sites.

The ZTE contract states that the CPE Subscriber Unit is Alvarion’s 2004 model BreezeMAX PRO. Unit price is $1,784, for a total of $46,105,696 for the 25,844 units, in the contract signed in Apr. 2007.

But Alvarion’s quote to ZTE, made in May 2006, was much lower — only $743.16 apiece. At that low price, ZTE already would have a cozy profit of 20 percent, since Alvarion gave a “partner’s price” of $576++. The 20-percent margin was considered high in the very competitive telecom business.

In effect, the 25,844 CPE Subscriber Units should have cost only $19,206,227. There was overpricing of $26,899,469 (almost P1.35 billion) on one item alone.

When Alvarion first quoted the price for the CPE Subscriber Units, it was for only 63 sites. The government later decided to have 25,844 sites. With the tremendous 410-fold increase in volume, the government should have wangled from ZTE a much lower unit price. It didn’t.

There was also overpricing in the Base Stations, Cables and Others. Adding up the two items in the ZTE contract, the combined cost of Base Station Modules and Cables is $8,735,272 for 300 base stations. This means a unit cost of $29,117.57.

Again compare it to Alvarion’s quote: only $8,853.60 for equipment and cables in each base station, or a total of $2,656,080. This means there was a further overprice of $6,079,192 (roughly P305 million).

Like the CPE Subscriber Units, the Base Station Modules and Cables came with a 20-percent “partner’s price”’ that is, ZTE’s comfortable markup. But ZTE more than tripled in its contract the price of the latter two items. And the government willingly accepted.

The item “Others”, costing $27,236,577, consists of software licenses. This is where the bulk of the overpricing was incorporated. Extrapolating from the Alvarion quotation, the licenses for the equipment in the 300 base stations and 25,844 sites would have cost $471,789. There was another overprice of $26,764,788, or 5,800 percent.

Whistleblower Joey de Venecia had submitted to the Senate his own industry estimates for the WiMAX component of the ZTE contract. He said this should have cost only $19,753,200. Witness Dante Madriaga presented his own figures as the technical man tapped by ZTE’s Filipino brokers. Their figures jibe with that of Alvarion. Madriaga also said that, as the number of base stations and sites increased, the kickback also increased exponentially.

If senators are not satisfied with all this, they can do their own research on the Internet. One of my telecom sources pointed out that Alvarion’s BreezeMAX has a close competitor model: Proxim Tsunami MP 16 3500 Subscriber Station with Integrated 18 dBi Panel Antenna. This can be ordered online for only $579.99 apiece. This is very close the Alvarion’s quote of $743.16 apiece, less 20-percent “partner’s price”, or $576++. Follow the link: http://www.wirelessnetworkproducts.com/index.asp?PageAction=VIEWPROD&ProdID=1404.

There were overprices also in the testing and commissioning of the WiMAX gadgetry. Also, the item “Services” breached the government limits for such component in public contracting. This will be discussed on Friday.

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