ZTE overprice evident in Equipment, Services (2)

From the Apr. 2007 signing, Malacañang and ZTE sought to hide the $330-million broadband contract from the Filipino people who will pay for it. At first they simply ignored news bits about the rush to sign in China, thinking perhaps that the story will blow away. Then in June they claimed that the document was stolen minutes after the signing, and that newsmen who were writing about it must be the thieves. Later forced to yield papers to the Senate, they tried to avert public release by invoking “confidentiality of proprietary information.” The senators nevertheless gave out copies to the press, which promptly posted the details on websites. No wonder the contracting parties attempted coverup. The contract is full of fraud.

All of $329,480,941 (P16.5 billion) the contract consists of Equipment, $194,051,628, or 59 percent; and Services, $135,429,313, or 41 percent.

In Equipment, there was obvious overpricing of about $60 million (P3 billion) in the WiMAX portion alone (see Gotcha, 4 Mar. 2009).

There was also clear overpricing in Services, consisting of three types:

• Engineering, $118,605.301;

• Management, $14,875,507; and

• Training, $1,948,505.

Firstly, the ZTE deal broke government contracting limits for Services in relation to direct cost. Since 1998 the NEDA rule is for a maximum of 6 percent for engineering design, and 10 percent for construction supervision, or 16 percent total. Since the direct cost for Equipment is $194 million, the 16-percent maximum for Engineering and Management Services should be only $31.04 million. But that is not the case. For, including Training, the combined Services comprise 70 percent of Equipment cost.

The Engineering Service alone of $118.6 million is 61.1 percent of the Equipment cost, an extremely long shot from the 6-percent ceiling. Yet Romy Neri, the NEDA head who approved the ZTE deal, claimed that it met all the regulations.

Secondly, again contrary to NEDA rules, the contract digressed from FIDIC international procurement standards and forms. Token inclusion of some basic documentary requirements was at best spotty.

FIDIC is (French acronym for) International Federation of Consulting Engineers. Founded in 1923, it consists of national unions of consulting engineers from over 60 countries, including China and RP. Its proposals on international procurement, tenders and contract forms have been adopted for transparent best practices and fairness to client-governments, supply and construction companies, and consulting engineers. All international agencies, including UN organizations, use FIDIC procurement forms. The Philippine government requires the same in infrastructure and supply contracts funded by foreign governments. The DOTC itself has used such forms in its LRT, ports, air transport and navigation, land transport and related projects.

NEDA sources analyzed the ZTE contract posted on websites. They noted that it lacked the all-important performance bond of 5 percent. ZTE was not made to advance 15 percent of the Equipment and Services costs. Instead there was a proviso called Conditions Precedent, which shows that the contract was rushed. Also missing are requisite contract attachments: NEDA clearance to adopt direct procurement method for a project costing more than P500 million; DOJ opinion and presidential authority to adopt such direct procurement; submission by ZTE and receipt by DOTC of bid proposal (technical and financial); signed minutes or records of DOTC-ZTE contract negotiations; initialed draft contract and final attachments; prior clearance and authority from the President to sign ZTE contract through direct procurement above P500 million; DOTC official notice and ZTE acceptance of contract award.

The items in Engineering Services were vague. Lacking, according to NEDA sources, were preliminary and detailed designs, procurement plan, and implementation schedule. Management and Training Services did not set work scopes, detailed prices, and verifiable, measurable performance standards.

All these were deliberate, and lead to the third proof of overpricing. Part of Engineering Service calls for $25,844,000 for “installation, testing and commissioning” of 25,844 CPE Subscriber Units in 25,844 sites, or $1,000 per site. A telecom source (who can’t surface for now because tied to an official in the ZTE deal) described what this is all about:

“Installation simply means mounting an antenna (21 x 21 x 5 cm; 3 lb) outside a building, and connecting its cables to the network device and PC. Given three-page idiot-proof instructions, it can be done in two hours in a site. It’s easy to test and commission the wireless connection from the remote site to the nearest of the 300 base stations, and from the station to the central network center. This requires Person 1 in the remote site talking on the phone to Person 2 in the base station and Person 3 in the central. Installation, testing and commissioning of one remote location can be done in a couple of days. The cost for three persons working two days can be reasonably estimated at $250 per location, or a total of $6.5 million, not $25,844,000, for 25,844 locations.”

Given the data from a telecom expert, the overpricing for installation, testing and commissioning alone is over $19 million (P950 million).

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