Notes on a scandal

(First of two parts)

Just yesterday, the Department of Transportation and Communications (DOTC), at a meeting called with the private telecommunications carriers (Telcos), announced that the NBN (National Broadband Network) project had not been abandoned, but would be pursued using the capabilities of our local telcos. But, in the same breath, the DOTC official who is virtually alone in undertaking the explanations, whether technical, legal, economic, or financial, Atty. Lorenzo Formoso, explicitly said that it will most likely cost even more than the contract amount in the DOTC-ZTE deal. Formoso is being projected as the expert on all four fronts, in fact, a virtual Superman.

After the meeting, I was able to call Atty. Rodolfo Salalima, Globe Telecom senior vice president and chief of its legal department, who decided that the best way to answer the questions I was asking him was to send a paper to me captioned “Government Broadband Network Project, An Initial Commentary by the Philippine Chamber of Telecommunications Operators (PCTO),” of which, I was told, Salalima is president.

While I was watching the television news report, I heard Formoso say that if we undertake this project via the telcos, the cost might even become larger than the US$329 million which has been subjected to what I think is the worst deluge of accusations of violations of laws, of scandalous briberies attendant to the signing of the contract, of the most grievous violations of the rules on transparency.

This statement of Formoso that the cost will be even higher than the P16 billion was immediately repudiated on television through a statement by the former dean of the UP School of Economics, Professor Raul Fabella, who was one of the two authors of the UP paper that, to my mind, destroyed the arguments in favor of the now notorious NBN-ZTE contract, from the economic standpoint.

I am very glad that the NBN project/contract with ZTE has been abandoned. I am also glad that this NBN project is being done through the private sector. This is the mandate of both R.A.7925 passed in 1995, which is the fundamental law governing telecommunications development in the country, and the E Commerce Act, passed in 2000. Both pieces of legislation mandate that the engines of sector development, growth and expansion should be the private sector.

For Assistant Secretary Formoso to say that, should the telcos implement the NBN, in spite of the existence of at least two backbones in the country, the project will become even more expensive than the $329 million that the DOTC had contracted with ZTE Corporation is, to say the least, misleading and unreliable.

In order to initially repudiate his statement, I was able to get the arguments of Prof. Fabella, which he very kindly put together, and are quoted verbatim below:

 “The DOTC still insists that the NBN facility procured through the ZTE with its associated China Ex-Im Bank soft loan will be cheaper than the facility being explored for procurement from local private telco companies, the latter being unable to avail of financing at three percent interest. The argument is then that this discount on financing is all that matters. Even the Marines would cringe at such attempted obfuscation.

“Firstly, the broadband network involves two components: the backbone and the last mile connectivity and interoperability. The ZTE contract includes both components. The NBN being explored with local telcos will include only the second. Why? Because there are already two privately-owned underutilized backbones. The NBN-ZTE modality is like buying a package of TV and home theater when all you need is the home theater since you already have two brand-new TVs in the house.

“The DOTC position gets sillier. Procuring the NBN through local telcos means these telcos will themselves raise the financing required. The government will not need to spend up-front apart from the end-point capability to receive and send digital signals and the service fees for the connection. This was presumably the purpose of the original allocation of P5 billion for the original NBN. The local providers will maintain the system, ensuring that it is a sustainable proposition and obsolescence is avoided. If the telcos can avail of financing at three percent, of course, their service charges will be somewhat lower than if they get financing at 10 percent. But will it be higher than NBN-ZTE’s? It would be naïve to think so.

“Think first of quality of service. If the locally procured NBN service proves substandard, the government can terminate its contract and move to another provider which is the essence of being a buyer of service. Or it can revert to status-quo ante. This market challenge is a safeguard against quality erosion. By contrast, the NBN-ZTE will be financed, owned and operated by the government, running a considerable risk that it will end up in the same graveyard as the ‘French Protocol’ and ‘Telepono sa Barangay’ in which case quality is zilch but we still owe $329 million. Even if it does not vanish, the quality will be so poor government will cease to use it. Witness Telof. Again we still owe $329 million.

“The NBN via local telcos will be procured in a transparent process and more importantly will be subject to market challenge. This will obviate the usual overpricing associated with non-transparent negotiated contracts as was the NBN-ZTE. The so-called three-percent soft-loan facility can easily be voided by overpricing. A 20-percent discount on a TV set overpriced by 40 percent means a 20-percent overspend. Suppose the TV set’s true market price is P100,000. A 20-percent discount on the true price means you pay P80,000 and save P20,000. A 20-percent discount on the same TV now overpriced at P200,000 means you pay P160,000 or P60,000 higher than simply buying it directly. The arithmetic of non-transparent negotiated contracts is dangerous because you never get to know the true price of the TV set without market challenge. Indeed, in the annals of ODA and soft loans, the three percent has been used as an opiate to blind the public to grand larcenies.

“As the government and the local telcos grope towards a delivery modality for the original NBN facility, let us hope that the principles of transparency, consumer sovereignty and market challenge will be scrupulously observed.”

(To be continued)

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Next week, I will feature the initial commentary of the PCTO with a statement from the president, Atty. Rodolfo Salalima.

Thanks for your e-mails sent to jtl@pldtdsl.net.