Cabinet split on cost, benefits of NBN, overlap with CyberEd

EXCLUSIVE: They projected a united front at the Senate on Thursday but official records show that big policy issues about the National Broadband Network (NBN) project -- financing cost, benefits, rationale, and overlap with the Cyber Education Project (CEP) -- split Cabinet members of President Gloria Macapagal Arroyo, until a week before she approved the award of the deal to China’s ZTE Corporation. And before the issues could be settled with finality, with apparent haste and according to terms of the loan offered by the government of China, Mrs Arroyo approved the NBN project as chair of the National Economic and Development Authority (NEDA) board. On March 29, 2007, the NEDA board approved the project, just three days after the contentious "special joint meeting" of the NEDA Investment Coordination Committee, Cabinet Committee and Technical Board, on March 26, 2007. Signed on same day? Three weeks later, on April 21, Transportation Secretary Leandro Mendoza signed in China the $329-million “provisional contract" with ZTE. On the same day, Trade and Industry Secretary Peter Favila signed, also in China, an agreement for a separate China government loan of $504-million (P22.77 billion) for the CEP. Also on April 21, Mrs Arroyo flew to China for a few hours to attend an economic forum in Hainan province, while her husband, First Gentleman Mike Arroyo was recovering in a Quezon City hospital, from heart surgery. (Six months earlier, in October 2006, Mrs Arroyo also visited China and played golf with officials of ZTE Corporation, according to Speaker Jose de Venecia's son, Joey de Venecia III, who owns the company that lost the bid, Amsterdam Holdings Inc.) Among the big issues about the NBN deal that split the Arroyo Cabinet, then Economic Planning Secretary Romulo Neri pointed out: • The terms of China’s loan for the project “are actually almost commercial." • “A basic overlap" between the NBN and the Cyber Education Project funded by another China government loan that cost “around P4 billion to P5 billion." • “The definition, quantification and computation of the project benefits." In addition, the Cabinet officials at the March 26 meeting questioned: • “The rationale of government venturing into the project despite private sector provision of similar services." • The NBN’s “advantages over CEP." • “Whether the Chinese are capable of providing 4G technology given that China is still in the process of developing its 3G technology." These policy differences were spelled out in minutes of the joint meeting of NEDA Investment Coordinating Committee, Technical Board and Cabinet Committee held at the Department of Finance office in the Bangko Sentral compound in Manila. 44 attended meeting Finance Secretary Margarito Teves presided over the meeting attended by six Cabinet secretaries, four undersecretaries, a BSP director, and 33 other executive officials and staff personnel. Curiously, just a week earlier on March 19, 2007, the minutes cited that the CEP or Cyber Education Project had just been approved by the NEDA ICC. “The main objective of the CEP is to accelerate the provision of equitable access to quality education through the use of Information and Communication Technology, which will involve the use of satellite-based interactive facilities intended for real-time broadcasting of instructions/lectures," the minutes stated. Education Secretary Jesli Lapus, in earlier reports, affirmed that CEP will cost the government P26.48 billion, of which 86 per cent or P22.77 billion will come from a separate loan from China. Lapus said the CEP loan agreement was signed by Secretary Favila for DepEd and Dr. Kang Ke Jung of Tsinghua Tongfang Nuctech Co. in Boao, China, on April 21, 2007 – the same date of signing reflected in the “provisional agreement" on the NBN deal with ZTE Corporation. The minutes of the March 26 meeting of the NEDA ICC, Cabinet Committee and Technical Board showed that the preferences of the government of China prevailed in the discussions on the NBN, despite concerns by some Philippine officials about its economic viability. For instance, the minutes stated: “Assuming the NBN project will only cover the above allocated 4,282 schools (per CEP proposal), the project will no longer be economically viable, with a computed economic NPV (net present value) of negative P1,581.45 million and EIRR of 13.01%." China's wishes It continued: “However, there was an earlier indication from the Chinese government that it will not fund the components of the NBN project which cater to e-education component." This preference of the Chinese government prompted local officials to shift the NBN’s focus on barangays as beneficiaries. “In this regard," the minutes stated, “instead of catering to schools, the NBN may provide coverage to barangay offices." Thus, “with the assumption of barangay coverage for NBN project of 23,549 barangays (about 56 percent of 41,982 total barangays and 2,000 NGA (national government agency) offices, the economic NPV of the project is computed at PhP652.13 and an EIRR of 15.8%." Project Evaluation Report It must be noted that in a separate “Project Evaluation Report" that NEDA produced on March 29, 2007, the NEDA judged the NBN as “economically viable" in light of “adjustments and assumptions." Apart from a longer loan repayment schedule, and reduced interest rate of 3 from 4 percent per annum, one other adjustment made was the increase in the number of national government agencies to be covered, from 2,000 to 2,295 listed in the March 29 report. The cost of overlap between the NBN and CEP was also a major point raised by Neri. But this results mainly from the terms of the separate loans from China for the two projects – that the Chinese government made known in communication from its embassy in Manila. In the March 26 meeting minutes, Neri was said to have noted that “the Chinese Government’s position that the NBN and the Cyber Education projects be treated separately." Chinese embassy letter “He (Neri) added that while the Chinese Embassy, in a letter, expressed readiness to show flexibility should DepEd and DOTC reach an agreement, Secretary Lapua has already indicated his preference that the CEP network be dedicated to education. Secretary Mendoza, he shared, has also expressed readiness to remove the schools as part of the NBN project design." The minutes continued: “Secretary Neri noted the basic overlap seems to be in the antenna. The CEP antenna, he added, would be basically satellite-based, and with limited Internet capability." But “the ZTE antenna, on the other hand, will have multiple applications and in fact, maybe (sic) used to complement the CEP antenna once the schools require full internet access." The cost on the government of this overlap is huge – it amounts to about one-third of the entire NBN project cost. “The cost of this overlap," Neri said in the minutes, “is around PhP4 billion to PhP5 billion." As of March 26, 2007, or three weeks before the "provisional contract" with ZTE was signed, the ICC-Cabinet Committee and Technical Board of NEDA had serious doubts about the "economic viability" of the project. Too, they wanted to be further assured that it would be good for the government to have its own backbone, rather than use private sector services. The minutes prodded the DOTC "to refine the NBN proposal" to shore up its "economic viability" values. In particular, the minutes recommended that DOTC do the following: * "Alternatively develop its application to the 23,549 barangays, instead of focusing on schoolbuildings, thus refining DOTC's estimated economic benefits of the NBN project. This is expected to improve the economic viability of the project (estimated at least with a NPV of PhP0.7billion, EIRR of 15.8%." * "Pursue concessionality of the proposed Chinese financing at least to that provided for DepEd's Cyber Education Project;" and * "In relation to the available broadband services from the private sector, establish clearly the public sector savings of having such a government backbone by not using private sector providers, as well as indicate cost-recovery measures, where applicable." Longer loan payment sked Just a few points differed in the project documents between March 26, when the ICC-Cabinet Committee and Technical Board met, and March 29, when the Project Evaluation Report was released by NEDA. In the March 26 minutes, the project cost was explained thus: "The foreign component amounting to P18,999,32 million (US$379.99 million) is proposed to be financed through an Official Development Assistance from China (i.e., Concession Buyer's Credit of Chinese Government with a 10-year term, including 3-year grace period and 7-year repayment period)." "The loan interest is assumed to be at a maximum of 4% p.a. (per annum) and the principal amount of the loan will be repaid in 14 equal and consecutive semi-annual installments, the first one falling due 3.5 years after the first drawdown under the loan agreement," the minutes stated. The local counterpart "amounting to P397 million" refers to "the costs of the management team from DOTC that will be dedicated to the NBN project (at PhP99.25 million per year for the 4-year implementation period to cover personnel, office expenses, travel expenses, among others)," the minutes said. On the other hand, the March 29 Project Evaluation Report of the NEDA stated that "the total project cost is estimated at PhP16,474,06 million, no local components required." "The total project cost amounting to P16.47 billion (US329.38 million) is proposed to be financed through an Official Development Assistance (ODA) loan from China... with a 15-year term, including 5-year grace period and 10-year repayment period," the March 29 report stated. "The loan interest is assumed to be at a maximum of 3% p.a., and the principal amount of the loan will be repaid in 20 equal and consecutive semi-annual installments, the first one falling due 5.5 years after the first drawdown under the loan agreement," the report continued. Instead of a "local counterpart fund," the March 29 report referred to a a "project management cost" that amounts to "PhP298 million (that) is included in the loan amount." "Project management of P99.25 million per year for the 3-year implementation period will cover the personnel, office expenses, travel expenses, among others," the March 29 report said. – GMANews.TV Editor's Note: GMANews.TV obtained a copy of the minutes of the March 26, 2007 meeting stamped as "confirmed minutes" on April 25, 2007, from official sources in NEDA. The editors repeatedly tried to secure the comments of Secretaries Romulo Neri and Leandro Mendoza, and Assistant Secretary Luis Formoso III. Neri and Formoso refused to answer phone calls, while a deputy said Mendoza would rather have Formoso answer our questions. At 6:30 p.m., his staff said Formoso was on his way to the DOTC for a meeting with Mendoza.