Wednesday, September 19, 2007

National Broadband Network (NBN) Project Contract with ZTE: Preliiminary Analysis

The Inquirer Online has made available a scanned copy of the 39-page contract here. The price (in US Dollars) is broken down as follows:

Price of NBN Contract with ZTE
Contract ComponentPrice (US Dollars)
Engineering Services118,605,650
Managed Services14,875,507

Here are my preliminary observations, in particular, with regard to what is *not* included in the above price:

The price (as indicated above) and quantity of equipment delivered is subject to change upon mutual agreement between the contracting parties as indicated in Article 5 Bill of Quantities (BOQ):
"...The Priced Bill of Quantities shall be revised in accordance with the actual requirement of the project to be determined and approved by the Purchaser and the Contractor during the detailed engineering stage..."
As far as the Managed Services portion of the Contract is concerned, this only covers 18 months as stated in Article 6: Managed Services:
"...The Contractor shall provide the Managed Services to the Purchaser in respect of the Network for a period of one year and a half ('form of the Managed Services') commencing from the issuance of the Provisional Acceptance Certificate, provided that the contractor has received the advanced payment set out in Article 8.4.1 herein..."
That means that the cost of operating and managing the equipment and facilities after this 18 month period is over has not been not factored in. The above price also does not include any taxes or duties to be paid locally as stated in Article 9 Section 9.1:
"All taxes, import or customs duties and other taxes and duties, including without limitation VAT and Income tax in connection with or in respect of the performance of this Contract levied by the relevant authority in the Republic of the Philippines shall be borne and paid by the Purchaser."
Maintenance after the Warranty Period is also not included. The Contractor (ZTE) is given the option to provide this service as stated in Article 29 Post Warranty:
"The Contractor may, upon payment of mutually agreed prices, provide maintenance and technical support to the Purchaser in respect of all the Equipment and Services for at least three (3) years after the expiry of the relevant Warranty Period. The said post warranty services may include repair of boards, PC boards, and other components, modifications of the Software, supply of spare parts, and other maintenance and operation support required by the Purchasor."
Given the above exclusions to the price, it is unclear whether the contention of former CICT head Ramon Sales before the Senate that the "ZTE proposal would have reduced costs by 1 billion [pesos] a year from 4th to 20th year, saving 17 billion [pesos]." can be supported. The numbers for these items must be included in the computation of overall costs in order to determine either way.

Unfortunately, the Attachments detailing the Equipment, as well as the Scope of Engineering Services and Managed Services to be rendered are not available online so no further analysis can be done at this point. These are also part of the Contract and IMHO, the interesting stuff would be found there so i hope these are made these available online as well.

Update Sept-26-2007 11:56PM: From today's Senate hearing, there is a request to restrict access to the annexes. As per Manolo's liveblog transcript:
"Roxas: There was a compliance with information request pertaining to annexes of ZTE contract. Some requests for confidentiality and/or restricted access made, will be taken up by committee in caucus."
Why am i not surprised?

Housekeeping Update Oct-04-2007 2:28AM: A link to further discussions last Sept 21 (mostly with blogger Manilabaywatch) over at Manolo's.

Update Oct-04-2007 12:27PM: Senator Alan Peter Cayetano has decided to postpone the hearings under suspicious circumstances. On a brighter note, Senator Lacson has called for an autopsy of the cancelled contract.


MBW said...

Hi Chuck,

Taking a peek here before I hit the sack.

That's a good thing to do: analyze the contract.

I'm going to download it sometime this week and send a copy to one of my ex colleagues, an engineer friend, who handled the company's proposal for a similar project to RP govt.

Will be good to compare.

MBW said...


Browsed through the first few pages of the Inquirer copy but all of them were so blurred - unreadable (or at least to my eyes).

How did you do it? Maybe I need a bigger screen - will have to do it at home.


cvj said...

Hi Anna,

Yes, it would be good to benchmark against other similar contracts. I hope the Attachments can be made available online as well because what is in the Inquirer site is just the main body.

In order to read the blurred copies, i had to download them to my PC and open the jpeg files with Microsoft Photo Editor so that i could magnify to a larger size.

Anonymous said...

If you click the the image, you can view the enlarged, zoom image. Fills my whole screen and is quite legible.

cvj said...

Anonymous, i see what you mean, i clicked on the 'zoom' icon and the image would fill the screen. Thanks for the tip.

mschumey07 said...

We all know how technology becomes obsolete after 5 years and this loan runs for 25 years. So in 5 yrs., what ZTE supplied as will be old technology. What behooves me is why bank on the length of the loan when we all know the project's life is only 5? Why create a new backbone when an existing one needs only upgrading?

Just like the Northrail, the system China will supply as are obsolete. I believe this is the system they'll be phasing out due to their massive railway updating. The system we will be getting is more than 35 yrs. old.

And Gloria thinks we will be a 1st world nation in 10 yrs., not by a long shot.

cvj said...

Schumey, that's true. Although the underlying cabling is usually designed to be used for 15 years, the network equipment is usually refreshed every three to five years.

The Senate should demand that the annexes which detail what is to be delivered be produced. That will enable us to tell whether JDV3's allegations of overpricing is true or not.

Anonymous said...

Gloria should ask other nations to submit a proposal - only way to see if this ZTE thing is not grossly overpriced.

mlq3 said...

chuck, this is up your alley. do youyou think you can make a chart of zte's stock price over the past few weeks, with lines indicating when news broke of the hacking into the berlin, whitehall, and pentagon servers? and when the manila story began to play out?

then we can see if manila's had an impact on the share price.

cvj said...

Hi Manolo, ok i'll see what i can do.