NBN: The devil hides the detail

The devil, it is said, is in the detail. Unfortunately for us, our senators and journalists have not shown much resolve in examining details, maybe out of plain incompetence or laziness. In this case, too, it is the devil herself hiding the detail.

When I first learned that the NEDA had refused the Senate’s request for the NBN documents, I couldn’t believe it. After the initial denial, I wanted to puke. I was so mad that for the first time this year, I honked my horn on the way to Greenbelt to watch a film in the Spanish movie festival. And I was doing 80 instead of my usual wimpy 60 kph.

You may not know it but the documents requested, at least some of them anyway, had already been made available to the media and posted in at least one website. I’m referring to (1) the minutes of the joint NEDA-ICC cabinet committee and the ICC technical board held March 26, 2007, and (2) the evaluation report of the NEDA infrastructure committee dated March 29. .

In a previous post, I pointed out that even these two documents in themselves constitute the smoking gun in the allegations of scandal in which the president was a willing conspirator, at worst, and as an accessory at best. Let me now explain in greater detail.

During that joint meeting, the ICC secretariat presented to the members a status report on the the NBN project . In the form and substance it had been presented to the last meeting, the minutes said, the NBN, covering the needs of national government agencies and city and municipal branches, and 23,549 elementary and high schools in the country’s first and second class municipalities, the whole project would have an economic internal rate of return (EIRR) of only13.01% Because the hurdle rate of NEDA is 15%, the NPV was a negative (-) P1.58B ), clearly a no go. Also, the Chinese government had indicated that it would not fund the connectivity to the schools, and the alternative to be explored was to replace the connectivity to 23,549 barangays (no mention in which cities and municipalities) and the NPV would be P652.13M and the EIRR would be a marginally improved 15.8%.

Recall that during the Senate blue ribbon hearings, Neri had asserted that the project, regardless of modality and financing sources, had an NPV more of than P10B and an EIRR of close to 30%.

IN any case, the presentation of the secretariat’s ended with the following recommendation:

In line with the government’s thrust of promoting digital infrastructure development for provision of ICT services across the country to address the digital divide, the Secretariat favorably recommends the project subject to the resolution of the above issues, especially on the replacement of school beneficiaries with barangay offices.

Three days later (!), the infrastructure committee of the NEDA-ICC issued its report. With the figures cited by Neri in the Senate hearings. But first, let me discuss what transpired after the presentation of the secretariat.

“Neri noted that the terms and conditions for the proposed loan for the project are not as concessionary as those for other Chinese-assisted projects such as the Northrail and the CEP projects. With an annual interest rate of 4% and repayment period of 10 years, inclsuive of 3 years grace period, Secretary Neri added that the terms are actually almost commercial.”

On project costs

Secretary Neri noted that among the alternatives being presented by the Secretariat were one in which the schools not covered by the CEP were considered, and one which excluded said schools. He inquired on whether school site engineering cost amounting to almost P1.4 M will be dropped in the event that the schools will be dropped from the project. He also sought clarification if the expense would be the same if the barangay offices, instead of the schools, are considered the project beneficiaries. The Secretariat confirmed that the site engineering cost will be dropped if the schools are excluded and that the cost would be the same if the barangay offices, instead of the schools, are considered as project beneficiaries. (Note that the locations of the schools and the barangays are not in the same geographical area.

On economic benefits

Secretary Neri inquired on how savings will be generated as a result of the retirement of old equipment. The Secretariat clarified that savings will be generated as the proponent will no longer have to buy expensive and non-readily available spare parts for the old analog system, as well as eliminate the cost for regular site inspection/network trouble-shooting and the required manpower due to the computerized /automatic network management feature, thereby resulting in savings in terms of operations and maintenance costs. The Secretariat added that the old eqipment will not be sold and in fact some of them will still be used .

Secetary Nery sought clarification on how VoIP savings translate into benefits for the government. The Secretariat replied that with the project, the government will reduce its fixed line subscription by as much as 50% and its fax and mobile phone costs by about 80%.

With regard to Secretary Nery’s inquiry on how the benefits resulting from having a centralized IDC are quantified, the Secretariat explained that the IDC can host all government applications software and databases. Thus, eliminating individual data centers and corresponding O&M costs.

In the March 26 meeting, there were a number of issues left hanging as indicated by the following:

1. The terms of the projected loan from the Chinese government as pointed out byh Neri;
2. Skepticism over how the savings were calculated. In the project evaluation report by the Infrastructure staff, the savings were in fact referred to as assumptions and not as best estimates or calculations. How can these be included in an economic valuation?
3. Finance Secretary Gary Teves asserted that the project as represented had to be clarified with the president because, in his own understanding, the president had a different concept.
4. DOF Undersecretary Paul had doubts about the projects consistency with existing policy.

Yet, in the Infrastructure staff report of March 29, the EIRR had shot up to 30% from the 15.8% initially presented in the March 26 meeting. This is clearly a case of underestimating costs and bloating the benefits to maximize the attractiveness of the project. Let me just focus on the projected benefits in the NEDA infrastructure staff’s spreadsheet calculations:

1. The savings from foregone operation and maintenance costs of the old DOTC equipment were included throughout the project life, at more than P500M per year for 15 years. As I asserted in a previous post, only the mentally retarded would count unnecessary MOE as savings when the system would have been useless in the near future anyway. If you have a car which will have to be discarded in a year or two, you just decide to stop using it period, and this decision is not related to your buying a new car later.
2. The savings from VOIP/landline/mobile subscriptions and internet connections are dubious, to be kind. As I’ve said, the NEDA infrastructure staff, taking DOTC figures at face value, referred to these as assumptions and not as rigorous estimates.
3. As for the internet connection savings, I noticed that these were assumed to decrease by 5% annually to reflect both greater competition and technological progress. Five percent? Just this year alone, I saved more than 50% by switching from Pacific to Sky DSL. In his Senate testimony, Neri lamented the fact that commercial broadband costs in the country were as much as a multiple of a hundred to costs abroad. If he had properly studied the calculations of his own staff, he himself would have concluded that the broadband service savings are ghost benefits, especially if Neri believed that the system can be improved with better regulation and freer entry.
4. In the meeting of March 26, Neri was uncomfortable with the 4% interest indicated by the Chinese government. Yet, in the NEDA infra staff evaluation, the loan interest was assumed to be at a maximum of 3%, a 25% reduction.

In short, the real and final question is, what happened between March 26 and March 29, when so many basic and controversial questions were resolved by the infra staff ?(hint: the Senate should ask Ruben Reinoso to testify; there might even be no further need to hear from Neri).

During the Senate hearings, Neri was asked if there was anything irregular in the time lapse between the economic evaluation report and the final NEDA board approval on April 20. He replied that this was not unusual. Except that April 20 was the eve of the signing of the contract in China, witnessed by the president herself.