Now that the Bill of Quantities (BoQ) of the controversial ZTE National Broadband Network Project by the Philippine government has been released, I was asked to take a look and see what I make out of it. Here are my findings so far.
The Bill of Quantities is an annex of documents which outline the details of the project costing from the equipments to the services and trainings that will be undergone to implement the project. By checking and analyzing some of the data in there, we can make reasonable conclusions if the project were indeed padded or not.
First stop, the topology. This will illustrate how the network will be interconnected and with what. I’ve drawn a diagram below as best as I could to show how they plan to do it.
The primary line of transmission is via the NBN Backbone distributed thru microwave relay stations deployed nationwide. They will reach majority of the WiMax Base Stations and transmitted to the nodes (regional government offices, municipalities and barangays).
The secondary transmission is done via commercial networks — meaning, if the microwave relay stations cannot reach/cover a certain base station, they will hook them up via 2Mbps ADSL from local Internet Service Providers (ISPs).
The 3rd mode of transmission is via VSAT (Very Small Aperture Terminal, via Satellite Internet) which can get access up to 4Mbps to the WiMax base stations. This is a back-up plan for locations where there are no local/commercial broadband service and relay stations cannot reach. They’ve allocated 5% (or 15 of the 300 base stations) of the total base stations that might avail of this. This mode is the most expensive of the 3 in terms of monthly link charges.
Next, let’s look at the breakdown of the costing. The total contract price (TCP) of the project is pegged at $329,281,290 or about Php13.5 Billion at current exchange rates. This is broken down into two — Equipment Sales of $194,051,628 and Service Charges of $135,429,662.
The Equipment cost is further distributed as follows:
Transmission Backbone Equipment: $47,649,037
Regional WiMax System: $82,077,545
IP Backbone Equipment: $15,510,251
VoIP System: $15,175,887
DC/NOC Equipment: $8,977,882
Information Security system: $6,743,012
Monitor & Environment Equipment: $3,532,877
Uniform NMS: $2,143,540
DC Power & Diesel Generator: $11,505,187
Total Price: $194,051,628
It’s very hard to determine if these equipments were overpriced. Some of them, you can’t even search on the internet — like those Microwave transmitters carrying 4 x E1 to 16 x E1 connections which costs between $1.2 to $4.5M each according to the BoQ. So, I looked at a few samples which we can obviously compare to current market prices.
Office Printer : 1 set @ $804.20
Desktop Computer : 1 set @ $2,055.94
Laptop Computer : 1 set @ $3,440.56
Basic E1 Tester : 5 units @ $7,128.41
MS SQL Server 2005 Standard Ed. : 1 CPU License @ $6,797.73
These items, though a bit pricey, are still within tolerable reasonable levels considering 2007 market prices. I searched on eBay for an E1 Tester and saw one at $3,500 and the current 1 CPU license for MS SQL Server is $5,999 according to the Microsoft website.
Then, I looked at connection/link charges that were included in the pricing:
Manila IDC: 100Mbps/155M SDH Link = $30,000/month
Regional PRI to PSTN: E1 $500 x 43 = $21,500/month
Regional Sites DSL: 2MB/128K CIR @ $80 x 300 = $24,000/month
VSAT: E1 (2Mbps) $7,000 x 15 = $105,000/month (est. 5% of total)
That brings the annual connection cost of $2,166,000. The ZTE contract price includes this for up to first 3 years only ($6.5M). That means after that, the government will have to shoulder it back again. Commercial price of an E1 connection is at $500 and the $80 for a 2Mbps DSL with 128Kb CIR (committed internet rate) seemed normal. The VSAT is obviously very expensive considering it will probably only cover 5% of the total base stations.
So far so good. Now, we look at the breakdown of the Services cost:
Site Prep & Civil Works: $48,571,040
System Implementation & Engineering: $20,607,490
Site Engineering for Remote Office Site: $28,686,840
Service for IDC Construction & Integration: $8,287,281
Joint Project Management Office: $5,995,000
Link Charges: $6,498,000
Training: $1,948,505
Managed Services: $14,875,507
Total Price: $135,429,662
The problem with service costing is that there are no standards and they’re mostly priced arbitrarily. I find it rather interesting that for a huge infrastructural project such as this, services take up 41.1% of the total cost. Take for example the training cost ($1.95M) — it will take $1.3 M to bring 20 people to China to train how to run the Microwave/WiMax equipments. Each course costs an average $12,000 per person. Likewise, they will spend another $600,000 to train 40 people locally on the same courses. I thought if you buy some sophisticated equipment, the vendor will train someone from the buyer how to operate it for free?
So, what’s the verdict? Let me qualify this by answering specific questions.
Is the ZTE proposal a sound strategy for a national broadband plan? IMO, it looks like it. They’ve maximized the WiMax implementation, coupled with local ISP connectivity and a VSAT backup. I think this approach is practical and cost effective in itself.
Does the NBN Project really cover 100% of the country as it claimed it can? Yes, it can — the VSAT backup practically guarantees that.
Is there overpricing in the hardware/equipment costs? Nothing too obvious nor significant — my sample comparison of some listed items with market prices turned out reasonable.
Is there overpricing in the services component? I cannot categorically say ‘yes’, but there’s some semblance of it. Besides, service charging is mostly a guesstimate so you can fairly say that they’ve somehow padded these prices a bit. If by how much, I cannot say. Only way to calibrate that is by asking 2 other suppliers to send in their costing for the same project.
So, where’s the catch? Here’s my theory. This is not your ordinary “where’s my cut” type of underhanded deal where suppliers bid for government projects with overpriced materials like a Php20,000 toilet seat or Php1,500 for an ordinary broom. That’s so amateurish.
For huge projects like this, the “payouts” are drawn from wholesale discounts. So, instead of say a 30% discount to nab the deal, they’ll charge in full and re-allocate the 30% corporate discount to the pockets of those who will guarantee the approval of the project. Incidentally, a 30% discount amounts to $100M so it’s not a bad deal after all, if that were the case. That way, the Bill of Quantities will still pass thru rigid scrutiny.
Note: There are so many other stuff I haven’t covered here, esp. the details. You may download a copy of the Bill of Quantities here so you can see it for yourself and make your own personal assessment.
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4.final discussion or solution
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I’m spending the weekend with my parents, who flew in from New Brunswick on Wednesday, my brother who recently came back from Texas, and my boyfriend! We’re going to check out a huge new mall and go out for dinner tonight, then relax tomorrow.
Bumili nalang sila ng isang set na PC then lagyan ng printer.. tapos magpakabit ng internet.. tapos.. haha..
kasi ganun din naman lagi sistema nila eh.
BOQ or bill of quantities will surely not show the overcharging of a project cost, definitely for large projects as the author mentioned, they pay the “representation fees” via the vendors’ pockets. the invoice for sure is somehow reasonable, but the vendor will cut down their own profit ie from 30% to 25% just to accomodate the 5% to the client representatives. Thats how the business works.
BOQ also allocates, unexpected or cost variations, if their are changes in the current or ongoing project, this will also be charged to the government, that is why main contractor are very confident to shell out money for the meantime, and in the long run, these variation costs (which reflects the current prices including the overhead expenses will cover the cash outs from initial stages of the project)
Should be the auditor scrutinize the prices, he/she will find nothing in that case, but there should be strict and well scoped contract terms and agreements to avoid corruption.
I wouldn’t agree with you more Dave. It seems all of the post were focused on specific equipments and certain contract prices but none of it were able to question the value of those equipments, contracts, trainings if its really important or worth it.
“The entire NBN project is a solution in search of a requirement … “—this is so true!
Instead of the government build its own infrastructure and invest on it and take revenue for services after, they would rather buy something outside and increase more country’s debts (although theyre claiming zero expenses). Philippines has enormous resources and talent and even budget if spent well to invest in such engineering feets…we just need to wake up and make things happen.
Sorry I haven’t got around to reading this until now, Abe. Good of you to post/discuss it, since almost all discussion anywhere else just focuses on personalities or politics.
There is a basic flaw in the whole idea that needs to be re-thought. I have 20 years expereince moving government microwave networks back onto commercial fiber and microwave backbones. It sounds enticingly cheap for a government to buy microwave backbone equipment and set up their own ‘pipes’ without paying charges to PLDT and their cohorts. The US did it for years … nearly 10,000 miles in Japan/Korea alone.
By properly negotiating contracts with commercial carriers we moved nearly every mile of this onto commercial connectivity and saved millions of dollars per year in maintenance cost, even after subtracting the connectivity charges by the carriers.
This plan, sad to say, is based on 40 year-old thinking and in some cases 40 year-old technology … buying channelized equipment, like T-1 or E-1 components is dark ages stuff … you don’t need anything like 64 kbps channels for voice today. Building a network like the NBN is currently envisioned would cripple the government with operational costs even if the network itself was free to build.
The entire NBN project is a solution in search of a requirement … it really needs to go back to the beginning and determine what the needs of the government actually are rather than proposing a juggernaut of a technical solution. When you let the department of forestries and a cable TV marketing exec determine a country’s communications future, your have a problem, ZTE, JDV or any other entity notwithstanding.
I just watched the special on GMA about the NBN – ZTE deal. With everyone pointing fingers at each other I doubt things will get resolved anything soon and while everyone’s too busy covering their own a$s we get to watch the country tumble.
*sigh*
Interesting. I wonder how they would achieve peering with commercial providers, given the previous attempts in that field.
The architecture, at first glance, appears sound and achievable. Note, though, that there are already precedents for this: PREGINET, DA VSAT, etc. Boosting the TELOF infra will help. But… remember “Telepono sa Barangay”?
Lyle, I happen to visit one of the offices in DFA last year and saw this huge, centralized, network printer being shared by people in the whole room. Instead of getting each desk a cheap, sub-Php5k printer, they got a high-performance network printer serving the whole department.
I’m not arguing here that they should get a cheapo 2-page per minute printer instead of a high-performance 15-page per minute network printer. I am merely pointing out that the $804.20 budget is within a commercial range of HP’s printer line-up $179.99 to $2,799.99. In short, if they got an HP Laserjet printer for $804.20, the price is just right within current market figures. In essence, the figure was not padded.
It’s a different thing if they listed there an Epson LX 300 (that slow ribbon printer) and put a price of $840.20 when we know the market price for such printer is just $80. Now there’s the clear padding of prices.
Then again, I’m pretty sure that this single printer will not be used by a government office. This printer, laptop and PC will be used by the engineers during the implementation period. If it were for a government office, I don’t think they’ll buy just 1 unit.
“B&W Business HP Laserjet Printer costs between $179.99 to $2,799.99.
An HP Pavillion dv2700t is around $2,500 (fully upgraded)
An HP Compaq PC Desktop dc7800 Series costs between $800 – $2,500, fully loaded.
I believe this *single unit* will be used in the Remote Office during implementation. These will not be bulk orders for each offices.”
So are you saying that our goverment offices are that high-tech that a sub Php 5,000 office printer won’t do the job?
Come on, we’re talking about government offices here.
@ edwin, it’s the same as any vendor (say competitor Huahwei) so I discounted that marketing aspect. And it’s hard to put a solid price there. If you look at the BoQ, not all materials will come from ZTE. There are microwave transmitters, sensors, UPS, generators, McAfee softwares, cables that are quoted by other 3rd party vendors. I was not able to further break them down which ones came from ZTE and which ones came from other vendors because pages of the BoQ docs were blurred/unreadable.
I did not end up with a solid conclusion because I don’t have 3rd party evidence to say the service prices were padded by how much.
Go back and look at the topology again and you will see that commercial operators are still a major part in the network. Majority of the cost in the equipments will go to microwave transmitters and WiMAx base stations.
You need to take a look at the BoQ again yourself to see the nitty details and breakdowns.
Download it here.
quote:
Is there overpricing in the hardware/equipment costs? Nothing obvious nor significant — my sample comparison of some listed items with market prices turned out reasonable.
You failed to point out that ZTE manufacture those products. And the plus side is what? Even if they sold this at negative or zero profit they earned a free marketing material that everyone will say ZTE. That’s more profitable than what they are getting from us filipinos.
quote:
Is there overpricing in the services component? I cannot categorically say ‘yes’, but there’s some semblance of it. Besides, service charging is mostly a guesstimate so you can fairly say that they’ve somehow padded these prices a bit. If by how much, I cannot say. Only way to calibrate that is by asking 2 other suppliers to send in their costing for the same project.
Site Prep & Civil Works: $48,571,040
System Implementation & Engineering: $20,607,490
Site Engineering for Remote Office Site: $28,686,840
Service for IDC Construction & Integration: $8,287,281
Joint Project Management Office: $5,995,000
Link Charges: $6,498,000
Training: $1,948,505
Managed Services: $14,875,507
Total Price: $135,429,662
take a look at system implementation and engineering. HOW MANY ENGINEERS DO YOU THINK IT WILL TAKE TO CONFIGURE THOSE ROUTERS AND SUCH? The things should come pre configured from china. Plus remote access cost 20m? and link charges? 8million? why would they ask for link charges IF THEY ARE ALREADY CHARGING FOR IMPLEMENTATION? and links from what? :)
Plus The network design is a security nightmare from the start. Government Network piggy backing the internets!?!?! I dont presume being even adept at security but common sense requires to be used at a times like this.
lastly that alan tan is an idiot. please use common sense next time before posting anything. or better yet ask somebody who knows a little bit about the price difference from buying in VillMan from buying in gilmore and buying directly from a supplier to buying directly to the factory who made that stuff.
Guys, brian gorrell’s blog is up and he’s getting really good at it.
excerpt:
“Because you are just another carbuncle on Manila’s ballast tanks.”
” I thought if you buy some sophisticated equipment, the vendor will train someone from the buyer how to operate it for free? ”
Well in this case as if they have asked for a big discount price for the equipment.. That is why equipment manufacturer opt not to includ this item in their price..
Your post was indeed a great source of information.
Well if there is a padding in this kind of contract it will always be at at the engineering side of the project. This is where nobody can question since this is not physically visible.
Forget about the columns of an obviously paid hack like Mr. Jarius Bondoc. And to hell with the theatrics of the adulterous thief Mr. Jun Lozada, and the addle-brained Mr. Joey de Venecia. To truly and soberly assess if there was overpricing in the contract, the Senate should have brought in techies to assess the Bill of Quantities of the contract. That Messrs. Cayetano, Lacson, Escudero and Madam Madrigal did not do so was intentional – they would not have gotten any publicity mileage and their destructive partisanship would have tripped them up to the Filipino people.
At last, an honest look at the pricing of the contract. Although not totally conclusive, it shows that the dunderheads at the Senate have been making fools of the Filipino people all along. All of them should hang by their balls a million times over!
Thanks for this post.
ZTE Phone enters US market.
http://www.cellphones.ca/news/post002981/
Normally I would brush off articles regarding the ZTE controversy mainly because nagsasawa na ako sa mga useless news about it. But yours is worth reading Abe. Great job on breaking down the prices. The costs of services looks very jacked up to me. Also, your bulk discount theory is top notch.
I just can’t believe how these politicians sleep at night. Or do they?
B&W Business HP Laserjet Printer costs between $179.99 to $2,799.99.
An HP Pavillion dv2700t is around $2,500 (fully upgraded)
An HP Compaq PC Desktop dc7800 Series costs between $800 – $2,500, fully loaded.
I believe this *single unit* will be used in the Remote Office during implementation. These will not be bulk orders for each offices.
What kind of printer does a government office need? $804.20 or a whopping Php 32,168.00 for a government office printer is hardly reasonable in my opinion.
The laptop and desktop units are also somewhat expensive for a government office. Can’t generic computers, which will only cost Php30,000 or below, meet their (government) needs?