Philippine-China Summit Dominated by Scandal

UNCLAS SECTION 01 OF 02 MANILA 003340

SIPDIS

SIPDIS

STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA
STATE PASS EXIM, OPIC, AND USTR
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE
TREASURY FOR OASIA
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN

E.O. 12958: N/A
TAGS: EFIN ECON PGOV RP CM
SUBJECT: Philippine-China Summit Dominated by Scandal

Ref: Manila 2456


1. Summary: Philippine President Gloria Macapagal-Arroyo reportedly
spent much of her October 2 meeting with Chinese President Hu Jintao
explaining bribery allegations that forced her to cancel a $330
million national broadband network contract and suspend other
projects funded by China (reftel). Philippine media coverage of the
summit concentrated almost entirely on the ramifications of the
scandal, and the government has been distracted from other issues.
Given the importance of China's economic assistance to the
Philippines and growing trade and investment ties between the two
countries, both sides are trying to put the scandal behind them.
However, the scandal could drag on for some time and further tar the
Arroyo administration. End summary.

Allegations of Corruption and Improper Influence
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2. Allegations of Philippine Government officials' illegal conduct
and bribery offers have tainted the $330 million suppliers' contract
for a government National Broadband Network since it was signed in
China in April. These allegations snowballed in recent days after
lengthy testimony during senate hearings that implicated the
Commission on Elections Chairman Benjamin Abalos and also detailed
possible intervention in the deal by President Arroyo's husband Jose
Miguel "Mike" Arroyo.


3. Last week, former National Economic and Development Authority
Secretary Romulo Neri told senators that Commission on Elections

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Chairman Benjamin Abalos had offered him 200 million pesos to
expedite the project review process for a proposal by China's
state-owned Zhong Xing Telecommunication Equipment (ZTE) Corporation
to build a "National Broadband Network" in the Philippines for use
by Philippine government agencies. Neri testified that he reported
the bribe attempt to President Arroyo, who instructed him to reject
the bribe but approve the project. The head of a rival broadband
company (the son of House Speaker Jose de Venecia) earlier testified
that Mike Arroyo had demanded him to withdraw his own company's
broadband proposal. In the face of likely impeachment proceedings
by the House of Representatives, increasing public outcry, and
eroding support from senior Government officials, Abalos resigned
his position on October 1.

Emotional Outburst Directed at Chinese
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4. The testimony before the Philippine Senate last week was also
notable for Senator Miriam Santiago's (Chairman of the Senate
Foreign Relations Committee) emotional outburst that "the Chinese
invented corruption for all human civilization," for which the
Chinese Embassy demanded and received an apology. Several observers
have told us that Senator Santiago's statement, while inappropriate,
accurately expressed a widespread Filipino belief that Chinese
businesses frequently use unethical business practices. During the
testimony, one Philippine newspaper published a column contrasting
the perception of unethical Chinese business practices with the
perception of honest American companies, which included a favorable
explanation of the U.S. Foreign Corrupt Practices Act.

Damage Control
--------------


5. The Arroyo administration has struggled to contain the damage by
forming a panel to review all Chinese government-funded projects in
the Philippines and putting on hold the broadband project, a cyber
education project, and two large agricultural projects. On October
2, Arroyo announced from Shanghai that the broadband contract with
ZTE would be cancelled, and in Manila, Arroyo's Executive Secretary
Eduardo Ermita told reporters he saw no more need for further Senate
investigation after the cancellation of the contract and the
resignation of Abalos. It is currently unclear whether the Senate
investigation into the broadband scandal will continue and whether
any of the many other Chinese government projects in the Philippines
that are currently suspended will be cancelled. Certainly, these
projects will be subjected to closer scrutiny.

Setback for Chinese Government
--------------


6. Our contacts report that the Chinese government views the
frenzied media reporting linking a Chinese state-owned company with
bribery of Philippine officials as a setback to Chinese efforts to
expand its influence in the Philippines through low-interest loans.
Meanwhile, the Chinese Embassy claims that the scandal is a "purely

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domestic Philippine affair." We have also verified that Nueva
Vizcaya Representative Carlos Padilla on August 28 filed charges
against several of the individuals involved in the scandal with the
Office of the Ombudsman, which investigates and prosecutes graft and
corruption cases involving government officials. Investigators have
not yet questioned local ZTE executives or asked the company for its
records.

Comment
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7. While some observers believe that President Arroyo's
cancellation of the broadband project and Abalos' resignation may be
enough to end the Senate investigation, others note the seriousness
of the allegations, the separate Ombudsman investigation and other
questionable Chinese-funded projects as factors that will keep the
scandal alive. These allegations of corruption in the ZTE broadband
project only add to cynicism concerning the Government's commitment
to root out corruption and certainly have the potential to weaken
the Arroyo administration.

KENNEY