BRIBERY ALLEGATIONS ROIL ARROYO ADMINISTRATION

UNCLAS SECTION 01 OF 02 MANILA 000404 SIPDIS SENSITIVE SIPDIS DEPT FOR EAP/MTS E.O. 12958:N/A TAGS: PGOV KCOR PINR RP SUBJECT: BRIBERY ALLEGATIONS ROIL ARROYO ADMINISTRATION REF: A. MANILA 316 ¶B. 07 MANILA 3816 ¶1. (SBU) SUMMARY: Several days of melodramatic Senate testimony have brought renewed opposition calls for President Arroyo to step down over allegations her husband and senior government officials sought to profit illegally from a telecommunications deal with a Chinese firm. Since the allegations were leveled in late summer, the so-called ZTE scandal has caused the resignation of the election commission head and helped bring down the Speaker of the House (ref A). Opposition groups have called anti-Arroyo demonstrations for February 15, and the armed forces and police are taking normal precautions. A senior Catholic prelate urged Filipinos not to take to the streets, but instead to reflect on the persistent problem of corruption in the country. While the scandal has stubbornly clung to life, President Arroyo has weathered heavier storms, and is likely prepared to weather this one. END SUMMARY. NATIONAL BROADBAND NETWORK -------------- ¶2. (SBU) At the heart of the scandal is a controversial government contract known as the National Broadband Network, signed in April 2007 between the Philippine government and China's ZTE Corporation. Under the contract, ZTE undertook to set up a digital network to connect government offices throughout the Philippines to each other and the internet at a cost of $329 million. The deal would have been financed through a concessional loan from the Chinese government. In addition to ZTE Corporation, two other companies sought to win the deal - reportedly at significantly lower cost - and one proposal had the backing of Jose "Joey" de Venecia III, the son of the then-Speaker of the House. BRIBERY ALLEGATIONS SURFACE -------------- ¶3. (SBU) Apparently smarting from the failure to land the contract, Joey de Venecia testified to the Senate in September that an Arroyo ally had tried to bribe him to withdraw his bid. De Venecia also claimed that First Gentleman Mike Arroyo had warned him to "back off" the project. A former top economic official, Romulo Neri, whose National Economic Development Authority agency was charged with reviewing the project, testified later that he had been offered P200 million to approve the project. ARROYO CANCELS THE DEAL -------------- ¶4. (SBU) Under mounting pressure, President Arroyo canceled the contract in October, while on an official visit to China. The cancellation notwithstanding, the opposition-dominated Senate pursued its investigation. It summoned Neri and his unofficial consultant, Rodolfo Lozada, Jr., to testify further. Refusing to appear before the Senate, they were ordered arrested. Neri successfully fought the arrest warrant, while Lozada left for Hong Kong. "MODERATING THE GREED" -------------- ¶5. (SBU) Lozada's return to Manila late last week revived the scandal, and at an emotional Senate hearing February 8, Lozada claimed the project's cost ballooned to USD 329 million (up from USD 262 million) because of kickbacks allegedly intended for the President's husband and others. In one memorable phrase, Lozada claimed he was urged to "moderate the greed" of a key partner who continued to press for a USD 130 million "commission." MIXED REACTIONS TO TESTIMONY -------------- ¶6. (SBU) Lozada's testimony elicited strong public reactions. Pro-administration lawmakers, led by new House Speaker Prospero Nograles, asserted Lozada had offered only hearsay to link the President or her husband to the deal, and added there were no grounds for the President's impeachment. Former President Fidel Ramos also opposed the calls for President Arroyo's resignation, stating that as long as the opposition failed to present a better alternative, he would not support her removal. ¶7. (SBU) The opposition view was predictably harsh. Senator Panfilo Lacson demanded President Arroyo's resignation, recommending a snap election to prevent destabilization of the government. Surprisingly, leftist politicians were more circumspect. Rep. Teodoro Casino concurred with pro-administration lawmakers, stating Lozada's testimony was not enough to unleash another "people power" MANILA 00000404 002 OF 002 revolution. Even Joel Villanueva, a rabidly anti-Arroyo representative, admitted there was nothing new in Lozada's testimony, but argued that it bolstered other accusations against the Administration and eroded public trust in the President. OPPOSITION GROUPS TO HOLD ANTI-ARROYO DEMONSTRATION -------------- -------------- ¶8. (U) Opposition leaders, civil society groups, militant organizations, and student activists have called for demonstrations on Friday, February 15, to denounce government corruption and urge the President to step down. The Catholic Bishops Conference of the Philippines called for "communal action" by citizens, but Archbishop Gaudencio Cardinal Rosales clarified the phrase did not mean street protests, but rather personal reflection. ¶9. (U) A top police official told poloff the police were on alert but expected the rally to be peaceful. Contrary to press accounts, which reported that the police would have 650 officers on site, the official said 300 personnel would be deployed in the Makati business district, where the demonstration is expected. Separately, the armed forces put troops on full alert in metro Manila after reports the New People's Army could infiltrate the demonstrations. COMMENT -------------- ¶10. (SBU) While the ZTE scandal has stubbornly clung to life, President Arroyo has weathered heavier storms, retains significant political support. The House is overwhelmingly pro-Administration and she counts on the support of 85 percent of provincial governors and local mayors. In addition, her relationship with top military and police leaders remains strong, as evidenced by their unwavering support during the Peninsula hotel standoff in November 2007 (ref B). Finally, there is a silent majority who may be suffering not only from scandal fatigue, but "people power" fatigue as well. Former President Ramos probably summed it best when he admonished recently that people power is not the solution. Visit Embassy Manila's Classified SIPRNET website: http://www.state.sgov.gov/p/eap/manila/index. cfm You can also access this site through the State Department's Classified SIPRNET website: http://www.state.sgov.gov KENNEY