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TO RUEHC/SECSTATE WASHDC IMMEDIATE 8515
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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 
--------------------------------------------- --- 
 
¶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 
 
SIPDIS 
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 
-------------------------------------- 
 
¶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 
 
MANILA 00003340  002 OF 002 
 
 
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 
------- 
 
¶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