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OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHML #0404/01 0450917
ZNR UUUUU ZZH
O 140917Z FEB 08
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9762
INFO RUCNASE/ASEAN MEMBER COLLECTIVE IMMEDIATE
RHHMUNA/CDR USPACOM HONOLULU HI IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE

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