Mystery taints Taiwan 3G contract
By Matthew Smith
TAIPEI - Score another one for the transparency of Taiwan's public procurement process. The government's recent decision on a contract to supply third-generation (3G) mobile broadband telecommunications equipment for state-owned Chunghwa Telecom, the first of Taiwan's five 3G licensees to announce plans to purchase equipment, has observers groping through the fog in a vain effort to get some answers.
There has not yet been any real public explanation as to why. But on October 29, a panel of officials from Chunghwa and the Central Trust of China (CTC) awarded the 3G equipment contract to Nokia of Finland, which had bid NT$12 billion (US$344 million) - some NT$4 billion (US$86 million) higher than a competing bid by Canada's Nortel Networks.
Precisely why the Taiwanese authorities would decide to pay 50 percent more for Nokia's WCDMA (wideband code division multiple access) equipment is still very much a mystery. The decision came as a shock, since Nortel has supplied Chunghwa with GSM (global system for mobile communication) mobile network equipment since 1995 in bidding procedures that observers say were always very straightforward.
The decision could have profound implications for the future of the 3G equipment market in Taiwan, an early adapter of the broadband mobile technology. Yet it is more than simply a local issue. Given the protracted global slump for the telecommunications industry, the resulting dispute carries a highlighted sense of urgency for several of the largest network equipment suppliers in the world.
With Taiwan's four other 3G licensees yet to announce plans to purchase equipment, Nortel would appear to be the hardest hit of the losing bidders. This is because other 3G service providers - in Taiwan, and perhaps elsewhere too - are likely to view the decision by first mover Chunghwa to purchase the relatively expensive Nokia equipment as an indication that Nortel products are inferior.
"This really risks harming their reputation, because people think they are selling lousy equipment," says one observer. Indeed, the Chinese-language Economic Daily News quoted an unnamed official of the Ministry of Transportation and Communications (MOTC) as saying that the decision showed that Chunghwa "buys good products, not cheap products".
Nortel officials insist that it is exactly that impression - and not the loss of the contract per se - that has them up in arms since the announcement, which came after a expensive procurement process of over a year's duration. To comply with the lengthiest portion of the process, the technical evaluation, Nortel says that about 40 employees were kept busy supplying more than 4,000 sheets of engineering data and other technical information to back up its proposal.
In the end, the authorities passed four technical proposals - those by Nokia, Nortel, Siemens and Ericsson - and sealed the evaluation scores, which were based on 5,000 technical points. After the final phase - the price bid - the committee unveiled the proposed prices.
That's when things got very strange. Based on their price bid, which was by far the lowest, Nortel officials thought the deal was theirs. But then all the bidders were asked to leave the room, and a few hours later the officials announced that Nokia had won the contract. But the technical evaluations, which Nortel says accounted for 70 percent of the final score, were kept under wraps.
Helped by pressure from Canada, and perhaps the United States and France (headquarters of Nokia's wireless division) as well, the indignant Nortel executives succeeded in forcing the panel to let them look at the technical evaluation scores a few days later. But Nortel says key information had been removed from the results, the final score of which was so low as to doom the company's bid even if it had not charged a penny for the equipment.
"When we look at all the momentum we have in Europe and worldwide, this technical evaluation score gap cannot be explained - at least not to the point of compensating for a price difference of NT$4 billion," said Stephane Le Dreau, senior director of the company's Asian wireless products division. Yet sources say that the other losing bidders likewise would have had to pay Chunghwa, rather than the other way around, in order to raise their scores high enough to win the contract.
One rumor has it that the apparent mandate to grant the contract to Nokia is a sign that Chunghwa, which is 95 percent owned by the MOTC, plans to purchase mobile service provider KG Telecommunications (KGT), which uses Nokia equipment.
Majority owned by the politically powerful Koo family, the company is widely believed to be up for grabs. NTT DoCoMo, which owns a 21 percent stake in KGT and was reportedly enraged by the Koos' decision to drop out of last February's auction for Taiwan's five 3G licenses, would make a good partner for Chunghwa. A tie-in with the Japanese giant might help the Taiwanese firm develop its 3G services and consolidate its early-mover position in the market.
Yet all of this is just conjecture - and of no help whatsoever to the story's apparent victims. These include not just the losing bidders but also the owners of 95 percent of Chunghwa Telecom - the taxpayers. The hapless holders of the 5 percent of the company that has been issued on the local bourse also seem to be getting a raw deal, with no explanation for why they must pay more for the equipment. Surely the cash-strapped Taiwan government should not expect that the appearance of impropriety in the case will instill much confidence in investors the next time the it tries to sell off a stake in Chunghwa to raise public revenues.
Neither Chunghwa nor CTC responded to requests for an explanation for the unusual results, but the Economic Daily News reported an official as claiming that the decision was a demonstration of transparency, fairness, and the rule of law.
Clearly, it was none of the above. Yet there may yet be some accountability in the case. As of last week, the Public Construction Commission (PCC) had suspended the deal pending an investigation by the CTC into its own procurement procedures. While some might question the agency's ability to police itself, the other option - a PCC investigation into the case - would take several weeks.
Yet that is precisely what the losing companies will demand, and what the CTC should expect, if the authorities fail to find fault with the way that their own agency handled the decision. The closed- door decision on this vital procurement contract was a very poor beginning for the development of Taiwan's 3G infrastructure.
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