Kickback allegations involving Chinese telecom supplier ZTE have stalled a ＄329 million contract with the Manila government, drawing the presidents of China and the Philippines into the fray.

By staff reporters Ji Minhua and Zhou Qiong

Chinese telecommunications equipment and network supplier ZTE has advanced on the Ethiopian market despite a scandal that has stalled a major contract in the Philippines.

The Ethiopian agreement, signed September 16 and announced three days later, said ZTE would provide US＄ 478 million in services and GSM equipment to the national telecommunications company over two years.

However, the good news in Africa has diverted little attention from the Chinese company’s trouble in Southeast Asia, where the husband of the Philippine president and others have been named in a Senate inquiry into alleged kickbacks tied to a ZTE contract with the Manila government.

The controversy even led to a sideline discussion between Chinese President Hu Jintao and Philippine President Gloria Macapagal-Arroyo at a recent economic summit of Asia-Pacific leaders, according to Phillippine media.

The political storm has been brewing since April, when the Philippine minister of transportation and telecommunications traveled to China’s Hainan Province to sign a US＄ 329 million deal with ZTE. According to the deal, ZTE would build 300 WiMax stations for the Philippine government, linking land phone, cell phone and Internet connections for 25,800 offices.

ZTE’s project would be financed at favorable interest rates by The Export-Import Bank of China. Payments for the first five years would be interest-free, while rates as low as 3 percent would be applied to the remaining 15 years of the contract. A memorandum of understanding was signed for the loan, although a final contract has yet to be penned.

ZTE’s financing hurdles, however, are minor compared with the political roadblocks stemming from allegations that the Philippine government awarded the contract to ZTE without following a competitive bid procedure.

The charges were leveled by the top executive at Amsterdam Holdings Inc., a Philippine company and ZTE rival, who claimed the Chinese firm overcharged at least US＄ 130 million for the project and used the extra money to pay kickbacks and bribes to government officials.

The executive, Amsterdam founder Joey de Venecia III, is the son of Philippine House of Representatives Speaker Jose de Venecia. At a Senate hearing, Philippine media reports said, the company chief claimed the deal was brokered by Benjamin Abalos, who heads the national elections commission, and a middleman who cultivated a relationship between ZTE and Jose Miguel Arroyo, husband of the Philippine president.

The Amsterdam executive said Abalos tried to persuade him not to compete against ZTE for the contract, according to media reports, and promised a kickback of US＄ 10 million if he complied. He also claimed he was threatened by the president’s husband, and that he saw Abalos ask for kickbacks from ZTE at a meeting in Shenzhen.

Abalos and the president’s husband have denied the allegations.

A senator fanned the flames by claiming kickbacks and bribes connected to the deal totaled US＄ 198 million. One elections commission official accepted US＄ 55 million, the senator claimed, while two other high officials received US＄ 75 million. Moreover, ZTE was charged with contributing US＄ 68 million to a presidential election fund.

Arroyo and Hu discussed the scandal September 9 during an APEC summit in Sydney, the Philippine president’s spokesman told the media. The leaders agreed that Philippine Trade and Industry Minister Peter Favila and Chinese Minister of Commerce Bo Xilai would work together in search of a solution.

Meanwhile, ZTE announced September 15 that the company is working with Philippine courts in hopes of lifting a legal order that halted the telecom project while the investigation continues.