Fight over profits cause of poll automation woes
by Aries Rufo, abs-cbnNEWS.com/Newsbreak | 07/03/2009 11:23 AM
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MANILA - While influential figures and other unseen hands have been considered as reasons for the uncertainties in the poll automation project, money also played a major role in it.
Earlier, Total Information Management (TIM), the local partner in the winning consortium, has referred to its foreign partner, Smartmatic, having the upper hand in the financial management of the project as a major reason for unilaterally backing out of the deal.
However, based on the documents obtained by abs-cbnNEWS.com/Newsbreak and in our interviews with other industry players and losing bidders, how the two will split the earnings as earlier designed was TIM's beef.
The documents show that, despite TIM being the majority partner, Smartmatic will assume most, if not all, the financial risks involved in the project.
Financial risk
While TIM enjoys good reputation (it provides information technology services to the financial sector), industry players knew that it could not cough up the financial requirement needed for the incorporation of the joint venture partnership as well as for the automation project.
For the joint venture, Smartmatic and TIM are supposed to register a corporate vehicle where TIM will have a 60 percent stake and Smartmatic 40 percent to comply with the constitutional requirements.
However, each's stake does not translate to control. In reality, Smartmatic assumes most of the financial benefits since it also assumes most of the financial risks.
For TIM to raise its P678 million share in the capitalization, it obtained a P683.354 million credit line from HSBC. However, the multinational bank appoved the credit line largely because of Smartmatic.
TIM could only draw funds from the HSBC credit line if it could deliver the loan collaterals, namely the pledged shares of TIM in the joint venture partnership, which is yet to be finalized, and a standby letter of credit issued by HSBC's private banking arm. These collaterals were specified in the loan documents obtained by abs-cbnNEWS.com/Newsbreak.
That standby letter of credit, dated April 30, was issued in favor of Comelec, which contracted the joint venture for the poll automation project. Comelec can cash in on the standby letter of credit if TIM and Smartmatic fail to deliver the terms of the contract.
However, the standby letter of credit is actually worth P1.122 billion. Since only 60 percent of that amount is TIM's approved loan facility, the remaining 40 percent is mostly likely a guaranty for Smartmatic's own funding source, which could also be a separate loan.
HSBC Private Bank issued that standby letter of credit based on the guaranty of Smartmatic. In other words, if TIM fails to pay back its loan, HSBC will turn to Smartmatic and squeeze them for the payments.
Why the structure of raising funds to meet the capitalization requirement is like this could be explained by a side agreement between the two.
The draft side agreement between the two erstwhile partners said, “Smartmatic shall secure the necessary funding for TIM’s investment in the Holding Corporation.”
Also, in case of penalties or liabilities arising from the project, TIM is spared from any financial trouble, according to the draft side agreement.
“Smartmatic shall assume sole responsibility for any and all liabilities/penalties,” the draft stated.
As a security for TIM, Smartmatic will be issuing a P350 million irrevocable letter of credit (promise to pay) in TIM’s favor to cover any liabilities or penalties incurred.
In essence, TIM has little--or no--contribution to the financial requirements of the joint venture’s incorporation and its succeeding liabilities. A former justice described the set-up as going around the law, in particular the anti-dummy law.
Division of spoils
It was no surprise then that in the division of spoils, Smartmatic stands to gain the most.
And this is apparently where the trouble started.
In the draft side agreement, TIM is only entitled to get one percent of the total contract price as fee for its participation in the automation project.
Since the two's winning bid was P7.2 billion, TIM’s gross share amounts to a measly P72 million. From this, Smartmatic will still deduct P9.6million.
We sought the opinion of losing bidders in the automation project, and they said while TIM in essence has no financial contribution, its one percent share is "not fair."
“That amount they can easily get from their local projects. It is way too low,” one said.
From its P72 million gross share, TIM will have to net out its share of the project costs, including logistics and operational expenses for the automation.
While the technical aspect is shouldered solely by Smartmatic, the joint venture agreement requires TIM to contribute and be responsible or value-added services, logistics, deployment, manpower and local support staff. “In the end TIM may get nothing,” one representative of a losing member assessed.
Meanwhile, Smartmatic's share of the project's gross and net earnings are not known.
It is assessed that Smartmatic may not be primarily after the profit but only to establish track record. Outside of Venezuela, Smartmatic has no extensive implementation of automation. Its profits may come after the elections. For instance, the Comelec has the option to buy the counting machines to the tune of P2.13 billion after the poll exercise.
We sought the side of Smartmatic and TIM but both declined to be interviewed, citing the gag order issued by Comelec.
Aboitiz windfall
In contrast, one subcontractor appear to gain a lot from the P7.2 billion project. The Aboitiz’s family’s transport system 2GO, which has been tapped by Smartmatic to handle the shipment and storage of the thousands of electronic voting machines (EVM), for one, may get a huge windfall.
One losing bidder related that they also tried to negotiate with 2GO for the deployment of the EVMs before the bidding started. But they could not agree on the cost.
By the bidder’s calculation and comparison with other firms, the deployment and storage of the machines easily cost almost P1 billion. This covers the transport of the machines from Manila to the provincial warehouses and the precincts as well the retrieval of the machines after the elections.
But the negotiation with 2GO failed. It was only during the Senate hearing that the Aboitiz firm was named as the one that closed a deal with the Smartmatic and TIM partnership.
How much Aboitiz will net from being a subcontractor has not been disclosed.
Legal charges
The two have until Friday to settle their corporate squabble, or the Commission on Elections would be forced to inflict legal charges.
Comelec legal department head Ferdinand Rafanan, who also chaired the Special Bids and Awards Committee on the automation project, told abs-cbnnews.com/Newsbreak that civil and criminal charges are being readied against TIM in case its talks with Smartmatic International Corp. bogs down.
He said he has been tasked by Comelec chair Jose Melo to prepare the charges for immediate filing after the Friday ultimatum.
Rafanan also said that the Comelec is ready to forfeit the performance bond amounting to posted by Smartmatic and TIM amounting to P350 million if they renege in implementing the automation project.
Smartmatic and TIM bested six other consortia for the right to automate the May 10, 2010 polls, with a bid of P7.2 billion. But just before the contract is signed with Comelec, TIM unilaterally announced that it is withdrawing from its partnership.
Thus, as far as the Comelec is concerned, it is the Filipino partner that should be whipped.
Sources from both sides have leaked the reasons for the split. TIM’s camp said they wanted more control in the financial and technical aspect of the project.
Too, they were wary that some powerful individuals could be dipping their fingers into the project. On the other hand, Smartmatic, through Makati Rep.Teodoro Locsin, charged that TIM is trying to extort P500 million from its partner.
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