IBM, other vendors accused of cheating E-Rate program

U.S. House members Wednesday accused IBM and other IT vendors of breaking the rules in a much-criticized program designed to help schools and libraries purchase Internet equipment.

U.S. House members Wednesday accused IBM and other IT vendors of breaking the rules in a much-criticized program designed to help schools and libraries purchase Internet equipment.

Lawmakers and E-Rate investigators have alleged widespread fraud and abuse in the E-Rate program, which was established by Congress in 1996. Critics of the program accuse schools and IT vendors of circumventing competitive bidding requirements, charging E-Rate for equipment that is not allowed to be funded and asking for millions of dollars worth of equipment that schools didn't need. The program, with an annual budget of $2.25 billion, is designed to help schools purchase technology equipment, such as broadband modems and routers.

Investigators told the subcommittee about 35 E-Rate investigations are under way.

An IBM "scheme," as Representative Peter Deutsch called it, was a major topic of questioning during a hearing on the E-Rate program before the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations. Deutsch (D-Fla.) other lawmakers and E-Rate program officials accused IBM of circumventing competitive bidding requirements by signing consulting contracts with about nine school districts before the schools had decided what equipment they would apply to receive funding for.

"A program that serves such an important role has been derailed by incompetent administration, greedy vendors and, in some cases, ill-prepared local school officials," Deutsch said.

IBM denied it has broken E-Rate rules. In the early stages of the program, the FCC asked vendors to help school districts take advantage of the program, and IBM's continued consulting role does not circumvent bidding rules, said Christopher Caine, vice president of government programs for IBM.

For multimillion-dollar technology projects, consulting expertise can help move projects forward in a cost-effective way, Caine told the subcommittee. "It is important the schools get the right technical and project management help," he said.

In the case of an IBM contract with the El Paso Independent School District in Texas, which came under fire during the hearing, IBM's expertise helped the projects come in "on time and on budget," Caine said. IBM was selected as a consultant after a two-step bidding process, he said.

Investigations into E-Rate funding for El Paso's contract with IBM led the FCC to reject funding requests from El Paso and seven other school districts with similar IBM contracts for the 2002 funding year. In addition, the Universal Service Administrative, which administers the program, may seek to recover a substantial portion of $55 million given to the El Paso district in 2001, said George McDonald, vice president of the schools and libraries division at the Universal Service Administrative.

McDonald questioned the IBM contract with El Paso and other districts. "There was only one vendor at the table," he said.

Lawmakers heard a number of allegations of E-Rate fraud at the hearing, including of vendors offering schools expensive "bonus" equipment not authorized under the program in return for doing business with them. Such bonus packages are often financed through inflated prices vendors charge to the E-Rate program, McDonald said.

Robert McCain, a program manager at NEC-Business Network Solutions, testified that he believed NEC had used E-Rate funds to build a television studio at the Ecorse Public School District in Michigan, even though lawmakers said E-Rate rules prohibited funding for television studios. Douglas Benit, former facilities director at the Ecorse district, said it was his understanding that NEC donated the $750,000 studio to the school district.

Lawmakers produced a video and documents showing that Video Network Communications Inc. (VNCI), NEC and IBM were technology partners of the National Alliance of Black School Educators (NABSE), which encouraged schools to use its expertise in getting E-Rate funding in return for a payment of 1.5% of the E-Rate contracts.

Two former employees of VNCI, including former President and CEO Carl Muscari, were subpoenaed to appear at the hearing but refused to testify, asserting their Fifth Amendment rights against self-incrimination.

Lawmakers alleged that a former employee of VNCI, based in Portsmouth, N.H., worked with school districts to circumvent bidding and other E-Rate rules.

One superintendent told the subcommittee NABSE advised his district to accept a "bonus package" of computer-related equipment not eligible for E-Rate funding. William Singleton, superintendent at Jasper County Schools, in Ridgeland, S.C., said NABSE advised his district that it was not against E-Rate rules to accept $3 million worth of equipment as a substitute for the district's obligation to pay 10% of its $9.5 million E-Rate projects in 2000. Singleton said that, in retrospect, it sounded too good to be true.

Quentin Lawson, executive director of NABSE, also refused to testify, but the group issued a press release, saying it supports "fair and just investigative procedures."

NEC-Business Network Solutions and other vendors have come under scrutiny this year. In May, NEC pleaded guilty to defrauding the E-Rate program and agreed to pay $20.6 million in fines and restitution. Earlier this year, SBC Communications Inc. agreed to return $8.8 million to the FCC after equipment was not installed in Chicago schools.

About 35 E-Rate investigations are ongoing, and rules were violated in 36% of 135 E-Rate audits done by the FCC, said H. Walker Feaster III, inspector general at the FCC, which oversees the program.

Asked by Representative Joe Barton, a Texas Republican, whether E-Rate funding should be suspended until better controls can be put in place, Feaster said that would be a "radical step." McDonald also opposed shutting down the program, but also disagreed with Barton's suggestion that schools pay more than 10% of the cost of the equipment as a way to discourage abuse.

Requiring schools to pay a larger percentage would discourage the poorest schools from participating, McDonald said. He suggested that the amount of fraud and waste within the program was decreasing in the last couple of years.

But Feaster said he had no way to measure if the situation was improving. "We have indications that waste and fraud are widespread," he said.

Several witnesses told the subcommittee that simplifying the application procedure for E-Rate funding would cut down on rule-breaking. The rules are "at best less than straightforward," said Sharon Foster, former E-Rate coordinator at El Paso Independent School District.

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