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IBM, other vendors accused of cheating E-Rate program

By , IDG News Service
September 23, 2004 08:57 AM ET

IDG News Service - 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.

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