Archive for August 16th, 2006

The cynical face of the Minister of Information

August 16, 2006

Minister of Information Wiliam Lara is not only a cynic, but he speaks for the Government or Chavez’ MVR party at will, turning him into the biggest “caradura” of the mediocre Chavista Government. Today was truly incredible as he came out and said that the CNE “guaranteed” that the regulations of the election would be followed and that no significant “abuses” had been made. He said that his office was “exhorting” Government agencies not to spend money on electoral campaigning.

What this cynic failed to mention is that his own Ministry has spent money in publishing ads that clearly violate the regulations, as part of the dozens of ads documented here (his is the one on the 15th. celebrating the two years of the recall vote) as violating the regulations, day after day, after day…I guess his exhortations don’t even work in his Ministry.

How much did the CNE pay for the fingerprint identification system?

August 16, 2006


Whenever
you see a press or Government report about the fingerprint identification
system purchased by the CNE, the standard answer is that the CNE spent US$ 66
million on it. Is this number correct or is it simply the case of a number said
so many times that it has become the truth?

I have
wondered about it for a while, because I have always believed that such a
system was a luxury for Venezuela and wanted to know its true cost, but could
never figured out what the total cost was. However, I have never been able to
find a consistent source of what the number means. Nevertheless, the number
gets repeated over and over

As far as
I can tell, the original 14,000 fingerprint machines purchased
by the CNE cost US$ 53.9 million, which together with the satellite dish system
purchased from Gilat for US$ 13. 2 million, would give US$ 67.1 million. Not
exactly 66, but in any case, we know they bought 2,000 new machines after the
recall. Thus, the number has to be higher.

The other
possibility is that after paying the US$ 53.9 million, the CNE paid
US$ 11.1 million for “Intellectual property rights of
the Automated Fingerprint Identification Systems”
, but this would mean
that the total was US$ 65 million, not 66 either and once again, this leaves
2,000 machines out.

Thus, it
is not easy to figure out how much the system cost. It is one thing what the
CNE has said or continues to say and what the Cogent SEC filings say. However,
even the filings sometimes have some very gray areas and inconstancies that
make it hard to figure out exactly how much the CNE has paid Cogent. Since the
CNE has always given roughly the same number for the cost of the fingerprint
system, around US$ 66 million, while Cogent has given us information in time,
we will use the SEC filings to analyze the relationship between the CNE and the
company. Simply remember that the SEC filings have legal validity, while the
CNE can say whatever it wants, after all there are no checks and balances in
this country.

The first
thing that I found peculiar is that Cogent makes no mention of the CNE, in its
filings, as a customer until September 23d. 2004. This does not mean much.
Cogent filed it first registration (S-1) filing with the SEC in May 2004,
simply stating that it was planning to go public. At the time, the type of
information that it had to reveal was less detailed than the one required once
you are public. But still, Cogent Systems filed six S-1 Registration Statements
between May 14th. 2004 and it is not until Sep 23 2004 that Cogent
actually acknowledges that the CNE is a costumer. In fact, in the Sep. 9th.
registration, the CNE is mentioned as having used fingerprint systems, but not
as a costumer, without explicitly saying that it was a Cogent system that was
used a month earlier during the recall vote.

Even more
amazing is the fact that in the registration filing (S-1) dated August 11th.
2004, that is four days before the recall referendum in which Cogent machines
were used, no mention is made of the CNE either being a costumer, using
AFIS machines from Cogent or even having a contract with Cogent. Strange, no?

Obviously,
if Cogent deployed the AFIS system for the recall referendum which took place
on August 15th. 2004, the CNE had to have a contract with Cogent and
made payments even sometime before. But the regulations before you go public,
as you are registering, are more lax than after you go public so that Cogent
may have received funding before July 1st. 2004 from the CNE, but
may never know about it since the first quarter for which Cogent had to provide
detailed financials was the July 1st. to September 30th.. 2004
quarter.

It would
seem logical that the CNE made a payment before July 1st. but we
simply can’t tell. Logical, because this was a fairly complex system that had
never been installed in the world, an AFIS real time system for the
instantaneous comparison of one fingerprint to all the previous ones in the
database. It would be very surprising to sign such a contract and make payments
less than six weeks before the recall vote took place. Thus, it would seem as
if some form of payment had to be made in the 2nd. quarter 2004, but
we don’t know.

After July
1st. we have a little more detail, even if accounting conventions may
obscure it sometimes.

1)
In
the 2004 Annual Report (10-K), filed
by Cogent
on March 22nd. 2005, it is stated that the company
entered into a contract with the CNE during the third quarter in the amount of
US$ 54 million. It also says that it entered into a second contract with the
CNE for US$ 20.2 million in the fourth quarter 2004.

2)
In
the 2005 Annual Report (10-K), filed
by Cogent
on March 15th. 2006, it is stated that the company
entered into a contract with the CNE for US$ 31.8 million in the second quarter
of 2005.

Thus,
since Cogent went public and it reported its third quarter of 2004 which
started on July 1st. of that year, the CNE has signed contracts
worth US$ 105.0 million with it, not counting any possible payments before the
third quarter of 2004 which may or not have taken place, but it would seem
there had to be a prior payment.

Now, from
the same filings, it seems like the CNE has paid most of the US$ 105 million,
even if Cogent has not registered it as revenue. Let me explain. According to
the Cogent filings, the first two contracts have been completed and all of the
funds have been recorded as revenue by the company. However, the last contract
has been paid by the CNE, but the company does not record all of the revenue at
once but does it over the life of the contract, this is common practice. The
simplest example I know of is Microsoft, when you buy Windows or Office from
them, they record (or at least used to record) the revenues in four parts over
the next four quarters.

This is
done for a number of reasons. One, troubles could arise over the life of the
contract and it might be delayed. Two, money may have to be returned to the
other party but the main reason it is done, is to smooth earnings as much as
possible during the year. Why? Well, recording a big contract all at once like
that would give a big jump in earnings for the company and the stock may jump
up on the news. However, if a similar contract is not signed the next quarter,
it would look as if the company is doing worse, because it recorded less
revenues and earnings. There are
rules on this and the SEC has sometimes scolded companies for doing this too
much, as it might deceive investors into thinking their company is doing great,
while revenues and earnings are going down but you don’t see it because they
have been smoothed out.

Thus, of
the US$ 38.1 million of last year’s contract, Cogent has yet to recognize US$
26.3 million, from Cogent’s latest quarterly filing: ”Deferred revenue related
to the contract totaled approximately $ 28.7 million and $26.3 as of December
31, 2005 and June 30, 2006 respectively.”

Thus, the
conclusion is that the CNE has paid Cogent a minimum of US$ 105
million so far, of which the company has recognized so far a minimum of US$
78.7 million. Add the Gilat contract of US$ 13.2 million and the CNE has spent
a minimum of US$ 118.2 million on the complete system for fingerprint
identification in Venezuelan elections, according to the legal filings as well
as the record on the Gilat contract. Any different number is just hearsay.

By the
way, US$ 118.2 million implies that each person caught voting twice has cost
between US$ 2.23 million and US$ 4.09 million depending on which number you
believe. (From 29 to 53 persons caught cheating) With the fear these systems
have instilled in people and the cost, they have certainly been a waste of
money in my opinion, more so in a poor country.

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