IBM and other IT suppliers have been accused of breaking the rules set down in US law for supplying internet equipment to libraries and schools.
Members of Congress said the much-criticised E-Rate programme had been subject to widespread fraud and abuse.
Critics accuse schools and IT suppliers of circumventing competitive bidding requirements, charging E-Rate for equipment that does not qualify and asking for millions of dollars worth of equipment that schools did not need.
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The programme, with an annual budget of $2.25bn (£1.24bn), is designed to help schools to buy technology equipment such as broadband modems and routers.
IBM scheme examined
An IBM scheme was a major topic of questioning during a hearing on the E-Rate programme before the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations.
IBM was accused 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 programme that serves such an important role has been derailed by incompetent administration, greedy suppliers and, in some cases, ill-prepared local school officials," said congressman Peter Deutsch.
IBM denied it has broken E-Rate rules. In the early stages of the programme the US Federal Communications Commission (FCC) asked suppliers to help school districts to take advantage of the programme and IBM's continued consulting role does not circumvent bidding rules, said Christopher Caine, vice-president of government programmes for IBM.
Consulting expertise can help to move multimillion-dollar technology 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, 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.
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 Company, which administers the programme, may seek to recover a substantial portion of $55m given to the El Paso district in 2001, said George McDonald, vice-president of the schools and libraries division at the company.
McDonald questioned the IBM contract with El Paso and other districts. "There was only one supplier at the table," he said.
A number of allegations of E-Rate fraud were made at the hearing, including that suppliers offered schools expensive "bonus" equipment not authorised under the programme in return for doing business with them. Such bonus packages are often financed through inflated prices suppliers charge to the E-Rate programme, 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.
Video and documentary evidence was brought to show that Video Network Communications (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 chief executive Carl Muscari, were subpoenaed to appear at the hearing but refused to testify, asserting their Fifth Amendment rights against self-incrimination.
One superintendent told the subcommittee that 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 South Carolina, said NABSE advised his district that it was not against E-Rate rules to accept $3m-worth of equipment as a substitute for the district's obligation to pay 10%of its $9.5m E-Rate projects in 2000.
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".
In May, NEC pleaded guilty to defrauding the E-Rate programme and agreed to pay $20.6m in fines and restitution. Earlier this year, SBC Communications agreed to return $8.8m to the FCC after equipment was not installed in Chicago schools.
Grant Gross writes for IDG News Service