Conflict of interest

Despite the army of lawyers at DOTC, they seem to have difficulty recognizing a conflict of interest situation. Two cases are particularly telling: the Mactan and the Puerto Princesa airport projects.

The Puerto project is a more obvious case of conflict of interest, clearly an open and shut case. But the Mactan project, as the transcript of the Senate hearing shows, is a good example too. 

For background, DOTC hired Incheon to be its consultant for the preparation of tender documents for the bid and assist in the evaluation of bids including the technical aspects for the Puerto Princesa airport project.

Problem is, Incheon is associated with Kumho. Both companies are together in a consortium that made a bid with San Miguel for Mactan and in an international airport project in Myanmar. This point was recognized by lawyer Gerald L. Chan of DOTC’s legal office who warned the BAC of the conflict situation in a memorandum.

Kumho is also undergoing financial rehabilitation since 2009. I guess after reading the transcript of the Mactan hearing at the Senate, I am not surprised. Senator Serge Osmena proved DOTC does not do good financial due diligence.

I heard DOTC, on advice of its conflicted consultant, Incheon, is inclined to award the Puerto airport project to Kumho, Incheon’s partner. Kumho should have been disqualified outright for conflict of interest and questionable financial capacity. Kumho’s financial bid is also less advantageous to the government than Hanjin’s.

In the Mactan case, it was ironic that DOTC’s BAC refused a redefinition of a conflict of interest situation during the pre-bidding conference when it was questioned, and insisted on their original strict definition. Now, as Sen Osmena puts it, they are trying legal calisthenics to make their conflict of interest rule “unstrict”. I heard from very good sources that DOTC’s BAC is inclined to award the Mactan project to Megawide/GMR if they can find a credible way to wiggle out of their own strict conflict of interest rule.

Here is the transcript of that Senate hearing that covers the issue of conflict of interest in the Mactan situation.

Sen Osmeña: ... I’d like to go to the conflict of interest rule. Mr. Secretary, you had a rule which says that, “A member of the board of directors, partner, officer, employee, or agent of a bidder, any consortium member or any of their affiliates for either the bidder or any of its consortium member, is also directly involved in any capacity related to the bidding process for the project of another bidder, consortium member, other bidders, their affiliates or any bidder or its consortium member within a period of two years prior to the publication of the invitation to prequalify and bid and one year after the award of the project.”

Now, here are the facts: Isn’t Mr. Bashir a member of the board of two or more of the affiliates or subsidiaries of GMR?

Sec Abaya: Sir, may I allow the chairman of the BAC to answer that question?

Sen Osmeña: Yes, please.

Usec Lotilla: I think he is a member of two of the subsidiaries.

Sen Osmeña: That Mr. Bashir who is the, I think, CEO of Malaysia Airports Holdings Berhad.

Usec Lotilla: Yes, the managing director, Your Honor…

Sen. Osmeña: Okay. And would you like to explain to the committee why you even added a phrase which makes it even more difficult? Because the phrase is: “Within a period of two years prior to the publication of the invitation to prequalify and bid and one year after award of the project.” You’re familiar with that part of it, of course.

Usec Lotilla: Yes, Your Honor.

Sen. Osmeña: And if 11 months from now somebody from Megawide joins another bidder who happens to be awarded the bid, that also is ground for disqualification? Usec Lotilla: Under the language of that provision ---

Sen. Osmeña: You did discuss these rules, right? And they were challenged during the pre-bids. But you insisted on keeping them in.

First question, how do you disqualify somebody who is already constructing a terminal? It’s just something that boggles my mind. You gave me the award--- Mr. Trillanes who used to be with the opposing bidder joins me in six months, ergo, I’m now to be disqualified. How could you do that physically when I started digging my hole?

Usec Lotilla: Your Honor, if I may explain, Your Honor? You see, this provision started as a conflict of interest provision because that is a standard provision that’s put in concession agreements for purpose of preventing conflict of interest. Now---

Sen. Osmeña: Juju, don’t explain to us why it’s there. Explain to me how you’re going to disqualify somebody one year after… For example, this is awarded to Megawide-GMR and somebody from Filinvest resigns six months from now and joins Megawide, this now disqualifies Megawide. How is that possible? I myself, would be the first one to stand up kasi they have nothing to do with that. (Laughter)

Usec. Lotilla: Your Honor, may I request undersecretary Limcaoco?

Usec. Limcaoco: Yes, Mr. Chairman. When we did look at that rule, in fact, that same issue did come out and we did recognize although a little bit late that it is too strict. And so in our next succeeding bids, the two year and one year, we are…

Sen. Osmeña: Now, this period of two years, I can understand that.

Usec. Limcaoco: Yeah.

Sen. Osmeña: But the one year was the one that was impossible to understand.

Usec. Limcaoco: Yes. Because when we looked back at it, it was too strict.

Sen. Osmeña: Now. How would you implement it?

Usec. Limcaoco: Right.

Sen Osmeña: How would you physically ---

Usec. Limcaoco: It was just impractical.

Sen. Osmeña: Megawide-GMR, if they are awarded, well, sunk about P10 billion already in the project and you’re gonna come up and knock on their doors and say, “Oh-oh, by the way, you are disqualified.”

Usec. Limcaoco: When we were looking at this, we are --- the whole- --- looking at the project finance from the award and signing, a company might take even longer than one year to reach financial close. So, they might not even start digging. That was our frame of mind. But then, that---

Sen. Osmena: Uh-huh.

Usec. Limcaoco: Yes, sir. A practical aspect did come out.

Sen. Osmeña: Okay, So, they still hadn’t dug a hole in the ground and you can still disqualify? You know, that is pretty strict, that you can disqualify. But it is a very strict that even two years before, hindi pwede. So now, you have a problem wherein you have Bashir who is a current director of an affiliate and you have not disqualified or you have not used that provision. You still haven’t decided?

Usec. Lotilla: Your Honor, may we beg to be excused from answering that question because it’s actually one of the issues that’s still being tackled by the BAC, Your Honor.

Sen. Osmeña: All right. But, you know, we would be interested because you made it strict. And now, are you looking for a way to make it “unstrict,” if there is such a term?

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Mr. Joseph Yap of Filinvest recounts how the DOTC BAC rejected attempts to clarify the conflict of interest provision which means the strict rule applies to Megawide/GSR. 

Mr. Yap: Now on SBB (Special Bidding Bulletin) 11, there was a proposal by one of the bidders to clarify the Rule on Conflict of Interest to make clear that, in fact, active participation in both bidders was necessary to constitute conflict of interest. So they had the proposed rewording… So if this phrase had been inserted in the bidding rules, then it would be clear that it must be required.

Sen. Osmeña: The phrase there that is operative would be “in any capacity”?

Mr Yap: yes, but also “who is directly involved in the bidding process for the project with respect to a bidder.”

Sen. Osmeña: And that was rejected?

Mr. Yap: In the response, it was just referred back to the actual wording of the Conflict of Interest Rules as it finally appeared in the instruction to bidders. Therefore, the conclusion would be the PBAC rejected that clarification. Therefore, it is not their intention to require an active participation in both bidders. Plus, the fact --- something that you earlier brought up, Your Honor, that the member of the board was a member two years prior. How could there be such a requirement that he be actively involved if he was prior board member?

Sen. Osmeña: Because they can see into the future, you see. So two years from now, there will be a bidding somewhere and I will actively become a director of one of those companies so that they will be disqualified.

It will be very interesting to see how the bright lawyers of DOTC will extricate themselves out of a legal mess they created.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco