COA says Northrail contract signed without public bidding

MANILA, Philippines – State auditors have revealed that the contract for the 63-kilometer railway project from Caloocan City to Malolos, Bulacan was signed without any public bidding.

The Commission on Audit (COA) said since the contract for Northrail’s Phase 1, Section 1 was not supported by a Certificate of Availability of Funds (CAF) – a basic requirement in the execution of a contract – the North Luzon Railways Corp. must explain why there were incomplete provisions in the contract and why the contract deviated from the Terms of Reference.

“Explain why this contract should not be considered null and void in the absence of a CAF covering the whole contract price,” read the report.

The COA report said the absence of a CAF was not in accordance with section 86 of Presidential Decree 1445.

“No contract involving the expenditure of public funds by any government agency shall be entered into or authorized unless the proper accounting officials of the agency concerned shall have certified to the officer entering into the obligation that funds have been duly appropriated for the purpose,” the report quoted PD 1445.

The COA said without a CAF, there is no assurance that the project will be implemented on time and Northrail might face the same problems previously encountered in Phase 1, Section 2, particularly the incurrence of higher commitment fees.

Initial review of the contract revealed that no CAF was issued by Northrail for the local counterpart funding amounting to $86.91 million, added the report.

The COA said the $421-million is a loan to the government, and that after the loan contract has been concluded, the amount should have been deposited to the account of the Republic of the Philippines. 

Part of the amount advanced by CNMEG intended for right of way expenses and the relocation of public utilities amounting to $22.109 million – used by Northrail to pay for its loans in 2005 – remained unavailable, added the report.

Review of other payables in previous years showed that the $22.109-million was used to pay for Northrail’s loans with Banco de Oro, Metrobank and Sumitomo Mitsui Banking Corp., the COA reported.

The supply contract was signed by North Luzon Railways Corp. and China National Machinery and Equipment Corp. (CNMEG, now known as SINOMACH), and endorsed by the National Economic and Development Authority in July 2004, according to the report.

The COA said the Department of Finance and Export-Import Bank of China (China Eximbank) signed a $400-million Buyer’s Credit Loan Agreement (BCLA) in February 2004.

“As provided in the BCLA, the lender agrees to make available a loan facility to the borrower in an aggregate principal amount not exceeding $400 million or 95 percent of the contract price for the purpose of financing the construction of the Northrail project,” read the report.

“The remaining five percent or $21.05 million shall be the Philippine counterpart.”

State auditors said their review of the supply contract agreement revealed it was “granted to CNMEG without the benefit of a public bidding.”

“The contract agreement with CNMEG includes design,” read the report.

“However, said design has not been prepared and submitted before the implementation of the contract agreement, hence, said provision may be considered disadvantageous since Northrail is deprived of the option to determine whether the design conforms with the requirement of the Northrail vis-a-vis the contract cost.”

State auditors also questioned provisions of the BCLA that are “disadvantageous” to the government:

• The “no tax deductions” clause that prevents the imposition of taxes required by law;

• The one that cancels the right to immunity of the borrower; and

• The assignment of rights by the borrower requires the prior consent to the lender but the assignment of rights by the lender requires a mere notice to the borrower.

The agreement between Northrail and SINOMACH was signed in November 2006 to develop, rehabilitate, construct and supply the equipment and multiple units for Northrail Project Phase 1, Section 2 with a contract price of $586,910,000.

The DOF and the China Eximbank signed a $500-million Preferential Buyer’s Credit Loan Agreement in January 2007 to fund the project.

“Initial review of the contract revealed that no CAF was issued by Northrail for the local counterpart amounting to $86,910,000, as required under Section 86 of PD 1445,” read the COA report.

“It was noted that despite the existing problems in the implementation of Phase 1, Section 1 of the project, particularly the inability to secure loans for the local counterpart fund, Northrail proceeded with the execution of the contract for Phase 1, Section 2,” read the COA report.

State auditors also questioned why a portion of an amount advanced by CNMEG supposedly for right-of-way expenses and relocation of public utilities worth $22.109 million but used by Northrail to settle its loans in 2005 remained unavailable.

State auditors said the company’s budget for operating expenses was spent to pay for billings for project management, an item under capital expenditure that was contrary to the intent of the budget.

When they checked the Northrail project’s accomplishments against its targets, they found out that there was a delay of 3.33 percent for pre-construction activities and 7.11 percent for civil and track works, the state auditors added.

The Northrail project’s first phase, a 32-kilometer stretch from Caloocan to Malolos, was originally funded by a $400-million loan from China’s Eximbank and $103 million counterpart funding from the government.

The second phase is another 32-kilometer project from Malolos to Clark, involving another $500-million loan from Eximbank. – With Reinir Padua