Continuation of: "On the basis of a complaint filed by the All U.P. Workers Union"

On the basis of a complaint filed by the All U.P. Workers Union (AUPWU), the Commission on Audit (COA) has now cast doubts on the legality and validity of the 25-year lease contract entered into by and between the UP, through U.P. Manila- Philippine General Hospital (UPM-PGH), and the Mercado General Hospital, Inc. (MGHI), for the conversion and development of the PGH Dispensary historical three-storey concrete building into the Faculty Medical Arts Building (FMAB) in its recently released 2009 Consolidated Audited Annual Report (CAAR).

The FMAB is a priority project of the Administration of outgoing U.P. President Emerlinda R. Roman. However, the 2009 CAAR refers extensively to “unresolved legal issues and inadequacy of auditorial documentary requirements on the 25- year lease contract of the Faculty Medical Arts Building (FMAB).”

COA said the unresolved legal issues and inadequacy of the auditorial documentary requirements cast doubts on the legality and validity of the 25-year lease contract entered into by and between the UP, through the UPM-PGH, and the Mercado General Hospital, Inc. (MGHI), for the conversion and development of the PGH Dispensary historical three-storey concrete building into the FMAB.

COA said AUPWU, based on its preliminary analysis and evaluations of the subject contract, raised an issue that certain provisions of the 2008 University of the Philippines Charter (RA 9500), particularly Section 23 thereof on the “Safeguards on Assets Disposition” may have been violated, and that the contract is allegedly disadvantageous and contracted with attendant irregularities.

Correspondingly, the issue was submitted to the Department of Justice (DOJ) for an opinion on whether the new requirements provided in Section 23 of the R.A. No. 9500, which took effect only in May 2008, or three years after the approval of the FMAB Project, apply retroactively to the subject contract. The DOJ Secretary, in Opinion No. 8 s, 2010, commented that the non-impairment of contracts clause as claimed by U.P. would not apply to the FMAB Lease Contract, or assuming it is applicable, the non-impairment clause must “yield to the police power of the state and that there may be certain provisions in the Terms of Reference (TOR) which was approved before R.A 9500 was passed that are no longer applicable or needs to be revisited in order to be beneficial to all the parties involved.”

Quoting from the DOJ opinion, COA said in the 2009 CAAR that:

“Records would show that the University was in the middle of negotiations when the UP Charter of 2008 was passed. No contract was entered into, no agreement was yet in effect. It approved the renegotiated terms of the contract months after the effectivity of the UP Charter of 2008. It was only at that time that the contract was perfected between the parties. Hence, the non-impairment clause as claimed by UP, would not apply.”

“Besides, assuming that the non-impairment clause is applicable, UP’s contention would still not stand. In Oposa vs. Factoran, Jr (G.R. No. 101083, July 31, 1993, 224 SCRA 792) the Supreme Court held that the non-impairment clause must yield to the police power of the state. Property rights and contractual rights are not absolute. The constitutional guaranty of non-impairment of obligations is limited by the exercise of the police power of the State for the common good of the general public. In this case, the State makes it clear that the preservation of U.P. property is of primordial concern which is the reason why in passing the law, Congress deemed it fit to provide for safeguards in asset distribution. This is more on the protection of the University itself and its properties.”

“Moreover, it was pointed out that the TOR has been approved long before the new law was passed, but since the project has dragged on for years, the situation now may be different, there may be certain provisions in the TOR that are no longer applicable or needs to be re-visited in order to be beneficial to all the parties involved.”

“Lastly, we call your attention to Section 22 (f) of RA 9500 which states that, “any plan to generate revenues and other sources from land grants and other real properties entrusted to the national university, shall be consistent with the academic mission and orientation of the national university as well as protect it from undue influence and control of commercial interests”. Provided, that such programs, projects or mechanisms shall be approved by the Board subject to a transparent and democratic process of consultation with the constituents of the national university; xxx” (emphasis ours).”

“Further, Section 5 of Article 5 of the contract exempts the University, among others, from any liability, loss or damage to persons and properties during the lease period which is contrary with Section V A.1 Policies and Guidelines of the Department of Health (DOH A.O. No. 2007 – 0021 dated June 6, 2007 on the issuance of a Single License to Operate (LTO), quoted below:

“Section V A. 1 Policies and Guidelines provides, among others:

Ancillary and other facilities that are located within the premises of the hospital shall be included in the LTO.

Sanctions for violations involving ancillary and other facilities, regardless of the ownership, shall be borne by the hospital.”

“Moreover, legal and auditorial review showed absence of the following additional documents/information necessary to determine reasonable assurance of the contract’s compliance to existing government rules to establish the validity and regularity of the transaction:

a. Authority from the National Historical Institute (NHI) for the conversion, rehabilitation and development of the PGH Dispensary Building, a historical three-storey concrete building into the FMAB in compliance with Section 5 of Presidential Decree (PD) No. 260 as amended by P.D. No. 1505, which provides that:

“It shall be unlawful for any person to modify, alter, repair or destroy the original features of any national shrine, monument, landmark and other important historic edifices declared and classified by the National Historical Institute as such without the prior written permission from the Chairman of the said Institute.”

b. As the contractual arrangement for the FMAB Project is under the Build Operate and Transfer scheme, the approval of the Investment Coordination Committee (ICC) of the NEDA pursuant to Section 2.7 of the IRR of R.A. 6957 as amended by R.A. 7718, which provides as follows:

“Section 2.7 Approval of Priority Projects – The approval of projects prosecuted under this Act shall be in accordance with the following:

National Priority Projects – The projects must be part of the Agency’s development programs, and shall be approved as follows:

1. projects costing up to P300 million, shall be submitted to the ICC for approval;

2. projects costing more than P300 million, shall be submitted to the NEDA Board for approval upon the recommendation of the ICC; and

3. negotiated projects shall be submitted to the ICC for it to prescribe the reasonable rate of return prior to negotiation and/or call for comparative proposals.

c. Financial and Technical Evaluation of the Negotiated Lease Contract is required under Section 9.4 of the said IRR, which shall include among others, assessment of the technical, operational, environmental and
financing viability of the proposal vis-à-vis prescribed requirements and criteria/minimum standards;

d. UPM infrastructure/development programs and list of priority projects published and provided to project proponents;

e. The UPM did not invite a Technical Officer from a concerned regulatory body, two representatives from the private sector as non-voting member and representative from the Coordinating Council of the Philippine Assistance Program (CCPAP) as non-voting observer in the Bids and Awards Committee (BAC);

f. Invitation to pre-qualify and bid was only published in the Philippine Star and not in at least two newspapers of general circulation and in at least one local newspaper of general circulation;

g. Information to bidders of the results of the BAC action/decision;

h. Bidders’ acceptance of criteria and waiver of rights to enjoin project;

i. Department of Environment and Natural Resources (DENR) environmental clearance;

j. Notice to Proceed;

k. Insurance; and

l. Monitoring and Supervision Reports.”

“The foregoing conditions cast doubts on the legality and validity of the 25-year FMAB contract of lease.”

“We recommended that management submit the aforementioned information/documents requested for further review and evaluation as well as its legal stand on the issues raised over the subject contract.”

COA said the DOJ comment was forwarded to the UP System Administration through the Vice President for Legal Affairs, Atty. Theodore Te, copy furnished the Auditor. Since the case was already referred to the COA Legal Office, the DOJ's comment will be forwarded to that Office for consideration.

Last March 3, 2010, the Diliman Diary reported on a press conference held by the All U.P. Workers Union, then-PGH Director Jose Gonzales, Faculty Regent Judy M. Taguiwalo and former Student Regent Charisse Banez where it was first revealed that the DOJ had already questioned the validity of the contract (see http://diliman-diary.blogspot.com/2010/03/department-of-justice-up-board-of.html).

This case has turned out to be a major embarrassment for the U.P. Administration because COA has now closed ranks with the DOJ in questioning the contract in the 2009 CAAR even as it is now up for review by the legal department of COA. Additionally, another Diliman Diary story dated April 29, 2010 revealed that the legal personality signing with U.P., Mercado General Hospital, Inc. (MGHI) (see: http://diliman-diary.blogspot.com/2010/04/up-philippine-general-hospital-contract.html) should logically have been disqualified from even bidding on the FMAB project, as its articles of incorporation shows the capital stock of MGHI that is actually subscribed is a meager PhP 2 million only. What is baffling, however is the failure of the U.P. Administration-dominated Board of Regents to disqualify MGHI from bidding on the contract in the first place, which was signed on July, 2009 when the minimum amount of PhP 400 million will be spent on a pharmacy and a medical diagnostics center but where MGHI clearly was severely undercapitalized.

Clearly, such a public-private sector partnership would never have passed muster by the NEDA Board, since the contract does not make clear what is in it for U.P. in terms of such traditional strait-laced financial criteria, such as Net Present Value (NPV), Internal Rate of Return (IRR), Return on Investment (ROI), and acceptability by and among affected constituents which are criteria employed by the NEDA Board in approving large-scale projects. Additionally, the NEDA Board typically would require proof of capability of the project proponent and thus at a mere capitalization of PhP 2 million, MGHI's severe undercapitalization of  a PhP 2 million company that aggressively pursued a PhP 400 million project, causes it to join the ranks of other equally ambitious but tiny companies who dared to bid for government projects far beyond their allowable margin for error commensurate with their financial capabilities.One example of this in the past is the failed attempt in 1996 of Domestic Satellite Co., Inc. (DOMSAT) to band together a consortium of equally tiny companies to launch the first Philippine satellite in space, the Philippine Agila satellite, Inc. (PASI) consortium on a Philippine government owned orbital slot. However, the project ultimately failed when its financing fell apart (see: http://pdff.sytes.net/ar/t2890.htm).

Although the FMAB construction along Taft Avenue has already exceeded 60% completion, with the essential structure finished, the major dillema now facing the U.P. Administration is that COA may actually disallow the contract, leading to a possible capital flight on the part of the investing company, MGHI and its possible "silent" investors. This could create a huge headache, as the remaining renovation works could be left hanging with a possible adverse COA decision disallowing the contract in the pipeline. The question is, why did a project of such questionable legality and financial viability be allowed to fly in the first place by the current U.P. Administration? With the facts starting to emerge, more tough questions are sure to follow, now that the national government authorities are taking a direct hand in investigating this case.

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