Findings No.2 COA Annual Audit Report 2005

July 25, 2008

.2. Reasonableness of the repayment schemes on the Build Operate and Transfer (BOT) projects in the total amount of P312,832,807.01 could not be determined due to the absence of complete documentations necessary for the review of the total investment on the project and the absence of formula in the determination of the margin of profit.

Republic Act 6957, as amended by Republic No. 7718 provides for the Implementing Rules and Regulations authorizing the financing, construction, operation and maintenance of infrastructure projects by the private sector and for other purposes to recognize the indispensable role of the private sector as the main engine for national growth and development and provide the most appropriate favorable incentives to mobilize private resources for the purpose.

An Audit Observation No. 2006-01-001(100) dated January 12, 2006 was issued to the Local Chief Executive of Cagayan de Oro City as a result of the Office of the Audit Team Leaders evaluation on the documents submitted relative to the compliance with the pertaining provisions of the Implementing Rules and Regulations of RA 7718 as required under Audit Observation Memorandum Nos. 2005-10-03(100) and 2005-12-01(100) dated October 05, 2005 and December 10, 2005, respectively.

On November 18, 2005 as response on the AOM was received from Mrs. Estrella F. Sagaral, City Administrator-Designate stating therein the comment/reply on specific documents required for submission. Verification on the reply made, we believe that the City partially complied the preparation of documents as to compliance with RA 7718 and the amendments made on the Contract Agreement on the Redevelopment of Carmen and Cogon Market resulted to a change of contractual arrangement from a Build to Operate Transfer (BOT) to a mixed contractual arrangement particularly described below:

Redevelopment of Carmen Market:

Build Operate and Transfer (BOT) on the Commercial Complex which covers all the pre-identified commercial rentable spaces agreed to be under the Project-Proponent operation and management located at the ground floor as indicated in the floor plan and covered the whole of the second floor, all comfort/rest rooms and shower rooms.

Build and Transfer (BT) on the Public Market and PUJ Terminal which is to be operated and managed by the City Government with the agreement that revenue shares of eighty percent (80%) of the gross monthly income will be paid to the Project proponent every seventh (7th) working day of the following month.

A provision was also included that for the failure of the City Government to remit on time the monthly revenue share shall be considered as default on the part of the city Government and the total unpaid and overdue monthly revenue share shall bear interest at two (2%) percent per month.

Redevelopment of Cogon Market

Build Operate and Transfer (BOT) the commercial complex which shall cover all areas of the third floor of the complex agreed to be under the proponents operation and management as indicated in the floor plan and all comfort/rest rooms and shower rooms in the building.

Build and transfer (BT) in the Public Market which comprises all stalls and spaces in the ground floor and second floor which is to be operated and managed by the city government with the agreement that revenue share of eighty (80%) of the gross monthly income will be paid to the project proponent every seventh (7th) working day of the following month.

The above-mentioned contractual arrangement resulted to be application of a mixed repayment scheme as provided under Section 12.15.1 of the Implementing Rules and Regulation of the Republic Act No. 7718, quoted hereunder as follows:

“12.15.1 General Classification. - The repayments schemes for the projects shall depend on the contractual arrangement used therefore, which shall be generally classified as follows:

Arrangement where the project proponent operates the facility for a fixed term and thereafter, transfers the facility to the Agency or LGU concerned (BOT, CAO, DOT, ROT);

Arrangement where the project proponent is allowed to own and operate the facility (BOO, ROO);

Arrangement where the project proponent builds and transfer the facility to the Agency or LGU concerned, but operates the facility on behalf of the Agency or LGU (BTO) through management contract;

Arrangement where the project proponent does not operate the facility (BT, BLT).

For projects undertaken through arrangement described in (a) and (b) above, the project proponents shall be repaid by authorizing it to collect reasonable tolls, fees, and charges for a fixed term. In the case of arrangement described in (a), such term shall in no case exceed fifty (50) years. However, arrangement described in (b), the project proponent, upon renewal of its franchise or contract with the Agency or LGU, may be allowed to continue collecting toll, fees, charges and rentals for the operation of the facility or the provision of the service.

Projects undertaken through arrangements described in letter © above, may be repaid either of the following two options. Under the first option, the Agency/LGU provides amortization payments as may be appropriate and reasonable. Tolls, fees, rentals and charges that the project proponent may collect while operating the facility on behalf of the agency maybe applied directly to the amortization payments. Moreover, the facility operator may be repaid by the Agency/LGU through the management fee as may be incorporated in the management contract entered between the Agency/LGU and the project proponent. Under the second option, the proponent may be allowed to directly collect tolls, fees, rentals and charges for a fixed term. Projects amortization payments as may be appropriate and reasonable. Where applicable, the proponent may likewise be repaid in the form of a share in the revenue of the project or other non-monetary payments, such as, but not limited to the grant of commercial development rights or the grant of a portion or percentage of the reclaimed land, subject to the constitutional requirement that only Filipino citizens or in the case of a corporation only those with least 60% Filipino equity will be allowed to own land.

Arrangements which are variations of the foregoing and/or which have been approved/authorized by the President of Philippines upon the recommendation of the ICC.

Projects undertaken through arrangements prescribed under (e) may be repaid through any schemes as recommended by the ICC and approved/authorized by the President of the Philippines.”

Based on the above-mentioned provisions, the repayment schemes for the projects should be:

under letter (a) for the commercial complex of the project wherein the project proponents shall be repaid by authorizing it to collect reasonable tolls, fees, and charges within the cooperation period provided in therein, and

under letter (d) for the Public Market wherein the project proponent may be repaid by the Agency/LGU through amortization payments as may be appropriate and reasonable.

In connection with the repayment schemes whereby the project proponent was authorized to collect tolls, fees, charges and rentals, Section 12.15.2 provides the following as quoted:

“Tolls, fees, rentals and charge. -

General. – The tolls, fees, charges and rentals that a project proponent may generally charge for the use of the facility shall be those incorporated in the contract and, if by existing laws, approved by the appropriate government regulatory bodies. The proposed tolls, fees, and charges shall be considered by the Agency or LGU in the evaluation of the bid, taking into account the reasonableness thereof to the end-users of the facility.”

Review and verification of the agreement as amended disclosed that no provision was made about the repayment scheme to be made on the commercial complex in both BOT projects.

The facility usage fee provided in the original agreement under the Redevelopment of Carmen Market was deleted while in the Redevelopment of Cogon Market, no provisions was disclosed therein, which deprived the City Government of such income out of the grant made to the project proponent.

Initial evaluation on the actual collections made by the local government on both public markets as conducted by the CEED disclosed that the City Government was not able to meet the eighty percent (80%) collection of the expected gross monthly income to sustain the payment of the revenue share to be paid to the project proponent in the operation and management of the Public Market as shown on the succeeding page.

Redevelopment of Carmen Market:

Collection for the

month

80% Collection

Per SL

Payments Made

Accumulated

Difference

Reference

Amount

Period Billed

1/1-31/05

225,884.94

2/1-28/05

417,393.74

PCI CK#3263479

1,056,144.95

Jan. 2005

-412,866.27

3/1-31/05

485,443.79

PVB CK117411

953,937.38

Feb. 2005

-881,359.86

4/1-30/05

PCI CK#263529

1,056,144.95

Mar. 2005

-1,937,504.81

5/1-31/05

964,068.36

DBP CK#19379697

1,052283.76

Apr. 2005

-2,025,720.21

6/1-30/05

641,003.86

DBP CK#19379722

1,072,016.95

May 2005

-2,456,733.30

7/1-31/05

665,932.10

DBP CK#19379770

1,037,435.76

June 2005

-2,828,236.96

8/1-31/05

842,829.42

LBP-V CK#50090

1,072,017.00

July 2005

-3,057,424.54

9/1-30/05

603,992.22

LBP-V CK#50222

1,072,016.95

Aug.

2005

-3,525,449.27

10/1-31/05

411,433.92

LBP-V CK#50256

1,087,907.36

Sept. 2005

-4,201,922.71

11/1-30/05

231,294.26

DBP CK#19380053

1,098,439.35

Oct. 2005

-5,069,067.80

12/1-31/05

1,192,410.39

PCI CK#263678

1,085,559.76

Nov. 2005

-5,175,918.43

TOTAL

6,681,687.00

11,643,904.17

-5,175,918.43

B. Redevelopment of Cogon Market:

Collection for

the month80% Collection

Per SLPayment MadeAccumulated

DifferenceReferenceAmountPeriod Billed7/1-31/05No SL was maintainedJune 20058/1-31/05560,293.20July 2005560,293.209/1-30/05858,970.42Aug. 20051,419,263.6210/1-1/05728,919.10Sept. 20052,148,182.7211/1-0/05655,472.17DBP CK#193800533,948,539.44Oct. 2005-1,144,884.5512/1-31/051,238,028.91PCI CK#2636783,821,167.20Nov. 2005-3,728,022.84TOTAL4,041,683.807,769,706.64-3,728,022.84

As could be gleaned on the table, collections from both CEED Office could not be extracted due to delayed posting in the Subsidiary Ledger in the Accounting Office because the aforementioned Office is also late in the submission of the Report of Collections and Deposits of approximately one month.

The failure to meet at least eighty percent of the expected gross income oblige the City Government to look for source of fund to cope up its obligation including the expenditures for the manpower of the operation and management.

The City Administrator-Designate commented the following :

“1. That there are two BOT schemes applied in Carmen and Cogon Markets BOT Projects, the Build-Transfer (BT) scheme and Build-Operate-Transfer (BOT) scheme.

For the Public Market, which is the area located at ground floor, except of pre-determined commercial spaces of Carmen Market and all areas of ground and second floors of Cogon Market, BT scheme was applied. N the completion of the construction of the projects, the Public Market was turned over to the City Government for its Operation.

For Commercial Complex, which is the area not covered under Public Market, BOT scheme was applied. In the completion of the construction of the projects, the UKC operated the Commercial Complex for the period specified in the contract and thereafter turned over to the City Government for the operation.

2. On Repayment Scheme: The Proponent (UKC) was repaid in BT and BOT arrangements by the following scheme as reflected in the agreement.

The City government pays the project proponent of 80% of the gross monthly income of Public Market of both Carmen & Cogon Markets within 20 & 25 years, respectively.

The City government grants the proponent to charge and collect fees/rentals and other income in the Commercial Complex of Both Carmen & Cogon Markets within the cooperation period.

Under the BT/BOT Agreement, the City government will handle the collection of stall rental fees/revenues, garbage disposal and imposition of policies on the vendors in the public market. Maintenance including the repair, cleanliness, lighting, security and others in the whole complex shall be the proponent’s responsibilities.

Basis of Repayment Scheme:

In method used to calculate reasonableness of repayment schemes was the analysis using the financial viability indicators (or Return of Investment), such as the Financial Internal Rate of Return (FIRR) and the Net Present Value (NPV). The revenues of the project were mainly the rental fees of the spaces; other income such as comfort rooms, ads, and other charges are very minimal. However, higher revenues were restricted by lower current rental charges in the vicinity and limited rentable spaces. The Return of Investment of these BOT projects depends upon the income share of the public market, occupancy rate of the commercial complex and the number of cooperation period.

BOT Projects are purely private capital in which the repayment schemes are applied in order to recover its investment. In the determination of the reasonableness of repayment scheme, the cost of money is the baseline of the negotiation at the procurement state. At that time, the appropriate or the prevailing cost of money (as weighted Average Cost of Capital (WACC) was 15% to 20%, however, the proponent’s cost of money used was 14% and the WACC was 12.5% since the prevailing Commercial Loan interest was down to 11% from 16%.

Note: The WACC is the benchmark indicator used to evaluate the profitability of the investment against other investment opportunities.

The FIRR should be at least as high as the WACC in order for the project to be considered feasible and NPV @ discount rate of WACC should be not less than zero.

City Government Interest:

On the primary objectives of the government in the negotiation is to ensure the viability of the project to sustain the project within the cooperation period and avoiding the bankruptcy of the proponent. That is why the City Government is focusing on the appropriate financial return of the proponent. Hence, the City prioritized on the improvement of public service rather than more profit derived from the projects. Anyway, the City subsidized the operation of those markets before.

For government investment, the government is particularly looking on the economic viability rather than the financial profitability of the project. The economic viability is estimated by comparing the present values of investment and benefits. The completion of BOT projects (Carmen & Cogon) resulted to (without the cost of the city) the increase of economic activities in the vicinity, improved the income level of market vendors/stall holders, increase employment, solved the unsanitary problem, eased the traffic congestion, etc.

3. Not like the commercial complex wherein it has lower expected number of taker, the public market has enough takers to occupy all stalls to reach the occupancy rate of 95% to 100%. In the calculation, assuming that the occupancy rate is maintained at 90%, therefore, the income of the city is 10% of the projected gross income. This income is more than enough to cover the city’s operation costs of these markets. Note: The operation cost of the city covers the salary of the collectors (Personal Services) under the City Treasurer’s Office. Other local revenue is not covered under the agreement, is the collection of Business Permits/Licenses of all stalls and rented commercial spaces.

4. As built plans consisting of 53 sheets for Carmen Market and 54 sheets for Cogon Market were submitted.

Due to time constraints and in consideration that the Redevelopment of the City Slaughterhouse Project has just been completed, the Operator is still in the process of processing the as-built plans with the City Building Office, hence, we request for 30 days extension period.”

Rejoinder:

The City Management has not clearly shown the formula for the computation of the return of investment including the rate of return that should be made as repayment to the project proponent within the cooperation period.

While they consider the determination of the reasonableness of repayment scheme based on the cost of money at procurement stage, we can not conclude that the 8-0%-20% sharing agreement on the public market and the grant to the proponent the collection and the charges of fee/rental and other income in the communal complex will be reasonable.

The Local Government Unit disregarded the provision on the obligation of the project-proponent to pay the % usage fee which is the original agreement of the parties on the pure BOT arrangement before the amendment.

Attention should be made that the fees/rentals that will be charged by the project-proponent on the Communal Complex should be provided in the contract agreement.

Further, LGU had not completed the submission of the proposed Approved Detailed Engineering Designs and Plans of both BOT Projects including the submission of the As Built Plans for the Slaughterhouse Redevelopment.

Recommendations

Review of the contract agreement of both BOT projects and determine the reasonableness of the repayment scheme, considering the absence of the provision of repayment scheme on the Commercial Complex and the provision of sharing the revenue of the Public Market at 80-20%.

CLICK HERE for the latest 2nd Hand Laptops, Mobile Phones, SMART/ GLOBE /TALK 'N TEXT/ TOUCH MOBILE / SUN CELLULAR Postpaid, Pre-paid and International Roaming PROMOS, Philippine Airlines (PAL) and Cebu Pacific Airlines Airline AIRFARE DISCOUNT tickets for sale!

Check out our Updated/Latest List of GOVERNMENT JOBS AND OTHER GOVERNMENT VACANT POSITIONS, PRIVATE JOBS, PRIVATE FULL-TIME JOBS, PRIVATE PART-TIME JOBS and OTHER ONLINE JOBS in this link!

Written by admin · Filed Under Cagayan de Oro, Commission on Audit