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By: Atty. Edgardo B. Prospero and Exequiel Martinez, CPA 1. ADMIN DIRECTLY HANDLED PROJECTS We noted that some projects were retained by the project proponent for them to directly handle and supervise. These projects were not included in the main projects awarded to the three (3) main contractors, but were split or broken into smaller parts or sub-projects. The supply, install, test and commissioning of equipment & its appurtenances were given to Lacto_Asia Pacific Corporation, while civil works portion were shared between Brima Construction and Davao Contractors Development Cooperative (DACODECO). Supply and installation, including commissioning of three (3) units 167 KVA single phase transformer was given to DACODECO. In short, the main component of the project, totaling P98,500,000.00, including cost of extra-works were shared by the three contractors. The rest of the smaller projects which can still be handled by the three (3) main contractors, with an estimated project cost of P25,689,547.00, exclusive of the cost of six (6) units brand new Garbage Trucks & upgrading/rehabilitation of seven (7) units of existing garbage trucks, amounting to P31,520,613.00, and lot acquisition and related expenses, amounting to P13,995,039.00, were directly handled and supervised by the Project Proponent or the City Government. As of December 31, 2013, unused loan or cash-on-hand is P14,137,655.10 per bank statement issued by DBP. A review of the list of projects submitted by Accounting Department revealed that these smaller projects directly handled by the Project Proponent or the City Government has an estimated project cost of less than P5.0 million each. So far, there was no valid explanation why these smaller projects were not included in the main component of the projects awarded to the three (3) main contractors. The cost of said smaller projects with a combined amount of P53,429,451.00 is arrived at the following computation: Source of Funding 1. DBP Bank Loan 2. Equity: 2005-2011 20% Development Fund Total LESS: Projects awarded to three (3) contractors Total Less: 1) Purchase/upgrading of G/trucks & equipts 2) Lot Acquisition & related expenses: 3) Unused Loan-Cash-on-hand: Amount P163,638,000.00 25,181,000.00 P188,819,000.00 103,723,554.00 P85,095,446.00 31,273,205.00 13,995,039.00 14,137,655.00 P59,405,899.00
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(As of Dec 31,2013 as per Bank Statement issued by DBP) Actual Projects directly handled by the City Govt


The decision to retain some of the smaller projects or sub-projects under the direct supervision of the project proponent is good, but it may not be so effective considering the fact that the City Government lacks sufficient manpower, engineers and technical personnel to manage and supervise these projects. The City Government is not also equipped with sufficient tools and heavy equipment needed to fast track the completion of the projects. A classic example is the Site Development Project for CMRCF, with project cost of P4,657,192.32, under the supervision of the City Engineers Office. During the interview, a project engineer of the City Engineers Office assigned in the Site Development Project aired his disappointment over the slow and lack of support from the City Government when it comes to hiring of project engineers to supervise the project. He was just assigned as Project Engineer of CMRCF project in addition to his present job at the City Engineers Office. He allegedly submitted an organizational chart showing his proposed manpower requirement for the duration of the project, but unfortunately, it was never acted upon by the City Government. On the other hand, had these projects been awarded to reliable and duly accredited contractors, the regular employees of the City Government would be able to devote their time to the most urgent public services program of the city. Because there was no full time project engineers who managed and supervised these smaller projects, it has contributed to the evident and substantial delay in the completion of the CMRCF project. As gleaned from the records, the first loan release in the amount of P9-million happened in April 2006, and the bulk of the releases were later on made on December 2007 and December 2009, in the amount of P62.44 million. and P78.05 million respectively. Sad to say, the project completion dragged on and allegedly completed in the year 2013. Recommendation: We recommend, therefore, that for big projects that will be undertaken by the City Government in the future, these projects must not be split into smaller portion or sub-projects, but instead, it should be grouped into two or three packages, and the same must be subjected to public bidding. Except on very extreme cases, the City Government should not retained some of these projects for them to directly handle and supervise. We did not underestimate the capability and technical expertise of some of the engineers in the City Engineers Office, but our concern is the existing bureaucracy that we have in the government. Classic example, it is very difficult to move and process certain materials/purchase requisition without passing through a tedious and long procurement procedures or bidding process before said item/materials are received by the requisitioner.

2. INCLUSION OF CMRCF NON-RELATED PROJECTS We also noted that some projects which are not directly related to CMRCF projects were included and funded from the appropriation intended for CMRCF. Based on the listing of projects submitted, these projects, with their corresponding cost were included as part of the CMRCF project as follows: Name of Project Amount
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1. 2. 3. 4.

Agri-Demo (Agri-Crop Demonstration) Butterfly Farm Agri-Demo (Nursery Propagation) Construction of Agri-Demo Nursery Total

P 400,000.00 167,419.00 200,000.00 146,076.00 P 913,000.00

Based on interviews from concerned individuals, said projects are not even existing and functioning. In fact, no one has been on top to manage these projects. This is a violation of Sec. 23, paragraph (e) of the General Conditions of the Term Loan Agreement with DBP which provides that The Borrower shall ensure that the proceeds of the Loan will be used exclusively for the purpose for which it was granted . . . . . ..

3. SALARIES AND WAGES FOR ADMIN HANDLED PROJECTS Based on the data gathered from the Accounting Department of the City Government, labor cost (salaries and wages) incurred for Administration handled projects are quite substantial. The following profile showed salaries and wages paid/funded from bank loan and equity coming from the 20% Development Fund incurred from September 2005 up to April 2012: Year Incurred 2005 2006 2007 2008 2009 2010 2011 2012 Paid/ Funded From: Equity DBP Loan P 920,000.00 P 396,206.00 522,879.54 2,232,229.92 111,836.00 3,326,397.40 924,153.00 1,460,313.97 841,761.68 685,783.00 398,278.17 __ 42,760.48 Total P 3,037,978.00 P 8,824,639.16 ========= ============ Amount P 920,000.00 919,085.54 2,232,229.92 3,438,233.40 2,384,466.97 841,761.68 1,084,061.17 42,760.48 P 11,862,617.16 =============

Said Salaries and Wages incurred amounting to P8,824,639.16 was paid through DBP Checking Account No. DBP-0820016200-080/0-05673-820-8-GF maintained for MRF Project, while the P3,037,978.00 was paid out from equity coming from the 20% Development Fund. Per interview with concerned person from Cashiering Section, these are salaries and wages of casual employees paid in the form of cash advances to Tessie Generalao, one of the cashiers in the Treasurers Office. However, these cash advances will be liquidated later on by the concerned cashier once the individual casual employees had already affixed their signature on the payroll sheet acknowledging their receipt of the amount representing their net pay as indicated therein. Due to lack of material time, we were not able to dig deeper into the supporting documents, such as the payroll sheet and DTRs of the individual casual employees, to determine whether or not the net pay of said casual employees were really received by them. The Deployment Order is prepared by the City Environment Management Office (CEMO) and approved by the City Mayor. The Deployment Order is reviewed by the City Budget Office for allocation. HR prepares Job Order (JO's) and forwards the same to CEMO who prepares the payroll with attached DTR's. HR checks the computations and if in order
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submits the same to Accounting for processing of payment. We have no time to verify and determine whether or not the number of casual employees whose wages were charged to CMRCF project are legitimate and the number of casual employees hired represent the actual number of persons actually needed in the project. A quick glance of the present Job Order (JO) System for casual employees of the City Government revealed a need to improve and strengthen the present internal control system in the system itself. The present BAC Chairman confirmed that Job Order (JOs) does not anymore pass to BAC for public bidding and it is the HR who prepares the JOs for casual employees and the CEMO prepares the payroll of casual employees and submits the same to HR for checking, and lastly to Accounting for processing of payment. In our interview, it was confirmed by the Head, Planning & Engineering of the City Engineers Office that the budgeted project cost allocated for Direct Labor is based on pe rcentage to the total project cost. He mentioned between 35-40% as the standard. For example, in the Site Development Project for CMRCF, with a total estimated project cost of P4,657,195.00, the allocated budget for direct labor (salaries and wages) is P1,895,625.40 or roughly about 40.7%. In short, there is no actual estimate prepared for a number of casual employees who will be hired and worked for the project. Though this might be an accepted sound engineering practice, but nevertheless, it would provide a room for abuse in relation to the hiring of casual employees. There is no means of checking whether the number of casual employees who will be hired corresponds to the number of workers actually needed in the project. Engr. Taban confirmed that they are the one controlling the number of casual employees covered under the JO system, but they did not discount the possibility that more casual employees had been hired more than what they need because of political consideration. With the huge amount of salaries and wages incurred, it seems that the hiring of casual or contractual employees was not properly evaluated and determined. This is the very reason why the expense report prepared by Accounting Department showing a comparison between the budgeted project cost and actual expenditures incurred particularly on labor cost for the smaller projects directly supervised by the project proponent showed a zero variance, meaning the actual cost incurred is exactly the same with that of the budgeted project cost. This is highly improbable and ridiculous. By allocating or putting up estimated project cost for direct labor (salaries and wages) in the budget, based on percentage to the total project cost, anybody who has a direct influence and control in the project may be tempted to fully utilize the budgeted direct labor cost in the budget even without necessarily reviewing and evaluating whether or not the hiring of casual employees is really necessary. In short, the system itself is not effective because it provides room or opportunity for corruption. Some public officials may take advantage of this system for their own personal or political purpose. At present, we do not have a valid answer why the project proponent opted to split the project into smaller ones instead of packing them up into larger portion so that these will be subjected for public bidding. But my analysis pointed out to this area as the real reason why the project proponent decided to break the project into smaller ones with project cost not exceeding P5,000.00, in order not subject them for public bidding and retained them under the Admin handled projects. The present practice, allowing the cashier to pay the wages of the casual employees in the form of cash advances, subject to liquidation in his or her name based on the duly approved payroll sheet may be acceptable by reason of practicality. But internal control
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must be strengthened in this area especially on the procedure and manner of receiving the money or net pay of the casual employees. The casual employee must be the one to receive his or her net pay in order to ensure that the wages are received by the respective casual employees. The alleged practice of having one person to receive the net pay in behalf of all casual employees in the project, similar to what happened in the Cayaco case, must be stopped.

Recommendation: a) We reiterate that splitting of projects into smaller ones in order to exempt them from public bidding and retained these projects for direct supervision by the project proponent must be discouraged. b) Budget allocation for direct labor, pre-engineering, project management, and quality management based on percentage to the total project cost must be stopped. Planning & Engineering Section of the City Engineers should make a review and recommendation to improve the direct labor cost allocation in the budget. Budget allocation based on actual number of persons really needed in the project is highly recommended.

4. PROJECT MANAGEMENT, PRE-ENGINEERING & QUALITY CONTROL COSTS We also noted that costs for Project management, pre-engineering and quality control are quite significant. Based on the Expense Report prepared by Accounting Department, the CMRCF project incurred a total of P2,472,932 for these three (3) cost accounts broken down as follows: Pre-Engineering Project Management Quality Control Total P 1,334,348.00 808,450.00 330,134.00 1,472,932.00 ==========

Again, because of lack of material time, we did not anymore review the supporting documents used as the basis in arriving at the figures stated above. But in an interview with Engr. Taban, he confirmed that the budgeted project cost for pre-engineering, project management and quality control is still based on percentage to the total project cost, same as that of the allocation for labor cost. This is also covered by Job Order (JOs) similar to the JO for salaries and wages for casual employees. We do not know exactly the actual cost composition for project management expenditure as well the pre-engineering cost and whether or not the persons hired are casual employees or consultants. Based on the interview, there were no project consultants hired. The management of the project before and during the project implementation was handled by the regular employees of the City Government.

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If these are regular employees of the City Government, why the cost is so significant? Is it partake of an honorarium or compensation for an additional services rendered in addition to their present job as regular employees? This has to be verified.

5. BANK RECONCILIATION The Bank Reconciliation Statement for Checking Account No. 0820-016200-080 prepared by Accounting Department showed an adjusted balance of P 14,144,881.06 as of September 30, 2013. On the other hand, the Subsidiary Ledger maintained by Accounting Department of the City Government for DBP Checking Account No. 802-016200-080 showed the same running balance of P14,144,881.06 as of the same period. This checking account is the depository account of the loans released from the Development Bank of the Philippines amounting to P172,638,000.00, the bulk of which is payable in twelve (12) years, inclusive of two (2) years grace period. Said checking account is opened purposely for this loan from DBP. The Subsidiary Ledger for DBP Checking Account No. 802-016200-080 is maintained by Accounting Department to record and document the transactions relative to the receipt of bank loan and the various disbursements/expenditures for the CMRCF Project. As verified, the Expenditures Report relative to the P172,638,000.00 loan from DBP prepared by Accounting Department showed a remaining balance of only P9,899,426.60 or a positive variance. Ms. Delia B. Sausa of the Accounting Department has committed to conduct a further review of the transactions in order to reconcile the accounting records. To date, we have not yet received copy of the latest bank statement coming from DBP as of December 31, 2013. Said bank statement will be used for the preparation of bank reconciliation statement as of December 31, 2013. The adjusted balance in the December 31, 2013 bank reconciliation will then be compared to the running balance of P9,899,426.60 as reflected in the Expense Report prepared by Accounting Department in order to have an apple to apple comparison.

Submitted by:

Atty. Edgardo B. Prospero

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CMRCF Financial Review

By: Exequiel Martinez, CPA

1. Per feasibility study, the following are the revenue potentials of the CMRCF per year. a. Compost Fertilizer (16,083,360 kg x P3.00) b. Recyclables (5,606,400 kg x P1.00) c. Concrete Bricks (2,304,000 kg x P4.00) Total per year P 48,250,080 P 5,606,400 P 9,216,000 P 63,072,480 ==================

Up to now, nothing is realized from the above revenue potentials. On the contrary, present monthly payroll alone of about P500,000 or a total of P6,500,000 per year is incurred to operate the facility. 2. Although the actual expenditures of the project which is already accepted as of 12/31/2013 was already P178,322,260 it is only capable of processing 16MT of solid waste. The project is estimated to cost P188,819,000 and is expected to be capable of processing 80MT per day. Therefore, the actual project cost is already 94.45% of estimate, while the actual processing capacity is only 20% of the expected processing capability. 3. There is no adequate system and procedures to record and report the processing of activities of the CMRCF for proper evaluation and monitoring. Its processing shift should be able to record and report important information such as: 1. 2. 3. 4. 5. MT of solid waste processed Fertilizers, bricks produces Recyclable waste materials gathered Manpower complement Problems encountered

4. Loan drawdowns were made very much ahead of their use/application resulting to big interest cost to the city. DBP LOAN DRAWDOWN April 31, 2006 August 9, 2006 9,000,000.00 7,538,000.00 April 21,2006 March 20, 2008 MAJOR PAYMENTS 5,783,418.30 land purchase 5,186,453.89 Brima
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August 9, 2006 December 9, 2009 February 2012

62,440,000.00 78,050,000.00 15,610,000.00 172,638,000.00

December 24, 2008 February 4, 2009 March 26, 2009 July 1, 2009 July 15, 2009 December 8, 2009 March 12, 2010 June 17, 2010 August 23, 2010 August 25, 2010 November 5, 2010 December 30, 2010 February 9, 2011 April 11, 2011 July 18, 2011 August 26, 2011 November 23, 2011 March 5, 2012 March 29, 2012

1,057,021.87 M. Dvo. Co. 8,434,962.29 Brima 8,774,844.38 Brima 6,183,701.89 Brima 2,420,669.76 Brima 1,319,662.76 Brima 2,051,251.12 Brima 445,088.28 Brima 4,137,608.38 DACODECO 4,452,522.79 Lacto-Asia 5,681,559.56 Lacto-Asia 5,277,183.01 DACODECO 8,068,149.03 Lacto-Asia 6,716,592.07 DACODECO 2,299,730.00 Lacto-Asia 9,922,815.67 DACODECO 1,508,539.29 Lacto-Asia 2,793,131.80 Lacto-Asia 4,429,824.92

P 96,944,730.41 ====================

As of September 30, 2013 of the P9,000,000.00 DBP loan made on April 3, 2006, P5,400,000.00 principal was paid, but P393,093.00 of interest was also paid. The P163,638,000.00 borrowed from DBP, P80,8299,396.00 principal was already paid, but P56,675,92.00 of interest was also paid. Said interest cost amount could have been reduced if the drawdowns were made closed to the major payments made. Although the term Loan Agreement mentioned only three drawdowns, these could have been made closed to major payments made. Equity. Please note that from 2005 to 2009, the city also infused P25,181,000.00 as Loan

5. Based on our initial review of the records, it is better to conduct a detailed review of the major payments to contractors of the CMRCF.

Submitted by:

Exequiel Martinez, CPA

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