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Republic of the Philippines

COMMISSION ON AUDIT
Commonwealth Avenue, Quezon City, Philippines

ANNUAL AUDIT REPORT


on the

PHILIPPINE NATIONAL RAILWAYS

For The Year Ended December 31, 2014

TABLE OF CONTENTS
Page No
EXECUTIVE SUMMARY

i - vi

PART I - AUDITED FINANCIAL STATEMENTS


Independent Auditors Report

1-3

Statement of Management Responsibility


Statement of Financial Position

Statement of Comprehensive Income

Statement of Changes in Equity

Statement of Cash Flows

Notes to Financial Statements

8 - 30

PART II - AUDIT OBSERVATIONS AND RECOMMENDATIONS


A.
B.
C.
D.
E.
F.
G.

Financial and Compliance Audit


Value for Money
Adequacy of Internal Control
Compliance with Tax Laws
Gender and Development
Compliance with the GSIS Act of 1997, the
National Health Insurance Act of 2013 and
Remittances with the Pag-Ibig Fund
Status of Audit Suspensions, Disallowances and
Charges

31 - 76
76 - 80
80 - 85
85 - 88
88 - 89
90 - 91
91 - 97

PART III - STATUS OF IMPLEMENTATION OF PRIOR YEARS


AUDIT RECOMMENDATIONS
Status of Implementation of Prior Years Audit
Recommendations
Annex A

98 - 111
112 - 115

EXECUTIVE SUMMARY
A.

Introduction
Philippine National Railways (PNR)
1.

The PNR is a wholly-owned government corporation created to provide railroad and


transportation system. On August 20, 1971, RA 6366 was issued amending certain
provisions of RA 4156 with the objective of rehabilitation and modernization of transport
facilities to effectively perform mandated tasks. With the expanded role of the PNR in the
total economic and social development of the country it was imperative to facilitate the
restoration of abandoned lines, and expansion of line services; thus, re-amendment of
several provisions of the Corporate Charter was made four years later upon the
issuance of Presidential Decree No. 741 on July 3, 1975. Among the changes made to
expeditiously attain the objectives was the increase in PNRs authorized capital stock to
P1.5 billion.

2.

The PNR provides one of the oldest and thriving mass transport systems in the country.
The agency survived through the years, from the steam engine era to dieselization
period, enduring world wars, revolutions, and calamities that caused interruption on
railroad operations. Its term of existence was extended for another 50 years after
expiration last June 20, 2014. Republic Act No. 10638 was approved by the President
of the Philippines on June 16, 2014, amending RA 4156.

3.

To contribute in the rapid growth of the Philippine economy, the role of the PNR is to
provide mobility in transport system at minimum passenger and freight prices possible.
In 2014, the PNR operated the Metro Manila Commuter Service (MMCS) with service
routes from Tutuban to Alabang running average of 52 trips daily. Train service was
extended from Bian to Calamba City in Laguna with two trips per day. It also served
the Bicol Commuter providing transportation service to train passengers between Naga
City and Sipocot, Camarines Sur using one train set of 3-rail cars in four trips per day.
With 21,777 train trips in year 2014 compared to 20,218 trips in year 2013, PNR was
able to carry 24,671,954 passengers during the year as against 19,968,784 in the
previous year thus, posting an increase in ridership by 23.55%.

Scope and Objectives of Audit


4.

The audit covered the transactions, accounts and operations of the PNR for CY 2014.
The audit was conducted to determine (a) the level of assurance that may be placed on
the assertions of Management on the financial statements; (b) the propriety of
transactions and compliance with existing rules and regulation as well as managements
policies; and, (c) the extent of implementation of prior years audit recommendations. .

5.

The audit involved performing procedures to obtain audit evidence to determine the
fairness of presentation of the financial statements and the propriety of the financial
transactions, in accordance with the Philippine Standards of Auditing, applicable laws,
rules and regulations. We identified the following accounts as thrust of audit conducted
on a test basis: Plant Property and Equipment including Construction in Progress,
Rental Receivable with related account of Income from Lease of Property, Subsidy from
the National Government, taxes on fuel Due to Bureau of Internal Revenue, Honoraria,

Per Diems, statutory deductions on salaries due for remittance to the GSIS, Philhealth
and Pag-Ibig and Cash in Bank.
B.

Financial Highlights (In pesos)


Financial Position

Assets
Liabilities
Equity/Capital Deficiency

2014

As restated
2013

Increase /
(Decrease)

51,896,055,986

52,824,149,901

(928,093,915)
361,440,272
(1,289,534,187)

1.8
1.4
20.7

26,476,042,530
25,420,013,456

26,114.602,258
26,709,547,643

Results of Operations

Total rail and non-rail revenue


Personal Services
Maintenance & Other
Operating Expenses
Financial Expenses
Total other income (expenses)
Subsidy from Natl. Govt.
Net loss

C.

2014

As restated
2013

Increase/
(Decrease)

515,500,949
102,773,148

401,023,352
99,198,000

114,477,597
3,575,148

28.5
3.6

789,394,898
288,200,327
153,146,827
178,808,276
332,912,321

567,912,203
225,307,544
(25,669,591)
254,605,291
262,458,695

221,482,695
62,892,783
178,816,418
(75,797,015)
70,453,626

39.0
27.9
696.6
(29.8)
26.8

Auditors Opinion
An adverse opinion was rendered by the Auditor on the fairness of presentation of the
financial statements of the PNR as of December 31, 2014 because:
1. Physical inventory of Property, Plant and Equipment (PPE) was not undertaken to
establish the existence of the assets consisting the account. Moreover, the carrying
value of PPE amounting to P50.98 billion as of December 31, 2014, comprising
98.2% of Total Assets of P51.90 billion was misstated with the value of Land under
PPE recognized at zonal value. Managements disclosure in supplemental Note 5 to
the Financial Statements (FS) that Land was carried in the books at zonal value did
not correct the misstatement of the balance of PPE as under Philippine Accounting
Standards (PAS) No.16, the generally accepted valuation of PPE was either at cost
or appraised value determined by an independent appraiser. Furthermore, building
structures carried in the books at estimated cost of P31.05 million were not
derecognized in the books upon demolition which was accomplished without adhering
to prescribed rules.
2. The reported year-end balance of the Construction-in-Progress (CIP) account was not
correctly stated as it included P213.31 million costs of bridges and P26.99 million
building stations and P2.69 million related costs of other projects already completed.
Also, borrowing cost capitalized of P414.61 million on loan funded projects already
completed was still carried under the CIP account. There were also unaccounted
ii

charges of P379.58 million comprising the beginning balance of the account; and,
improper charges of recoupment of advances to Contractors of P6.93 million.
3. The accuracy of the reported Rental Receivable-TPI of P361.86 million under Note 9
of the FS was uncertain as consisting of rental arrears of more than P316.68 million
which had remained uncollected for a long period of time due to unresolved issue on
escalation rate whether compounded or simple rate. . On the other hand, Rental
Receivable-Other Lessees of P156.26 million as of December 31, 2014 included
unconfirmed accounts totalling P71.96 million and double recording of accounts
amounting to P1.68 million..
4. The year-end balance of Cash In Bank account included dormant bank accounts with
balances totaling P1.89 million and long outstanding reconciling items of unrecorded
disbursements amounting to P6.15 million
For the significant accounting deviations and other deficiencies cited above, the Auditor
recommended compliance with the provisions of PAS No. 16 and conduct of physical
inventory. Further, Management should undertake appropriate actions to correct and present
fairly the balances of accounts in the financial statements as of reporting date.
D.

Significant Audit Observations and Recommendations


In addition, the following are the other significant observations and the corresponding
recommendations, the details of which were discussed in Part II, together with the other audit
observations and recommendations:
1. The propriety and legality of the May 2014 Supplement to Contract of Lease entered
into by and between PNR and SM Prime Holdings, Inc. with contract price of
approximately P4.41 billion for period of 25 years were found questionable
considering (a) the major changes from the 1983 Original Contract of Lease which
was (b) unimplemented for more than 31 years and (c) transfer of rights and
obligations had been made by the Lessee.
Also, P150.00 million of the unearned income from lease due for the first 12 years of
the contract had been collected in advance even if the supplemental contract has not
been ratified by the PNR Board of Directors. In the computation of the present value
of the fixed annual rental due for the 1st 12 years collected in advance, the provision
on escalation at 10% every four years at compounded rate was not considered, thus
the computed total unearned income from lease was deficient in amount by more
than P190.42 million.
Recommendation:
Conduct immediate review prior to ratification by the PNR Board of Directors of the
provisions contained in the May 2014 Supplemental Contract of Lease particularly,
the revisions or amendments made to the Contract of Lease that are
disadvantageous to the government.
2. Overpayment on settlement of obligations to suppliers thru the Expanded Modified
Disbursement Payment System (ExMDPS) was incurred totalling P2.15 million.

iii

Audit Action Taken:


We issued Notice of Suspension No. 14004-107-(14) dated December 15, 2014
relative to the overpayment in the amount of P2.147 million requiring compliance of
documentary requirements.
3. Alternative mode of negotiated procurement was resorted to in the awarding of the
project General Overhaul and Upgrading of Diesel Engine Locomotives with a
contract price of P150.0 million by the PNR to Miescorrail, Inc. and Desco, Inc. Joint
Venture where one of the partners was the lone bidder who as per BAC Resolution
No. 03-2014 Goods-RSM failed to submit information on the completion of similar
project requirement.
Also, advance payment of P22.50 million was made despite absence of an
irrevocable letter of credit or bank guarantee required in Memorandum Order No. 15
dated May 9, 2011 and other documents that would establish the propriety of the
transaction.
Recommendations:
a. Submit explanation/s on Managements failure to comply with the submission of
the contract for review within the period prescribed in COA Circular No. 2009
001;
b. Provide the lacking documents in order to facilitate complete review, evaluation
and post audit of payments involving the contract; and,
c. Explain why the contract was awarded to the Joint Venture considering that the
bid proposal of Miescorrail, Inc. was evaluated non-compliant and that Miescorrail
and Desco did not meet the requirement on completed similar contracts/projects.
4. The propriety of the increase in per diems of the Board of Directors as a result of
reclassification of the PNR by the GCG as GOCC under Classification E to
Classification D is disputable since based on increased Total Assets in the
Statement of Financial Condition or Balance Sheet where the Auditor rendered
adverse opinion on the fairness of presentation.
Recommendation:
To prove the correctness and erase doubts on the change in GOCC classification of
the PNR thereby, justify the increased amounts in per diems of the Board of
Directors, our recommendation for PNR Management to conduct actual physical
inventory of assets and proper valuation to establish existence and real worth of
PNRs assets was reiterated.
5. Payment of honoraria to the members of the PNR Bids and Awards Committee
(BAC), Technical Working Group and members of the BAC Secretariat were not
supported with documents required in COA Circular No. 2012-001. Also, hire and
fire contractual workers were assigned as administrative support to the BAC
Secretariat and paid P189,000 as honoraria contrary to Budget Circular 2004-5A.
iv

Recommendation:
Attach the required supporting documents to vouchers for the payment of honoraria
prescribed in COA Circular No. 2012-001 dated June 14, 2012 to prevent
suspension/disallowance of the transactions in audit; and, require the refund of the
honoraria paid to hire and fire personnel designated as administrative support staff
to the BAC Secretariat amounting to P189,000.
6. After the lapse of four years, the computerization project embarked by the PNR at
reduced contract cost of P31.57 million has, to date, not attained its objective of
providing efficient and effective computerized Payroll and Property Management
Systems.
Despite awaiting for the approval by the Commission on Audit of the petition for
payment based on quantum meruit filed by the contractor in June 2014, five
disbursement vouchers were paid totalling P8.5 million to the contractor, from June
9, 2014 to February 16, 2015, for the Board approved compromised balance of
P14.52 million.
Recommendations:
a. Considering the rapid change in information technology, immediately formulate
solutions in order that the computer system procured would be more productive
and effective before it becomes obsolete and/or unserviceable; and
b. Submit explanation why payments were made to the Contractor in the total
amount of P8.5 million even if the petition for money claim of PC Craft was still
pending for review and approval of COA to determine the reasonableness of the
reduced contract cost P31.57 million.
7. Internal control weaknesses in Real Estate Management were observed rendering it
difficult to determine the accuracy of collections on lease and the reasonableness of
the lease rate imposed. There was no clear policy in the determination of the fair
rental rate and what was authorized was not consistently applied. There were
instances of overlapping rights on the leased premises and lack of manpower and will
to effectively manage the vast parcels of real property of the PNR.
Recommendations:
a. With the immeasurable parcels of real property which the PNR is unable to
manage effectively, thoroughly review the Inventory List of PNR Real Property
and determine which property would no longer be used in the expansion or
rehabilitation of lines in the rail transportation system. Management may consider
sale of the assets in order to generate much needed fund for the efficient delivery
of rail transportation service by the PNR.
b. Issue clear policy in the determination of the reasonable rate of lease; and
c. Reassess the use of zonal value in determining the proper lease rate in the
leasing of real property instead of the prevailing rental rate in the vicinity which
generally is considered reasonable and fair value.
v

8. The PNR failed to withhold 5% final VAT estimated at P16.14 million and 1%
creditable income tax of approximately P3.23 million or a total of P19.36 million on
bulk purchase of fuel for locomotives from CY 2011 to 2014 in the total amount of
P361.47 million (inclusive of 12% VAT).
Recommendation:
Provide explanation/s for not adhering to the established rules prescribed in BIR
Revenue Memorandum Orders issued to implement the provisions of the National
Internal Revenue Code.
9. PNR Management did not comply with the requirements of COA Circular No. 2009001 dated February 12, 2009 on the timely submission of copies of perfected
contracts and Purchase Orders including supporting documents thereby holding back
conduct of review and audit.
Recommendations:
a. Submit explanation/s on its failure in year 2014 to strictly comply with the
requirements of COA Circular 2009-001 as it hindered the conduct of auditorial
review; and
b. Submit all lacking supporting documents to the contracts submitted to avoid
suspension of related disbursement transactions.
10. Turnover by Collecting Officers to the Cashier of cash collections due for deposit on
the following day averaging more than P1 million daily was done without official
document to indicate transfer of accountability on collections.
Recommendation:
Require each accountable officer to accomplish separate DPN for collections for
deposit, considering that the amount of collections per bank statement is shown by
collecting officer and not in lump-sum, thus rendering turnover of cash by the
collecting officers to the depositor in-charge unnecessary.
E.

Status of Implementation of Prior Years Audit Recommendations


Of the 59 specific audit recommendations disclosed in the CY 2013 Annual Audit Report,
only 20 were implemented, 24 were partially implemented, while 15 were not implemented.

vi

Republic of the Philippines

COMMISSION ON AUDIT

Commonwealth Avenue, Quezon City, Philippines

INDEPENDENT AUDITORS REPORT


THE BOARD OF DIRECTORS
Philippine National Railways
PNR Executive Building
Tutuban, Manila
Report on the Financial Statements
We have audited the accompanying financial statements of the Philippine National Railways
(PNR), which comprise the statement of financial position as at December 31, 2014, and the
statement of comprehensive income, statement of changes in equity and statement of cash
flows for the year then ended, and a summary of significant accounting policies and other
explanatory information.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial
statements in accordance with state accounting principles generally accepted in the
Philippines, and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due
to fraud or error.
Auditors Responsibility

Our responsibility is to express an opinion on these financial statements based on our


audit. We conducted our audit in accordance with Philippine Standards on Auditing.
Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditors
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entitys preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entitys internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our adverse audit opinion.

Bases for Adverse Opinion


Physical inventory of Property, Plant and Equipment (PPE) was not undertaken to establish
the existence of the assets consisting the account. Moreover, the carrying value of PPE
amounting to P50.98 billion as of December 31, 2014, comprising 98.2% of Total Assets of
P51.90 billion was misstated with the value of Land under PPE recognized at zonal value.
Managements disclosure in supplemental Note 5 to the Financial Statements (FS) that Land
was carried in the books at zonal value did not correct the misstatement of the balance of
PPE as under Philippine Accounting Standards (PAS) No.16, the generally accepted
valuation of PPE was either at cost or appraised value determined by an independent
appraiser. Furthermore, building structures carried in the books at estimated cost of P31.05
million were not derecognized in the books upon demolition which was accomplished without
adhering to prescribed rules.
The reported year-end balance of the Construction-in-Progress (CIP) account was not
correctly stated as it included P213.31 million costs of bridges and P26.99 million building
stations and P2.69 million related costs of other projects already completed. Also, borrowing
cost capitalized of P414.61 million on loan funded projects already completed was still
carried under the CIP account. There were also unaccounted charges of P379.58 million
comprising the beginning balance of the account; and, improper charges of recoupment of
advances to Contractors of P6.93 million.
The accuracy of the reported Rental Receivable-TPI of P361.86 million under Note 9 of the
FS was uncertain as consisting of rental arrears of more than P316.68 million which had
remained uncollected for a long period of time due to unresolved issue on escalation rate
whether compounded or simple rate. On the other hand, Rental Receivable-Other Lessees of
P156.26 million as of December 31, 2014 included unconfirmed accounts totalling P71.96
million and double recording of accounts amounting to P1.68 million.
The year-end balance of Cash In Bank account included dormant bank accounts with
balances totaling P1.89 million and long outstanding reconciling items of unrecorded
disbursements amounting to P6.15 million.
Adverse Opinion
In our opinion, because of the significance of the matters discussed in the Bases for Adverse
Opinion paragraphs, the financial statements do not present fairly the financial position of the
PNR as at December 31, 2014, and of its financial performance and its cash flows for the
year then ended in accordance with state accounting principles generally accepted in the
Philippines.
Emphasis of Matter
We draw attention to the pending cases disclosed in Note 34 of the Notes to Financial
Statements wherein the PNR is a defendant or litigant, the outcome of which may affect the
financial condition of the agency.

Other Matter
We likewise draw attention to the May 2014 Supplement to Contract of Lease executed with
SM Primeholdings, Inc. with contract price of approximately P4.41 billion for period of 25
years the propriety and legality of which were found questionable considering (a) the major
changes from the 1983 Original Contract of Lease; (b) the original contract was
unimplemented for more than 31 years; and, (c) transfer of rights and obligations had been
made by the Lessee. Also, P150.00 million of the unearned income from lease due for the
first 12 years of the contract had been collected in advance even if the supplemental contract
has not been ratified by the PNR Board of Directors. In the computation of the present value
of the fixed annual rental due for the 1st 12 years collected in advance, the provision on
escalation at 10% every four years at compounded rate was not considered, thus the
computed total unearned income from lease was deficient in amount by more than P190.42
million.
We wish to give emphasis on the internal control weaknesses in Real Estate Management
rendering it difficult to determine the accuracy of collections on lease and the
reasonableness of the lease rate imposed. There was no clear policy in the determination of
the fair rental rate and what was authorized was not consistently applied. There were
instances of overlapping rights on the leased premises and lack of manpower and will to
effectively manage the vast parcels of real property of the PNR.
Report on the Supplementary Information Required Under Revenue Regulations 15-2010
Management of the PNR has not presented the supplementary information on taxes, duties
and license fees required for purposes of filing with the BIR. Such information is not required
part of the basic financial statements.
COMMISSION ON AUDIT
By:

MAYOLA PAREDES-SALITA
Supervising Auditor

June 25, 2015

PHILIPPINE NATIONAL RAILWAYS


STATEMENT OF FINANCIAL POSITION
December 31, 2014
(With comparative figures for the year ended December 31, 2013)
(In Philippine Peso)
As restated
2013

Notes

2014

6, 33
7

50,978,107,037
15,968,849

52,038,834,453
15,968,849

50,994,075,886

52,054,803,302

192,545,988
468,183,254
148,641,593
82,836,721
5,858,560
3,913,984

186,117,996
381,180,583
148,395,751
40,901,604
9,143,741
3,606,924

901,980,100

769,346,599

51,896,055,986

52,824,149,901

2,168,734,993
385,050,494

2,586,993,082
205,688,450

2,553,785,487

2,792,681,532

23,065,327,054
278,128,462
164,166,584
157,491,993
90,838,441
64,998,115
42,768,689
31,591,369
27,221,252
(8,897,707)
8,622,791

22,703,082,124
258,791,997
0
73,526,433
85,125,927
64,998,115
36,906,862
32,712,895
46,451,616
(3,126,149)
23,450,906

23,922,257,043

23,321,920,726

Equity

25,420,013,456

26,709,547,643

TOTAL LIABILITIES AND EQUITY

51,896,055,986

52,824,149,901

ASSETS
Non-Current Assets
Property, plant and equipment
Other assets
Total Non-Current Assets
Current Assets
Cash and cash equivalents
Accounts receivable
Due from officers and employees
Prepaid expenses
Materials and supplies inventory
Guaranty deposits

8
9
10
11
12
13

Total Current Assets


TOTAL ASSETS

LIABILITIES AND EQUITY


Non-Current Liabilities
Loans payable - foreign
Deferred credits

14
15

Total Non-Current Liabilities


Current Liabilities
Due to the Bureau of Treasury
Current portion of loans payable
Due to Landbank- short term loan
Payable-others
Due to the Commission on Audit
Due to local government unit
Guaranty deposit liabilities
Due to other government agencies
Due to the Bureau of Internal Revenue
Due to officers and employees
Other current liabilities

16
14
17
18
19
20
21
22
23
24
25

Total Current Liabilities

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL RAILWAYS


STATEMENT OF COMPREHENSIVE INCOME
For the Year Ended December 31, 2014
(With comparative figures for the year ended December 31, 2013)
(In Philippine Peso)

Notes
REVENUE
Operating revenue
Commuter/passenger
Discount, refund and commission
Non-operating revenue
Rental income
Miscellaneous income

313,805,934
(5,880)

Total Revenue
EXPENSES
Personal services
Maintenance and other operating expenses
Financial expenses

26
27
28

Total Expenses
NET LOSS FROM OPERATIONS
OTHER INCOME (EXPENSES)
Gain (loss) on foreign exchange
Gain on sale of assets
Interest income

29

Total Other Income (Expenses)


NET LOSS BEFORE SUBSIDY
Subsidy from National Government
NET LOSS
OTHER COMPREHENSIVE INCOME
TOTAL COMPREHENSIVE LOSS

2014

30

2013

235,831,973
0

197,770,730
3,930,165

163,679,508
1,511,871

515,500,949

401,023,352

102,773,148
789,394,898
288,200,327

99,198,000
567,912,203
225,307,544

1,180,368,373

892,417,747

(664,867,424)

(491,394,395)

150,626,408
1,630,028
890,391

(27,715,568)
0
2,045,977

153,146,827

(25,669,591)

(511,720,597)
178,808,276

(517,063,986)
254,605,291

(332,912,321)

(262,458,695)

(332,912,321)

(262,458,695)

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL RAILWAYS


STATEMENT OF CHANGES IN EQUITY
For the Year Ended December 31, 2014
(With comparative figures for the year ended December 31, 2013)
(In Philippine Peso)

Notes
CAPITAL STOCK

31

GOVERNMENT GRANTS AND CONTRIBUTIONS


APPRAISAL INCREMENT
Balance at beginning of year
Adjustment on revaluation-sale of assets

2014

As restated
2013

1,500,000,000

1,500,000,000

903,287

903,287

40,655,182,085
0

40,699,651,481
(44,469,396)

40,655,182,085

40,655,182,085

DEFICIT
Balance at beginning of year
Prior-period adjustments
Net profit loss

(15,446,537,729)
(956,621,866)
(332,912,321)

(15,054,032,512)
(130,046,522)
(262,458,695)

Balance at end of year

(16,736,071,916)

(15,446,537,729)

25,420,013,456

26,709,547,643

33

Balance at end of year

EQUITY
See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL RAILWAYS


STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2014
(With comparative figures for the year ended December 31, 2013)
(In Philippine Peso)

2014
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from operations
Subsidy from the National Government
Interest income
Payment of operating expenses

2013

618,491,975
178,808,276
890,391
(696,840,169)

349,768,604
254,605,291
2,055,576
(653,067,986)

Net Cash from (Used in) Operating Activities

101,350,473

46,638,515

CASH FLOWS FROM INVESTING ACTIVITIES


Proceeds from sale of real estate
Proceeds from sale of Disposable & Scrap Materials
Payments for construction in progress

5,367,232
1,630,028
(90,733,828)

13,371,051
0
(94,132,186)

Net Cash from (Used in) Investing Activities

(83,736,568)

(80,761,135)

164,088,319
(115,626,744)
(56,271,739)
(3,375,749)

0
(6,559,831)
(4,561,527)
0

(11,185,913)

(11,121,358)

NET INCREASE IN CASH ON HAND AND IN BANKS


CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

6,427,992
186,117,996

(138,521,008)
324,639,006

CASH AND CASH EQUIVALENTS, END OF YEAR

192,545,988

186,117,996

CASH FLOWS FROM FINANCING ACTIVITIES


Proceeds from Domestic Loan-LBP
Payment of Long Term Debt
Payment of interest on long-term debts & guarantee fee
Payment of Interest on Domestic Loan
Net Cash from (Used in) Financing Activities

See accompanying Notes to Financial Statements.

PART I AUDITED FINANCIAL STATEMENTS

PHILIPPINE NATIONAL RAILWAYS

NOTES TO FINANCIAL STATEMENTS

1. CORPORATE INFORMATION
The Philippine National Railways (PNR) was created on June 20, 1964 by virtue of
Republic Act 4156 with primary function of serving the best interest of the public by
ensuring that railway transport service is rendered at optimum level with reasonable
passenger fare and minimum cost of freight. It is the instrumentality of the Government of
the Philippines in providing a nationwide railroad and transport system. The PNR, attached
to the Department of Transportation and Communication (DOTC) for national policy and
program coordination, replaced the old Manila Railroad Company after assuming all of its
assets and liabilities.
Republic Act 6366 issued on August 20, 1971 amended certain provisions of R.A. 4156 in
order to ensure the extensive rehabilitation and modernization of the agencys transport
facilities. Presidential Decree (PD) No. 741 issued on July 3, 1975 re-amended several
provisions of the Corporate Charter. Among the significant revision is the increase in the
agencys authorized capital stock from six hundred fifty million pesos (P650,000,000) to one
billion five hundred million pesos (P1,500,000,000). PD 741 also converted the corporate
liabilities of the PNR with government banks and financial institutions into paid-up shares of
stocks.
The corporate powers of the Corporation are vested to its Board of Directors composed of
the Chairman, who is appointed by the President, the General Manager as Vice Chairman
and seven (7) members. Aside from the General Manager and Assistant General Manager,
top management in the Organizational Structure of the PNR as rationalized in 2008 is
comprised of four department managers, one each for Administrative and Finance,
Transportation, Engineering and the Rolling Stock Maintenance.
Human resources as of December 31, 2014 consisted of a total of 215 permanent
employees and 1,263 job order employees. The Corporations registered office address is
at PNR Executive Building, Mayhaligue Street, Tondo, Manila.

2. EXTENSION OF CORPORATE LIFE


Republic Act No. 10638 or AN ACT EXTENDING THE CORPORATE LIFE OF THE
PHILIPPINE NATIONAL RAILWAYS FOR ANOTHER FIFTY (50) YEARS, FURTHER
AMENDING FOR THE PURPOSE REPUBLIC ACT NO. 4156, AS AMENDED, ENTITLED
AN ACT CREATING THE PHILIPPINE NATIONAL RAILWAYS, PRESCRIBING ITS
POWERS, FUNCTIONS AND DUTIES, AND PROVIDING FOR THE NECESSARY FUNDS
8

FOR ITS OPERATION was approved by the President of the Philippines on June 16,
2014. It extended the corporate life of the PNR for another 50 years commencing on June
20, 2014.

3. STATUS OF TRAIN OPERATIONS


Metro Manila Commuter Service The Metro Manila Commuter Service (MMCS) operated in the following service routes in
year 2014
Route

a. Manila to Alabang
b. Manila to Sta. Rosa
c. Manila to Mamatid
d. Manila to Calamba

Period

January to December 2014


January to April 27, 2014
April 28 to December 1, 2014
December 2 to 31, 2014

No of trips

Average of 52 trips per day


2 trips per day
2 trips per day
2 trips per day

Bicol Express Service


The long distance trips from Manila to Bicol Region (Manila-Naga and Manila-Legazpi) had
not resumed operation since its suspension on October 26, 2012 after a derailment incident
caused by Typhoon Ofel.
Bicol Commuter Service
For the year 2014, the Bicol Commuter Service operated four (4) trips per day on the NagaSipocot route using one (1) train set of 3-rail cars (Kiha) with seating capacity of 344
persons per train.
Below is a statistical summary of transportation service in Year 2014 compared to 2013

TYPE OF SERVICE
Metro Manila Commuter Service
Tutuban to Alabang
Tutuban to Bian
Tutuban to Sta. Rosa
Tutuban to Mamatid
Tutuban to Calamba
Lond Distance Train (Bicol Express)
Bicol Commuter Service
TOTAL

No. Of Trains Trips


2014 2013 Inc/(Dec)
18,957 18,057
713
659
677
54
1,430 1,448
21,777 20,218

No. Of Passengers Carried


2014
2013 Inc/(Dec)

900 22,351,847
(713)
659
790,560
677
951,228
54
106,845
(18)
471,474
1,559 24,671,954

18,326,296 4,025,551
1,156,825 (1,156,825)
790,560
951,228
106,845
485,663
(14,189)
19,968,784 4,703,170

The comparative data on transportation service rendered by month follows:


Metro Manila Commuter
Service
January
February
March
April
May
June
July
August
September
October
November
December
TOTAL

Bicol Commuter Service


January
February
March
April
May
June
July
August
September
October
November
December
TOTAL

No. Of Trains Trips


2014
2013 Inc/(Dec)

No. Of Passengers Carried


2014
2013 Inc/(Dec)

1,724
1,832
2,204
1,960
1,911
1,616
1,629
1,495
1,474
1,569
1,465
1,468

1,419
1,309
1,341
1,400
1,656
1,628
1,747
1,567
1,624
1,678
1,642
1,759

305
523
863
560
255
(12)
(118)
(72)
(150)
(109)
(177)
(291)

1,990,331
1,946,926
2,237,895
1,961,039
2,123,792
1,940,516
1,996,850
1,944,596
1,939,519
2,019,675
2,069,880
2,029,461

1,295,826
1,259,182
1,310,314
1,402,142
1,510,952
1,544,324
1,803,348
1,594,445
1,788,830
1,916,512
1,952,672
2,104,574

694,505
687,744
927,581
558,897
612,840
396,192
193,502
350,151
150,689
103,163
117,208
(75,133)

20,347

18,770

1,577 24,200,480

19,483,121

4,717,359

No. Of Trains Trips


2014
2013 Inc/(Dec)

No. Of Passengers Carried


2014
2013 Inc/(Dec)

120
112
124
120
124
120
108
124
120
124
120
114

120
112
120
120
124
120
124
124
120
124
116
124

4
(16)
4
(10)

39,495
37,621
40,635
35,025
40,631
39,114
34,278
41,063
43,480
40,365
42,999
36,768

35,859
34,894
40,693
36,921
42,732
40,462
41,318
40,334
46,827
42,381
40,060
43,182

3,636
2,727
(58)
(1,896)
(2,101)
(1,348)
(7,040)
729
(3,347)
(2,016)
2,939
(6,414)

1,430

1,448

(18)

471,474

485,663

(14,189)

10

4. STATUS OF PROJECTS UNDERTAKEN


The Consolidated Quarterly Report on Government Projects/Programs/Activities of the
Philippine National Railways for the fourth quarter ending December 31, 2014 is presented
below:
Project /
Program /
Activity
Name

Location

Contract
Amount (ABC)
in pesos

Date
Started

No.
of Ex
tensi
ons

Target
Completion
Date

Project Status
% of
Completion

Total Cost
Incurred to
date

171,607,118

Remarks

DBM SARO Php477M Program


Design and
Construction
of San
Cristobal
Bridge

Calamba,
Laguna

Original
Contract
Amount:
247,335,590
Revised
Contract
Amount:
204,876,131

December
22, 2008

Original Contract
Duration - April
21, 2010 (485
CD)
Revised
Contract
Duration August 31, 2014

98.28

Design and
Construction
of Travesia
Bridge

Guinobata
n, Albay

Original
Contract
Amount:
116,927,339
Revised
Contract
Amount:
71,880,680

December
22, 2008

Original Contract
DurationDecember 22,
2009 (365 CD)
Revised
Contract
Duration August 31, 2014

100

Supply and
Delivery of
Various
Communicatio
n Equipment

Manila
Area

1,493,440

May 30,
2014

July 30, 2014

100

Supply and
Distribution of
Ballast

PlaridelGumaca
Quezon

17,970,807

March 15,
2014

June 13, 2014

100

May 08,
2014

July 07, 2014

100

DOTC SUB-SARO PHP250M Program


Supply and
Alabang to
12,464,657
Delivery of
Calamba
Prestressed
Concrete
Sleepers(5,57
0 pcs)

69,320,276

1,493,440

17,970,807

12,464,657

Project
Implementation
was suspended
since
December 16,
2011 after 95%
accomplishmen
t.
Implementation
resumed on
June 2, 2014
after execution
of
Supplemental
Agreement.
100 %
Accomplished

Completed
PS-DBM
conducted
bidding and
Contract
Implementation
Completed
PS-DBM
conducted
bidding and
Contract
Implementation

Completed
PS-DBM
conducted
bidding and
Contract
Implementation

11

Project /
Program /
Activity
Name
Supply of
Huck Bolt
Tools and
Equipment
including
Accessories
and Huck
Bolts

Location

No.
of Ex
tensi
ons

Target
Completion
Date

March 10,
2014

5,360,677

June 20,
2014

5,915,731

Contract
Amount (ABC)
in pesos

Date
Started

2,768,613

Alabang to
Calamba

DBM SARO Php359M Program


Renovation of
Daraga,
Daraga
Albay
Station

Project Status
% of
Completion

Total Cost
Incurred to
date

June 08, 2014

100

2,768,613

Original:
October 03,
2014
Revised:
October 30,
2014

96.50

June 23,
2014

Original:
October 06,
2014
Revised:
October 12,
2014

100

Renovation of
Polangui
Station

Polangui,
Albay

Retrofitting of
Piers &
Abutments

Quezon
Area

9,798,510

April 11,
2014

June 30, 2014

100

Painting of
Thirty One
(31) Steel
Bridge
Superstructur
es

Hondagua
Area

2,764,100

April 17,
2014

Original:
July 11, 2014
Revised:
July 19, 2014

65.00

Painting of
Thirteen (13)
Steel Bridge
Superstructur
es
Painting of
Thirty Four
(34) Steel
Bridge
Superstructur
es

Lucena
Area

2,970,806

April 30,
2014

July 29, 2014

100

May 16,
2014

Original:
August 24, 2014
Revised:
October 02,
2014

100

Replacement
of Concrete
Bridge Slab
Deck

Laguna
Area

May 21,
2014

Original:
August 19, 2014
Revised:
September 04,
2014

96.67

June 20,
2014

Original:
August 04, 2014
Revised:
August 14, 2014

75.5

Retrofitting of
Pier No.2 and
Pier No.3 of
Quilbay
Bridge

Naga Area

Del
Gallego,
Camarine
s Sur

Original
Contract
Amount:
3,518,865
Revised
Contract
Amount:
3,754,408
7,415,054

17,046,889

Remarks

Completed
PS-DBM
conducted
bidding and
Contract
Implementation

3,768,153

Under Contract
Implementation

2,686,527

100%
Accomplished

4,675,521

100%
Accomplished

414,615

2,970,806

2,272,835

Under Contract
Implementation

Completed

100%
Accomplished

7,118,452

Under Contract
Implementation

5,589,735

Under Contract
Implementation

12

Project /
Program /
Activity
Name

Location

Contract
Amount (ABC)
in pesos

Date
Started

No.
of Ex
tensi
ons

Target
Completion
Date

Project Status
% of
Completion

Total Cost
Incurred to
date

Remarks

DBM SARO Php359M Program


Regirdering of
Three (3)
Steel Bridge
Superstructur
es

Quezon
Area

Renovation of
Travesia
Station

Travesia,
Albay

Renovation of
Ligao Station

Ligao,
Albay

Renovation of
Iriga Station

Iriga,
Camarine
s Sur

Regirdering of
Two (2) Steel
Bridge
Superstructur
es

Laguna
Area

9,115,654

June 23,
2014

Original:
August 22, 2014
Revised:
August 31, 2014

99.31

July 10,
2014

November 7,
2014

91.50

July 14,
2014

October 27,
2014

96.06

July 18,
2014

Original:
October 31,
2014
Revised:
November 25,
2014

92.44

7,852,320

July 21,
2014

September 19,
2014

55.32

Manila &
Naga

89,494,000

June 30,
2014

February 10,
2015

64.57

Main Line
South

8,190,052

July 07,
2014

Original:
September 25,
2014
Revised:
October 25,
2014

72.17

Main Line
South

51,888,000

July 08,
2014

Original:
November 05,
2014
Revised:
December 15,
2014

100

8,284,729

5,737,820
Original
Contract
Amount:
5,591,317
Revised
Contract
Amount:
5,701,024

5,656,000

6,535,880

Under Contract
Implementation

Under Contract
Implementation

4,856,522

Under Contract
Implementation

4,268,033

Under Contract
Implementation

1,177,848

Under Contract
Implementation

DBM SARO Php344M Program


Supply and
Distribution of
Ballast
Construction
of Concrete
Lined Ditch

Supply of
1,000 pcs
37kg. X 20
meter Rails
Including Rail
Fishplates
And
Trackbolts

39,046,232

Under Contract
Implementation

1,228,506

Under Contract
Implementation

51,888,000

Completed

13

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Financial Statements Preparation
Measurement of the elements of the financial statements
The elements of the financial statements are recognized and carried in the books at
historical cost and are presented in Philippine pesos (P), the functional currency of
the corporation.
Statement of Compliance
The Philippine National Railways adopted the accounts in the New Government
Accounting System (NGAS) prescribed under COA Circular No. 2004-02. The
application is consistent with the prior years preparation of financial statements.
Recognition of Income and Expenses
The Corporation uses the accrual basis of accounting for income and expenses, except for
income on lease of real property not covered with contracts of lease which is recorded upon
receipt and income from ticket sales which is also recorded on cash basis.
Cash and Cash Equivalents
Cash includes cash on hand and cash deposited in authorized depository banks held for
the purpose of meeting short term cash commitments.
Property, Plant and Equipment
Property, Plant and Equipment except for land are carried in the books at cost/appraised
value determined in 1981 and 1982 by independent appraiser Asian Appraisal Co., Inc. less
accumulated depreciation. Land is carried in the books at zonal value based on revaluation
conducted in 2012.
Subsequent expenditure on Property, Plant and Equipment is recognized as an asset when
the expenditure improves the condition of the asset beyond its originally assessed standard
of performance. All other subsequent expenditures are recognized as expense when
incurred.
Infrastructure development and major rehabilitation projects are capitalized and all
unfinished projects as of financial reporting date are presented under the Construction-inProgress account.

14

When assets are sold, retired or disposed, the cost and related accumulated depreciation
are removed from the account and any resulting gain or loss is credited or charged to
current operations.
Depreciation
Depreciation commences once the asset is use in operations. It is computed using the
straight-line method over the following estimated useful lives of the assets with 10%
residual value considered in determining the depreciable cost.
Item of Property
Railways/Tracks
Passenger Train Cars
Commuter Train Cars
Locomotives
Station Buildings
Bridges
Land Improvement
Plant & Equipment
Office Equipment

Estimated Useful Life in Years


40
30
25
20
20
20
10
10
5

Inventories
Inventory of diesel fuel, accountable forms and supplies and materials is valued at cost and
is charged to expense upon issuance using the first-in, first-out (FIFO) method of costing.
Foreign Exchange Transactions
Transactions in foreign currencies are recorded using the exchange rates prevailing at the
date of the transactions. Liabilities denominated in foreign currencies are restated using
the Bangko Sentral ng Pilipinas (BSP) guiding rate of exchange as of reporting date.
Foreign exchange differences resulting from restatement of outstanding loan balances and
in settlements are recognized in the period in which they arise as gain or loss on foreign
exchange.
Events after the Financial Reporting Date
Post year-end events up to date of the audit report that provide additional information about
the Corporations position at financial reporting date (adjusting events) are reflected in the
financial statements. Post year-end events that are not adjusting events are disclosed in the
notes to the financial statements when material.

15

6. PROPERTY, PLANT AND EQUIPMENT


This account is composed of the following:
Land & Land
Improvement
COST
January 01, 2014
Additions
Adjustments
December 31, 2014

Buildings, Roads,
Transportation
Other Assets
Equipment,
Equipment
Furnitures

Construction in
Progress

Total

40,015,811,072
0
0
40,015,811,072

9,189,157,150
11,755,141
1,098,396,525
10,299,308,816

4,565,240,059 315,479,502
16,605,250
0
103,435,871 (268,222,642)
4,685,281,180
47,256,860

2,619,633,988
70,032,072
(1,798,305,455)
891,360,605

56,705,321,771
98,392,463
(864,695,701)
55,939,018,533

2,823,606
0
0
2,823,606

1,634,554,152
56,209,657
160,582,855
1,851,346,664

2,760,888,944 268,220,616
138,776,862
0
207,075,418 (268,220,616)
3,106,741,224
0

0
0
0
0

4,666,487,318
194,986,519
99,437,657
4,960,911,494

NETCARRYING AMOUNT
DECEMBER 31, 2014

40,012,987,466

8,447,962,152

1,578,539,956

47,256,860

891,360,605

50,978,107,037

NET CARRYING AMOUNT


DECEMBER 31, 2013

40,012,987,466

7,554,602,999

1,804,351,115

47,258,886

2,619,633,988

52,038,834,453

ACCUMULATED
DEPRECIATION
January 01, 2014
Depreciation
Adjustments
December 31, 2014

_____________________________________________________________________________
7. OTHER ASSETS
This account consists of:

Non - operating property


Materials - in transit

2014

2013

9,009,972
6,958,877
15,968,849

9,009,972
6,958,877
15,968,849

Non-operating property consists of unserviceable locomotives, commuter cars, passenger


and freight train cars and equipment.

16

8. CASH AND CASH EQUIVALENTS


The breakdown of this account is as follows:

Cash in banks
Cash on hand
Cash with collecting officers
Cash with disbursing officers
Total

2014
181,578,202

2013
175,828,166

9,998,638
969,148
10,967,786
192,545,988

9,376,539
913,291
10,289,830
186,117,996

2014

2013

5,619,926
3,715,901
248,336

5,619,926
3,715,901
248,336

9,584,163
(9,584,163)

9,584,163
(9,584,163)

9. RECEIVABLES
This account includes the following:
Receivables trade
Accounts receivable RP & US Government
Receivables commercial
Receivables others
Less: Allowance for doubtful accounts

0
Intra-agency and Other Receivables
Rental receivable Tutuban Properties, Inc.
Rental receivables other lessees
Due from DBM Procurement Service
Due from other GOCC (LRTA)
Receivables - others
Receivables - utilities
Receivable La Mallorca Transit
Receivable - sale of land
Less: Allowance for doubtful accounts

361,864,988
156,261,552
16,981,407
4,162,500
2,068,444
1,689,903
1,320,000
692,546

287,381,048
157,855,478
0
7,031,250
2,068,444
1,689,903
1,320,000
692,546

545,041,340
(76,858,086)

458,038,669
(76,858,086)

468,183,254
468,183,254

381,180,583
381,180,583

17

The details of the trade receivables remained unknown despite utmost effort by
management to identity the debtors, the particulars and dates when the transactions
transpired, and most importantly the documents that would support any legal claim of the
PNR. Management shall request for the approval of the Commission on Audit for the writeoff of the accounts pursuant to applicable government rules on dormant accounts.

10. DUE FROM OFFICERS AND EMPLOYEES


This account substantially consists of disallowances in audit, overpayment in salaries, cash
advances, short remittances and amounts of lost tickets.

11. PREPAID EXPENSES


Prepaid expenses represent advance payment granted to contractors not exceeding 15
percent of the total contract price in pursuant to Republic Act 9184. It also includes
creditable withholding taxes deducted from rent income withheld by various lessees. These
may be applied as tax credits or tax refund from the Bureau of Internal Revenue supported
by BIR Form No. 2307.
The breakdown of the account follows:

Advances to contractors
Prepaid expenses

2014

2013

53,114,472
29,722,249
82,836,721

24,027,445
16,874,159
40,901,604

2014

2013

4,064,058
1,794,502
5,858,560

7,349,239
1,794,502
9,143,741

12. MATERIALS AND SUPPLIES INVENTORY


This account consists of:

Diesel fuel inventory


Accountable forms inventory

18

13. GUARANTY DEPOSITS


Guaranty deposits consist of the amounts deposited with contractors, suppliers and utility
companies such as the Manila Electric Company (Meralco), Maynilad Water Services, and
the telephone companies to guarantee performance of obligation. The deposit is subject to
refund or application on unpaid obligations upon termination of the service contract.

14. LOANS PAYABLE - FOREIGN


This account pertains to outstanding loans relent by the National Government and those
that were directly contracted from foreign lending institutions for the purchase of railcars
and tamping machines, and for the Mainline South Project, and the Northrail - Southrail
Linkage Project.
Below is the breakdown of the account:
Loan
Account

Interest No. of Years


Rate
& Maturity
%
Date

Loan
Amount

In Foreign
Currency

Outstanding Balance
In Peso
2014

2013

409,724,832
217,926,598
1,313,602,948
379,286,552
126,322,525

572,856,692
287,648,209
1,391,265,554
446,208,330
147,806,294

2,446,863,455

2,845,785,079

Current Portion

(278,128,462)

(258,791,997)

Long-Term Portion

2,168,734,993

2,586,993,082

JBIC-PH-P98
JBIC-PH-P119
EDCF/Korea
KEXIM-II
RZB Austria

2.70
2.70
2.50
5.62
2.99

30 May 2019 Y 5,036,657,567


30 June 2021
1,854,688,059
20 May 2034 W 33,183,191,260
10 May 2020 $
15,419,865
17.5 June 2025
2,536,050

Y 1,105,605,000
588,055,000
W32,353,581,000
$
8,500,942

2,219,043

The following are the Bangko Sentral ng Pilipinas guiding rates of exchange which were
used in the restatement of the outstanding balances of foreign loans as of reporting date:
Foreign Currency
Japanese Yen (Y)
United States Dollar ($)
Korean Won (W)
European Euro ()

Y1.00
$1.00
W1.00
1.00

=
=
=
=

2014

2013

$0.008306
P44.617
$0.000910
P54.339

$0.009545
P44.414
$0.000944
P60.8161

19

___________________________________________________________________________
15. DEFERRED CREDITS
This account includes the amount of income received before it is earned or realized, as
follows:

Advance rental-SMPHI
Deferred income-sale of land
Advance rental-Tutuban Properties, Inc.
Deferred credits to income
Advance rental-Pabahay sa Riles Property
Advance rental-SM
Other deferred credits

2014

2013

168,000,000
131,300,988
35,119,569
20,186,815
15,834,375
700,000
13,908,747
385,050,494

0
128,802,505
35,119,569
11,323,254
15,834,375
700,000
13,908,747
205,688,450

Deferred income sale of land pertains to installment payments received on property sold,
for transfer and conveyance to homeowners associations by the PNR that are covered with
Memorandum of Agreement involving repayment period of 10 to 15 years.

16. DUE TO THE BUREAU OF TREASURY


This represents advances made by the Bureau of Treasury on due dates of payment on
loans relent to the PNR by the National Government. It also includes interest charges
assessed by the Bureau of Treasury on the advances made.

Principal and interest on loans advanced


by the BTR
Interest Expense on advances made by BTR
Guarantee fee payable

2014

2013

12,738,245,937
9,997,552,614
329,528,503
23,065,327,054

12,566,852,268
9,826,583,821
309,646,035
22,703,082,124

17. DUE TO LAND BANK OF THE PHILIPPINES


This account pertains to a short term domestic loan acquired to finance foreign loan
amortizations involving the accounts JBIC PH-98 and PH119, EDCF Korea, Kexim and
RZB Austria due for payment on May 20, 2014 and June 20 and 30, 2014.
20

18. PAYABLE OTHERS


The substantial amount of payable at year-end consists of certified obligations on expenses
incurred in 2014 for projects, fuel, power, and other expenditures.

19. DUE TO THE COMMISSION ON AUDIT


The balance of the account is comprised of the cost of audit services rendered from CY
1999 up to 2010 amounting to P85,125,927 and the assessment for CY 2014 of
P5,712,514 which was settled in April 2015.

20. DUE TO LOCAL GOVERNMENT UNIT


This account consists of real property tax liability levied by the City of Manila recognized in
the books in year 2005 but remained unsettled pending resolution of legal issue.

21. GUARANTY DEPOSIT LIABILITIES


Guaranty deposit liabilities are bid and bond deposits and 10% retention fees from
contractors required to guaranty the performance of contracts.

22. DUE TO OTHER GOVERNMENT AGENCIES


This account is comprised of payables involving the mandatory deductions withheld from
salaries of personnel that are due for remittance to various government agencies in
payment of employees insurance premium contributions, and loan amortizations. Also
included is advances made by the Philippine Ports Authority for a specific project. The
breakdown of the account follows:

Due to Philippine Ports Authority


Due to Government Service Insurance System
Due to Philhealth
Due to Pag-ibig
Due to other government owned and controlled
corporations

2014
18,000,000
8,607,217
4,889,828
91,654

2013
18,000,000
9,753,963
4,883,053
73,209

2,670
31,591,369

2,670
32,712,895
21

23. DUE TO THE BUREAU OF INTERNAL REVENUE


The account consists of withholding taxes due for remittance on January 2014 and
deficiency tax liabilities in FY 2009 which are to be paid on installment basisfor a period of
one and half years starting January 2014.

24. DUE TO OFFICERS AND EMPLOYEES


This account is used to record payroll payable, and refund on over deduction of taxes
withheld and GSIS contribution.

25. OTHER CURRENT LIABILITIES


This account is composed of the following:

Other payables - miscellaneous


Other payables - NGA
Other payables -trust liabilities
Other payables diesel fuel

2014

2013

7,686,936
806,010
129,845
0
8,622,791

7,468,115
806,010
622,318
14,554,463
23,450,906

Other payables - trust liabilities are deductions on salaries of personnel for employees
union, savings association, cooperative dues and insurance premiums.

___________________________________________________________________________
26. PERSONAL SERVICES
The breakdown of the account follows:

Salaries and wages


Bonus and incentives
Economic assistance and additional compensation
Commutable allowances/RATA

2014

2013

68,152,419
6,720,006
5,111,783
3,193,273

65,592,356
6,378,278
4,837,537
3,174,484
22

2014
1,065,000
1,061,500
1,043,500
884,500
0
15,541,167
102,773,148

Clothing / uniform allowance


Cash gift
Per diem
Honoraria
Overtime pay and night service pay
Personnel contribution and other benefits

2013
1,020,000
995,000
207,900
140,000
695,900
16,156,545
99,198,000

27. MAINTENANCE AND OTHER OPERATING EXPENSES


This account consists of: 163662695.3

Repairs and maintenance - government facilities


Depreciation
Other services-hire and fire employees
Fuel and lubricants
Security services
Water, illumination and power services
Auditing services
Printing and binding expense
Consultancy services
Supplies and materials
Travelling expenses
Communication expenses
PNP Personnel Allowance
Taxes, duties and fees
Awards, indemnities and other legal expense
Advertising expense
Representation expense
Janitorial services
Repairs and maintenance - government vehicles
Training expense
Cultural and athletic
Bond premium and insurance expense
Donation
Miscellaneous and other operating expenses

2014

2013

208,443,420
194,769,519
163,662,695
118,323,258
52,944,230
16,236,343
6,729,967
6,601,458
6,449,227
2,230,963
1,685,075
1,648,332
1,262,200
1,221,236
1,027,775
758,193
743,177
549,500
342,971
332,154
195,822
136,271
0
3,101,112
789,394,898

19,431,655
170,646,147
182,377,384
100,716,089
46,811,294
17,247,269
6,564,989
5,150,768
4,499,682
2,907,097
1,480,266
1,519,337
1,261,000
24,107
821,310
1,200,784
673,026
0
369,097
810,077
0
12,792
4,000
3,384,033
567,912,203

23

28. FINANCIAL EXPENSES


This account pertains to the following

Interest expense on net advances


Interest expense on long-term debts
Guarantee fees
Commitment and other financial charges
Interest on domestic loan

2013

2013

170,968,792
84,610,129
19,882,468
9,836,854
2,902,084
288,200,327

102,692,992
103,462,961
18,753,836
397,755
0
225,307,544

Interest expense on net advances represents charges assessed by the National


Government on advances made by the Bureau of Treasury on the principal repayments and
interests on foreign loans acquired by the PNR.
Interest expense on long-term debts is borrowing cost recognized as expense in the period
in which incurred.
Guarantee fees represent the charges assessed by the National Government, thru the
Bureau of Treasury, on PNR's availment of the Export Finance Insurance Corporation
(EFIC) guaranteed loan at the rate of 1% per annum.
Interest expense on domestic loan- is borrowing cost charged by the Landbank of the
Philippines (LBP) for the short term loan obtained by the PNR for the purpose of paying a
currently maturing foreign loan which the Bureau of Treasury obligated the PNR to settle.
Acquisition of the LBP loan was authorized under PNR Board Resolution No. 037-2014.

29. GAIN (LOSS) ON FOREIGN EXCHANGE


Net gain (loss) on foreign exchange represents the amount recognized as actual gain/loss
from foreign currency transactions which is the difference between the actual amounts
billed and settled at the time of debt servicing of the foreign loans and its recorded book
value. The account also consists of the difference in the carrying and restated value of the
foreign loans as of reporting date. Gains due to foreign exchange fluctuation during the
year totaled to P156,178,326; while, losses amounted to P5,551,918, resulting in net gain
of P150,626,407.

24

30. SUBSIDY FROM THE NATIONAL GOVERNMENT


This represents the total budgetary support released by the National Government to the
Corporation for the establishment or maintenance and operation of a safe, reliable and
affordable railway transport service system.

31. CAPITAL STOCK


The authorized capital stock of the Corporation of P1.5 billion is divided into 7,500,000
shares with par value of P200 each is subscribed as follows:
Subscriber
National Government
Philippine National Bank
Government Service Insurance System
Development Bank of the Philippines

Percentage of Ownership
94.07
2.37
1.83
1.73
100

Amount
1,411,050,000
35,550,000
27,450,000
25,950,000
1,500,000,000

32. TAXES
In the opinion of the PNR, it is exempt from payment of value-added taxes as provided in its
Charter, RA 4156, as amended. Being formed under a special law, exemption is expressly
recognized under Section 109 (K) of RA 9337 which took effect on July 1, 2005. The PNR
sought the affirmation on tax exemption in the letter dated November 5, 2014, addressed to
the Honorable Commissioner, Bureau of Internal Revenue.

33. CORRECTION OF PRIOR YEARS ERROR


In accordance with Philippine Accounting Standards No. 8 on Accounting Policies, Changes
in Accounting Estimates and Errors, correcting entry was taken up during the year to adjust
the Land account due to error in revaluation recognized in December 2012. The
restrospective restatement affected Land and Revaluation Surplus accounts by
P44,469,396 in the CY 2013 Statement of Financial Position and the Statement of Changes
in Equity.

25

34. PENDING LAWSUITS


As of December 31, 2014, the year the PNR is involved in the following cases, the ultimate
outcome of which could affect its financial condition and operations:
Court Case
Ensons Commercial
vs PNR

Nature/Status
Breach of Contract with
Damages

RTC Branch 42, Manila


Manna Properties Corp.
vs PNR

The CA denied on September


24, 2010 the Petition for Review
filed by Manna Properties

Agripino Alcantara et al.


vs PNR et al.

Enforcement of Constitutional
Guarantee
Initial presentation of plaintiffs
evidence on June 25,2014
Sum of money with damages

Supreme Court

Decided with Finality by the


Supreme Court in favor of the
PNR

PNR vs Natividad Peralta

Unlawful detainer

MTC- Taguig Branch 74

The structures put up by Peralta


were demolished.

Arnulfo Tauro vs PNR

Injunction

RTC-Manila Branch 06

The RTC dismissed the petition.


The RTC order became final and
executory.

Foundation Specialist,
Inc. vs PNR
Court of Appeals

Severo Bolo vs PNR

RTC dismissed the complaint and


awarded PNR P8million as back
rentals . Ensons appealed to the
Court of Appeals. PNR has a good
chance of winning.

Consignation

Court of Appeals

Kanlaon Construction vs
PNR

Financial Consequence

Unless the PNR can definitely


identify the encroached area by
the plaintiffs, PNR might lose the
case.

Injunction
The petition for review filed by
the foundation Specialist was
dismissed by the CA. FSI filed a
Motion for Reconsideration
which was denied. Petition for
review filed with SC dismissed.
Breach of contract with
damages.

In case of negative verdict, PNR


may be made to pay P600,000 as

26

Court Case

RTC Branch 128,


Caloocan City

Heirs of Alfredo Alzate v.


Sps. Allan and Divina
Llavor, et al.
RTC Branch 126,
Caloocan City
Julie R. Certeza, PNR
Herminio Del Rosario, Jr.
NHA, Northrail Corp. rep.
by the Office of the
Government Corporate
Counsel
RTC- Malolos City,
Bulacan Branch 79
Infinite Grafix and
Outdoor Advertising Inc.
vs PNR
Pasig City

Lilia Virata vs PNR


RTC Branch 125
Caloocan City

Sitio de Asis
Homeowners Association
United Residents of
Balabag Abandoned Line
Homes vs PNR

Nature/Status
RTC ordered PNR the alleged
deficiency of delivery of 53,572
kilos of crap rails and bridges
and to pay P25,000 Attys fees,
pending appeal in the CA.

Financial Consequence

actual damages, P250,000 as


exemplary damages, P25,000 as
attorneys fee.

Reconveyance of structureand
damages
The pending incident is plaintiffs
Motion to admit third amended
complaint.
Damages arising from the illegal
and unauthorized demolition of
improvements owned by Ms.
Certeza.
The counsel for the plaintiff
earlier terminated his direct
examination
Consignation.
Defendant through counsel
moved for the dismissal of the
case for violation of forum
shopping/ litis pendentia and
lack of cause of action.
Civil case for damages on train
accident filed by an injured
Passenger.
The next hearing set on April
23,2014 fsentation ointiffs third
witness
Specific performance and
damages.
The case is submitted for
resolution.

The case is dismissible based on


violation of forum-shopping and
lack of action.

PNR would be liable applying the


common Carrier law. In case of
negative verdict PNR may be
made to pay total damages of P
800,000 as prayed for more or
less.
Case was dismissed for lack of
jurisdiction. Plaintiff elevated the
case before the court Appeals.

Paranaque City
Heirs of Francisco Papa,
Heirs of Nazareno vs
PNR
Naic, Cavite

Damages with injuction


The court direct the said counsel
to formally file his comment.
Incident is submitted for
resolution

There is a strong probability that


the Court will decide against the
plaintiff. Evidence for the plaintiff
showed that the same were
obatained under questionable
circumstance

27

Court Case

Nature/Status

Financial Consequence

Danilo Mariano et al.,


Manotok Services, Inc.
and PNR

PNR was impleaded as a


necessary party being the owner
of the properties of which
plaintiffs claims, collectively,
inchoate rights.

Considering that PNR was merely


impleaded in the case and plaintiff
had not presented its Evidence
cousel cannot predict its
possibleconclusion.

Leon Pacito, Jose


Madayag and PNR

Declaratory Relief

Respondent Madayag filed a


Motion to Dismiss. The Court
directed the petitioners to file their
comments and the matter was
submitted for resolution.

Manna Properties inc.


Jose Madayag and PNR

Declaratory Relief.

Respondent Madayag filed a


Motion to Dismiss. The court
directed the petitioners to file their
comments and the matter was
submitted for resolution.

For theft and violation of antifencing law.

There is a probability that cases


will be dismissed based on
reasonable doubt.

The motion to dismiss filed by


respondent through counsel is
still awaiting for resolution

San Fernando, La Union


People vs Leonora
Enclano & Dominador
Manila

___________________________________________________________________
35. LANDS WITH RESTRICTIONS
Tutuban Properties, Inc.
On August 23, 1989, the PNR as Lessor and Gotesco Investment, Inc. as Lessee entered
into a 25 year Contract of Lease of the Tutuban Terminal Compound measuring 20
hectares, more or less. The financial consideration for the lease includes a guaranteed
minimum annual rental of P52.5 million plus an amount equivalent to 1% of gross sales and
15% of income derived from sublease of any part of the leased premises other than those
directly operated by the Lessee. The guaranteed annual rental of P52.5 million shall be
escalated at 10% every two years.
By virtue of a Deed of Assignment dated August 28, 1990, Gotesco Investment, Inc.
assigned unto the Tutuban Properties Inc. all its rights, obligations, title and interest in and
over the leased premises. On August 16, 1993 an agreement was entered into by the PNR
and the TPI which provided for other terms and conditions of the original Contract.
An advance renewal of the lease contract was executed on December 22, 2009 or about 5
years before the expiration of the original contract on September 4, 2014. Due however to
the existence of contentious issues surrounding the renewed lease agreement, the current
management informed the TPI that PNR shall treat the lease contract on a month to month
basis after the expiration date on September 4, 2014.

28

Twenty Seven (27) Land Titles covering a land area of 312,256.90 square meters with a
total Zonal Valuation of P5,938,714,864 were with inscriptions dated March 24, 1992 on the
encumbrance or claim against the property. The encumbrance restricted free use other
than the lease in favor originally of Gotesco Investments, Inc. which subsequently was
assigned to Tutuban Properties, Inc.

SM Prime Holdings, Inc.


A supplement to the Contract of Lease dated 08 December 1995 was entered into by and
between the PNR and SM Prime holdings, Inc. on May 2, 2014. The agreement increased
the Leased Premises in Caloocan City by to one hundred three thousand one hundred
forty-six square meters (103,146 sq. m.).

Manila North Tollways Corporation


On April 29, 2014, the PNR and the Manila North Tollways Corporation (MNTC) entered
into a 24-month contract of lease on PNR land located at Caloocan City with an area of
36,422.50 square meters. The land shall be used by the lessee MNTC as site for the
facilities of its designated contractors during the pre-construction, construction and early
operation of the Segment 10 Project which is approximately 5.65 kilometer mainly elevated
toll expressway connecting the existing Segment 9 of the NLEX in Valenzuela City to
Malabon City up to C-3 road in Caloocan City.

Land titles in the custody of HGC for annotation of Deed of Conveyance


Sixty seven (67) title certificates on parcels of land with a total area of 494,074.10 square
meters with estimated zonal valuation of P3,164,461,486 were given to the Home Guaranty
Corporation(HGC) for annotation of the Deed of Conveyance with the register of deeds,
City of Manila. The Documents were borrowed from PNR for annotation and conveyance of
the Asset Pool pursuant to the Trust Agreement executed on March 29, 1996, in connection
with the Pabahay sa Riles Joint Venture Project initiated in 1995. The parties to the Trust
agreement agreed to convey their individual assets to the Trustee PNB who issued P1.73
billion Asset Participation Certificates (APCs) which were guaranteed by HGC for recovery
by various third party investors. The project did not materialize and despite several
demands from PNR management, HGC failed to return the Certificate of Titles.

Land covered with Conditional Contract to Sell to Homeowners Associations


From the year 2003 to 2009, PNR entered into various Memorandum of Agreement and
Conditional Contract to Sell with the National Housing Authority and other government
agencies and with various homeowners associations for land covering a total area of
136,589.87 square meters.

29

Land titles for reconstitution


A total of 71 certificates of title on land located at different areas in Luzon measuring about
2,112,429 square meters are not on file. The certificates are subject of reconstitution.

30

PART II AUDIT OBSERVATIONS AND


RECOMMENDATIONS

AUDIT OBSERVATIONS AND RECOMMENDATIONS


A. Financial and Compliance Audit
1. The propriety and legality of the May 2014 Supplement to Contract of Lease entered
into by and between PNR and SM Prime Holdings, Inc. with contract price of
approximately P4.41 billion for period of 25 years were found questionable
considering:
a. the major changes from the 1983 Original Contract of Lease;
b. the Original Contract was unimplemented for more than 31 years; and
c. transfer of rights and obligations had been made by the Lessee.
Also, P150.00 million of the unearned income from lease due for the first 12 years of
the contract had been collected in advance even if the supplemental contract has not
been ratified by the PNR Board of Directors. In the computation of the present value
of the fixed annual rental due for the 1st 12 years collected in advance, the provision
on escalation at 10% every four years at compounded rate was not considered, thus
the computed total unearned income from lease was deficient in amount by more than
P190.42 million.
1.1

PNR as Lessor executed a Contract of Lease with Shoemart, Inc. (SMI) as Lessee
on March 22, 1982 which was revised, signed anew and notarized on August 5,
1983. The intention of the contracting parties PNR and SMI as stated in the contract
under Paragraph No. 1 on Purpose were:
a. The leased property shall be used as a site for commercial shopping
center in an integrated and controlled development program.
b. SMI shall construct and deliver free of charge a railroad station
adjacent to the leased premises.
c. SMI may sublease or sublet part of the spaces banks, airline offices,
drugstores, beauty salons and dental clinics and other entities.

1.2

We noted a transfer of interest/rights and obligations thereafter, as discussed


below.
1.2.1

Ten years after the execution of the Original Contract, another Contract of
Lease, duly notarized on September 14, 1993, was executed with the PNR as
LESSOR and Land Project Managers Affiliates, Inc. (LPMAI) as
LESSEE. As contained therein, the 1993 Contract of Lease was a
confirmation and ratification of the March 22, 1982 Contract of Lease by and
between the PNR and SMI which contract had been assigned by SMI in
favour of LPMAI.
We were provided a copy of the undated Deed of Assignment with SMI as
ASSIGNOR and LPMAI as ASSIGNEE. The original 1983 Contract of
Lease specifically involving the Transfer of Rights provided that, no right, title
31

or interest thereto or therein shall be conferred on or vested in any one or


other than the LESSEE without such written consent in the form of a
separate agreement
1.2.2

Then, a Sublease Agreement with Assignment of Right to Construct was


signed July 12, 1994, by and between LPMAI as SUBLESSOR/
ASSIGNOR and SMI as SUBLESSEE/ASSIGNEE.
The Sublease
Agreement stated that LPMAI hereby LEASES, RENTS AND DELIVERS by
way of sublease unto SUBLESSEE/ASSIGNEE the LEASED PROPERTIES
and ASSIGNS, CEDES, TRANSFERS and conveys by way of absolute
assignment all its right, interest, obligation and participation to develop the
LEASED PROPERTIES into a commercial center complex, including the right
to lease and develop the adjoining areas ... In effect, the rights on the Leased
premises of LPMAI were assigned back to the original Lessee SMI who had
become a Sub-lessee.

1.2.3

Notwithstanding the 1994 subleasing agreement wherein LPMAI had


absolutely assigned, ceded and transferred all its right, interest and obligation
on the Leased Properties, LPMAI and the PNR negotiated for amendment of
the September 14, 1993 contract. Another Contract of Lease was
executed by PNR and LPMAI which was duly notarized on December 8,
1995 modifying several of the terms, covenants and conditions provided in the
1993 Contract, with details in Annex A.

1.2.4

On May 2, 2014, a Supplement to Contract of Lease was executed,


whereby in one of the whereas clauses, it was stated that, Whereas, LPMAI
and SHOEMART, INC. subsequently assigned the 1995 Contract and 1994
Agreement, respectively, to the LESSEE who is now SM PRIME HOLDINGS,
INC.

1.2.5

Below is a diagram showing the transfer of interest/rights and obligations from


Shoemart Inc. to Land Project Managers Affiliates Inc. thereafter to SM
Primeholdings, Inc.
Transfer of Interest / Rights and Obligations

PNR
SMI
Lessor Lessee

SMI
LPMAI
Assignor Assignee

Contract of Lease
March 22, 1982
1983Sept. 14, 1993

Undated Deed
of Assignment

B
32

SMI
Sublessee /
Assignee

LPMAI
Sublessor /
Assignor

Sublease Agreement
July 12, 1994

LPMAI

PNR
Lessor

SMPHI
Lessee

Supplement to Contract of
Lease dated May 2, 2014
December 8, 1995

1.2.6

PNR
Lessor

LPMAI
Lessee

Contract of Lease
Sept. 14, 1993

PNR
Lessor

LPMAI
Lessee

Contract of Lease
December 8, 1995

Our audit observations relative to the transfer of interest/rights disclosed the


following:
a. The rights and interests of the original Lessee SMI had been
transferred to LPMAI in 1993 and no document was provided to prove
that LPMAI subsequently transferred it in 2014 to SMPHI, the
successor in interest of SMI.
The original 1983 Contract of Lease provided in the paragraph on the
Term of lease that, The term of the Contract shall be for a period of
twenty-five (25) years from the date of the effectivity of this contract. It
is The expiration of the term of corporate life or charter of the
parties shall not be deemed to be an expiration of this lease if the term
of the corporate charter of the parties is extended or if the successors-

33

in-interest of the parties are not otherwise prohibited by law from


honouring the contract.
On the other hand, in the 1994 Sublease Agreement entered into by
SUBLESSOR/ASSIGNOR LPMAI and SUBLESSEE/ASSIGNEE
SMI, it was stated among the terms, covenants and conditions under
Paragraph No. 6 that SMI shall own all improvements on the Leased
Premises during the term of the lease or its extensions and that upon
termination, the Leased Premises and improvements thereon shall be
surrendered to the PNR by the SMI or its successor-in-interest.
No successorin-interest was identified in the 1983 Contract of Lease
and 1994 Sublease Agreement. In the 1993 Contract of Lease which
was amended in 1995, the rights and interest of the original Lessee
SMI had been transferred to LPMAI. In the Supplemental Contract of
2014 it was stated that LPMAI subsequently transferred this to SMPHI.
We were not furnished with any proof or evidence to this effect and in
the May 22, 2015 reply to our Audit Observation Memorandum,
Management informed that they shall request SM to provide the same
to PNR and COA.
b. The copy of the Sublease Agreement provided this Office did not have
the signature of the PNR General Manager to signify conformity on the
agreement entered into by LPMAI and SMI. Paragraph No. 7 on the
terms and conditions stated that it is essential condition that that
LPMAI secure the conformity of the PNR and the approval of the
President of the Philippines.
1.3

We analyzed the collection of advance rental, and observed the following:


1.3.1

1.3.2

The financial considerations in the 2014 Supplement to Contract of Lease


which amended the rental rates prescribed in the 1995 Contract of Lease
involved huge amount of contract price due to increase in the area covered by
the lease, from 35,334 square meters to 103,146 square meters, which is to
be used primarily as a site for a fully integrated transport-oriented commercial
development with spaces for sub-lease to third parties, including. The
LESSEE SMPHI is obliged to pay PNR the following:

All reasonable and necessary expenses for clearing operations shall


be shouldered by the LESSEE which shall not form part of the rentals
payable up to the extent of P800.0 million.

Fixed annual rental @ P960 per square meter or equivalent to


P99,020,160, exclusive of VAT and subject to escalation at the rate of
10% every four years computed at compounded rate.

Distinct from the 1995 Lease Contract, the Supplement to Contract of Lease
no longer provided for the payment by the LESSEE of a percentage rental
based on gross receipts to be received from sale of goods and services which
was not favourable to the government.

34

1.3.3

The amount of P99,020,160 per annum escalated every four years at


compounded rate of 10% for a term of 25 years would approximately amount
to P3,609,408,915, add the P800.0 million allotted for clearing operations
would be equal to a contract price of P4,409,408,915. However, the
supplemental contract provided for an advance payment of the fixed rental
due for the first 12 years of the 25-year lease term to be paid by the LESSEE
SMPHI which Management computed at present value not exceeding P1.0
billion. The advance rental shall be paid, as follows:
a)
b)
c)

1.3.4

15% or P150.0 million upon execution of this supplement;


35% or P350.0 million upon clearing 50% of the leased area by
PNR; and
50% or P500.0 million upon total clearing of total leased area and
full turnover.

We inquired from Management on how the lease rate of P960 per square
meter was determined, and how the threshold of P1.0 billion was arrived at as
the present value of the rental due for the 1st 12 years of the lease payable in
advance by the Lessee. The parcel of land in Caloocan City submitted for
appraisal with area of 125,226 square meters was valued at P24,000 per
square meter or equal to P3,005,420,000. The fair rental value determined by
the appraiser hired by PNR was 4% of the appraised value of P3.0 billion or
equal to P120,220,000 or P960 per square meter per annum and P80 per
square meter per month. In the computation of the maximum limit of P1.0
billion, Management provided the following tabulated computations (A):

A. Computation Made

B. Escalated Rental
(1,000,000,000)

1
2
3
4
5
6
7
8
9
10
11
12
Total

99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
99,020,160
1,188,241,920

NPV of 12 yr cashflows

1,000,038,826

Difference

2.76%
99,020,160
99,020,160
99,020,160
108,922,176
108,922,176
108,922,176
119,814,394
119,814,394
119,814,394
131,795,833
131,795,833
131,795,833
1,378,657,689

190,415,769

190,415,769190,415,767

1.3.5

The amount of P150.0 million or 15% of the maximum limit of P1.0 billion was
received in CY2014 and gradually spent for operating expenses. Based on the
above tables, Management did not apply the provision on the escalation of
35

lease to be collected at 10% compounded rate every four years. The amount
used as basis of computing the net present value of the rental due for the 1 st
12 years of the lease was understated as shown in the above table.
During the exit conference conducted prior to issuance of this report,
Management informed that the Supplement to the Contract of Lease had not
been ratified by the PNR Board of Directors. However, lease income not yet
earned had been collected.
1.4

As regards the provision on right of first refusal,


following::
1.4.1

our analysis disclosed the

Quoted hereunder is the condition on Right of First Refusal embodied in the


Contract of Lease:
Should the LESSOR decide to develop a commercial center in
the areas contiguous to the leased properties or to offer the same for
lease to be develop in substantially the same type or compatible plans
with the commercial shopping center under this Contract, the
LESSEE shall have an option to develop and operate said areas at
substantially the same terms and conditions of this Contract or upon
the same terms and conditions as the offer to a third party, but should
a third party offer better terms and conditions for said development, it
shall be understood that the LESSOR shall first inform the LESSEE of
such better terms and conditions, and if the latter is willing to exercise
its option to develop and operate the contiguous areas under the
terms and conditions offered by the third party, then the LESSOR can
award the right to the LESSEE, under the terms and conditions
offered by the third party.

1.5

1.4.2

The area covered by the revised 1983 Contract of Lease totalled 39,000
square meters; while, in the 1993 and 1995 Contracts the three parcels of
land totalled only 35,334 square meters, with option to lease any or all
adjacent parcels of land totalling 67,812 square meters. The Supplement to
Contract of Lease expanded the covered area or Leased Premises to 103,146
square meters including the adjacent areas.

1.4.3

In the best interest of the government and taking into consideration the above
quoted provision on Right of First Refusal, the PNR should have invited other
proponents for the infrastructure or development project.

We also reviewed the provision on the approval of the Contract of Lease by higher
government authorities and we observed that:
1.5.1

Aside from the increase in financial considerations, the deletion of the


provisions requiring approval by higher government authorities (in paragraph
22 on Effectivity) and by the President of the Philippines (in paragraphs 2 and
3 on Delivery of Premises and Relocation, respectively) were significant
changes made in the 1995 Contract of Lease.

36

1.6

1.5.2

Management furnished a copy of the letter dated May 11, 1995 of the then
Executive Secretary, Office of the President, suggesting that all provisions in
the Lease Contract with reference to the approval by the Office of the
President be deleted, in compliance with Section 7 of Executive Order 301 s.
1987 and Section 534, Chapter 2, Book III of the GAAM. The jurisdiction or
authority over lease contracts in determining the reasonableness of the terms
of the lease and rental rates lies with the agency head without need of prior
approval of higher authorities. The attention of Management was also called
upon on the requirement of Section 531 of the GAAM wherein revenue
generating contracts should be publicly bidded.

1.5.3

In the Memorandum dated June 30, 2000 from the Office of the President
which was subsequently issued and disseminated in COA Memorandum No.
2000-089 dated August 11, 2000, all government offices including
Government Owned and Controlled Corporations are directed that
henceforth, all dispositions of government land, whether by lease or sale,
regardless of amount, duration or legal nature, shall be submitted to the Office
of the President for review and further consideration.

1.5.4

The contract entered into by and between the PNR and SMPHI is no ordinary
Contract of Lease whereby the PNR leased out a government property. It is
equated to a Build-Operate-Transfer contract involving a contractual
arrangement wherein the LESSEE shall undertake the construction including
financing of the shopping complex and the PNR Grand Central Station;
thereafter, operate and maintain it for a fixed term during which it will be
allowed to collect rents from sub-lessees, fees and charges in order to recover
its investment. As provided in Section 19 of the 1995 Contract, upon
termination of the lease, the LESSOR becomes the owner of all the
improvements free from any liens and encumbrances.

1.5.5

We sought the opinion of the Investment Coordinating Committee Secretariat


of the NEDA. The Assistant Director General believes that since the legal
basis invoked is EO 301 and not the BOT Law, EO 301 governs and may not
be covered by them.

Further, we scrutinized the provision on automatic renewal after 25 years and


noted the following:
1.6.1

Section 6 of the 2014 Supplement to Contract of Lease amended the term of


the 1995 Contract of Lease. As stated therein, the term of the lease shall be
for 25 years which shall be automatically renewed for another 25 years under
the same terms.

1.6.2

Without taking into consideration the following: a) compliance with the terms
and conditions of the existing contract; b) the condition of the assets on the
leased premises; c) the value of financial considerations; and, d) other factors,
the automatic renewal with the same terms appears not favourable to the
government.

37

1.7

We believe that the Supplement to Contract of Lease dated May 2, 2014 should have
passed review and approval of higher authorities due to the following considerations:
a) the development project did not materialize; b) more than 30 years since the
original contract was entered into with SMI; c) an amended Contract of Lease with
LPMAI was executed involving assignment of rights, interest, and obligations; d) the
increase in area for development and lease; e) the significant changes in the financial
consideration of the contract.

1.8

In the Memorandum dated May 20, 2014 issued by the Undersecretary for Planning
and Project Development, approval by the Secretary of the Department of
Transportation and Communications of the Supplemental Contract subject to
adoption of amendments was recommended.
We have not received document
showing that the Supplemental Contract passed the approval of the DOTC Secretary.

1.9

We recommend immediate review prior to ratification by the PNR Board of


Directors of the provisions contained in the May 2014 Supplemental Contract of
Lease particularly, the revisions or amendments made to the Contract of Lease
that are disadvantageous to the government.

1.10

It is informed that any amount of under collection of income due for payment
by the Lessee as a result of erroneous computation or non-application of the
provisions of the contract shall be issued with Notice of Charge to the persons
responsible.

1.11

In addition to the explanations of Management stated in paragraph 1.3.4 and the


letter dated May 11, 1995 of the Executive Secretary discussed in paragraph 1.5.2,
Management submitted the following comments:
a. The Supplement to the Contract of Lease was merely a confirmation and
ratification of the 1983 contract, therefore not a new contract that may be
covered by the 1994 BOT Law.
b. The PNR-SM lease contract is not an infrastructure or development project as
defined in Section 2 (a) of RA 7718 since the establishment of a shopping mall
is not a project normally financed and operated by public sector. If there was
stipulation on the establishment of a PNR Grand Central Station, the same is
not the main consideration of the contract but is merely an accessory to it, the
primary being the lease of the property. The offer to put up the station is in
consideration of the business to make it more attractive to the public.
c. It is not necessary to inform and secure the approval of the NEDA ICC since
the Caloocan SM commercial mall project is not a priority project as defined
by Section 4 of RA 7718, a project costing P300 million that is part of the
development program of the agency.
d. With regard to the percentage rental based on gross receipts of the Lessee
from sale of goods and services which is no longer provided in the
Supplemental Contract, Management opined that if it is not provided in the
Supplement, it shall continue to subsist so long as there is no inconsistency
between the supplement and the original contract.

38

2. The reported year-end balance of the Construction-in-Progress account was not fairly
presented as it included:
a. P213.31 million costs of bridges completed and ready for operations;
b. P26.99 million building stations and P2.69 million related costs of other
projects already completed;
c. P414.61 borrowing cost capitalized with projects funded by the loan also
completed;
d. Unaccounted beginning balance of the account of P379.58 million; and
e. Improper charges of recoupment of advances to Contractors of P6.93
million.
2.1

The balance of the account Construction-in-Progress (CIP) as of reporting date


should consist only of the costs directly related to construction of assets to be used in
operations. The accumulated cost of each project is recognized in the books while
the project is on-going and subsequently reclassified to appropriate fixed asset or
specific property plant and equipment account upon completion, and subjected to
depreciation to recognize wear and tear.

2.2

The PNR reported the balance of CIP account at P891,360,604 as of December 31,
2014. Audit disclosed that the balance of CIP consisted of the following:
Particulars

Amount

1. Beginning balance unaccounted since January 1, 2003


2. Completed project funded by the EPIC II loan

3. Costs of bridges completed and ready for use in operations

379,581,720
414,607,224

213,312,689

Costs of completed station buildings recommended for reclassification /


4. adjustment in the CY2013 Annual Audit Report

Cost of project already issued with Certificate of Completion and the


5. final claim for payment was being processed at year-end
6. Recoupment transactions credited to the account
7. Costs of on-going projects
8.. Reclassification entries to proper PPE
9. Adjusting/correcting entries recorded
Balance as of December 31, 2014

26,989,034
2,686,527
(6,927,354)
35,349,485
(205,547,303)
31,308,581
P 891,360,604

a. The schedule of transactions comprising CIP furnished by the Controllership


Division, reflected the amount of P379,581,720 as the beginning balance of
CIP in CY2003. Accounting of the cost component or projects comprising the
balance forwarded could not be provided by PNR Management.
b. Utilizations of loan proceeds acquired from Export Finance and Insurance
Corporation (EFIC) II in Year 2003 up to 2005 for the Revitalization of the
Mainline South Commuter Project were still carried in the books under the CIP
account as of December 31, 2014. The project was reportedly completed in

39

October 20, 2005; however, the costs of the project which accumulated to
P414,607,224 was not yet reclassified from CIP to the proper PPE accounts.
The project cost comprised 46.51% of the balance of CIP account of
P861,360,604.
c. In the percentage of completion method of accounting it is recommended that
if the outcome of a construction contract can be estimated reliably, revenue
and costs should be recognized in proportion to the stage of completion of the
contract activity. Section 8.2 on Liquidated Damages of the Revised
Implementing Rules and Regulations of RA 9184 provides that, A project or
portion thereof may be deemed usable when it starts to provide the desired
benefits as certified by the targeted end-users and the concerned procuring
entity.
d. In the Notes to Financial Statement No. 3 on the Status of Projects Being
Undertaken as of December 31, 2014, disclosed the following information on
the bridge projects:
Bridge
Project

Revised
Contract
Amount

Cost
Revised Target
% of
Incurred to
Date of Completion Completion
date

Amount per
books

a. San
Cristobal

P 204,876,131

August 31, 2014

98%

171,607,118

150,485,028

b. Travesia

71,880,680

August 31, 2014

100%

69,320,276

62,827,661

240,927,394

213,312,689

Total

P276,756,811

Difference - Unrecorded additional cost of projects

27,614,705
240,927,394

240,927,394

As shown above, the cost incurred for the projects as disclosed in Note 3
amounted to P240,927,394. However, the accumulated costs for the projects
charged to CIP per books totalled P213,312,689 showing a difference of
P27,614,705. Considering however, that the projects had been completed, the
charges to CIP actually overstated the CIP account by P213,312,689 and
understated the affected PPE accounts by the same amount.
e. In the Annual Audit Report for CY 2013 (Audit Observation No. 10, Part II), we
invited the attention of Management on the costs of PNR stations listed below
which are already 100% completed but not yet recognized in the books as
Station Buildings and other proper PPE account:
Location of Station
Building
Reconstructed
a. Cabuyao station

Percentage
of
Completion
100%

October 1, 2013

Amount
Charged
to CIP Account
P
3,002,623

Certified Date
of Completion

b. Mamatid station

100%

October 1, 2013

3,066,533

c. Bian station

100%

December 23, 2013

8,306,823

d. San Pedro station

100%

October 1, 2013

6,242,456

40

e. Calamba station

100%

December 1, 2013

6,370,299

Total

P 26,989,034

In addition to the above listed PNR stations, the Renovation of Polangui


Station Building by HKP Construction and Supply at a cost of P2,686,527 was
completed on October 12, 2014 per the Certificate of Completion signed by
the General Manager and Final Inspection Report signed by the Project
Engineers and the Inspection and Acceptance Committee. The project was
still presented part of the CIP account.
f.

The recoupment of advance payments to Contractors thru deductions from


payments of progress billings should be recorded in the books as reduction or
credit to the account Advances to Contractors and not as credits to CIP
account such as those taken up in the books on the recoupments of the
advances granted to Advance Foundation and R. U. Aquino Joint Venture, as
follows:
Project Name

Progress
Claim

a. Design and Reconstruction of San Cristobal bridge

First Claim

b. Design and Reconstruction of Travesia bridge

First Claim

Amount Credited to
CIP Account
P

( 9,720,606)
( 6,492,615)

c. Design and Reconstruction of San Cristobal bridge Second Claim

( 4,469,622)

d. Design and Reconstruction of San Cristobal bridge

( 6,927,363)

Total

Third Claim

P (27,610,206)

The accounting entries recorded in the books as credits to CIP that decreased the
reported cost of construction of PNR projects by P27,610,206 were adjusted except
for the last item amounting to P6,927,363..
2.3

We recommended to Management the following:


a. Ensure that all documents from the Engineering and other Departments
necessary in recording/reclassifying the costs of completed projects
from CIP to proper Property and Equipment accounts are immediately
forwarded to the Controllership Division;
b. Regularly monitor and reconcile the data on PNR projects per
Accounting records and the Quarterly Report on Government Projects,
Programs and Activities; and
c. Conduct thorough analysis of the transactions; and gather the
supporting documents necessary to record all adjusting entries in order
to reflect the correct balance of CIP in the financial statements of the
PNR.

41

2.4

The Manager of the Engineering Department informed that they will comply with the
requirements of the Controllership Division to assist them in updating the Accounting
records.

3. PNR Management did not consider periodic physical inventory of Property, Plant and
Equipment (PPE) account a priority concern contrary to COA Circular No 80-124 and
despite the misstated balance of PPE account with carrying value of P50.98 billion as
of December 31, 2014 which comprised 98.2 % of PNRs Total Assets of P51.90 billion.
3.1

In the Annual Audit Report (AAR) for the last five years (from CY2009 to CY 2013),
we repeatedly disclosed the absence of physical inventory of assets comprising the
PPE account and reconciliation of the results thereof with the property and
accounting records.
COA Circular 80-124 dated January 18, 1980 emphasized that physical inventory
taking is an indispensable procedure for checking the integrity of property
custodianship and should be made at least once a year. This in fact was among the
primary bases in the rendition of adverse opinions in the AARs of prior years due to
the inability of the Auditor to ascertain the fairness of the reported balance of PPE in
the financial statements (FS) presented by PNR Management as of reporting date.

3.2

PPE is a material element in the FS of the agency. Its net carrying value of P50.98
billion as of December 31, 2014 comprised 98.2 % of PNRs Total Assets of P51.90
billion. Significant components of PPE are Land with zonal valuation of P40.02
billion; and, Road, Building, Equipment and Machineries with net carrying value of
P8.45 billion.

3.3

PNR Office Order No. 330, series of 2014 dated August 10, 2014 was issued for the
creation of an Inventory Team that would conduct physical inventory taking and
ensure that inventory reports shall be properly reconciled with accounting and
inventory records of the PNR. An inventory report was required to be consolidated
and submitted to the Office of the General Manager not later than October 15, 2014.
There was no invitation to the auditing unit for a representative to witness an
inventory taking activity nor was there an Inventory Report furnished in audit.

3.4

Through the years, PNR Management did not consider complete physical inventory
taking of fixed assets a priority concern despite its significance. The existence of the
assets comprising PPE could not be confirmed and the financial information in
accounting records and reports could not be relied upon. No alternative procedures
were done by Management to establish the validity, accuracy and proper valuation of
PPE.

3.5

Management likewise did not give due importance in monitoring and safeguarding of
assets. There is no designated property custodian of machineries and equipment,
unserviceable assets including salvage or waste materials. There was no check and
balance as the Accounting Units as well as the Property Office did not maintain
complete Supplies Ledger Cards/Stock Cards by stock number and PPE Equipment
Ledger Cards/Property Cards by category of PPE.

42

3.6

The aggregate balance of Buildings, Roads, Equipment and Furniture amounting to


P10,299,308,816 consisted 20.2% of the balance of PPE of P50,978,107,037, broken
down as follows:

Buildings, Roads, Equipment and


Furniture (BREF) Accounts

Balance
as of 12/31/14

Tracks
Station, Office & General Buildings
Bridges
Machineries and Equipment
Communication System
Furniture and Fixtures

P 7,258,060,535
1,530,971,989
966,661,034
421,438,610
108,291,094
13,885,553

Total

P 10,299,308,816

Accumulated
Depreciation

Net
Book Value

P 516,032,391 P 6,742,028,144
646,830,099
884,141,890
441,408,742
525,252,293
195,832,052
225,606,559
50,234,953
58,056,141
1,008,428
12,877,125
P 1,851,346,664

P 8,447,962,152

Verification disclosed the following:


a. There were assets acquired and carried in the books for a long period of
time which had already exceeded their estimated economic useful lives,
such as:
Classification of Affected PPE
Accounts
Machineries and Equipment
Station, Office and General Buildings
Furniture and Fixtures
Communication System

Recording Estimated
Economic
Dates

Book Value

Useful Life

1985-2002
1981-1990
1988-2002
1981-1998

10 years P 88,978,037
20 years
11,657,186
10 years
119,261,000
5 years
6,744,517

Total

P 252,986,968

b. The reported costs of several buildings, equipment and furniture were


doubtful as the items did not qualify to be considered PPE with values
below the capitalization benchmark of P10,000:
Classification of Affected PPE Accounts

Recording
Dates

Book Value of the


Affected Assets

Machineries and Equipment

2010 - 2013

P 1,399.818

Communication System

1988 - 2001

1,038,317

Furniture and Fixtures

1978 - 2014

933,009

1981

486,658

Station, Office and General Buildings


Total

P 3,857,802

43

c. The Schedules of Tracks (Account No. 204A), Bridges (204B) and


Buildings (204E, 204F) did not have any detailed information or description
of their components for proper accounting and verification.
d.

3.7

The Stores Depot and General Buildings (204F) improperly included a


Metro Manila Commuter Railcar Maintenance account amounting to
P1,101,077,072 recorded in Year 1995.

In view of the foregoing, we recommended the following:


a. Abide strictly with the requirements of COA Circular No. 80 124 which
provides that failure of officials concerned to submit the inventory
reports shall automatically cause the suspension of payment of salaries
until they have complied with the requirements pursuant to Section 122
of PD 1445;
b. Check the actual condition of the assets whose economic useful lives
had been exceeded but still carried in the books as part of PPE used in
operations; and derecognize if no longer existing, or reclassify in the
books to Other Assets Held for Disposal or Sale, whichever is
appropriate;
c. Prepare the necessary adjusting entries for the items which were
incorrectly accounted as PPE; and
d. Submit Lapsing Schedule of the components of PPE.

3.8

We have not received a reply from Management on the audit observations.

4. There was no sufficient legal basis in billing Tutuban Properties Inc. monthly rental of
P11.35 million after the expiration of the Contract of Lease on September 4, 2014.
Further, the Lease Receivable arrears of P316.68 million as of expiration date
remained uncollected.
4.1

The 25-year Contract of Lease originally entered into on August 23, 1989 by the PNR
with Gotesco Investment, Inc. which was subsequently assigned to Tutuban
Properties, Inc. (TPI) expired last September 4, 2014.

4.2

In the implementation of the Contract of Lease, the following issues cropped up which
remained unresolved until the expiration date of the contract:
a. Advance renewal of the contract on December 22, 2009 with terms and
conditions tend to favour the TPI.
b. Ownership of improvements introduced during the term of the lease such as
the PNR Executive Building with original estimated cost of P75 million which is
not yet recognized in the books as asset despite expiration of lease in
September 2014 and beneficial use by the PNR.
44

c. Rental receivables based on compounded rate of 10% every two years which
were regularly billed and recorded in the books but, PNRs right to collect was
not asserted. As of maturity date of the contract on September 4, 2014, the
uncollected rental amounted to P316,683,881 in the books of the PNR.
d. The obligation to pay real estate taxes on the leased property which is the
subject of Civil Case No. 13-129381entitled, PNR versus the City of Manila
before Branch 30 of the Regional Trial Court of Manila.
4.3

An assessment/review of the 2009 Renewal Contract of Lease was jointly undertaken


by the PNR and the Office of the Solicitor General wherein it was recommended that,
an action for rescission of the lease contract be made and appropriate criminal, civil
and administrative complaint be filed against those individual in this transaction,
which is grossly disadvantageous to the government. The following irregularities
were observed:
a. The lease rate was far below the lease rates that PNR may realize given the
appraised value of P7.1 billion for the entire 20 hectares of property.
b. The Lessee unilaterally withheld payment of rentals invoking the provisions
under the Renewal Contract of Lease.
c. Payment of real property tax (RPT) was not taken into account. If PNR would
be accountable to the RPT (principal only) of P44.90 million as against TPIs
reduced payment of P71.32 million, gross income for the government would
only amount to P26.43 million or equivalent to a lease of P310.90 per square
meters per annum or P25 per square meters per month of lease on a property
with appraised value of P7 billion.
d. The assessment of RPT was greater than the actual payment made by TPI.
e. The previous PNR Management acted in bad faith since the renewal of the
contract was entered into before the impending change of administration and
without taking into account the fact that PNRs existence based on its Charter
was only until June 2014.
f. In the COA CY 2010 Annual Audit Report, it was stated that the Renewal
Contract of Lease practically compromised PNRs P161.9 million claim against
the TPI to the detriment of the government.

4.4

For CY2014, the computed billings for fixed rentals escalated at compounded rate
every two years as provided in the agreement, and, the collections from the TPI were
shown as follows:
Date

Bill No.

03/31/14

23133

Period
Covered
Jan-Mar14

06/11/14

25463

Apr-Jun14

Amount
Billed
34,042,870
*279,441,912
34,042,870
*298,062,896

Date

OR No.

03/31/14

6721286

07/10/13

6722513
to 16

Amount
Collected **
14,650,791
14,650,791

45

10/10/14

25488

10/10/14

25491

11/11/14

25510

12/15/14

25515

01/07/15

25519

02/12/15

25535

02/12/15

25536

03/04/15

25539

Jul 1 to
Sept 4,2014
Sept. 5 to
Oct. 4,2014
Oct. 5 to
Nov.4,2014
Nov. 5 to
Nov.30,2014
Dec. 1 to
Dec.31,2014
Jan. 1 to
31, 2015
Feb. 1 to
28, 2015
Mar. 1 to
31,2015

24,208,263
*316,683,881
11,298,816
* no billing
11,396,430
*336,769,076
9,834,607
*336,769,076
11,347,623
*336,769,076
11,347,623
*353,925,851
11,347,623
*365,273,474
11,347,623
*376,621,098

10/10/14
for period
Jul-Sept.
2014

6722542
to 45

14,650,791

11/28/14
for period
Oct-Dec
2014

4667027
to 30

14,650,791

* back rentals (escalation)


** net of 5% creditable withholding tax

4.5

As shown above, PNR billed TPI, after expiration of the term of original contract on
September 4, 2014, the amount of P136,171,479 per year was P11,347,623 per
month over the actual number of days covered by the billing period. The amount of
P136,171,479 was the guaranteed minimum annual rental of P52,500,000 agreed
upon in the August 16, 1993 Agreement with TPI subject to escalation of 10%
compounded every two years. The Chief, Legal Division in her letter dated October
10, 2014, instructed the Asset Management Division to bill TPI based on the terms of
the expired contract and that the renewal of the lease contract shall be on a monthly
basis.

4.6

Review of related documents showed that on August 22, 2014, the PNR informed the
TPI that although the lease contract was extended five years earlier the contentious
issues raised have yet to be resolved and pending final resolution thereof, the lease
contract shall be renewed on a monthly basis after expiration date.

4.7

In the letter dated August 29, 2014, the President of the TPI agreed to an exploratory
meeting with the PNR. The TPI stated its position that:
a. In the Memorandum of Understanding between the parties dated September
14, 2009 which was cited in Board Resolution No. 86-2009, the parties
identified, clarified and resolved all issues in the 1989 lease contract and
thereafter renewed in advance the lease contract.
b. PNR has failed to comply with its obligations particularly on the eviction of
illegal occupants, annotation of the renewal of the contract of lease in the
titles to the property, delivery PNRs Master Development Plan, and failure
to answer TPIs letter discussing the issue on rental arrearages.
c. PNR is liable to pay for the real estate taxes on the land leased to TPI.

46

d. Documents such as PNR Board Resolutions, the favorable opinion issued


dated December 9, 2009 of the then Government Corporate Counsel,
including the opinion of the then Resident Auditor that the Renewal Contract
of Lease was a better version of the 1989 Contract and that it was in order
showed that the contract of renewal was legal, binding, and enforceable
between the parties.
4.8

We wish to state that the TPI may not use the opinion of the former Auditor to prevent
the renegotiation or review of the 2009 Renewal of Contract of Lease which was
executed in advance. Even settled accounts are re-opened by the Commission if
found with error of calculation, tainted with fraud or collusion or when new material
evidence are discovered.

4.9

As to the amount of rentals for Phase II withheld by the Lessee amounting to


P148,038,141.91, its Chief Legal Counsel confirmed in her letter dated December 18,
2014 that the TPI agreed in principle to release to PNR the rentals premised on
PNRs recognition of TPIs contractual rights under the Renewal of Contract of Lease
dated 22 December 2009 and a confirmation of TPIs position expressed in its letters
dated 7 October 2014 and 29 August 2014, particularly on the simple and not
compounded computation of the escalation rate, the annotation of the Renewal
Contract of Lease on the titles of PNR, the completion of the PNR Master
Development Plan for Phase IIB; the turnover of the land in Phase IIA and air rights in
Phase IIB and that the contract of lease cannot be deemed to be on a month-tomonth basis.

4.10

In the letter dated February 26, 2015, the PNR accepted the schedule of payments
on the rentals withheld by TPI subject to the following conditions:

4.11

a.

PNR and TPI shall review the terms of the lease agreement upon
implementation of the Memorandum of Understanding (MOU) among the
Department of Transportation and Communications (DOTC), PNR and TPI
for the North-South Commuter Railway Project.

b.

Cooperate in the resolution of the issues in the letter of the Office of the
Solicitor General (OSG) and the 2013 COA Audit Findings

In the letter dated March 16, 2015, the President of TPI replied as follows:
a. On rental rate i. The current rental rate of TPI has already been increased under the
Renewal Contract of Lease dated December 22, 2009 covering the lease
period from September 2014 to September 2039. Rent in the original
contract of lease totalled to P1.608 billion compared to P3.918 billion in the
Renewal Contract of Lease of 2009.
ii. In view of PNRs inability to turn over Phase II to TPI, there was
overpayment in the rental for Phase II of P702.9 million in the 1st 25 years
of lease and P47.4 million from September 2014 to June 2015 plus the
incremental rent on land for phase IIA from January 2012 to August 2014,
47

or a total overpayment of P750.3 million. Further, the PNR illegally leased


certain portions of Phase II to third parties.
iii. Rental escalation rate every two years increased from 10% in the original
contract to 12% in the renewed contract.
iv. Ownership of all buildings and improvements in the original contract was
not provided; whereas, in the contract renewal the PNR shall have
ownership of all permanent structures in billions of pesos, after the
expiration of the Renewal Lease Contract without any compensation to TPI.
b. On second release of P64.925 million
The TPI is amenable to the request of the PNR Board but made it clear that its
acceptance of the Master Plan is only to the extent that the Master Plan will
determine the use by the PNR of Phase IIB for the development of its railway
lines, as provided under the Renewal Contract of Lease.
4.12

Though efforts are being exerted to resolve the matters extrajudicially, there is noted
delay in resolving the issues which had already been overtaken by significant events.
We raised the issues to the attention of PNR Management as early as year 2010 prior
to maturity date of the original contract in September 2014. After expiration date,
there appears no sufficient legal basis on the term and amount or rent being billed to
TPI. There is no meeting of minds between the Lessor PNR and the Lessee TPI. The
TPI is firm on its position and asserted that it was pursuant to the 2009 Renewal of
Contract of Lease; whereas, the PNR requested review/renegotiation of the
provisions for amendment thereof, if deemed necessary.

4.13

We recommended that the PNR exert more efforts for the prompt settlement of
the other issues aside from the release of the P148.04 million rentals withheld
by the TPI.

4.14

Management commented that the PNR negotiated for the release of the fund and as
stated above the TPI agreed premised on PNRs recognition of TPIs contractual
rights under the Renewal of Contract of Lease dated 22 December 2009 and a
confirmation of TPIs position....

4.15

Management furnished a copy of their latest communication dated May 12, 2015 to
the Office of the Solicitor General, PNRs statutory counsel, requesting assistance on
the unresolved issues with TPI. It is stated therein that:
a. There is danger of losing a major source of revenue with the issuance of a
warrant of levy to PNR to auction the property currently leased by TPI for nonpayment of Real Property Tax.
PNR and the DOTC Secretary tried to
convince the City of Manila to defer the auction to give chance to PNR to pay
its obligations. At the time of the original lease agreement, the property was
not yet subject to tax. Upon passage of the Local Government Code, the City
of Manila imposed taxes on the property being used by TPI, a taxable entity.

48

b. As there are pending issues on the lease agreement renewed in advance in


CY2009, PNR initially opposed the validity of the agreement and finding it
disadvantageous to the government. Refusing to surrender to TPI portions of
the property caused TPI to withhold rental payments.
c. The DOTC tried to resolve the pending issues on the renewal of lease
contract. On May 27, 2015, the DOTC, PNR and TPI executed a
Memorandum of Understanding in relation to the GOP North South Railway
Project (NSRP). Among the components of the project is the proposed
Tutuban Transfer Station with the aim of facilitating transfer and movement of
passengers from the NSRP to LRT Line 2 Station at Recto Avenue, Manila.
d. Documents submitted by the TPI to support the validity of the renewal of
Lease Contract were forwarded to the OSG. PNR is willing to finally
recognize the validity of the agreement subject to fair assessment by the OSG
and provided the TPI pays the back rentals which shall be used to pay the real
property taxes to prevent the auction of the property
5. The year-end balance of Cash In Bank account included dormant bank accounts with
balances totaling P1.89 million and long outstanding reconciling items of unrecorded
disbursements amounting to P6.15 million. Also, the Budget and Cash Division still
reflected in the Daily Cash Position Report a bank account with balance of P0.37
million placed under receivership, which was no longer carried in the books of the
Controllership Division.
5.1

5.2

The table below summarizes the balances of the depository accounts comprising
Cash in Bank per books, the results of confirmation from depository banks, and the
balances reflected in the Cash Position Report of the Budget and Cash Division for
the year ended December 31, 2014.

Bank Accounts

General Fund
DBP C/A 0410-029743030 107R-19
PVB C/A 0006-008165001 107R-21
LBP S/A 371-100-1084
107-T
DBP TD - 0410-029743100 107-U
DBP C/A - 0630029743-030 107R-27
LBP TD - 3711-0013-60
107-L

Balance as of Dec. 31, 2014


Per Budget and
Cash Division

Per
Books

Per Bank
Confirmation

Adjusted
Book/Bank
Balance

1,472,512

2,189,722

2,517,781

2,236,321

194,266

194,400

194,400

194,400

148,502

148,591

148,591

148,591

50,469,335

50,469,335

50,469,335

50,469,335

599,640

987,770

987,181

987,181

50,044,723

50,044,723

50,007,636

50,044,723

49

Enterprise Fund- Metro Manila Traffic Receipts


DBP C/A 0410-0303293,251,196
030 107R-22

3,489,476

3,486,093

3,363,693

41,421,440

41,425,006

41,425,006

41,425,006

4,693,567

4,697,627

4,697,627

4,697,627

1,911,032

11,890,986

13,182,370

11,890,986

19,711

19,412

19,612

19,412

4,580,192

4,582,533

4,582,533

4,582,533

2,764,438

3,093,300

3,093,300

3,093,300

Rehabilitation of PNR Commuter Line


DBP-MDS 2-00001-410193,287
8 107R-25

6,458,674*

161,763,839.82

179,691,557.12

Subsidy Fund
PVB C/A 0060-007220001 107R-15
DBP C/A 0410-028252030 107R-18
LBP C/A 371-210-0051
107S
Subsidy Fund for Operations
LBP C/A 371-210-0248
107-V
Project Fund
DBP C/A 0410-030119030 107R-20
Re-Opening of Bicol Lines
PVB C/A 0006-007629001 107R-17

Subtotal

174,811,466.02

0.00
173,153,109.02

Close and Dormant Accounts


Bank Account
PNB C/A 10-450210003-1
PNB CA-46-416-150005-8
PNB SA-215-599058-1
LBP ATA-0482-1030-65
PNB CA-276-058-40001-9 **
PNB SA-400-276-05803-5 **
Southern Line Deposits ***

Acct. Code
107F-14
107F-12
107X
107W
107F-8
107-Y

Sub total
Total

Per Books
1,389
20,280
126,395
2,796
1,477,678
258,107
-

Per Passbook
367,111

Adjusted Balance
closed acct.
closed acct.
126,395
2,796
closed acct.
closed acct.
-

1,886,645

129,191

181,578,202

174,811,466

* Latest Bank Statement Balance.


** no Bank Reconciliation Statements submitted
*** already received insurance proceeds

5.3

The year-end balance of Cash In Bank accounts included dormant bank


accounts with balances totaling P1.89 million.
5.3.1

The efforts exerted by Management in tracing and recognizing in the books


the unrecorded transactions of prior years involving the closed accounts with
the Philippine National Bank we recommended under Audit Observation No. 8
in the Annual Audit Report for CY 2013 was appreciated. However,
50

Management should likewise look into the remaining dormant accounts with
balances in the total amount of P1,886,645, as of December 31, 2014.
5.3.2

Substantial amount comprising the P1.887 million above in the aggregate of


P1,735,785 represents the dormant balances of PNB CA-276-058-40001-9
and SA-276-058-40003-5 under General Ledger Account Codes 107F-8 and
107-Y, respectively. The bank accounts were without Bank Reconciliation
Statements as of December 31, 2014. Also, we did not receive any reply to
the confirmation requests we sent to the Philippine National Bank Tutuban
Branch in order to prove the existence of the cash accounts as of year-end
2014.

5.3.3

The balances of closed accounts still carried in the Accounting records


overstated the reported Cash and Cash Equivalents in the Statement of
Financial Position. Audit showed the following transactions taken up in the
books in CY2014 that affected the PNB accounts:

PNB Account No.


CA-276-058-40001-9

GL Code
107F-8

Remaining balance to be accounted


SA-276-058-40003-5
107-Y
Remaining balance to be accounted
CA-46-416-150005-8
107F-12
Remaining balance to be accounted
CA-0060-1000-181-8

Particulars
Balance, Dec. 31, 2013
Less: Recorded in JEV 2014-01-25
Add: Recorded in JEV 2014-01-24
Balance, Dec. 31, 2013
Less: Recorded inJEV 2014-01-26
Less: Recorded in JEV 2014-01-24
Balance, Dec. 31, 2013
Less: Recorded in Apr. 2014 (CRJ)
Balance, Dec. 31, 2013
Less: Recorded in JEV 2014-443

Balance
Remaining Balance for Reconciliation as of December 31, 2014

Balance
11,440,245
(9,959,567)
3,000
1,477,678
1,685,462
(1,430,355)
(3,000)
258,107
24,149
(3,868)
20,280
330
(330)
0
P1,756,064.96

The accounting entry recorded per JEV 2014-01-25 that decreased the
balance of CA-276-058-40001-9 by P9,959,567.11 was:
Prior Years Adjustment
Cash in Bank (107-F8)

5.3.4

9,959,567

9,959,567

Verification of the details of the entry recorded showed that it was composed
of unrecorded disbursements in year 2010, mostly, involving payments of
unused leave credits of PNR employees who retired from service. However,
we noted that the accounting entry journalized in the Disbursement Vouchers
supporting the JEV was a debit to Accounts Payable and a corresponding
credit to Cash in Bank thereby, casting doubts on the propriety of charging the
account Prior Years' Adjustment.

51

5.3.5

We recommended the following:


a. Submit Bank Reconciliation Statements for the following bank
accounts:

PNB CA-276-058-40001-9 (107F-8)


PNB SA-276-058-40003-5 (107-Y)

b. Explain the debit to Prior Years Adjustment account instead of


Accounts Payable;
c. Restate the amounts presented in the prior years financial
statements in accordance with Philippine Accounting Standards
No. 8 which provide that an entity should correct material prior
period errors retrospectively; and
d. Immediately account and record in the books the adjusting entries
necessary to close the remaining balances of accounts with the
Philippine National Bank.
5.3.6

Management submitted the following comments:


a. The Bank Reconciliation Statements for the two accounts were
submitted for verification. Due to compelling and reasonable causes,
compliance with the recommendations on the audit observations may
be moving in slow phase. Lack of personnel to focus on the cash
account and compliance with the new reporting requirements of
oversight bodies made it impossible to continue the reconciliation of
dormant accounts.
b. A debit to Prior Years Adjustment is warranted as the adjusting entry
taken up under JEV 683 in December 2009 effectively closed the
payable account with explanation to close and adjust which remained
dormant for several years, accounts with negative balances and
relatively to proper accounts due to erroneous recording .
c. Absence of supporting documents on the aforementioned JEV could
not permit scrutiny of affected accounts thus the application of PAS 8
may not be practicable. Much time and working back make it
improbable to apply retrospectively the adjustment.
d. The absence of complete documents on transactions covering prior
years made determining the details of the discrepancies very difficult.

5.4

The year-end balance of Cash In Bank accounts included long outstanding


reconciling items of unrecorded disbursements amounting to P6.15 million.
5.4.1

Book reconciling items described as Unrecorded Disbursements were noted


in the Bank Reconciliation Statements submitted at year-end. The

52

transactions consisted of approved check payments charged to the PNR bank


account and those that are covered with Advice to Debit Account in the List of
Due and Demandable Accounts Payable settled under the Modified
Disbursement Scheme but had remained unrecorded for long period of time.
The New Government Accounting System (NGAS), Volume 1 provides for the
following on recording and reporting of checks prepared by the agency:
Sec 32.Recording of Check Disbursements in the Check Disbursements
Record (CkDR). All checks issued including cancelled checks
shall be recorded chronologically in the CkDR. The dates checks
were actually released shall be indicated in the appropriate
column provided for in the CkDR.
Sec 33.Reporting of Checks Issued/Released. All checks actually
released to claimants shall be included in the Report of Checks
Issued (RCI), which shall be prepared daily by the Cashier. The
RCI shall be submitted to the Accounting Unit for the preparation
of JEV. All unreleased checks as of the report date shall be
enumerated in a List of Unreleased Checks to be attached to
the RCI.

5.4.2

Had the checks prepared and issued been properly recorded in the CkDR and
RCI, unrecorded disbursements could have been avoided. The unrecorded
disbursements were reported on the following bank accounts:

Account
PNB C/A No. 464161500-058

Description
Close Account

DBP S/A 0410030329-030

Enterprise Fund Metro Manila Traffic


Receipts

DBP C/A No. 20000-14108

Rehabilitation of PNR Commuter Line MDS


Fund

Total

Amount *

20,280
125,783
6,002,177
6,148,240

* Breakdown in December 2014 BRS

5.4.3

Unrecorded disbursements which remain as reconciling items for a long


period may indicate red flag, such as, loss of fund and weakness in internal
control. Delay in recording the transactions affect the accuracy and reliability
of the reported balance of Cash and other affected accounts in the Financial
Statements. It is often caused by lack of coordination between functional units
and absence of adequate controls and safeguards on the resources of the
agency.

5.4.4

We recommended that Management:


a. Explain their failure to immediately account and record the
transactions reported in the Bank Reconciliation Statements as
Unrecorded Disbursements; and
b. Provide details and supporting documents on the transactions
considered as valid reconciling items.

53

5.4.5

5.5

Management commented that unrecorded disbursements on DBP C/A 20014108 relate to the overpayments made on the Modified Disbursement
Scheme. The issue on overpayment remained unsettled as of December 31,
2014 and the disbursement vouchers were not yet forwarded to the
Controllership Division for recording. Other reconciling items shall be
recorded as soon as supporting documents are duly accounted for.

The Budget and Cash Division still reflected in the Daily Cash Position Report a
bank account with balance of P0.37 million placed under receivership, which
was no longer carried in the books of the Controllership Division.
5.5.1

The Cash Position Report as of December 31, 2014 prepared by the Budget
and Cash Division reported a separate account with description of Southern
Line Deposits with a balance of P367,111, as of December 31, 2014. The
amount represents the balance of the cash in bank of the PNR not covered by
the insurance on bank deposits by Philippine Deposit Insurance Company
(PDIC). The original balance of the account in the beginning amounted to
P617,111. Audit showed that, on July 05, 2013, the PNR received P250,000
from PDIC as indemnity on deposit maintained with the Municipal Rural Bank
of Del Gallego (Camarines Sur), Inc. under S/A 2946 and 3182, which was
deposited directly to the General Fund kept under DBP S/A No. 0410029743-030. The rural bank was placed under receivership by the Bangko
Sentral ng Pilipinas.

5.5.2

The proceeds of P250,000.00 was taken up in books with the following journal
entry under JEV No 2013-07-291.
Cash in Bank (107R-19)
Prior Years Adjustment (681B)

5.5.3

250,000

250,000

We recommended that Management:


a. Confirm from the Philippine Deposit Insurance Corporation
(PDIC) if the balance of P367,111 could still be recovered; and
b. Explain the use of Prior Years Adjustment; and provide the
Journal Entry Voucher (JEV) when the account was derecognized
from the accounting records.

5.5.4

Management submitted the following comments:


a.

The Budget and Cash Division has initiated actions if there are
possibilities to recover the balance of P367,111.

b.

The Trial Balance as of December 2009 no longer reflected the cash


account at Rural Bank of Del Gallego. There is no evidence to support
whether a receivable or loss was recognized then in closing the
account.

54

6. Overpayment on settlement of obligations to suppliers thru the Expanded Modified


Disbursement Payment System (ExMDPS) was incurred totalling P2.15 million.
6.1

Paragraph 6.2 of DBM Circular No. 2013-16 dated December 23, 2013 states that,
Starting January 1, 2014, A/Ps due creditors/payees shall be credited thru the
Expanded Modified Direct Payment Scheme chargeable against the NCAs credited
under the regular MDS sub-account (Common Fund) of NGA.

6.2

In relation therewith, DBM Circular Letter No. 2013-12 dated November 21, 2013
provides that the Notice of Cash Allocations(NCA) for crediting to NGAs/Operating
units (OUs) regular MDS sub-accounts for any month of a given quarter, shall be
valid until the last working day of the 3rd month of that quarter. Also, paragraph 6.3 of
the said Circular states that, All NGAs/OUs shall use the List of Due and
Demandable Accounts Payable with Advice to Debit Account (LDDAP-ADA) in
processing payment of A/Ps under the ExMDPS.

6.3

The Summary of LDDAP-ADA attached to the disbursement vouchers disclosed the


following obligations payable to the contractors net of withholding taxes due to the
Bureau of Internal Revenue (BIR).
Payee

Legaspi Premium Development


Corporation
JV Ascutia Construction Corp.
JV Ascutia Construction Corp.
401 Devt. & Construction Corp.
OCM Steel Corp.
JV Ascutia Construction Corp.
JV Ascutia Construction Corp.
Fel-Gene Construction
Total

Gross
Amount

Witholding Taxes
(2%EWT for Services, 1%
for Goods, 5%Final VAT)

4,243,512
1,568,341
1,959,988
1,825,987
3,750,457
3,209,609
2,721,854
3,366,000
22,645,746

318,263
127,163
158,918
102,712
312,538
* 358,346
** 351,138
247,500
1,976,578

Net Amount
Payable
per LDDAP-ADA
3,925,248
1,441,178
***2,118,906
1,723,275
3,437,919
2,851,262
2,370,716
3,118,500
20,987,004

Per audited DV: * = 231,183 ** = 192,220


*** the difference between 1,959,988 and 158,918 is equal to 1,801,070

The Advice of NCAs Issued stated that all taxes withheld shall be remitted to the
Bureau of Internal Revenue through a Tax Remittance Advice pursuant to the
provisions of DOF-DBM-Joint Circular No. 1-2000A dated July 31, 2001.
6.4

Verification of transactions reflected in the Bank Statement for the MDS account
showed that the amounts charged or debited to the bank account involving payments
to contractors were mostly at gross amount inclusive of withholding taxes which
should be settled thru Tax Remittance Advices. Thus the amount of cash
credited/transferred to the contractors/payees bank accounts were overstated by the
amount of withholding taxes applicable to the above transactions.

6.5

In the pre-audited and recorded disbursement vouchers submitted to the DBM for
funding, the amounts determined payable to the contractors was actually net of
withholding taxes, 10% retention money and 15% recoupment on advances made.
The difference on the cash debited by the bank and the recorded decrease in cash in
55

bank per DV constitutes reconciling item in the preparation of Bank Reconciliation


Statement.
6.6

We noted the following deficiencies in audit:


6.6.1

Transactions covered by NCA No - NCA-BMB-A-14-0003589 amounting


to P172.74 million 6.6.1.1 There were discrepancies on LDDAP-ADA No. PNR-ADA-101-03-0012014 issued dated March 20, 2014. In Part II on Advice to Debit
Account (ADA) the amount requested to be debited under MDS SubAccount No. 2-00001-410-8 with corresponding credit to the individual
accounts of the creditors was the total in the gross amount column of
P7,771,840 instead of P7,453,577, the net amount payable to the
contractors as audited by the Controllership Division. Due to
erroneous computations the net amount payable per the LDDAP-ADA
even totaled to P7,485,332.
6.6.1.2 Furthermore, the gross amount of P2,118,906 and net amount
payable of P1,959,988 for Progress Claim No. 1 per DV No.
ENG.2014-03-297 dated March 5, 2014 that was due for payment to
JV Ascutia Construction Corp. were erroneously interchanged in the
LDDAP-ADA form. The net amount credited/paid to the contractor
however, was correct at P1,959,988.
6.6.1.3 On the other hand, the amount credited to the bank account of
Legazpi Premium Development Corporation per bank statement of the
PNR MDS account was P4,243,512. However, Legaspi Premium
Development Corporation acknowledged receipt of P3,925,248 only
per Official Receipt No. 2641, which notably was issued April 28, 2014
or one month after the amount of P4,243,512 was charged to the bank
account of the PNR.

Date

Payee

03/28/2014 Legaspi Premium


Devt. Corp.
03/28/2014 JV Ascutia
Construction
Corp.
03/28/2014 JV Ascutia
Construction
Corp.
Total Overpayment

Amount Debited
per Bank
Statement*

Amount
Payable
per DV & OR

3,925,248

318,263

3,925,248

1,568,341

1,568,341

1,441,178

1,959,988

1,959,988

2,118,906

7,771,840

7,453,577

318,263

7,485,332

4,243,512

Over
payment

Net Amount
Per LDDAP-ADA

* PNR DBP MDS Sub-Account No. 2-00001-410-8

6.6.1.4 Similar to the aforementioned transactions wherein the gross amount


payable was credited to the accounts of the contractors, another
overpayment was committed in PNR-ADA-101-03-002-2014 issued
56

dated March 27, 2014. The amount of P1,825,987 was erroneously


ordered credited to the account of 401 Development & Construction
Corporation. Said amount is inclusive of withholding taxes in the
aggregate of P102,712 and 10% retention fee of P182,599 plus 15%
recoupment of advances to the contractor amounting to P273,898,
which were actually deducted to progress claim No. 2 to determine the
net amount payable to the contractor. In effect, no recoupment of
advances and 10% retention of money were made. The correct
amount payable to the contractor under DV No. ENG. 2013-12-4427
dated January 29, 2014 which the Controllership Division should have
determined was P1,266,778 instead of P1,825,987; thereby, incurring
overpayment to the contractor in the amount P559,208. The
amount per Official Receipt No. 0538 of the contractor/payee dated
April 4, 2014 and per bank statement is equal to P1,825,987.
Transactions covered by NCA No - NCA-BMB-A-14-0007295 amounting
to P13.05 million 6.6.1.5 Payments made to OCM Steel Corporation and Fel-Gene Construction
under LDDAP-ADA No. PNR-ADA-101-06-004-2014 issued dated
June 23, 2014 were also inclusive of taxes payable to the BIR. In Part
II on Advice to Debit Account (ADA) the total amount requested to be
debited under DBP-MDS Sub-Account No. 2-00001-410-8 of the PNR
and correspondingly, credited to the individual accounts of the
creditors should be P6,556,419 (exclusive of withholding taxes
computed per DV No. ENG-2014-04-479 and 531) instead of
P7,116,457 or an overpayment of P560,038. The contractors
acknowledged payments received per OR No. 5552 dated July 10,
2014 and OR No. 1509 dated July 1, 2014 for OCM Steel Corporation
and Fel-Gene Construction, respectively, at net amount instead of
gross amount debited in PNRs MDS account with the DBP.
Date

Payee

Amount Debited
per Bank
Statement *

06/30/2014 OCM STEEL


Corp.
06/30/2014 Fel-Gene
Construction
Total Overpayment to Contractors

Amount
Payable
per DV

Over
payment

Per Payees
Official Receipt

3,750,457

3,437,919

312,538

3,437,919

3,366,000

3,118,500

247,500

3,118,500

560,038

* PNR DBP MDS Sub-Account No. 2-00001-410-8

6.6.1.6 The amounts of withholding taxes payable per the pre-audited DV


Nos. ENG 2014-05-884 and 885 both dated May 29, 2014 were not
equivalent to the amounts indicated to LDDAP-ADA No. PNR-ADA101-06-005-2014 that resulted in overstatement of the gross
amount paid to JV Ascutia Construction Corporation by
P709,484.

57

Date

Payee

Debited
per Bank
Statement *

JV Ascutia
Construction
3,209,609
Corp.
JV Ascutia
06/30/2014 Construction
2,721,851
Corp.
Total Overpayment to Contractors
6/30/2014

Amount
Payable
per DV

Over
payment

Per Payees
Official Receipt

2,851,262

358,346

No O.R. provided

2,370,716

351,138

No O.R. provided

709,484

* PNR DBP MDS Sub-Account No. 2-00001-410-8

6.6.1.7 The taxes due for remittance to the BIR per LDDAP-ADA No. PNRADA-101-06-005-2014 totaling P709,484 were different with the total
amount of taxes computed in the pre-audited DVs, as follows:
Date

Payee

6/30/2014
6/30/2014
Total

JV Ascutia Construction Corp.


JV Ascutia Construction Corp.

Per
LDDAP-ADA
358,346
351,138
709,484

Per DV
231,183
192,220
423,404

Difference
127,163
158,918
286,081

6.7

We found the above transactions not in order, hence, Notice of Suspension No.
14004-107-(14) dated December 15, 2014 was issued relative to the
overpayment in the amount of P2,146,994 requiring compliance of documentary
requirements.

6.8

Management gave the following comments:


a. The direct payment scheme to the bank account of suppliers/contractors
started only in January 1, 2014 and it was the first time that PNR prepared the
forms in accordance with the new system. As remedy on the over crediting of
the accounts of suppliers due to inclusion of the applicable withholding taxes,
the concerned suppliers/contractors were demanded to refund to the PNR the
over credited amount either by drawing a check directly payable to the BIR or
the account of PNR or pay directly to the BIR authorized depository bank on
the account of PNR. Consequently, the taxes were paid to the BIR supported
with BIR Payment Slips (PS) as proof of remittances except for JV Ascutia
Construction Corporation. The retention and recoupment of advances to
Contractors were deducted from Progress claim No. 2.
b. JV Ascutia informed in their letter dated February 2, 2015 that they could not
possibly refund the overpayment due to financial constraints. A request was
made that the overpaid amount be deducted in their final billing which had
been submitted to the PNR for processing. Management requested for
extension of time to submit the relevant documents as the payment for final
billing from which the overpayment shall be deducted is still being processed.

58

c. The BIR informed that the PNR is not among the entities listed to pay thru the
Tax Remittance Advice (TRA) hence, under the current checkless system the
amount payable to the supplier is credited directly to their account; while, a
check is drawn against the account where the LDDAP is credited by the DBM
in favor of the BIR for the applicable taxes.
7. Buildings and structures covered by the Lease Agreement with Manila North Tollways
Corporation was demolished without adhering to the guidelines on disposal of
government property. Also, derecognition of the assets carried in the books at a cost
of P31.05 million was not made.
7.1

Section 79 of the State Audit Code of the Philippines or PD 1445, on Destruction or


Sale of Unserviceable Property provides that, When government property has
become unserviceable for any cause, or is no longer needed, it shall, upon
application of the officer accountable therefor, be inspected by the head of the
agency or his duly authorized representative in the presence of the auditor concerned
and, if found to be valueless or unsalable, it may be destroyed in their presence. If
found to be valuable, it may be sold at public auction to the highest bidder

7.2

Accordingly, the general guidelines in the disposal of assets of government-owned


and/or controlled corporations are prescribed in COA Circular No. 86 - 264 dated
October 16, 1986. Section 4.1 thereof provides for the responsibilities of Management
in public auction of assets to be disposed. On the other hand, Section VII of COA
Circular 89-296 dated January 27, 1989 clearly defines COAs role during disposal of
government property. As stated therein, COA shall act as witness in all modes of
disposal, destruction or condemnation included.

7.3

A Contract of Lease with Reference No. 14402 was entered into by and between the
PNR and the Manila North Tollways Corporation (MNTC) which was notarized on April
29, 2014. The purpose of the lease is to provide MNTC with a site for pre-construction,
construction and early operation activities of the Segment 10 Project involving the
connection of the Manila North Expressway Project (NLEX) and the South Luzon
Expressway (SLEX) using the alignment of PNRs rail right-of-way (Connector Road
Project).

7.4

As provided in the lease contract, the PNR was obliged to immediately clear and
remove from the Leased Premises all structures and improvements therein upon
execution of the contract, including the immediate relocation of occupants and
informal settlers.
We were informed that in December 2014, three (3)
structures/warehouses were demolished initially to abide with the provisions of the
Contract. We were not informed of the activities undertaken nor the actual date/s or
period of demolition. However, Demolition Permit No. D-108 issued by the Office of
the Building Official of the DPWH at the City of Caloocan was dated July 2, 2014.

7.5

A copy of the Lease Contract was not furnished the Office of the Resident Auditor
within five days after execution; and, in the demolition of the warehouses proper
notification on the scheduled demolition was not made in violation of the above stated
provisions of PD 1445 and COA Circular 89-296. In the Memorandum dated
February 16, 2015 of the PNR General Manager addressed to the Supervising

59

Auditor, a representative from the auditing unit was requested to coordinate with the
Office of the Manager, Engineering Department, only, to oversee, direct and ensure
the transfer of the contents of the warehouse that was provided for COAs use when
the PNR Office was situated in Caloocan City.
7.6

Based on our review of Accounting records, the structures located in Caloocan City
affected by the MNTC Lease Agreement that were still carried in the books as of
December 31, 2014 cost P31,049,728. We did not find any accounting entry dropping
from the books the disposed assets. We were not furnished copies of Inventory and
Inspection Reports including an inventory list of assets with or without salvage value
found inside the warehouses.

7.7

In case the destruction of the assets took place subsequent to December 31, 2014,
the reporting date of the Statement of Financial Condition, proper disclosure should
be made in accordance with the Philippine Accounting Standards (PAS) No. 10.
Section 21 of PAS No. 10 requires that, If non-adjusting events after the balance
sheet date are material, non- disclosure could influence the economic decisions of
users taken on the basis of the financial statements. Accordingly, an entity shall
disclose the following for each material category of non-adjusting event after the
balance sheet date:
a) the nature of the event, and
b) an estimate of its financial effect, or a statement that such an
estimate cannot be made.

7.8

To date, the leased premises of the MNTC had been cleared of all structures and the
Lessee had started its constructing activities.

7.9

We recommended that Management:


a. Explain non-compliance with the government prescribed rules and
procedures in the disposal of property;
b. Derecognize in the books the disposed assets and/or comply with the
requirements of PAS 10, properly disclose the events that occurred
including its financial effect; and
c. Submit the Inventory and Inspection Reports on the structures
demolished and the report on the materials taken from the warehouses
determined with and without salvage values.

7.10 We have not received a reply from Management on the audit observations.

60

8. Alternative mode of negotiated procurement was resorted to in the awarding of the


project General Overhaul and Upgrading of Diesel Engine Locomotives with a
contract price of P150.0 million by the PNR to Miescorrail, Inc. and Desco, Inc. Joint
Venture where one of the partners was the lone bidder who as per BAC Resolution No.
03-2014 Goods-RSM failed to submit information on the completion of similar project
requirement.
Also, advance payment of P22.50 million was made despite absence of an irrevocable
letter of credit or bank guarantee required in Memorandum Order No. 15 dated May 9,
2011 and other documents that would establish the propriety of the transaction.
8.1

A contract agreement was entered into on September 15, 2015 by and between the
PNR and Miescorrail, Inc. and Desco, Inc. Joint Venture (MDJV) for the General
Overhauling and Upgrading of Diesel Electric Locomotives (DEL) Nos. 918, 919 and
921 with contract cost of P149,999,808. Alternative mode of negotiated procurement
was resorted to by the PNR after two failed biddings. Advance payment of
P22,499,971 or equivalent to 15% of the contract price was paid under Check No.
01245 dated November 27, 2014.

8.2

Initial review of the procurement contract and the documents attached to


Disbursement Voucher (DV) No. RSM-2014-11-2968 on the advance payment made
disclosed the following:
a. Prior to the advance payment made by PNR, copy of the contract was
not submitted to the auditing unit for review, within five days after execution
thereof, in violation of Section 3.1.1 of COA Circular No. 2009 - 001 dated
February 12, 2009 which states that, Within five (5) working days after the
execution of a contract by the government or any of its subdivisions,
agencies or instrumentalities, including government owned and controlled
corporations and their subsidiaries, a copy of said contract and each of all
documents forming part thereof by reference or incorporation shall be
furnished to the Auditor of the agency concerned. Further, Section 4.1
cautioned that any unjustified failure of the officials and employees
concerned to comply with the requirements herein imposed shall be subject
to administrative disciplinary action provided in:
Section 137 of Presidential Decree No. 1445
Section 55, Title 1-B, Book V of the Revised Administrative Code of
1987
Section 11 of RA No. 6713
b. Management did not submit the following documents necessary to establish
the propriety of the procurement contract:
(1) PNR Board Resolution (BR) No. 25 - 2013 dated March 20, 2013
stated in BAC Resolution No. 03(A)- 2014-Goods-RSM on the
approval of PNRs 2013 Annual Procurement Plan (APP) with
P150,000,000 allocated for the project.
(2) Material Requisition with detailed estimates to support the ABC or
the estimated budget for the general component of the contract as
61

required in Section 7.3.2(f) of the Revised Implementing Rules and


Regulations (R-IRR) of RA 9184
(3) Minutes of bidding conducted on December 10, 2013 (first failure of
bidding)
(4) Minutes of bidding conducted on January 16, 2014 (second failure
of bidding)
(5) Philippine Government Electronic Procurement System (PhilGEPS)
posting on April 12, 2014 for the first negotiated procurement
bidding
(6) Minutes of bidding conducted on May 9, 2014 for the first
negotiated procurement
(7) PhilGEPS posting on May 13, 2014 for the second bidding on
negotiated procurement
(8) Minutes of Board meeting on July 23, 2014. In the Memorandum
dated July 21, 2014 of the BAC Chairman to the PNR General
Manager it was stated that:
In the conduct of post-qualification/evaluation process,
the PNR-BAC determined that the bid of MiescorrailDesco Joint Venture failed to comply with all the
required documents as stated in Section 1,
Instruction to Bidders, B.1(a)(5)
of the bidding
document.
The PNR-BAC respectfully submits the said motion for
reconsideration to the General Manager for its
favorable endorsement to the Board Meeting, for
information purposes, to be held on 23 July 2014;
(9) Certificate of PhilGEPS Registration of the bidder with lowest
calculated bid
(10) Identification Card (ID) and other document identifying Mr. Jung Ho
Seo as the authorized representative of GE Transportation Parts,
LLC
c. The following additional requirements to support the procurement transaction
as required under COA Circular 2012-001were not provided:
1) Price quotations/bids/final offers from at least three invited suppliers
2) Abstract of submitted price quotations
3) Agencys offer for negotiations with selected suppliers, contractors or
consultants
4) Evidence of invitation of observers in all stages of the negotiation

62

d. It was resolved in Board Resolution No. 030-2014 dated April 10, 2014 that
negotiations by the PNR BAC shall be with the supplier nominated by General
Electric Transportation USA (GETS - USA), however, the nomination document
was not furnished.
e. The procedural guidelines for negotiated procurement are prescribed under
Section 53 of the Revised IRR of RA No. 9184.
We noted that in the
negotiated procurement for the contract on general overhauling and upgrading
of locomotives, the following activities were undertaken:
Date
April 10, 2014
April 12, 2014
May 9, 2014
May 13, 2014
June 3, 2014
June 4, 2014
June 25, 2014

August 13, 2014


Sept. 15, 2014

Activity
PNR BOD approved the negotiated procurement thru BR
No. 030-2014;
Posting at PhilGEPS portal for schedule of submission
and opening of bids;
Submission and opening of bids. MDJV was the lone
bidder but disqualified for non-payment of bidders fee;
Another posting at PhilGEPS portal for a second negotiated
bidding;
Submission and opening of re-bids. MDJV was the lone
bidder and quoted a bid price of P149,999,808.38;
Results of the evaluation of bids and declaration of MDJV
as the bidder with the lowest calculated bid;
Negotiations and agreement among and between PNR,
DESCO (one of the partners of MDJV) and General Electric
(GE) representatives on the scope of work and changes in
terms of reference (TOR);
The Notice of Award (NOA) was received by the Heads of
the MDJV and submission of performance security was
requested;
Contract signing between the Head of the Agency
(HOPE) and the respective Heads of the partners in the
Joint Venture (JV).

There were no documents submitted to prove that the BAC sent invitation to
sufficient number of suppliers to ensure competition aside from posting in the
PHilGEPS and bulletin boards.
f.

The Amended Articles of Incorporation (AAI) of Miescorrail, Inc. indicated the


name of Engr. Joseph Allan C. Dilay, current PNR General Manager as one
of the incorporators and directors of the corporation. AAI was duly certified by
the Securities and Exchange Commission (SEC) on February 16, 2012. In the
July 1, 2014 memorandum of the BAC Technical Working Group (TWG)
addressed to Engr. Besmonte, former BAC chairman, it was informed that the
General Manager was no longer connected with Miescorrail, Inc. This was
supported with an unsigned General Information Sheet (GIS) of the Corporation
which was not sufficient basis to conclude the absence of conflict of interest on
the part of the current GM.

63

g. In the Manual of Procedures for the Procurement of Goods and Services, the
financial envelope shall contain the financial proposal submission sheet
indicating the bid prices and the bill of quantities and the applicable price
schedules. We noted that the cost breakdown for the project amounting to
P149,999,808 was dated October 14, 2014 already. The breakdown on cost
should have been accomplished and included with other documents in the
financial envelope which was submitted December 10, 2013 prior to the
submission and opening of bids.
h. Memorandum Order No. 15 dated May 9, 2011 authorized advance payment
for contracts awarded thru public bidding upon submission of an irrevocable
letter of credit or bank guarantee. The MDJV requested for advance payment
equivalent to fifteen percent (15%) of the total contracted price. The check
payment of P22,499,971 was passed in pre-audit and paid even if the
documents necessary
to establish the propriety and regularity of the
transaction were incomplete.

8.3

i.

Section 2.1 of COA Circular No. 2013 - 004 dated January 30, 2013 requires
the quarterly submission of a list of all on-going government Projects/Programs/
Activities (PPA) including those that are to be implemented during the year.
We noted in the reports submitted by PNR for year 2014 that the project
General Overhauling and Upgrading of Diesel Electric Locomotives (DEL) Nos.
918, 919 and 921 project was not included.

j.

In whereas clauses of BAC Resolution No. 03(A)-2014-Goods-RSM, it was


stated that, Whereas, on 10 December 2013, the scheduled formal submission
and opening of bids, only Miescorrail, Inc. submitted its bid proposal. Upon
opening of the technical component of the bid of the lone bidder, the BAC
declared its bid as Failure for failure to meet the required completed similar
contract defined as General Overhauling and Upgrading of Diesel Engine
Locomotives. In the submitted Statement of Completed Projects of Desco,
Inc., it was indicated that Desco was involved in drilling services and supply of
manpower/labor and equipment.

We recommended that Management:


a. Explain its failure to comply with the submission of the contract for
review within the period prescribed in COA Circular No. 2009 001;
b. Require the contractor to submit all documents to facilitate complete
review, evaluation and post audit of payments involving the contract;
c. Submit copies of invitation for negotiated procurement sent to other
suppliers to ensure competition aside from posting at the PhilGEPS;
d. Provide the nomination document issued by GETS USA;
e. Submit a notarized and signed Secretarys Certificate and/or other proof
on the divestment of the shares of stocks and/or interests of Engr.
Joseph Allan C. Dilay with Miescorrail, Inc.;

64

f.

Explain why the breakdown of cost on the project was submitted later on
October 14, 2014 and not submitted as an integral part of the financial
envelope;

g. Require Miescorrail to submit an irrevocable letter of credit or bank


guarantee as required in the payment of advances to contractors;
h. Explain why the project was not among the projects in the Quarterly
Report on PPA submitted by the PNR;

8.4

i.

Submit a feasibility study and/or comparative analysis involving the


procurement of new DEL and the repair of the locomotives; and

j.

Explain why the contract was awarded to the Joint Venture considering
that the bid proposal of Miescorrail, Inc. was evaluated non-compliant
and that Miescorrail and Desco did not meet the requirement on
completed similar contracts/projects.

On April 16, 2015, the Manager of the Rolling Stocks Maintenance Department and
the Chairman of the PNR BAC submitted the following comments:
a. Failure to submit the contract for review within the prescribed period was due
to lack of personnel in the PNR BAC Secretariat.
b. The breakdown on cost was not required an integral part of the financial
requirement as stated in the Bid documents. It was required submitted on
October 14, 2014 with detailed breakdown tallied to the total amount of bid
offered.
c. Copy of the performance bond was submitted to the Office of the General
Manager before the issuance of the contract, Notice to Proceed and advance
payment.
d. Fund for the project was included in the P238 million repair budget for rolling
stock for CY 2013 MOOE. Project implementation started in October 22,
2014.
e. Comparative cost analysis was submitted to the GM but not provided to the
auditing unit.
f.

The documents necessary to explain the matter are still for searching as the
person in charge in safekeeping the document was not yet available.

On June 11, 2015, the General Manager submitted an Original Secretarys Certificate
from Mrail, Inc. notarized June 9, 2015 stating among others that:
On June 10, 2009, the Miescor-GTC Joint Venture was incorporated and
registered with the SEC as Miescorrail, Inc. to engage in the business of
general construction, development, operation and maintenance of railway
systems, industrial facilities, related infrastructures and consultancy services;

65

On March 29 2012, Mr. Joseph Allan C. Dilay and Mrs. Gina G. Dilay tendered
their resignation as members of the Corporations Board of Directors, which
resignation was duly accepted and approved by the Corporation; and
On March 22, 2015, the SEC approved and change in the Corporations
corporate name from Miescorrail, Inc. to MRail, Inc.
9. The propriety of the increase in per diems of the Board of Directors as a result of
reclassification of the PNR by the GCG as GOCC under Classification E to
Classification D is disputable since based on increased Total Assets in the
Statement of Financial Condition or Balance Sheet where the Auditor rendered
adverse opinion on the fairness of presentation.
9.1

On December 23, 2013, PNR requested for the approval of the Governance
Commission for Government Owned and Controlled Corporations (GCG) for a
retroactive increase in the per diems of the Board of Directors from the amount of
P3,500 per Regular and Special Meeting and P2,100 for Committee Meetings
attended to the next higher level under the rules of the Governance Commission. In
the letter dated June 2, 2014 of the Chairman, GCG, it was informed that after reevaluation, the classification of the PNR was elevated from Class E to D.

9.2

Based on the COA-Audited Financial Statements for CYs 2010, 2011 and 2012, the
GCG determined that PNR was under Classification D and the per diems the PNR
Board of Directors are entitled for actual attendance of meeting effective January 2,
2014 was as follows:
Board Meetings *
Committee Meetings
Max. Per
Max. per
Max. Per
Max. per
Meeting (P)
Year (P)
Meeting
Year (P)
D
10,000
240,000
6,000
144,000
* up to 20% premium allowed for the Chairman of the PNR Board

Class

9.3

Total Max.
(P)
384,000

Re-classification of the PNR was based on the following three-year comparative data
on financial condition and operational performance:
A. Balance Sheet Accounts
Particulars
(Amounts in thousand pesos)

Assets
Liabilities
Net Worth

2010
13,471,699
24,959,213
(11,487,514)

Historical

2011
13,621,810
25,607,009
(11,985,199)

2012
53,102,554
25,956,031
27,146,523

B. Revenue Streams
(In P)
Rail Revenue
Non-Rail Revenue
Other Income
Gain on Sale of Assets

2010
101,985,564
139,611,417
819,826
222,300

2011
185,992,271
168,250,990
2,450,373
0

2012
227,885,189
169,755,406
567,572,498
290,006,752

Average
171,954,341
159,205,938
190,280,899

66

(In P)
Gain on Forex
Interest Income
Subsidy from Natl. Govt.
Total Revenues
Total Revenues Net of
Subsidy and Unrealized
Forex Gain

9.4

597,526
98,655,625
341,072,432
242,416,807

2011

0
2,450,373
779,995340
1,136,688,974
356,693,634

2012
272,476,644
5,089,102
128,653,096
1,093,866,189
692,736,449

Average
335,768,020
857,209,198
430,615,630

The increase in per diems of the Members of the Board of Directors, from P3,500 to
P10,000 for Board Meetings and from P2,100 to P6,000 for Committee Meetings,
resulted in the increase of expense for per diems under personal services by 502% in
2014 compared to 2013, as follows:
2014
1,043,500

9.5

2010

2013
207,900

2012
268,800

Section 6 of Executive Order No. 24 provides that GOCCs shall be classified by size
based on assets from the audited Balance Sheet of the previous year and the
average of revenues in the Income Statements for the last three years shall be the
basis of the GCG in the reclassification. Based on financial data GOCCs are
classified as follows:
Classification
A
B
C
D
E

>
>
>
>
<

Assets (P)
100 billion
25 billion and < 100 billion
5 billion and < 25 billion
1 billion and < 5 billion
1 billion

>
>
>
>
<

Revenues (P)
10 billion
2.5 billion and < 10 billion
500 million and < 2.5 billion
100 million and < 500 million
100 million

9.6

The PNR was reclassified as GOCC under Classification D after posting Total
Assets of P53,102,554 as at December 31, 2012 and average total revenue in three
years from year 2010 to 2012 of P430,615,630.

9.7

However, we have doubts on the propriety of the reclassification from GOCC under
E to D. Among the conditions set under Section 6 of EO 24 is that, GOCCS must
meet both the asset and revenue criteria. The re-evaluation was based on COAAudited Financial Statements; however, as stated in Audit Finding No. 1 in the CY
2012 Annual Audit Report, the huge leap in the book value of Land from P704.01
million to P40.05 billion thereby, resulting in significant increase in Total Assets was
the result of revaluation based on zonal value of PNR lands. In accounting for PPE,
in-house appraisal is generally not acceptable as the appraisal results may be
biased. Moreover the revaluation or appraisal is required to be undertaken by an
independent appraiser for independent check of financial data.

9.8

The revaluation made was not in accordance with generally accepted accounting
principle (GAAP) on Plant, Property and Equipment (PPE) prescribed under

67

Philippine Accounting Standards No. 16 which requires that in the revaluation model
method of accounting and reporting for PPE, fair market value and not zonal value
should be used. . Because of the significant effect of the in house revaluation of PNR
lands on the Financial Statements, the Auditor rendered an adverse opinion that the
financial statements of PNR did not present fairly its financial position.

10.

9.9

We do not question the performance of the Governance Commission to evaluate


and decide on the matter as it is their mandated duty, moreover, we are not against
the increase in the per diems of the Board of Directors for the amount the Members
of the Board may be entitled may be more. However, it is also this Commissions
mandate that government funds are legally and properly disbursed. The revaluation
should have been based on correct interpretation of financial information for wise
decisions in accordance with the prescribed rules.

9.10

To prove the correctness and erase doubts on the change in GOCC


classification of the PNR thereby, justify the increased amounts in per diems of
the Board of Directors, our recommendation for PNR Management to conduct
actual physical inventory of assets and proper valuation to establish existence
and real worth of PNRs assets was reiterated.

9.11

Management informed that the PNR may not review the decision of the GCG but
could only implement it. Management asserted that even without the revaluation
undertaken in 2012 PNR still posted total assets of P13 billion hence may be
classified as under Classification C, D or E depending on average revenues.

9.12

Although, Management acknowledge the need for complete physical inventory of


PNR properties to have a more reliable asset valuation, Management explained that
the major bottlenecks in not conducting complete physical inventory and appraisal are
due to lack of manpower and availability of sufficient resources as well as, pressing
and emergent situations Management and the inventory committee face in their
regular duties.

9.13

As a rejoinder, although Total Assets of P13 billion was reported prior to revaluation
of Land, a disclaimer of opinion was rendered in the Auditors Report in the CY 2011
Annual Audit Report. Property Plant and Equipment (PPE) account with then net
carrying value of P12.8 billion comprising 94% of Total Assets could not be
substantiated due non-completion of physical inventory initiated by Management to
establish existence of the assets, and absence of complete records or detailed
schedules on the components of the assets classified as PPE. Even then, it was
uncertain if Total Assets was fairly presented in the Balance Sheet presented by the
PNR.

Payment of honoraria to the members of the PNR Bids and Awards Committee (BAC),
Technical Working Group and members of the BAC Secretariat were not supported
with documents required in COA Circular No. 2012-001. Also, hire and fire
68

contractual workers were assigned as administrative support to the BAC Secretariat


and paid P189,000 as honoraria contrary to Budget Circular 2004-5A.
10.1

We audited the disbursement vouchers covering payments of honoraria to the


members of the PNR Bids and Awards Committee (BAC), Technical Working Group
(TWG) and members of the BAC Secretariat and we noted the following:

10.2

Lack of supporting documents required in COA Circular No. 2012-001 dated


June 14, 2012.
10.2.1 The disbursement vouchers (DVs) covering honoraria paid in CY 2014 in the
total amount of P884,500 were not completely supported with the necessary
documents required under COA Circular No. 2012-001 or the Revised
Guidelines and Documentary Requirements for Common Government
Transactions that was issued dated June 14, 2012.
10.2.2 The supporting documents found attached to the DVs included:
a. Office Orders creating and designating the BAC Composition.
b. Attendance Sheet listing the names of attendees to the BAC meetings.
c. Bids and Awards Committee Resolution signed by the BAC Members
recommending the release or payment of Honoraria with the listing of
successfully awarded contracts/projects.
10.2.3 The following documents prescribed to support the transactions were not
attached in the paid DVs:
a. The Office Orders creating and designating the BAC members did not
expressly authorize the members to collect Honoraria.
b. Minutes of BAC Meetings
c. Notices of Award to the Winning Bidders of the procurement activities
claimed
d. Certifications that the procurements made involved competitive
biddings.

10.3

Honoraria totaling P189,000 was paid to job order personnel where there was
no employee-employer relationship.
10.3.1 Four Job Order Personnel (JOs) hired by the PNR on contractual basis of
three months were designated permanent members of the PNR-BAC
Secretariat. Their function was to assist and provide administrative support to
the BAC as authorized by Office Order No. 57 dated December 16, 2013 and
Office Order No.07, s of 2014 dated January 24, 2014. In CY2014, total
honoraria paid to the hire and fire personnel amounted to P189,000 based
on successfully awarded procurement projects/contracts.

69

10.3.2 The contracts of service of the JOs specifically stated that, This shall not
create an employer-employee relationship between PNR and above name
employees shall not be entitled to benefits (PERA, COLA, BONUSES and
other all allowances) except PHILHEALTH benefits in compliance with
Republic Act No. 7875. We
10.3.3 The JOs should not have been designated permanent members of the BAC
Secretariat, and were not entitled to the grant of honoraria there being no
existing employee-employer relationship.
10.3.4 Section 5.9 of Budget Circular 2004-5A on the Guidelines on the Grant of
Honoraria to Government Personnel involved in Government Procurement
actually permits payment of overtime for the administrative staff in lieu of
Honoraria if procurement activities rendered are in excess of official working
hours and should be in accordance with existing policy on overtime.
10.3.5 Also, in Office for Legal Affair (OLA) Opinion No. 226 s.2015 issued by the
Civil Service Commission in reply to our Audit Query seeking clarification on
the designation of a PNR hire and fire employee as permanent member of
the BAC Secretariat, it was stated that based on the provisions under Section
6(e), Rule III of the Revised Omnibus Rules on Appointments and Personnel
Actions, only those employees holding permanent appointments to career
positions may be imposed such additional duties. Consequently, one who
works under a Contract of Service (COS) may not be validly designated.
10.4 We recommended that Management:
a. Attach the required supporting documents to vouchers for the payment
of honoraria prescribed in COA Circular No. 2012-001 dated June 14, 2012
to prevent suspension/disallowance of the transactions in audit; and
b. Require the refund of the honoraria paid to hire and fire personnel
designated as administrative support staff to the BAC Secretariat
amounting to P189,000.
10.5 Management commented that the lacking supporting documents shall be submitted
the soonest possible. With inadequate permanent/plantilla positions in the Legal
Division where most of the members of the BAC Secretariat emanates and the hefty
workload in procurement activities, PNR is left with no other recourse but to designate
Legal Division Job Order personnel. Management recognizes the valuable support
JOs contributed in procurement activities. Hence, due to the absence of any provision
in the IRR of RA 9184 showing restriction on membership except for the Head, PNR
management designated JOs in the BAC Secretariat and allowed them to receive
honoraria. The honoraria paid were sourced from the sale of bidding documents.
10.6 As our rejoinder, there may be no provision restricting membership of JOs in the BAC
Secretariat however, the guidelines issued by the DBM on the payment of Honoraria
prohibits payment thereof to the administrative support to the BAC. Besides, their
contracts of service provided that they were not entitled to payments of benefits. The

70

proceeds from sale of bid documents are government fund, other income which should
be utilized in accordance with the prescribed government rules.
11.

Rental Receivable of P156.26 million as of December 31, 2014 included unconfirmed


accounts totalling P71.96 million and double recording of accounts that overstated the
balance as of year-end by P1.68 million.
11.1

Results of confirmation of balances from 26 lessees whose rental payable to PNR


amounted to P12,334,753 are shown below:

Result of Confirmation
No Confirmation Reply but
Confirmation Letter was received
on 3/21/15 per Post Office
Registry Return Slip.
-do-do-

No Confirmation Reply but


Confirmation Letter was received
on 3/31/15 per Post Office
Registry Return Slip.
-do-doNo Confirmation Reply but
Confirmation Letter was received
on 3/30/15 per Post Office
Registry Return Slip.
-doReturn to Sender Lessee
deceased
-doNo Confirmation Reply but
Confirmation Letter was received
on 3/31/15 per Post Office
Registry Return Slip.
-do-do-

Lessee

Address

Nestor and Yolanda


Dioquino

PNR Site Dagupan,


Dagupan Station
Grounds

Nestor G. Dioquino

PNR Site, Brgy.


Mayombo, Dagupan City
PNR Site Dagupan,
Dagupan Station
Grounds

Nestor & Yolanda


Dioquino
Lourdes Santos
c/o Carolina Nicolas

Lourdes Santos
c/o Carolina Nicolas
Lourdes Santos
c/o Carolina Nicolas
Edward Potenciano

Edward Potenciano
Engracia Malig
c/o Jose Malig
Engracia Malig
c/o Jose Malig
Pedro Balingit

Pedro Balingit
Pedro Balingit

Amount of
Receivable
P 327,526

14,500
299,802

622,244
253 Heroes del 96, Cal
City
253 Heroes del 96, Cal
City
253 Heroes del 96, Cal
City

687,720
272,950
579,317

Bonifacio & Canlalay


Streets, Binan, Laguna
Bonifacio & Canlalay
Streets, Binan, Laguna
Damortiz, La Union
Damortiz, La Union
M.H. Del Pilar Street
Dagupan City

M.H. Del Pilar Street


Dagupan City
M.H. Del Pilar Street
Dagupan City

579,317
315,941
315,941
537,791

935,650
734,654

71

Result of Confirmation
No Confirmation Reply but
Confirmation Letter was received
by Nilo Cardenas per Post Office
Registry Return Slip .
-do-

Dominador M.
Cardenas

Florante Roque

Malolos, Bulacan

780,925

Rolleo Luna Ignacio

93 Celery Street
Valle Verde 5, Pasig City

182,385

Maurita Villacruzes

No available record
from AMD

340,053

Maurita Villacruzes
Maurita Villacruzes

-DO-DO-

-do-

Nilo M. Cardenas

-do-

Confirmation Letter was not


mailed- due to incomplete mailing
address
Confirmation Letter was not
mailed- due to incomplete mailing
address
No Confirmation Reply but
Confirmation Letter was received
by Lucy Luterte per Post Office
Registry Return Slip.
Confirmation Letter was not
mailed because there was no
available record from AMD
-do-do-

Amount of
Receivable
193,279

Florante Roque

-do-

Return to Sender Lessee


deceased

Address

25 7th Ave., West Grace


Park, Kal City
25 7th Ave., West Grace
Park, Kal City
25 7th Ave., West Grace
Park, Kal City
107 P. Galauran, 7th
Ave West, Grace Park,
Kal. City
107 P. Galauran, 7th
Ave West, Grace Park,
Kal. City
107 P. Galauran, 7th
Ave West, Grace Park,
Kal. City
107 P. Galauran, 7th
Ave West, Grace Park,
Kal. City
Malolos, Bulacan

Dominador
Cardenas
Dominador
Cardenas
Nilo Cardenas

-do-

Total

Lessee

Romeo M. Cardenas

Romeo M. Cardenas

970,316
452,362
675,780

308,947

313,947

254,577

780,925

570,352
287,552
P12,334,753

11.2

From the Schedule on Aging of Rental Receivables for CY 2014, we selected 26


accounts for confirmation. However, we were not able to confirm six of them totalling
P2,759,807 because the debtors/lessees were with incomplete mailing addresses.

11.3

Four of the 20 confirmation letters we mailed were marked returned to sender


because the lessees with accounts unpaid totalling P1,200,407 were already dead.
The rest of the 16 Confirmation Letters were received as indicated in the Post Office

72

Registry Return Slip but the lessees did not send confirmation replies, as of May 8,
2015.
11.4

The following lessees had accounts recorded twice that overstated the balance of
Rental Receivable by P1,676,183:
Name

Amount

No of Lessee
in the Schedule

Edward Potenciano
Edward Potenciano
Engracia Malig
Engracia Malig

P 579,317
579,317
315,941
315,941

42
45
43
46

Florante Roque
Florante Roque

780,925
780,925
P 3,352,366

164
181

11.5

Result of Confirmation
Confirmation Letter was
received but no reply sent
- doDeceased
Deceased
Unable to confirm because with
incomplete mailing address
-do-

The Schedule on Aging of Rental Receivable for CY 2014 still included the accounts
of the following lessees who informed in their confirmation replies in year 2013 that
they no longer have outstanding accounts with the PNR:
Lessee

1 A Chan Sugar Corporation


2 Municipal Govt of San Fernando
3 City Government of Iriga
4 City Government of San Pablo
5 La Paz Investment Realty Corp.
6 Mun. Government of San Fabian
7 Municipality of Plaridel
Total

Amount

Per Confirmation Reply

Vacated PNR property 2/28/11;


P10,156,832 fully paid as of 7/29/11
9,233,253 Balance is nil
8,195,082 No account
7,392,707 Account is nil
The company is unable to use
the property which is occupied by
1,418,228 informal settlers
1,168,687 No more payable to PNR
34,394,094 No outstanding account
P71,958,883

The amount of P71,958,883 represented 46% of the total Rental Receivable of


P156,261,553 as of December 31, 2014. In reply to our Audit Observation
Memorandum in the previous year, Management committed to verify further the
accounts.
11.6

We recommended the following:


a. Adjust the rental receivables which were recorded twice thereby,
overstating the balance of the account by P1,676,183.
b. Provide the results of verification of the records of the accounts wherein the
lessees informed that they no longer have rental obligations with the PNR.
73

11.6

12.

Management informed that the overstatement on the balance of Rental Receivable


was, as recommended, adjusted in the books in 2015. On the accounts wherein the
Lessees replied that they no longer have obligations with the PNR, Management shall
formulate its procedures including ocular inspection of the property and review of
pertinent records.

The PNR was not able to comply with the requirements of the Property Insurance
Law (R. A. 656) posing imminent risk of non-recovery of costs of properties in case of
occurrence of natural and man-made calamities.
12.1

Republic Act No. 656 dated June 16, 1951 and Administrative Order (AO) No. 33,
series of 1987 prescribed the law and guidelines for the insurance of all the
government property, contracts, rights of action and other insurance risks of the
government including those wherein the government has insurable interest. As
required therein, the insurance of government property including those of the
Government Owned and Controlled Corporations (GOCCs) should be with the
General Insurance Fund (GIF) of the Government Service Insurance System (GSIS).

12.2

The PNR reported the following Property, Plant and Equipment (PPE) totaling
P51,474,065,448 in its financial statements as of September 30, 2014:

Property, Plant and Equipment


Land and Land Improvements

Balance per
Books

P 40,012,987,466

10,255,984,332

3,378,538,756

6,877.445,576

Land Transportation Equipment


Other Property, Plant and
Equipment

4,677,391,181

1,524,468,564

3,152,922,617

47,256,860

47,256,860

Construction-In-Progress

1,383,452,929

1,383,452,929

P56,379,896,374

P4,905,830,926

P51,474,065,448

Total

Net Book Value

2,823,606

Buildings, Furniture and Equipment

P40,015,811,072

Recorded
Depreciation

The PPE accounts comprised 98.13% of the agencys total assets of


P52,457,202,700 as of September 30, 2014. However, as of same reporting date,
the Insurance Expense account amounted to only P11,920. The insurance expense
represented the cost of renewal of licenses of PNR service motor vehicles. This
indicates that the PNR did not comply with the requirement of AO No. 33 and COA
Circular No. 79 - 112 dated August 30, 1979 resulting in an inadequate and nonprotection of PNR property against damage or loss and indemnification of
recoverable costs if ever natural or man-made calamity would occur.
12.3 We recommended that Management:
a. Explain non-compliance with the Property Insurance Law; and
74

b. Determine the PPE accounts which should be covered with Property


Insurance for application with the GSIS.
12.4 Management commented that no insurance policies were subscribed as financial and
operating constraints of the PNR were evident with the problem systemic and may not
be solved instantaneously. Provision for insurance of locomotives, train coaches,
buildings, stations, equipment and motor vehicles shall be made in the next Corporate
Operating Budget
13.

PNR Management did not comply with the requirements of COA Circular No. 2009-001
dated February 12, 2009 on the timely submission of copies of perfected contracts and
Purchase Orders including supporting documents thereby holding back conduct of
review and audit.
13.1

COA Circular 87-278 requires the submission of the perfected contract and all its
supporting documents, within five days after approval. COA Memorandum 2005-027
provides the basic documentary requirements and checklists for each specific kind of
contract. To facilitate systematic and effective technical review and evaluation, these
guidelines were again reiterated in COA Circular 2009-001 dated February 12, 2009..

13.2

In CY2014, the PNR submitted to the Commission copies of 22 perfected contracts


with contract price in the aggregate amount of P321,876,389. Seven of the contracts
were submitted in August 22, 2014; fourteen were forwarded on August 27, 2014,
and one was submitted on November 10, 2014. Based on the records of transmittal,
submission of the contracts for review was one to ten months delayed; and, we noted
that it was made only after the issuance of the Memorandum dated August 18, 2014
by the General Manager requiring strict adherence on the prescribed provisions of
COA Circular 2009-001.

13.3

However, it was noted that the contract for the project involving General Overhauling
and Upgrading of Diesel Electric Locomotives in the amount of P149,999,808 and
approved on September 15, 2014 was not submitted for review. Copy of the contract
was attached to the disbursement voucher covering advance payment to the
Contractor made on November 27, 2014 minus bidding and other documents forming
integral part thereof.

13.4

Initial review showed that the contracts submitted were not completely supported with
the basic documentary requirements listed in Section 3.1.2 of COA Circular 2009001, that are necessary to establish compliance with RA 9184 or the Procurement
Law. As a result timely submission for review and evaluation of technical aspect of
the contracts by the Technical Service Office was not made possible.

13.5

We value the issuance by the PNR General Manager, three days after the release of
the aforementioned AOM, of a Memorandum addressed to all concerned officials and
the BAC Committee reiterating compliance with the requirements of COA Circular
2009-001.

75

13.6

We recommended that Management submit explanations on its failure to


strictly comply with the requirements of COA Circular 2009-001 as it hindered
the conduct of auditorial review; and submit all lacking supporting documents
to the contracts submitted to avoid suspension of related disbursement
transactions.

13.7

We have not received a written reply to our Audit Observation Memorandum but we
were furnished Memorandum dated March 26, 2015 requiring henceforth, compliance
by all concerned with the prescribe provisions of COA Circular 2009-001.

B.

Value for Money Audit

14.

After the lapse of four years, the computerization project embarked by the PNR at
reduced contract cost of P31.57 million has, to date, not attained its objective of
providing efficient and effective computerized Payroll and Property Management
Systems.
Despite awaiting for the approval by the Commission on Audit of the petition for
payment based on quantum meruit filed by the contractor in June 2014, five
disbursement vouchers were paid totalling P8.50 million to the contractor, from June
9, 2014 to February 16, 2015, for the Board approved compromised balance of P14.52
million.
14.1

Section 58 of PD 1445 on the Audit of assets requires that, The examination and
audit of assets shall be performed with a view to ascertaining their existence,
ownership, valuation ; ascertaining if the assets were utilized economically,
efficiently and effectively; and .Accordingly, Section 27 on the Audit of Assets in
Volume III of the Government Accounting and Auditing Manual provides for the
following:
e. Economy and efficiency that assets are acquired, utilized and disposed of to
full advantage, and that internal controls are adequate and operating
effectively;
f. Effectiveness that results from the use of the assets contribute to the
achievement of the agency goals and mission.

14.2 In October 2009, the PNR embarked into a Computerization Project and hired an IT
Consultant who documented an Information System Strategic Plan (ISSP) for the
agency. Bidding for Phase 1 of the ISSP involving IT infrastructure plus the
development and implementation of Payroll and Property Management Systems was
conducted on March 10, 2010 with the Approved Budget for the Contract (ABC) of P50
million. Only PC Craft Computer Technologies, Inc. participated who was eventually
awarded the contract on May 14, 2010 at a total contract price of P43,500,374.
14.3 From July to August 2010 PC Craft constructed an IT room and delivered all hardware
in accordance with the terms of the contract. A full time employee was also provided
by PC Craft starting June 2010. For goods delivered and service provided partial
76

payments were made in August 2010 and January 2011 in the total amount of
P17,049,099 (inclusive of VAT).
14.4 In the implementation of the computerization program the Situational Report of the
Consultant, Audit Board Committee reported on the following issues that resulted in
non-settlement of the balance payable to PC Craft amounting to P26,451,275:
14.4.1

Lack of funds to pay for the balance on the contractual obligation a. The Corporate Operating Budget (COB) of the PNR including the
proposed funding for the computerization program was submitted for
approval to the Department of Budget and Management (DBM) on July
10, 2010.
However, the proposed budget for capital outlay of
P1,422,279,000 in the CY 2010 COB was reduced by the DBM to
P752,529,000 or by P668,750,000. Included in the disallowed items was
the budget for computerization due to lack of funding source.
b. The Certification as to availability of fund was issued despite the absence
of the approved COB. The Manager, Budget and Cash Division signed
Box B of the disbursement voucher and effected partial payment of the
contract price.

14.4.2 Non-approval of the Information System Strategic Plan (ISSP) ISSP was not approved by the National Computer Center (NCC). According
to the former General Manager, PNR Management was not aware of this
requirement.
14.4.3 Un-utilization of the Property Management and Payroll SystemsAs per the situational report of the Internal Audit Consultant submitted on April
18, 2011, four desktops were connected via a Local Area Network with real
estate data starting 2008 uploaded at the Real estate Management Division;
at the Controllership Division three desktops were installed on LAN and
master file data of personnel uploaded. Only the hardware were being utilized
while, the software or program on property management and payroll systems
developed by PC Craft were reportedly not adequate to address the
requirements.
14.4.4 No Manpower Resource
There was no PNR unit or even an employee designated as oversight in the
implementation of the project.
14.5 There was no Certificate of Final Acceptance and Final Accomplishment Report duly
signed by authorized agency officials. The succeeding Management of the PNR
doubted the reasonableness of the contract price entered into by the previous PNR
General Manager.
77

The lack of DBM approved budget for the project and authority to appropriate and pay
for the obligation with PC Craft was disclosed in the CY 2010 Annual Audit Report.
14.6 On July 18, 2011, the former PNR General Manager inquired from the auditing unit if
the conduct of pre-audit of the partial payment made to PC Craft effectively cured the
purported defects, such as, the lack of available funds to pay for the obligation. Also,
the General Manager queried if PNR through its Board of Directors may allot corporate
funds for the payment of the goods already delivered based on quantum meruit and
substantial justice.
In reply, the currently assigned Supervising Auditor opined that:
a. The disallowance by the DBM of the budget for capital outlay as per the
belatedly approved COB for FY 2010 rendered the transaction illegal and
irregular. Furthermore, the purported defect was not resolved upon passing of
the transaction in pre-audit as the then Supervising Auditor acted on the basis
of the representations and supporting documents provided by the PNR
Management.
b. The PNR Board of Directors may be held responsible for ratification of the ABC
involving the computerization project without an approved Corporate Operating
Budget (COB) for CY 2010. The ABC for the procurement of the computer
system was approved January 21, 2010 per Board Resolution 2010-003;
whereas, the COB was ratified by the Board later on June 29, 2010.
Misrepresentation was made by the Manager of the Budget and Cash Division
for certifying the availability of fund; while, the Manager of the Controllership
Division misrepresented that the documents supporting the transaction were
complete and proper.
14.7 The General Manager requested the Department of Justice (DOJ) for legal opinion
and in the letter dated December 6, 2012, the DOJ Secretary stated that:
a. The DOJ agreed with the COA finding that without the approved budget, the
contract is void having been rendered illegal and irregular.
b. The Resident Auditor is correct in that the purported defect of lack of funding
was not resolved upon passing of the transaction in pre-audit.
c. Without appropriation, the PNR cannot lawfully pay PC Craft Technologies.
d. However, payment of goods delivered and installed may still be made on the
principle of quantum meruit
14.8 On November 22, 2013, PC Craft Technologies was informed that a new PNR IT
Team was organized with the task of reviewing the works done by it and a
representative of the Company was invited in the conduct of inventory of the items
delivered by them. An Evaluation Report was submitted by the IT Inventory Team on
February 18, 2014 to which the President of PC Craft conformed.

78

In Board Resolution 015-2015 issued March 5, 2014, it was made known that after
joint evaluation by PC Craft and the PNR, the IT equipment delivered and operating
systems installed were valued at P31,569,405; and, it was jointly agreed that the
unpaid balance amounted to P14,520,306 which the PNR Board authorized for final
payment.
14.9 On June 5, 2014, the PC Craft Technologies filed a Petition for Money Claim with the
COA, with the ANSWER submitted by PNR Management on August 5, 2014.
However, even if the petition for payment based on quantum meruit was still under
evaluation by the Commission, payments of the compromised unpaid balance of
P14.520 million had been effected by PNR under the following documents in the total
amount of P8,500,000.00.
Date
06/09/14
07/23/14
10/23/14
11/18/14
02/16/15
Total

DV No.
OGM-2014-06-962
OGM-2014-07-1295
OGM-2014-10-2911
OGM-2014-11-3068
OGM-2015-02-165

DBP Check No.


44040946
44041077
41939130
47371872
47372002

Amount
3,000,000
3,000,000
1,000,000
1,000,000
500,000
P 8,500,000
P

14.10 In the Memorandum dated February 15, 2015 of the IT Consultant who conducted
inventory and evaluation of compliance with the supply and service contract, it was
informed that estimated stage of completion on unpaid items delivered was 59.6%
equivalent to P8,654,129 of the P14.52 million outstanding balance. Hence, the
remaining balance based on percentage completion amounted to only P15,129.
14.11 After the lapse of more than four years as of year-end 2014, PNRs Computer System
has not been utilized to full advantage, an indication of waste of government
resources. The objective of providing efficient and effective computerized Payroll and
Property Management Systems has not been achieved to date.
14.12 At the time of ocular inspection, we observed that the computer mainframe and
installed system is operated continuously to prevent machine breakdown, consuming
electric power and manned by two co-terminus employees assigned by the Office of
the General Manager and with an IT Consultant incurring cost of salaries and
consultancy fees amounting to a total of P70,852 per month. The system installed is
now being used for Electric Data Management System (EDMS) to keep track of
documents routed or issued and received by department offices of the PNR. The main
objective/goal which is the development and implementation of payroll and property
management was not attained by the PNR.
14.13 In the Memorandum dated February 20, 2015, the new Manager of the Administrative
and Finance Department informed that a dry run for the Biometric Attendance System
commenced last February 23, 2015 to assess and evaluate the system aside from
monitoring of personnel attendance.

79

14.14 Considering the rapid change in information technology, we recommended that


PNR Management immediately formulate solutions in order that the computer
system procured would be more productive and effective before it becomes
obsolete and/or unserviceable.
14.15 Also, we requested Management to explain why payments were made to the
Contractor in the total amount of P8,500,000 even if the petition for money claim
of PC Craft was still pending for review and approval of COA to determine the
reasonableness of the reduced contract cost P31.57 million.
Management opined that there was no compromise agreement and that Section 36 of
PD 1445 is not an authoritative basis in determining who will measure quantum
meruit. It is now clear to current Management to pursue what is best for the agencythat is to make use of the white elephant not utilized to a full advantage (as we may
quote from the AOM)-in order for PNR to at least join hands with other agencies in
adopting to technological advances, observing of course the rule of law.
14.16 As our rejoinder, Section 36 of PD 1445 provides that the power to compromise
money claims for or against the government is vested with the Commission on Audit.
It may approve, if within its limit or jurisdiction; or, recommend for approval by the
President or Congress, if exceeding its limit, to compromise or release in whole or in
part any settled claim or liability to any government agency. Compromise as stated
referred to settlement of accounts for or against (receivables or payables) the
government which is among the functions and duties vested to the Commission on
Audit under Article IX D of the Constitution.

C.

Adequacy of Internal Control

15.

Internal control weaknesses in Real Estate Management were observed rendering it


difficult to determine the accuracy of collections on lease and the reasonableness of
the lease rate imposed. There was no clear policy in the determination of the fair rental
rate and what was authorized was not consistently applied. There were instances of
overlapping rights on the leased premises and lack of manpower and will to effectively
manage the vast parcels of real property of the PNR.
The PNR earned total revenue of P515,500,950 in CY 2014 derived from the following
sources:
Source of Revenue
Amount
Percent
Train operations
P313,800,054
61
Lease of government property for residential,
38
commercial or agricultural purposes
197,770,730
Miscellaneous
3,930,166
1
Total
515,500,950
100
The accuracy of the collection of income earned from lease of government property and the
reasonableness of the rental imposed to the lessees was uncertain. Several problems and
issues affected Real Estate Management, such as:
15.1

There was no clear policy in the determination of the lease rate

80

15.1.1 The lease of small parcels of land involved a term of one to five years, subject
to renewal of the lease contract upon expiration. Based on available records,
the Asset Management Division (AMD) entered into 38 lease contracts with
various Lessees in CY2014. Excluded is the Supplemental Contract of Lease
by and between the PNR and SM Prime Holdings, the subject matter of Audit
Observation No. 1. From the 38 contracts executed in CY 2014, total cash
collected from lease amounted to P 19,033,690 with 52.55% of which was
accounted as advance rental received from Manila North Tollways
Corporation (MNTC) amounting to P10,056,981 .
15.1.2 Verification of the rental rates contracted with the lessees revealed that the
PNR used as basis the zonal value per square meter of the property leased
out or the rate computed and prescribed in the PNR Rental Rates Schedule,
whichever is higher.
15.1.3 In the Memorandum dated May 12, 1993 of the then PNR General Manager
addressed to the Board of Directors, the proposed rental rates effective
January 1, 1992 were to be increased every year up to the next review period
by 20% for residential sites and 10% based on fair values for commercial
sites. Review period shall at the most be every five years. In the Computations
of Rental Rates since CY 2005, however, we noted that the escalation rates
for both residential and commercial sites were at 10% up to year 2014.
15.2

The authorized lease rate was not consistently and uniformly applied
15.2.1 The use of the zonal value as basis for the lease rate was dated approved
November 20, 2009 under Board Resolution No. 2010-002 per the
recommendation of the then Real Estate Technical Working Committee. As
stated in Board Resolution No. 2010-001, 7% of the Zonal Value as Tariff
Rate for Lease of PNR Real Estate; Provided that Big Ticket Lease shall be
treated individually relative to the location of the property classification, and
the like; the local government units classification of the location whether
residential or commercial, shall be the basis of the nature of the use of the
property; and that the computation of the incremental increase of rental rates
shall also be based upon the adjustment of zonal valuation; Subject ...
However, review of the zonal values used as basis for rental rates for CY
2014 revealed that the zonal valuation in leasing the PNR properties dated
back from 2002 to 2010.
15.2.2 We also noted that the rate of P23.01 per square meter for parcels of land
measuring 36,422.5 square meters or P838,082 per month on property leased
by the PNR to MNTC for a period of 24 months was even lower than the zonal
value in the vicinity at Caloocan City.

15.3

There is legal and administrative risk in contracting overlapping rights to two


lessees on the same subject of lease, and collection in advance of unearned
income from lease
15.3.1 In the Contract of Lease executed with MNTC under Contract No. 14402, we
noticed the provision stated therein that the contracting parties PNR and
81

MNTC acknowledged that the a portion of the leased premises overlapped


with a part of the parcels of land covered by separate Lease Agreement
entered into by PNR with SM Prime Holdings, Inc. We are not certain if
SMPHI was properly informed regarding the matter.
15.3.2 Advance payment of rent due for the first 12 months of the lease period
amounting to P10,056,981 was received by the PNR from MNTC in the net
amount of P9,554,132 (net of 5% expanded withholding tax(EWT)) per Official
Receipt No. 6721291 dated May 14, 2014. We noted that the PNR collected
another 6 months advance rental in the net amount of P4,777,066
(P5,028,490 less EWT of P251,425) which was acknowledged received under
OR No. 4667022 dated November 21, 2014. The receipt of additional
advance rental for six months was not provided in the Contract of Lease dated
April 2014.
15.3.3 As disclosed in Audit Observation Memorandum 2015-010 dated April 24,
2015 PNR also collected in advance from the SM Primeholdings, Inc. income
from lease for the first 12 years of the lease period. The fund received was
initially invested in time deposit but subsequently mingled with the general
fund account used for current operating expenses.
15.3.4 In the event that the contracts entered into are not fully implemented due to
PNRs failure to comply the conditions stated therein, the agency would be
obliged to reimburse the amounts received in advance from the Lessees.
PNR may have difficulty to reimburse the advance rental received considering
its current financial state or condition.
15.3.5 The improper practice of contracting overlapping lease of property, might
result in conflict similar to the case of Tutuban Property Inc. (TPI) wherein, TPI
accused the PNR of breach of contract and unilaterally withheld the rentals
due and payable to the agency. Release of the amount withheld shall be
made only on the condition that the leased property shall be turned over free
of other illegal occupants.
15.4

There is lack of manpower and will to institute sufficient controls in managing


the vast parcels of PNR real property 15.4.1 In the Asset Management General Resurvey and Rental Collection Campaign
Report of the Asset Management Division it was stated that:

Majority of areas not currently used in railway operations including closed


lines are full of squatters. The presence of squatters in the right of way
cause major problems that hamper the operation, maintenance, and
rehabilitation of PNR lines.

Lease contracts are being issued for short term period and the lessees
continue to occupy the leased property without renewing the contract and
paying the annual rentals.

There are no field collecting officers to ensure the collection of income


from lease.
82

Ejectment suits were not initiated by PNR against lessees who failed to
pay rentals.

15.4.2 In its bid to undergo reformation and generate increased non-rail revenue, the
AMD recommended Task Force Sukat Singil for improved real estate
management the General Manager issued Memorandum dated March 3, 2014
containing clear set of policy guidelines and procedures that would govern the
leasing activities of the corporation. However, we noted that the guidelines in
the Memorandum did not contain standards in determining the
reasonableness of the terms of lease contract and the rental rates that would
be imposed.
15.4.3 Although earning non-rail revenue to support business operations, the leasing
of government property is not the mandate of the PNR. As mentioned above
problems on informal settlers in PNR right of way even caused major
problems that hindered PNRs performance of its principal mandate which is
to deliver efficient service in the rail transportation system.
15.4.4 Lapses in real estate management were observed and disclosed in Audit
Observation No. 3 in the CY 2011 Annual Audit Report. AMD furnished the
auditing office 24 pages listing various lessees on PNR real property located
in various areas in Luzon with an aggregate land area of 422,264 square
meters. With the significant number of occupants, we are not certain if those
who continued to occupy the premises were informal settlers or paying rent to
the PNR.
15.5

With the immeasurable parcels of real property which the PNR is unable to
manage effectively, we recommend that Management thoroughly review the
Inventory List of PNR Real Property and determine which property would no
longer be used in the expansion or rehabilitation of lines in the rail
transportation system. Management may consider sale of the assets in order
to generate much needed fund for the efficient delivery of rail transportation
service by the PNR.
Clear policy to be adopted in the determination of the reasonable rate of lease
should be issued. Management should reassess the use of zonal value in
determining the proper lease rate in the leasing of real property instead of the
prevailing rental rate in the vicinity which generally is considered reasonable
and fair value.

15.6.
16.

Management has not responded on the Audit Observation Memorandum.

Turnover by the Collecting Officers to the Cashier C of cash collections averaging


more than P1 million daily was done without official document to indicate transfer of
accountability on collections.
16.1

The PNR entered into Memorandum of Agreement (MOA) for Deposit/Pick-Up


Servicing with its depository bank the Development Bank of the Philippines (DBP) on
July 9, 2014.
83

16.2

In line with the deposit pickup arrangement with the depository bank, Mr. Eduardo
M. Garcia, Cashier C, Budget and Cash Division who is designated as payroll
disbursing officer also acted as Collecting Officer, in-charge of the deposit of
collections for pick up by the roving teller of the DBP.

16.3 We noted that the authorization letter of Mr. Garcia to deposit collections with the
depository bank was dated February 5, 2009. It was issued by the Manager of the
Budget and Cash Division and was not approved by the General Manager who is the
duly authorized representative of the PNR as far as the depository bank DBP is
concerned.
16.4 We were informed that the collections of the various PNR Collecting Officers, after
bank cut-off time were turned over to Mr. Garcia every afternoon for safekeeping and
deposit on the following day. We noted that receipt of the collections was not thru
officially prescribed form but in columnar books kept by each of the collecting officers
for personal security.
16.5 The practice of transferring cash collections by four Collecting Officers to the
Paymaster for safekeeping and deposit on the following day is contrary to Item No. 11
of the Laws and Rules Relevant in Cash Examinations involving Accountability which
specifically quote Section 77 of P.D. 1445 stating that, Transfer of government funds
from one officer to another shall, except as allowed by law or regulation, be made only
upon prior direction or authorization of the Commission or its representative.
16.6 We were informed that the collections for pick-up by the DBP roving teller are actually
counted in the presence and tallied against the deposit slips accomplished by each of
the collecting officers which are thereafter validated by the depository bank. In the
accomplished Deposit Pick-Up Notice (DPN) which constitutes summary of the
deposits made by the tellers, Mr Garcia signed as Depositor present upon counting of
the fund. On the other hand, the pick-up teller of the DBP signed to acknowledge
receipt of the cash deposited presented in the DPN.
16.7 In the Accounting records and the Report of Collection and Deposit of the PNR, the
concerned collecting officer signed as the depositor and was considered the officer
accountable for the collections deposited. Mr. Garcia was not recognized in PNR
books as accountable custodian and depositor of the fund turned over by the
collecting officers.
16.8 We learned that Ms. Ana Liza N. Estrella, a Collecting Officer in the absence of Mr.
Garcia had access of the cash vault of Mr. Garcia. We were also informed that the
collecting officers were provided separate vaults for safekeeping of cash.
16.9 With the foregoing procedures, there may be risks of loss and misappropriation in the
transfer of cash collections due to improper transfer of accountability on the collections
due for deposit on the following day averaging more than P1 million daily.
16.10 We recommended that Management require each accountable officer to
accomplish separate DPN for collections for deposit, considering that the
amount of collections per bank statement is shown by collecting officer and not

84

in lump-sum, thus rendering turnover of cash by the collecting officers to the


depositor in-charge unnecessary.
16.11 Management, through the Manager of the Budget and Cash Division submitted the
following comments:
a. The risk of loss and misappropriation is not possible because our collecting
officers are performing their tasks with due diligence. Mr. Garcia acts as
payroll disbursing officer and Cashier responsible for all safekeeping and
deposit of all cash collections to the depository bank.
b. The turn-over of accountable officers of all their cash and check collections
to Mr. Garcia has been the existing practice ever since and even before the
time of the Salary Standardization law. It was adopted consistent to the
Organization Study for the Treasury Department conducted in 1979,
submitted by the Commission and the Consultant Sycip, Gorres, Velayo and
Company. The procedure was approved by the Board of directors under
Board Resolution No. 59-79 dated April 3, 1979 which has not been
rescinded and still in effect.
c. A separate DPN for each teller would be in conflict with their arrangement
with the DBP that all deposits should be summarized and arranged in an
orderly manner to determine actual deposit for the day.
16.12 In order to control cash collections for deposit, we maintain that there should be
officially documented transfer of accountability since cash collected is handed-over by
the designated collecting officers to the Cashier. Otherwise proper arrangement with
the depository bank should be made since in the Accounting records, deposits of
collections are accounted by collecting officer and not in total as deposited by the
Cashier.

D.

Compliance with Tax Laws

17.

The PNR failed to withhold 5% final VAT estimated at P16.14 million and 1% creditable
income tax of approximately P3.23 million or a total of P19.36 million on bulk purchase
of fuel for locomotives from CY 2011 to 2014 in the total amount of P361.47 million
(inclusive of 12% VAT).
17.1

Revenue Memorandum Order No. 23-2014 dated June 20, 2014 of the Bureau of
Internal Revenue, on Obligations of Government Agencies, Bureaus, and
Instrumentalities as Withholding Agents provides that government agencies has the
obligation to withhold on purchases of goods and services the following:
a. Withholding of Creditable Income Tax

Income payments to certain contractors - On...


Income payments to its local/resident supplier of goods and local/resident
supplier of services other than those covered by other rates of withholding
tax.-

85

Supplier of goods One percent (1%)


Supplier of services Two percent (2%)
b. Withholding Tax on Government Money Payments

On purchases of goods and services from VAT registered


suppliers/payees Five percent (5%) of the gross payment
However, if payment for lease...
Purchases of the government that are covered by Purchase Orders duly
signed by the authorized official/s as well as purchases using the Petty
Cash Fund shall be subject to the 5% final VAT withholding. However...

17.2

In the payment for purchases of Gasoline or Petroleum Products, the Updated


Government Money Payment Chart, prescribed for use in Revenue Memorandum
Circular No. 56-2009 dated August 10, 2009 required the withholding by government
agents and remittance to the BIR of the Final VAT of 5% and Creditable Income Tax
of 1% covered with BIR Forms 1600 and 1601-E, respectively.
Section VI (e) of Revenue Memorandum Order No. 23-2014 pinpoints to the Chief
Accountant and the Head of Office or the General Manager the responsibility on
withholding of taxes due on purchases made by GOCCs. This responsibility was
likewise clearly reiterated under Section A. (b) and Section B. (3) of Revenue
Memorandum No. 23-2012 dated February 14, 2012.

17.3

The recorded entries in the index cards of the Controllership Division were traced to
the source documents. The verified cost of diesel procured accounted for the
following percentage of the cost of fuel and lubricants disclosed in the Notes to
Financial Statements:
Particular

Cost of fuel and lubricants


disclosed in the Notes to FS
Verified cost of fuel procured
Percentage of verification

17.4

CY2011

CY2012

CY2013

CY2014

P86,986,094
75,353,600
86.6%

P112,234,683
106,657,228
95.0%

P100,716,089
64,959,800
64.5%

P118,323,258
114,501,700
96.8%

We noted that in the disbursement vouchers covering payments on the bulk


purchase of fuel used in the operations of PNR locomotives and trains totalling
P361,472,328.00, from year 2011 to 2014, the amount paid to the VAT registered fuel
suppliers was at gross amount. Business taxes, Final VAT of 5% and creditable
withholding income tax on goods of 1% were not deducted in the computations of the
amount due for payment in violation of BIR Memorandum Order No. 23-2014 and
Revenue Memorandum Order 56-2009 resulting in increased outflow of cash
involving fuel expense paid to the suppliers.

17.5

In the breakdown of the fuel cost in several of the Sales Invoices, the Output VAT of
the suppliers at 12% was reflected. The final withholding VAT on sales of fuel or
petroleum products to the government was only 5% which if deducted the remaining
86

7% should have effectively accounted the standard input VAT for sales of goods to
the government. The amount of final VAT at 5% which was not deducted on the
gross sales of P361.472 million (inclusive of 12% VAT) from CY 2011 to 2014 was
estimated at P16,137,157.50; whereas, the creditable income tax of 1% was
approximately P3,227,431.50 or a total of P19,364,589.00.
17.6

In accordance with Revenue Memorandum Circular No. 23-2012 dated February 14,
2012, taxes withheld are due for remittance on the 10th day of the following month of
the period covered except for December which is due for remittance on the 15th day
of the following year. For failure to withhold tax, 20% interest pursuant to Section 249
of the Tax Code shall be imposed in addition to the amount due for collection.

17.7

Likewise, Section VII. C of Revenue Memorandum Order No. 23-2014, on Penalty


Provision in Violation of Withholding Tax Provisions (Section 272, NIRC) states that,
Every officer or employees of the Government of the Republic of the
Philippines or any of its agencies and instrumentalities, its political
subdivisions, as well as government-owned or controlled corporations
including the Bangko Sentral ng Pilipinas (BSP), who is charged with the
duty to deduct and withhold any internal revenue tax and to remit the same
is guilty of any offense herein below specified shall, upon conviction for
each act or omission be punished by a fine of not less than Five thosusand
pesos (P5,000) but not more than Fifty thousand pesos (P50,000) or suffer
imprisonment of not less than six (6) months and one (1) day but not more
than two (2) years, or both:
1. Failing or causing the failure to deduct and withhold any internal
revenue tax under any of the withholding tax laws and implementing
rules and regulations; or

17.8

We recommended that Management provide explanations for not adhering to


the established rules prescribed in BIR Revenue Memorandum Orders which
were issued to implement the provisions of the National Internal Revenue Code.

17.9

Management submitted the following comments:


a. It is informed that all disbursement vouchers for payment of diesel fuel were
retrieved and are now processed net of applicable withholding taxes.
b. Based on representations of concerned personnel to the current leadership of
PNR Management, no supplier wishes to supply the required diesel should
withholding taxes be deducted from the payments. One supplier wrote that the
supplier is responsible for the remittance of their taxes to the BIR. Further,
review of past records when pre-audit was not performed by Management
would show no deductions for withholding taxes from purchases of fuel.
According to the personnel concerned the previous Auditor instructed that the
withholding taxes may not be deducted but the breakdown of the billing cost
showing the tax components must be presented in the invoice. Hence, these

87

may be the reasons why the issue on withholding tax was no longer tackled in
the AOMs of the then Auditor and in AOM No. 2011-015 issued on June 4,
2011.
c. The PNR is embattled in various tax problems and Management is doing its
best to rectify errors and to faithfully and zealously comply with obligations as
taxpayer. Also, the diesel procuring personnel had been instructed to inform
the suppliers upon canvass, that withholding taxes are not part of their expense
but are considered as advances of their tax liabilities which could be used to
offset any tax obligations upon filing applicable tax returns.
17.10 As our rejoinder, AOM No. 2011-015 dated June 4, 2011 was issued to inform
Management on the observations where the focus of audit was non-conduct of public
bidding on bulk purchases of fuel, splitting of fuel purchases, inconsistency in
accounting for fuel purchased for use at Tutuban, Manila and Naga area, and other
lapses noted in Fuel Management. Further, the alleged suggestion of the then
Auditor should not have prevented PNR Management from performing its obligations
to comply with the tax regulations issued by the BIR.

E.

Gender and Development


18.

The results of audit of the fund allotted to promote gender sensitivity follows:
Particulars

Compliance / Non-Compliance

1.

GAD Plans and Budget (GPB)

The copy of the GPB of the PNR was not approved


and stamped received by the Department of
Transportation and Communication (DOTC) Focal
Point System (FPS) as required by the Philippine
Commission on Women (PCW), National Economic
and Development Authority (NEDA) and the
Department of Budget and Management (DBM)
Joint Circular No. 2012 -01, prescribing the
Guidelines of the GPB and Accomplishment
Reports (AR) to implement the Magna Carta of
Women, Section 7.0.v "January (one year before
the budget year) - Submission of reviewed GPBs
and ARs to PCW".

Accomplishment Report

GAD Accomplishment
submitted

Utilization of GAD Budget

Expenses were incurred in pursuance of identified


GAD Activities and Targets

Appropriated GAD Budget should be


at
least
5%
of
the
Total

With tight financial condition, the appropriated


GAD Budget was not equivalent to at least 5% of

Report

for

CY

2013

88

Particulars
Appropriation

of

the total appropriation. PNR allocated GAD Budget


of P3 million only representing 0.192% of the
total Corporate Operating Budget (COB) of P1.566
billion

Adoption
System

GAD

GAD PAPs should be supportive of The specified GAD PAPs of the PNR were
the Gender issues in the Agency
supportive of gender issues.

GAD Account Codes

The Accounting Department has no distinct and


separate codes for GAD expenditures. GAD
related expenses are accounted part of the
regular MOOEs

Cost of GAD Projects incurred

GAD expenses incurred were reasonable and not


overpriced

GAD Fund unutilized

Actual expenses totalled P99,337 equivalent to


only 3.311% of the budgeted amount of P3million
for FY 2014. The remaining P2.901million or
96.689% of the fund alloted to GAD was not
utilized.

10

Limited Budget Allocation

The PNR is heavily dependent on National


Government (NG) subsidy to sustain operations
thus had limited budget allotted for GAD

11

Other Audit Observation: Incomplete supporting documents on disbursement transactions:


Nature of Expense

F.

Compliance / Non-Compliance

b)

Training expenses

c)
d)

Travelling expenses
Honoraria

Focal

Point GAD FPS were observed

Amount
P29,100
9,398
8,000

Lacking Document
Office Order authorizing the participants
Certificates of Attendance
Travel itineraries
Certificates of travel completed
Course syllabus/programs of lecture

Compliance with the IRR of RA 8291 or the GSIS Act of 1997, the National Health
Insurance Act of 2013 and the PAG-IBIG Fund.
19.

During the year, the PNR complied with the Implementing Rules and Regulations
(IRR) of RA 8291 and the National Health Insurance Act of 2013.

89

19.1

The IRR on RA 8291 (GSIS Act of 1997), provides under paragraph 4.1.1,
Section 4, one of the basic principles under the Policy Governing Membership
Administration, as follows:
Membership in the GSIS carries with it the legal obligation to
promptly remit the required monthly premium contributions.
Thus the extent of the benefits to which a member is entitled
will depend upon the level of compliance in the remittance of
his premium contributions. (Underscoring supplied)
Agencies of the government are prohibited from incurring delay in the
remittance of collections to the GSIS including the employer/government
share which should be paid, within the first ten (10) days of the calendar
month following the month to which the contributions apply. The remittance
shall take priority over and above the payment of any and all obligations,
except salaries and wages of its employees. The amount due and payable to
the GSIS is part of the budgeted fund for Personal Services in the approved
Corporate Operating Budget and once withheld from salaries of employees
should not be utilized for other purposes; instead, this should be remitted
immediately to the GSIS.

19.2

Because of failure to comply in the previous years with the above quoted rule,
the PNR incurred arrearages on premium contributions which it had to settle
with the GSIS. To settle the obligations, the PNR and the GSIS entered into a
Memorandum of Agreement (MOA) on December 5, 2013 wherein, the
balance of unpaid premium contributions of P1,140,356 plus 50% of
P11,638,322, the balance of arrearages on interest for the period covering
October 31, 2006 to October 31, 2013, or equivalent to P5,819,161 were
restructured in the total amount of P6,959,517. The restructured obligation
with interest of 12% per annum based on diminishing balance shall be paid by
the PNR in 72 monthly instalments beginning January 2014 up to December
2019.
In 2014, the PNR paid the monthly instalments on the restructured obligation
totalling P1,496,659; and remitted the premium contributions of employees of
P6,113,022; as well as, government share of P8,152,345 including loan
amortizations of P78,788 deducted from the salaries of employees or an
aggregate of P15,840,814.

19.3

To ensure the grant of health insurance benefits to employees and avoid


penalties or sanctions that may be imposed for non-compliance with the IRR
of the National Health Insurance Act of 2013, the mandatory deductions of
Philhealth contributions were remitted by the PNR to the agency in 2014 in the
total amount of P 2,845,188 including government share of the same amount.

19.4

In addition, employees contributions to the Pag-ibig Fund of P360,200 with


corresponding government share of P255,400 was made during the year with
the remittances on repayments of loans availed of by the employees in the
amount of P212,416.

90

G. Status of Audit Suspensions, Disallowances and Charges


20.

Unsettled audit suspensions, disallowances and charges as of December 31, 2014


amounted to P2.74 million, P65.65 million and P139.38 million, respectively.
20.1

As of December 31, 2014, the unsettled audit disallowances totalled P65,650,892


consisting of the following:
a. P12,023,415 disallowances issued before the issuance of the Revised Rules
on Settlement of Accounts (RRSA); and
b. P53,627,477 disallowances issued after its effectivity on October 28, 2009.

20.2

On the other hand, audit charges substantially consisted of those issued before the
RRSA amounting to P118,454,114 and the balance of P20,924,097 after its issuance
resulting in a total of P139,378,211.
Transactions requiring explanations/justifications and/or submission of documentary
requirements which were suspended in audit per notices issued from December 2010
to December 15, 2014 totalled to P2,744,994.

20.3

We recommended that Management undertake appropriate actions to ensure


the settlement of the disallowances and charges which had been decided with
finality; and comply with the requirements for transactions suspended in audit.

20.4

Below is the tabular presentation of the above data with the breakdown thereof
presented in succeeding pages:

Audit Action
Suspensions

Balance
Dec. 31, 2013

Amount
Amount
Issued in 2014 Settled in 2014

Balance
Dec. 31, 2014

P 121,521,364

218,853,985

337,630,355

65,650,892

11,048

11,048

65,650,892

Charges

139,497,028

118,817

139,378,211

Total

P 326,669,284

218,865,033

337,760,220

P 207,774,097

Disallowances

2,744,994

91

Beginning
Balance

Audit Action
Date

Reference No.

Jan. 1, 2014

Issued

Settled

Ending
Balance
Dec. 31, 2014

Status
As of December 31, 2014

2,146,994

The
suspended
transactions
involved fund transferred to the
accounts of the contractors which
was inclusive of the amount of taxes
for remittance to the Bureau of
Internal Revenue (BIR). The account
was partially settled by P1,366,795
on March 4, 2015. A request was
made that the balance of P780,199
be deducted from the Contractors
final billing which had been
submitted
to
the
PNR
for
processing.

Suspensions:

12/15/2014 NS 14-004-107-(14)

08/27/2014
10/20/2014
05/04/2014
08/27/2014
04/24/2014
08/18/2014
07/09/2013
03/31/2014
07/09/2013
03/31/2014
03/06/2012
11/24/2014
03/06/2012
11/24/2014
03/06/2012
11/24/2014
03/06/2012

NS 14-003-107-(14)
NSSDC-2014-008
NS 14-002-107-(13)
NSSDC-2014-007
NS 14-001-107-(13)
NSSDC-2014-006
NS 13-001-401-(12)
NSSDC-2014-004
NS 13-001-401-(12)
NSSDC-2014-002&003
NS 12-006-107-(10-11)
NSSDC-2014-009
NS 12-005-107-(10-11)
NSSDC-2014-009
NS 12-004-107-(10-11)
NSSDC-2014-009
NS 12-003-107-(10-11)

P 2,146,994 P

22,048

22,048

215,684,943 215,684,943

1,000,000

1,000,000

329,807

329,807

119,897,557

119,897,557

96,000

96,000

96,000

96,000

96,000

96,000

96,000

96,000

92

Audit Action
Date
Reference No.
NSSDC-2014-009
11/24/2014
02/28/2012
11/24/2014
02/27/2012
11/24/2014
12/30/2010

NS 12-002-107-(10-11)
NSSDC-2014-009
NS 12-001-107-(10-11)
NSSDC-2014-009
NS 2010-05

12/30/2010 NS 2010-04

Total

Beginning
Balance
Jan. 1, 2014

Issued

Settled

Ending
Balance
Dec. 31, 2014

156,000

156,000

156,000

156,000

276,000

276,000

322,000

322,000

121,521,364 218,853,985 337,630,355

Status
As of December 31, 2014

Decrease in the amount of


consultancy fees decided by the
General Counsel upon request for
concurrence by the Commission of
the contracts of consultancy service.
The decision of the General Counsel
is subject of petition for review filed
with the Office of the Commission
Secretary.

2,744,994

Disallowances:
10/20/2014 ND 14-001-107-(14)
11/24/2014 NSSDC-2014-010

07/01/2013 ND 13-001-107-(13)

06/30/2012 ND 12-008-107-(11)

11,048

49,802,995

3,783,314

11,048

49,802,995

3,783,314

The ND on the transactions


involving procurement of yakal
wood ties was affirmed by the
Director in CGS-Cluster 3 Decision
No. 2014-20 dated October 7, 2014.
The persons liable filed petitions for
review of the Commission Proper.
Disallowance on excess payment on
payrolls of PNR hire and fire
employees which was affirmed in
CGS-Cluster 3 Decision No. 201512 dated March 30, 2015. Currently

93

Audit Action
Date

Reference No.

Beginning
Balance
Jan. 1, 2014

Issued

Settled

Ending
Balance
Dec. 31, 2014

12/06/2010 ND 2010-003

41,168

41,168

01/14/2009 ND 2009-001

11,220,857

11,220,857

06/04/2007 ND 2007-001

802,558

802,558

Total

65,650,892

11,048

11,048

Status
As of December 31, 2014

the subject of Petition for Review of


the CP under COA CP Case No.
2015-319.
The appeal on the disallowance for
payment of salaries was partially
granted in CGS-Cluster 3 Decision
No. 2014-13 dated August 5, 2014.
The decision is subject to automatic
review of the Commission Proper
pursuant to Sec. 7 of the Revised
Rules of Procedure.
Disallowance on the unnecessary
procurement of bolster spring and
violation of RA 9184. Notice of
Finality of Decision (NFD) was
issued dated March 8, 2011 and
COA Order of Execution (COE) on
March 17, 2011.
The audit disallowance involving
irregularity in the procurement of
diesel fuel totalling P802,568 was
referred to management in a letter
dated March 20, 2009 of the
Director, Cluster B, CGS requiring
for the payment of appeal fee.
However, no evidence of payment
was made as disclosed in the
Report
and
Analysis
of
Disallowances and Charges as of
December 31 2009.

65,650,892

94

Audit Action
Date

Reference No.

Beginning
Balance
Jan. 1, 2014

Issued

Settled

Ending
Balance
Dec. 31, 2014

Charges:

12/05/2013 NC 13-001-107-(12)

20,359,447

20,359,447

08/11/2010 NC 2010-001

564,650

564,650

11/06/2007 NC 2007-010

414,370

414,370

06/30/2007 NC 2007-005

1,840,982

1,840,982

06/08/2007 NC 2007-004 A

8,579,374

8,579,374

Status
As of December 31, 2014

An ANSWER to the ORDER was


submitted to the OCD, Cluster 3,
CGS in February 24, 2014. The
Notice
of
Charge
involved
unconscionable disbursement of
fund and uncollected income on the
use of PNR property in the supply
and distribution of ballasts.
The
audit
charge
amounting
P564,650 on the unaccounted train
tickets was the subject of COA
Order of Execution dated March 4,
2015, PNR management issued
demand letters dated September 1,
2014 to the persons liable.
The Notices of Charge Nos. 2007010 and 005 amounting P414,370
and
P1,840,982
respectively,
involving failure to exercise due
diligence and inaction to recover
missing
steel
materials
were
covered by NFDs both dated March
8, 2011 and COEs dated March 17,
2011.
The
unsettled
account
of
P8,579,374 involving back rentals
dropped from the books of accounts
and not considered during the sale
95

Audit Action
Date

05/30/2007
03/31/2014
05/30/2007
03/31/2014
05/30/2007
03/31/2014

Reference No.

NC 2007-009
NSSDC-2014-005
NC 2007-008
NSSDC-2014-005
NC 2007-007
NSSDC-2014-005

05/30/2007 NC 2007-006
03/31/2014 NSSDC-2014-005

Beginning
Balance
Jan. 1, 2014

Issued

Settled

Ending
Balance
Dec. 31, 2014

120,015

24,003

96,012

106,800

21,360

85,440

148,875

29,775

119,100

174,715

43,679

131,036

05/17/2007 NC 2007-002

139,750

139,750

02/22/2007 NC 2007-001

71,250

71,250

Status
As of December 31, 2014

transaction was submitted to the


Commission Proper for resolution in
1st Indorsement dated October 12,
2007, received by the then Cluster
III, CGS on October 26, 2007.
The amounts charged in audit of
P1,450,700
involving
sale
of
unserviceable
rolling
stocks
materials below the prevailing price
was decreased to P550,405 per
COA Decision No. 2013-128 dated
September 18, 2013. It was further
reduced by P118,817 thru deduction
from the last claim for payment of
one of the persons liable.
CGS - Cluster B affirmed the Notice
of Charge of P139,750 with
modification excluding among the
persons liable the team leader and
members of the withdrawal team
involved on the as is where is and
lot basis sale of property, as
disclosed in the Report and Analysis
of Disallowances and Charges as of
December 31 2009 of the then
Supervising Auditor dated January
28, 2010.
The sale of unserviceable equipment
and spare parts was not appealed
96

Audit Action
Date

Reference No.

06/08/2004 NC 2004-001 (2)

Total
Grand Total

Beginning
Balance
Jan. 1, 2014

Issued

Settled

106,976,800

139,497,028

Ending
Balance
Dec. 31, 2014

106,976,800

Status
As of December 31, 2014

by the persons liable and had


become final and executory as
disclosed in the Report and Analysis
of Disallowances and Charges as of
December 31 2009 of the then
Supervising Auditor dated January
28, 2010.
Notice of Charge of P106,976,800
involving undervaluation of PNR
property sold was
decided with
finality by the Commission Proper in
COA Decision No. 2009-073 dated
Sept. 1, 2009. The transaction was
the subject of litigation before the
Sandiganbayan docketed as SB 10
CRM 0009.

118,817 139,378,211

P326,669,284 P218,865,033 P337,760,220 P207,774,097

97

PART III STATUS OF IMPLEMENTATION OF


PRIOR YEARS AUDIT RECOMMENDATIONS

III STATUS OF IMPLEMENTATION OF PRIOR YEARS AUDIT RECOMMENDATIONS


Of the 59 specific audit recommendations disclosed in the CY 2013 Annual Audit Report,
only 20 were implemented, 24 were partially implemented, while 15 were not implemented.
Details are presented below.
Ref
1.1
2.
3.

Observations

Recommendations

Status of Implementation

As at December 31, 2013, We


recommended
that
in
PNR reported a huge
preparation for the forth coming
negative operating cash flow approval of the bill extending
at
P301.243
million,
PNRs Charter for another 50
indicating that it could not
meet
its
debt
service years, Management:
requirements
to
foreign
creditors which in the past a. undertake a complete physical a. Not implemented reiterated in
inventory of all PNR assets,
were advanced by the
Audit observation No. 3
which to date has not been
National
Government
complied with by Management;
totalling P22.703 billion, and
its unrecorded liabilities and
b. Not implemented. Appraisal was
statutory obligations to other b. cause the appraisal/proper
undertaken only where the
government agencies and
valuation of assets to have a
intention was to lease a large
contractors of at least P1.330
reasonable estimate of the
parcel of real property and not to
billion.
actual value of the resources of
provide fair value of the assets in
the PNR;
the financial statements.
Under its present state and c. formulate plans on improving
condition
whereby
its
the PNRs financial position,
such
as
collection
of
internally-generated
cash
receivables
from
various
was not sufficient to cover its
lessees and vendees of PNR
regular operating expenses
real property; strengthening
and capital expenditures,
monitoring control of proceeds
PNR
needs
substantial
from sale of train
tickets and
amount of subsidy from the
collections
from
non-rail
revenue;
disposal
of
National Government yearly
unserviceable and obsolete
and/or other sources of
assets no longer used in
revenues to sustain its
operations; and, ascertaining
operations and to cover the
other potential sources of
budget deficit.
funds/capital;
d. Improve the accounting system
for
proper
recording
of
transactions to provide reliable
information
and
financial
reports that are vital in decision
making by top management;

c. Partially implemented. Asset


Disposal Committee was formed
per Office Order No. 11 dated
March 18, 2014. PNR to conduct
inventory of assets for possible
disposal. Task Force Sukat
Singil was created to improve
collection of rent income.

d. Partially implemented. Requests


for write off of dormant payables
and receivables were submitted
for review and approval. Ledgers
and schedules of some general
ledger accounts are being
updated.

98

Ref

Observations

Recommendations

Status of Implementation

e. Comply
with
our e. Not implemented. No Manuals
recommendation in the CY
on Approval and Operating
2010 Annual Audit Report that
Procedures completed in 2014.
Management develop a Manual
Only loose guidelines and office
of Approvals that would define
orders on signatories on certain
limits of approving authority and
transactions were issued.
Manual of Standard Operating
Procedures as guide in carrying
out business operations and
financial transactions. To date
the Manuals have not been
completed.
4.
2

For the past three years, no


definite action had been
made to collect the huge
amount of overdue contested
Rental Receivables from
Tutuban
Properties,
Inc.
which accumulated to a
significant P263.153 million
as at year-end 2013. With the
covering lease agreement
expiring and the rental
arrears appeared to have
been compromised in the
advance renewal of the
contract
of
lease,
the
continuous recognition and
presentation of the accounts
as current assets was not
proper/valid.

We recommended that, by
remaining firm on its ground that
the receivables from lease of
property
had
not
been
compromised and should be
computed
at
escalated
compounded
rate,
PNR
immediately
pursue
the
appropriate action. It should
assert its right and enforce
collection of the P263.153 million
receivables instead of merely
issuing
and
recording
bills
involving lease receivables from
TPI.

5.
recommended
that
3 6. Vague provisions on the We
lease agreement with the Management:
TPI, which pertained to the
(a) ownership of building a. Act speedily in order to clarify
improvements on leased
the vague provisions on the
property covered by the
contract of lease with TPI, as
original contract; (b) the
non-settlement of the issues
fairness of percentage share
early
may
weaken
the
of the government from the
negotiating position of the PNR
income derived by the TPI
as it might be overtaken by the
from third parties; (c) liability
forthcoming implementation of
on real property taxes during
the renewed contract of lease
the term of the lease had to
effective on September 5, 2014;
be clarified immediately.
and
Also,
the
disclosure
requirement of PAS No. 17 b. Comply with the disclosure
on lease arrangements as of
requirement of PAS 17on lease
reporting date regarding the
arrangements as of reporting
contract with the TPI was not
date regarding the contract with
complied with.
the TPI.

Not yet fully resolved. Reiterated


under Audit Observation No. 4

Not yet resolved. Referred to the


Office of the Solicitor General.
Subject matter also of Audit
Observation No. 4.

Implemented. Disclosure made in


the Notes to Financial Statements
of CY2014.

99

Ref

Observations

Recommendations

Status of Implementation

7.
8.
4

The recorded value of Land In view of the foregoing audit


and Land Improvements at observations, we recommended
P40.055
billion
as
of the following:
December 31, 2013 was not
correctly stated mainly due a. Comply with the requirements of
to:
Section 74(a) of PAS 16; fully
disclose
in
the
financial
a. the
continuous
statements the amounts of
presentation of parcels of
restrictions on land titles covered
land with zonal valuation of
with
encumbrances
and/or
P3.164 billion as PNR
restrictions from use;
assets free of use even
though the land titles of b. Considering the advance
which were already in the
renewal of the contract of lease
custody of Home Guaranty
with TPI which the current
Corporation for annotation
Management of the PNR found
of the Deed of Assignment
onerous, provide the Audit Team
and Conveyance;
with Managements position
regarding the necessity of
b. the difference by 112,256.9
another entry or memorandum of
square meters per lease
encumbrance on the land titles
contract and the Masterlist
that in effect would cancel or
of PNR Property on the
amend the previous entries or
actual measurement of
annotations on the terms and
parcels of land revalued in
conditions of the lease contract
the books which were
with TPI;
leased and restricted for
use of the TPI; and
c. Explain the discrepancy noted
on the area of leased premises;
c. doubtful ownership on 71
locate the missing TCT No.
parcels of land measuring
45328 and take up the
2,112,429 square meters,
revaluation cost omitted in the
the titles of which were
books;
reportedly
for
reconstruction for more
than 10 years, already, and
the
lands
valued
at
P897.779 million sold to d. Provide for the plan or course of
homeowners associations
action to be taken by the
covered by five TCTs
current PNR Management to
without entries however, of
resolve the issue on the land
encumbrances
or
titles turned over to HGC by
restrictions in favour of the
PNB for annotation of the Deed
vendees.
of
Assignment
and
Conveyance;
Overstatement by P44.469
million was found in the Land e. Observe consistency, take into
and
Revaluation
Capital
account the revaluation of land
Accounts due to errors in the
under OCT 7313;
computation of the zonal
values of three parcels of f. Investigate and provide updated
land with total area of 580.4
information on the 71 missing

Implemented.

Implemented. The recommended


adjusting entry was taken up in the
books.
The
AMD
Manager
explained the difference on the
area occupied by TPI with that on
the lease contract. TCT 45328 was
determined to be in the custody of
the Engineering Department.
Initiated. Regarding the 67 lands
titles which were given to the HGC
and have not been returned as of
this
time,
management
will
organize a legal/task group to
review the transaction and if
possible to recover the said titles.
Implemented.

Initiated. Still for investigation and

100

Ref

9.

Observations

Recommendations

square meters; and, the Land


titles
allegedly
for
Improvement
account
reconstruction;
amounting to P5.131 million g. Investigate and provide relevant
could not be verified due to
documents on the parcels of
the absence of details or
land sold to homeowners
descriptions on the items
associations and the NHA;
comprising the account.
h.

PNR
incurred
constructive/committed
obligations to the contractor
Hanjin Heavy Industries and
Construction Co. Ltd. and
consultant
Yooshin
Engineering Corporation in
the implementation of the
Northrail-Southrail
Linkage
Project I in the total amount
of P484.105 million, and, to
Jadphil and Associates Inc.,
in
relation
to
the
Improvement
and
Modernization of Commuter
Line South Project payable at
compromised amount of
P17.046
million.
These
obligations can be settled on
the basis of quantum
meruit, the resolution of
which is through filing money
claim with the COA pursuant
to Rule VIII of the 2009
Revised Rules of Procedure
of the Commission on Audit.

Adjust the entry on net


overstatement
in
the
revaluation of land account
under paragraph 4.2.4(a) above
to correct the balances of
affected accounts; and

Status of Implementation
resolution by the task group.
Initiated. The 5 titles covering area
sold to various homeowners and/or
the NHA will also be included in
the items to be investigated and
resolved by the task group.
Implemented.

i. Verify the assets comprising


land improvements to establish
their validity.

Not implemented.

Considering that the obligations of


PNR are proper subject of money
claims
against
PNR,
we
recommended that the procedures
under Rule VIII of the 2009
Revised Rules of Procedure of the
Commission
on
Audit
be
observed.

Not yet implemented. No petition


from money claim yet is filed with
the Commission by the creditors
as
necessary
supporting
documents still being completed.

In addition to the legal issues and


funding requirements that need to
be addressed, we recommended
that provisions or disclosure be
made in the books of accounts as
the
transactions
meet
the
recognition criteria of provisions
on liabilities under paragraph 14
of PAS 37.

Not
yet
implemented.
The
obligations shall be recognized in
the books once the source
documents are submitted to the
Controllership Division.

Further, these obligations


remained unrecognized in

101

Ref

10.
6

Observations

Recommendations

Status of Implementation

the books and/or were not


disclosed in the financial
statements
contrary
to
Paragraph 14 of PAS 37.
Rental
Receivable
from
various lessees aggregating
P157.855 million was not
stated at its realizable value
as at December 31, 2013
due to:
a. Receivables of P71.975
million accruing from the
rent of property were
without
sufficient
accounting records and
unconfirmed
by
the
debtors;

We
recommended
Management:

that

a. Verify and establish the validity


of the accounts receivables;
and,
b. May consider requesting from
the Commission on Audit for an
authority to write off from the
books, accounts which qualify
for de-recognition pursuant to
the guidelines set forth in COA
Circular No. 97-001 dated
February 5, 1997.

Not Implemented. Reiterated in


Audit Observation No. 11

Not yet implemented in the


absence of complete supporting
documents to warrant write off.

b. Accounts
Receivable
amounting
to
P29.508
million had been dormant
for 15 and up to 37 years.
76

In the absence of clear policy


in
the
estimation
and
accounting of allowance for
bad debts to present at net
realizable value the rental
receivables from various
lessees, no provisions were
recognized in the books from
year 2011 to 2013, even if
the P71.09 million balance of
Provision
for
Doubtful
account carried in the books
since
CY
2010
was
understated compared to the
P155.98
million
rental
receivables which had long
been outstanding and/or with
zero chance of getting
collected.

87

Unreconciled
discrepancy We
recommended
that
ofP12.748 million existed as Management:
at year-end between Cashin-Bank balance of P175.828 a. Require
the
accountable
million and the results of
officers concerned to account
confirmation
with
the
for the noted discrepancy

We recommended that the PNR


formulate clear accounting policy
involving provision or allowance
for bad debts.

Not Implemented

Partially implemented

102

Ref

99

Observations

Recommendations

depository banks showing


between the balances per
confirmed
amount
of
books and confirmed balances
P163.081 million which was
by the banks;
and take
less than the book balance.
appropriate action for their
Management did not strictly
failure to do so;
abide by the requirement of
Section 74 of PD 1445 in b. Submit documents showing the
keeping the account, as Bank
approval by the DOF of
Reconciliation Statements on
keeping government funds or
the different bank accounts
deposits at banks other than
maintained by the PNR were
the LBP and DBP, pursuant to
incomplete, submitted late
Department Order No 27-05
and
not
adequately
dated December 9, 2005;
supported with documents to
confirm the veracity of c. Require
the
immediate
transactions and to properly
updating of the reconciliation of
account for the reconciling
the balances per banks and
items.
balance per books; and
d. Henceforth, strictly adhere to
the with the provisions of
Section 74, PD 1445, regularly
prepare at the close of each
month
the
reconciliation
statements and submit to the
auditing unit for verification.
There had been habitual
delay in the submission to
COA of the hard and soft
copies of payrolls on salaries
of employees paid thru ATMs
despite
reported
payroll
padding
in
2011.
The
improper practice hindered
the immediate conduct of
post audit and was in
violation of the Revised
Rules and Regulations on
Settlement of Accounts under
COA
Circular
2009-006
dated September 15, 2009.

We
recommended
that
Management
either
consider
preparing the Remittance List for
the Pay Period with the names of
PNR personnel in alphabetical
order by Department/Office similar
to the Monthly Payroll Summary
instead of Corporate- wide without
regard to work of assignment; or
submit to the bank the soft copy of
the pre-audited payroll with
additional column indicating the
corresponding
bank
account
number of each employee.

The existing process of


preparation, verification and We also recommended the
audit of payrolls paid thru following:
ATMs involving more than
1,400 personnel was tedious a. The Controllership Division
should
work
back
and
and time-consuming as it
thoroughly
verify
the
involved comparing printed
transactions under account
Computerized
Payroll
Due to Officers and Employees

Status of Implementation

Implemented.

Partially Implemented.

Partially Implemented.

Partially
Implemented.
To
ascertain that the first and second
half payrolls including the time
reports/sheets are submitted on
time, the same were required to be
submitted to the Controllership to
form part of the attachments of the
JEV booking the payroll.

Implemented. The payroll section


was advised to take the necessary
adjustment in the payroll system to
accommodate
the
request/
recommendation as contained in

103

Ref

Observations

Recommendations

Payroll Payable to determine


Summary
against
the
the reason behind its abnormal
Remittance List for the Pay
balance; accordingly, effect the
Period with the names of the
necessary
accounting
employees in the former
adjustments to reflect the
document
listed
in
correct balance as of reporting
alphabetical order by office
date;
whereas
in
the
latter
document, the employees in b. Management
ensure
that
control measures are in place
the Home Office and all
to prevent the recurrence of
stations of the PNR in Luzon
anomalous transactions in the
were listed in alphabetical
disbursement of fund for
order Corporate wide.
salaries, with a written diagram
10
or narrative flowchart in the
preparation and payment of
payrolls thru the bank and thru
PNRs disbursing officer/s.
11
10

12

The accuracy and validity of We


recommended
that
the
balance
of
CIP
Management:
amounting to P2.620 billion
could not be ascertained due
a. Explain the causes of delays in
to
the
absence
of
the implementation of the
record/schedule showing the
projects
presented
in
details of on-going projects
paragraphs 10.3 and 10.5to
comprising the account. The
justify the imposition or not of
Notes
to
Financial
liquidated damages; provide
Statements disclosed only
copies of the punch-list issued
P423.21 million costs of
to
the
contractors
in
projects being implemented
accordance with Section 7 of
as at year-end.
the IRR on RA 9184;
Included in the CIP account
balance was the cost of b. Submit justifications why the
periodic accomplishment and
repair
and
maintenance
submission of the Project
expenses of P72.197 million
Status Report was not complied
which
should
not
be
with;
capitalized.
On the other
hand, what was recorded
under CIP were the costs c. Verify/Work back on the
transactions
previously
incurred based on the
recorded
under
the
CIP
payments made to the
account;
and
accordingly
make
Contractors instead of the
the
necessary
accounting
percentage of completion
adjustment;
and
method
of
accounting
whereby costs are to be
recognized in proportion to
the stage of completion of
contract activity.
d. Require regular coordination
among the functional units or
offices
involved
in
the

Status of Implementation
the AOM that bank remittance
should be per department in
accordance with the payrolls.

Not Implemented.

Not Implemented.

Implemented. The review of the


CIP account has already been
initiated by the Controllership by
tracing and working back entries to
the account as well retrieving
supporting
documents.
The
recommended adjustments were
taken up in the books.
Partially implemented. Engineering
Department with the assistance of
the Controllership shall make an
assessment whether a project

104

Ref

Observations

Recommendations

Status of Implementation

implementation, reporting and


accounting of PNR projects.

reported
year-end
1113 The
balance
of
Land
Transportation Equipment at
P4.565
billion
was
overstated by P2.865 billion,
representing the value of
assets reportedly acquired
from 1948 to 2002 without
supporting inventory reports
to prove their existence. In
consideration
of
PNRs
policy on the estimated
useful lives of PPE, these
Transportation Equipment no
longer qualify as part of the
account since the same were
no longer used in operations
as
they
were
already
unserviceable,
nonoperational, or considered
for disposal, and these
should be presented instead
as Non-current Assets Held
for Sale and Discontinued
Operations, in accordance
with PFRS No. 5

14
12

In

view
of
the
foregoing
observations, we recommended
the following:

The assessment shall be indicated


in the face of the disbursement
voucher for reference.

a. For the items presented under


paragraph 11.3.1, adjust to
appropriate
inventory
or
expense account;

Implemented. The recommended


adjusting entries were taken up in
the books.

b. Confirm the existence of the


fixed assets in paragraph
11.2;derecognize or drop from
the books if no longer part of
the inventory of PPE or where
no
economic
benefit
is
expected from use or upon
disposal; present separately the
assets no longer used in
operations but economic benefit
is expected to be derived from
immediate sale;

Not Implemented. Absence of


physical inventory to confirm the
existence of assets reiterated in
Audit Observation No. 3.

c. Adjust
the
entries
on
restatement of foreign loans
debited to Land Transportation
Equipment in accordance with
PAS 8 on Accounting Policies,
The
balance
of
Land
Changes
in
Accounting
Transportation
Equipment
Estimates and Errors.
included items valued at
P2.049 million which were
below
the
capitalization
benchmark of P10,000 or the
minimum value of items to
be categorized as Property,
Plant
and
Equipment
prescribed in COA Circular
No. 97-005.
Likewise,
transactions amounting to
P53.592
million
were
erroneously charged to the
account.
The
exact
amount
of
Receivables from Sale of
Non-Core
Property
on

qualifies as an asset or an
expense following the guidelines
quoted in the AOM.

We
recommended
Management:

Not Implemented.

that

105

Ref

Observations

Recommendations

the
discrepancy
instalment payment basis a. Verify
amounting to P45.370 million
could not be determined due
on the amount received from
to the absence of records to
vendees based on available
establish the actual amounts
records and the amount which
already paid by vendees.
should have been collected as
Moreover, the PNR did not
stipulated in the agreements;
enforce the provisions on
terms of payment provided in b. Reconcile the records of the
Asset Management Division for
the
Memorandum
of
each vendees with the records
Agreements and Conditional
of
the
Homeowners
Contracts to Sale including
Associations;
the imposition of penalties on
delayed payments by the
c. Ensure that the Associations
vendees.
maintain general and individual
ledgers of its member buyers
15
indicating payments made to
the PNR as provided in the
MOA;

13

Status of Implementation
Partially
Implemented.
The
Controllership and the Asset
Management
Division
have
already started reconstructing the
records on payment made by the
various homeowners association.
Partially Implemented.

Partially Implemented.
Management likewise considering
the computerization of the records
on sale of non-core properties.

d. Assert the right to collect, issue


demand letters to the vendees
for the settlement of overdue
accounts; and

Partially Implemented.

e. Pursuant to the above stated


terms and conditions of the
agreements impose and collect
penalties
on
delayed
amortizations
of
accounts
involving sales of non-core
property of the PNR.

Partially Implemented.

recommended
that
Subsidy Fund of P33.09 We
Management:
million earmarked to finance
specific and programmed
a. Submit justification to the DBM
expenditures was utilized
on utilizing the programmed
instead to pay for the cost of
subsidy fund to reimburse the
security
services,
and
general fund used to cover
reimbursement
of
fund
other
operating
expenses
including obligations settled in
derived from the proceeds of
the previous year; and
PNR Hospital which was
utilized to pay for expenses
b. Henceforth,
refrain
from
in the preceding year. The
juggling and utilizing restricted
utilization
of
fund
for
subsidy fund other than for
purposes other than intended
which granted by the National
was improper and contrary to
Government to avoid penal
sanctions that may be imposed
Section 4 of PD 1445.
as this in effect constitutes
technical
malversation
of

Partially Implemented.
Request
for
realignment
now
being
submitted to the DBM.

Implemented. No similar
finding observed in 2014.

106

audit

Ref

Observations

Recommendations

Status of Implementation

government funds.
14

Claims of PNR employees


who retired in Year 2009
pursuant
to
the
PNR
Rationalization
Program
under Executive Order No.
366
remained
unsettled
despite approval of payment
by the PNR Board of
Directors. The long overdue
obligations of the PNR to the
retired employees who also
rendered valuable service to
the
agency
were
not
prioritized over the payments
of
benefits
of
active
employees.
Failure of Management to
carry out its commitment to
pay out of the proceeds on
sale of the PNR Hospital
resulted in a court complaint
or demand of action for
payment against the PNR
officials.

15

Deficiencies
and
noncompliance with the rules
and regulations governing
the grant, utilization and
liquidation of cash advances
were noted on Special Cash
Advances
issued
to
Paymasters or Disbursing
Officers on payrolls for
salaries of PNR employees
which totalled to P12.66
million in CY 2013.

We
recommended
that
Management submit explanation
why the authorized one-time
payment of the AdCom benefit to
the retirees was not given priority
over the payments involving
monetization of the unused leave
credits, COLA, and Productivity
Enhancement Incentives of active
employees including the check off
transactions involving remittances
to Philamlife, employees union
and cooperative.

Partially implemented. Justification


not submitted but allotted P10
million for the benefits of qualified
retirees. For 2015, management
allocated another P10million to
settle in full the obligations.

Without subsidy from the National


Government, the PNR did not
have the capability to meet its
matured, current and future cash
flow obligations.
Thus, we
recommended that there should
be proper matching of cash
generated from operations and
sale of assets against obligations.
It is extremely important to
observe order of priority in the
disbursement or utilization of fund
to avoid penal sanctions, interests
and risks of facing legal charges.

Partially Implemented. Mandatory


obligations were given priority.

We
recommended
that
Management submit the lacking
documents to avoid suspension of
the transactions in audit. Also,
Management was advised to
strictly adhere with the rules and
regulations on the liquidation of
cash
advances
to
avoid
suspensions and disallowances in
audit.

Implemented.

107

Ref

Observations

Recommendations

1616 The accuracy of collections In view thereof, we recommended


from daily ticket sales in the
the following:
average of P8.893 million per
month,
acknowledged
a. Accompany remittances by
received by the Regular
route station agents with
Collecting Officer in the
certified correct Daily Collection
unnumbered PNR Form TD
and Sales Report (Form
3-A
(Remittance
Slip)
Accounting 1-A) and Daily
showing the train number,
Sales Form (Accounting 2-A)
denomination and amount of
showing itemized listing of
cash remitted could not be
tickets sold with corresponding
verified immediately as the
rates or denomination to
same
were
without
facilitate verification of the
accompanying
supporting
accuracy of the cash remitted
document/s by which to
by them and received for
counter check and validate
deposit by the RCO;
the amount remitted.

Status of Implementation

Partially
Implemented.
Daily
transactions are not only hand
written on the appropriate Journal
Books, but are further encoded in
excel format for easy monitoring,
calculation, referencing and data
retrieval.

b. Use
Cashbook
or
Cash
Receipts Record prescribed for
use of designated Accountable
Officers; observe the rules on
the handling, custody and
disposition of the cashbook
provided in COA Circular 97002 dated February 10, 1997;
reconcile the cashbook balance
with the cash on hand daily;
foot and close the books at the
end of each month and
reconcile the account with the
Controllership
Division
quarterly;

Partially Implemented.

c. Require the RCO to prepare the


Monthly
Report
of
Accountability for Accountable
Forms for the booklets of official
receipts received, issued and
balance under her custody and
accountability;

Partially Implemented

d. Increase the bond coverage


from P75,000 to P225,000 for
minimum cash accountability of
P250,001 to P500,000 as
provided
in
the
Revised
Schedule of Premium Rates
issued by the Bureau of
Treasury; and

Implemented

e. For monitoring of accountability,


require
the
Controllership
Division to keep subsidiary

Implemented

108

Ref

Observations

Recommendations

Status of Implementation

ledgers for each collecting and


disbursing officer of the PNR.
17

17

Several deficiencies were In view of the foregoing, we


noted in the payment of
recommended
that
overtime rendered by PNR
Management:
employees that were contrary
to the rules and regulations a. In consideration of the agencys
limited sources of fund to sustain
under COA Circular No.
operations, review the working
2012-001 and DBM Budget
or shifting schedule of its
Circular No. 10, as well as
employees to avoid the rendition
PNRs Policy on Attendance,
of overtime for regular work or
Tardiness and Overtime.
activities;

Implemented.

b. Henceforth,
include
as
supporting document to OT
claims a duly accomplished
Overtime Work Program in
compliance
with
the
requirements of COA Circular
No. 2012-001;

Implemented. Lacking documents


submitted. Personnel who shall
claim for overtime payment shall
be required to submit the specific
documents contained in the
provisions of COA Circular No.
2012-001 dated June 14, 2014.

c. Strengthen internal control. Preaudit and ensure compliance


with the provisions of DBM
Circular No. 10 and PNRs policy
guidelines on overtime must be
consistently applied.

Implemented

1818 The PNR incurred a total of We


recommended
that
P29.973 million on monthly Management:
interests from October 31,
2006 to October 31, 2013 a. Strictly
monitor
premiums
due to non-remittance to
withheld
and
remittances
GSIS of government share
thereof to the GSIS monthly to
and employees premium
maintain accurate accounting
contributions
within
the
records and report of the
period prescribed in the IRR
account Due to GSIS;
of RA 8291. To restore the
full benefit that could be b. Comply with the IRR of RA
availed
of
based
on
8291; Promptly remit the GSIS
contributions actually paid for
contributions to avoid the
by
the
employees,
imposition
of
interest
on
Memorandum of Agreement
unremitted
premiums
and
was executed by and
suspensions of loan, dividend
between the PNR and the
and retirement privileges; and
GSIS to restructure the
unpaid obligation consisting
c. Settle on time the required
of
unpaid
premium

Implemented

Implemented.

Partially Implemented

109

Ref

Observations
contributions
of
P1.140
million plus 50% of P11.638
million, the balance of
arrearages on interest for the
period covering October 31,
2006 to October 31, 2013, or
equivalent to P5.819 million,
in the total amount of P6.960
million.

Recommendations

Status of Implementation

amortizations or instalments on
restructured obligations to avoid
unfavorable effects in case of
breach per Art. IV of the MOA.

The balances of GSIS


accounts in the books of the
PNR differed materially on
the amount restructured prior
to execution of the MOA.
Monitoring and reconciliation
of deductions made from
salaries against remittances
to GSIS in order to reflect the
correct balance of the
account per month was not
conducted regularly that
resulted in abnormal (debit)
balances of P9.703 million
and P2.447 million for
government
share
and
employees
contributions,
respectively, or a total
abnormal (debit) balance of
P12.150 million.
19

The Implementing Rules and


Regulations (IRR) of the
National Health Insurance
Act of 2013 or RA 7875, as
amended by RA No. 9241
were not strictly complied
with and deficiencies were
noted which in the long run
may affect PNR employees
availing of health insurance
benefits from the PHIC.

19
2020 The amount of payable
under Due to BIR reported
by Management in the
financial statements as of
December 31, 2013 was
understated by at least
P240.720
million
representing the unpaid and
unrecorded
surcharges,

We
recommended
that
Management strictly follow the
IRR of the National Health
Insurance Act of 2013 to ensure
the grant of health insurance
benefits to its employees and
avoid penalties or sanctions that
may be imposed for noncompliance therewith.

Implemented. Improved policy in


hiring of personnel and organize
personal information specially on
the
Personal
Identification
Numbers

We recommend that Management


resolve the legal tax issue
involving the assessment and
payment of various taxes to the
BIR.

Partially Implemented. Sought


ruling from the BIR on the taxability
of PNR from VAT and Percentage
Taxes (Common Carriers Tax).

110

Ref

Observations

Recommendations

Status of Implementation

interests and compromise


penalties payable to the BIR
for FY2008 and 2009
amounting
to
P172.976
million and P67.744 million,
respectively.
To date, total liabilities
unrecognized in PNRs books
of accounts amounted to not
less than P433.945 million,
the assessed taxes payable
for FY 2010 of P193.224
million included and without
considering yet, taxes which
may be imposed for FY 2011
to 2013 operations and
additional
charges
from
assessment date to date of
full settlement.
2121 The transactions involving
utilization of GAD fund were
not adequately supported
with documents necessary to
establish
propriety
and
validity

We recommended the submission


of
the
required
supporting
documents to the transactions.

Implemented

22

We
recommended
that
Management
undertake
appropriate actions to ensure the
settlement of the disallowances
and charges which had been
decided with finality; and comply
with
the
requirements
for
transactions suspended in audit.

Partially
Implemented.
Sent
demand letters to persons liable
and deducted the accountabilities
from last claims of former officials
and employees.

22

Unsettled audit suspensions,


disallowances and charges
as of December 31, 2013
amounted
to
P121.521
million, P65.651 million and
P139.497
million,
respectively.

111

Amendments in the December 8, 1995 Contract of Lease


Compared to the September 14, 1993 Contract of Lease
Executed by the Philippine National Railways as Lessor and
Land Project Manager Affiliates, Inc. (LPMAI) as Lessee"
Among the Terms, Covenants and Conditions
Paragraph No. - Description

Annex A

September 14, 1993 Contract

December 8, 1995 Contract

2. Delivery of Premises

The LESSOR ....widening of Samson Road. The LESSOR shall


deliver the lease property to the Lessee free and clear of any
occupant, PNR railway facilities and other existing structures and
improvements within six (6) months from the final approval of
this Contract by the Office of the President of the Philippines.

The LESSOR ....widening of Samson Road. The LESSOR shall


deliver the lease property to the Lessee free and clear of any
occupant, PNR railway facilities and other existing structures
and improvements within six (6) months from execution of this
Contract.

3. Relocation

Within six (6) months from the final approval of this Contract by
the Office of the President of the Philippines, the LESSOR shall
with the assistance of the LESSEE cause the site clearing and
relocation .... The LESSEE agrees to contribute an amount not
exceeding ONE MILLION (P1,000,000.00) PESOS to the LESSOR as
expenses for the cost of relocation of the squatters families
within the leased premises. In the event that the said amount
shall not be sufficient for such purpose, the LESSEE shall advance
such additional amount as may needed provided that said
additional expenses shall be deductible from the fixed rental due
to the LESSOR for the first seven (7) years of the lease as defined
in par. 7 hereof. Any further amount still required for that
purposes shall be advance by the LESSEE and deductible from
rental for such number of years required as may be mutually

Within six (6) months from the execution of this Contract within
such time as the same way may be feasible and practical based
on the circumstances prevailing, the LESSOR shall with the
assistance of the LESSEE cause the site clearing and relocation
.... The LESSEE agrees to contribute an amount not exceeding
ONE MILLION (P1,000,000.00) PESOS to the LESSOR as
expenses for the cost of relocation of the squatters families
within the leased premises. Both parties hereto agree to impose
a ceiling of PESOS: SEVENTY MILLION (P70,000,000.00) as the
maximum amount to be spent for the relocation of squatters
families inclusive of the P1,000,000.00 contribution by the
LESSEE, for that purpose, which maximum amount shall be
advanced by the LESSEE, provided that such amount shall be
reimbursed by and deductible from the fixed rental due to the

112

Paragraph No. - Description

September 14, 1993 Contract

December 8, 1995 Contract

determined by the parties.

LESSOR for the first fifteen (15) years of the Lease as defined in
Provision No. 7 hereof. Any further amount beyond the
maximum amount imposed which may still be required for that
purpose shall be for the sole account of, and borne by the
LESSEE without right of reimbursement from the LESSOR.
These ...
The LESSOR and the LESSEE mutually agree that, in the site
clearing and relocation of squatter families within the leased
premises, they hereto adapt, as far as practicable, the systems
and procedures which the National Government might have
previously effected in relocating squatter families similarly
situated. For this purpose, close coordination shall be effected
by both the LESSOR and the LESSEE with the local and national
government units concerned with such relocation, utilizing said
procedures hereto adapted.

4. Construction Period

The LESSEE shall submit to the LESSOR its plans and specifications
for the proposed development of the commercial shopping center
within six months from the time it shall have been informed in
writing by the LESSOR that the Contract of Lease has been
approved by the Office of the President.
From

The LESSEE shall submit to the LESSOR its plans and


specifications for the proposed development of the commercial
shopping center within six (6) months from the time it shall have
been informed in writing by the LESSOR that the leased property
is free and clear of squatters and ready for delivery to the
LESSEE.
From ...

7. Rental

The LESSEE shall upon the commencement of the term of the The LESSEE shall upon the commencement of the term of the
lease as defined in par. 6 pay the LESSOR, by way of rental fee for lease as defined in par. 6 pay the LESSOR, by way of rental fee
the premises, in cash, a fixed annual rental equivalent to TWO for the premises, in cash, a fixed annual rental equivalent to

113

Paragraph No. - Description

September 14, 1993 Contract

December 8, 1995 Contract

HUNDRED SIXTY FIVE (P265.00) PESOS per square meter as well


as a percentage rental as provided hereunder.
It
The percentage rental shall consists in an amount based on
gross receipts received by the LESSEE for the sale of goods and
services (as hereinafter defined) equivalent to the following
percentages:
P1.0M to P200.0M
1%
201.0M to 400.0M
%
401.0M to 600.0M
%
601.0M to up
%
In addition
.
For this purpose, the LESSOR shall allow the LESSEE a
maximum period of seven (7) years to effect said deductions of
advances from the fixed rental portion of the lease on the area
subject of this contract.

P372.00 per sq. m. annually or P13,144,248.00 for a total area


of 35,334 sq. m. of lease premises as well as percentage rental
as provided hereunder.
It
The percentage percentages:

12. Insurance

The LESSEE, at its sole cost and expense leased property insued
against destruction or damage by fire and extended coverage
risks and with such insurance company or companies acceptable,
to the LESSOR, in an amount equal to the maximum insurable
value

The LESSEE, at its sole cost and expense leased property


insued against destruction or damage by fire and extended
coverage risks and with such insurance company (deleted)equal
to the maximum insurable value

Reconstruction

In case the building Partial damage to or destruction of any In case the building Partial damage to or destruction of any

P1.0M to P200.0M
201.0M to 400.0M
401.0M to 600.0M
601.0M to P1.0B

1% of Gross Sales
P2.0M plus % of any increment
over & above P200.0M up to P400.0 M
P3.5M plus % of any increment
over & above P400.0M up to P600.0 M
P4.5M plus % of increment
over & above P600.0M up to P1.0B

In addition
.
For this purpose, the LESSOR shall allow the LESSEE a
maximum period of fifteen (15) years to effect said deductions
of advances from the fixed rental portion of the lease on the
area subject of this contract.

114

Paragraph No. - Description

1. Effectivity

September 14, 1993 Contract

December 8, 1995 Contract

portion of the buildings, structures and fixtures upon the leased


premises by any cause not covered by insurance, whether or not
without fault on the part of the LESSEE shall not terminate this
lease or entitle LESSEE to surrender the leased property

portion of the buildings, structures and fixtures upon the leased


premises by any cause not covered by insurance, whether or not
without fault on the part of the LESSEE (deleted) to surrender
the leased property

The parties
The parties
.
.
This contract shall be subject to approval by higher (deleted)
government authorities.

115