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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

4

Statement of Comprehensive Income

5

Statement of Changes in Equity

6

Statement of Cash Flows

7

Notes to Financial Statements

8 - 30

PART II - AUDIT OBSERVATIONS AND RECOMMENDATIONS

A. Financial and Compliance Audit 31 - 76 B. Value for Money 76 - 80 C. Adequacy of Internal Control 80 - 85 D. Compliance with Tax Laws 85 - 88 E. Gender and Development 88 - 89 F. Compliance with the GSIS Act of 1997, the

National Health Insurance Act of 2013 and Remittances with the Pag-Ibig Fund

90 - 91

G. Status of Audit Suspensions, Disallowances and Charges

91 - 97

PART III - STATUS OF IMPLEMENTATION OF PRIOR YEAR’S AUDIT RECOMMENDATIONS

Status of Implementation of Prior Year’s Audit Recommendations

98 - 111 Annex A 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 PNR’s 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 Biñan 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 management’s 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,

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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

2014

As restated 2013

Increase / (Decrease) %

Assets

51,896,055,986

52,824,149,901

(928,093,915) 1.8 Liabilities 26,476,042,530 26,114.602,258 361,440,272 1.4 Equity/Capital Deficiency 25,420,013,456 26,709,547,643 (1,289,534,187) 20.7

Results of Operations

2014

As restated 2013

Increase/ (Decrease) %

Total rail and non-rail revenue

515,500,949

401,023,352

114,477,597

28.5

Personal Services 102,773,148 99,198,000 3,575,148 3.6 Maintenance & Other Operating Expenses 789,394,898 567,912,203

221,482,695

39.0

Financial Expenses 288,200,327 225,307,544 62,892,783 27.9 Total other income (expenses) 153,146,827 (25,669,591) 178,816,418 696.6 Subsidy from Natl. Govt. 178,808,276 254,605,291 (75,797,015) (29.8) Net loss 332,912,321 262,458,695 70,453,626 26.8

C. Auditor’s 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. Management’s 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

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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.

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Audit Action Taken: We issued Notice of Suspension No. 14–004-107-(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 Management’s 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 PNR’s 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.

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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.

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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. 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.

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 Year’s 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.

Republic of the Philippines

COMMISSION ON AUDIT Commonwealth Avenue, Quezon City, Philippines

INDEPENDENT AUDITOR’S 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. Management’s 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. Auditor’s 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 auditor’s 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 entity’s 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 entity’s 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.

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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. Management’s 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.

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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


STATEMENT OF FINANCIAL POSITION

December 31, 2014

(With comparative figures for the year ended December 31, 2013)(In Philippine Peso)

As restated

Notes 2014 2013

ASSETS

Non-Current Assets

Property, plant and equipment 6, 33 50,978,107,037 52,038,834,453

Other assets 7 15,968,849 15,968,849

Total Non-Current Assets 50,994,075,886 52,054,803,302

Current Assets

Cash and cash equivalents 8 192,545,988 186,117,996

Accounts receivable 9 468,183,254 381,180,583

Due from officers and employees 10 148,641,593 148,395,751

Prepaid expenses 11 82,836,721 40,901,604

Materials and supplies inventory 12 5,858,560 9,143,741

Guaranty deposits 13 3,913,984 3,606,924

Total Current Assets 901,980,100 769,346,599

TOTAL ASSETS 51,896,055,986 52,824,149,901

LIABILITIES AND EQUITY

Non-Current Liabilities

Loans payable - foreign 14 2,168,734,993 2,586,993,082

Deferred credits 15 385,050,494 205,688,450

Total Non-Current Liabilities 2,553,785,487 2,792,681,532

Current Liabilities

Due to the Bureau of Treasury 16 23,065,327,054 22,703,082,124

Current portion of loans payable 14 278,128,462 258,791,997

Due to Landbank- short term loan 17 164,166,584 0

Payable-others 18 157,491,993 73,526,433

Due to the Commission on Audit 19 90,838,441 85,125,927

Due to local government unit 20 64,998,115 64,998,115

Guaranty deposit liabilities 21 42,768,689 36,906,862

Due to other government agencies 22 31,591,369 32,712,895 Due to the Bureau of Internal Revenue 23 27,221,252 46,451,616

Due to officers and employees 24 (8,897,707) (3,126,149)

Other current liabilities 25 8,622,791 23,450,906

Total Current Liabilities 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

See accompanying Notes to Financial Statements.

Notes 2014 2013

REVENUE

Operating revenue

Commuter/passenger 313,805,934 235,831,973

Discount, refund and commission (5,880) 0

Non-operating revenue

Rental income 197,770,730 163,679,508

Miscellaneous income 3,930,165 1,511,871

Total Revenue 515,500,949 401,023,352

EXPENSES

Personal services 26 102,773,148 99,198,000

Maintenance and other operating expenses 27 789,394,898 567,912,203

Financial expenses 28 288,200,327 225,307,544

Total Expenses 1,180,368,373 892,417,747

NET LOSS FROM OPERATIONS (664,867,424) (491,394,395)

OTHER INCOME (EXPENSES)

Gain (loss) on foreign exchange 29 150,626,408 (27,715,568)

Gain on sale of assets 1,630,028 0

Interest income 890,391 2,045,977

Total Other Income (Expenses) 153,146,827 (25,669,591)

NET LOSS BEFORE SUBSIDY (511,720,597) (517,063,986)

Subsidy from National Government 30 178,808,276 254,605,291

NET LOSS (332,912,321) (262,458,695)

OTHER COMPREHENSIVE INCOME 0 0

TOTAL COMPREHENSIVE LOSS (332,912,321) (262,458,695)


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(In Philippine Peso)


STATEMENT OF COMPREHENSIVE INCOME

For the Year Ended December 31, 2014

(With comparative figures for the year ended December 31, 2013)


As restated

Notes 2014 2013

CAPITAL STOCK 31 1,500,000,000 1,500,000,000

GOVERNMENT GRANTS AND CONTRIBUTIONS 903,287 903,287

APPRAISAL INCREMENT

Balance at beginning of year 40,655,182,085 40,699,651,481

Adjustment on revaluation-sale of assets 33 0 (44,469,396)

Balance at end of year 40,655,182,085 40,655,182,085

DEFICIT

Balance at beginning of year (15,446,537,729) (15,054,032,512)

Prior-period adjustments (956,621,866) (130,046,522)

Net profit loss (332,912,321) (262,458,695)

Balance at end of year (16,736,071,916) (15,446,537,729)

EQUITY 25,420,013,456 26,709,547,643


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STATEMENT OF CHANGES IN EQUITY



2014 2013

CASH FLOWS FROM OPERATING ACTIVITIES

Cash received from operations 618,491,975 349,768,604

Subsidy from the National Government 178,808,276 254,605,291

Interest income 890,391 2,055,576

Payment of operating expenses (696,840,169) (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 5,367,232 13,371,051Proceeds from sale of Disposable & Scrap Materials 1,630,028 0

Payments for construction in progress (90,733,828) (94,132,186)

Net Cash from (Used in) Investing Activities (83,736,568) (80,761,135)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from Domestic Loan-LBP 164,088,319 0

Payment of Long Term Debt (115,626,744) (6,559,831)

Payment of interest on long-term debts & guarantee fee (56,271,739) (4,561,527)

Payment of Interest on Domestic Loan (3,375,749) 0

Net Cash from (Used in) Financing Activities (11,185,913) (11,121,358)

NET INCREASE IN CASH ON HAND AND IN BANKS 6,427,992 (138,521,008)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 186,117,996 324,639,006

CASH AND CASH EQUIVALENTS, END OF YEAR 192,545,988 186,117,996


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STATEMENT OF CASH FLOWS



PART I – AUDITED FINANCIAL STATEMENTS

8

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 agency’s 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 agency’s 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 Corporation’s 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

9

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 Period No of trips a. Manila to Alabang January to December 2014 Average of 52 trips per day b. Manila to Sta. Rosa January to April 27, 2014 2 trips per day

c. Manila to Mamatid April 28 to December 1, 2014 2 trips per day

d. Manila to Calamba December 2 to 31, 2014 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 Naga-Sipocot 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 2014 2013 Inc/(Dec) 2014 2013 Inc/(Dec)Metro Manila Commuter Service

Tutuban to Alabang 18,957 18,057 900 22,351,847 18,326,296 4,025,551Tutuban to Biñan - 713 (713) - 1,156,825 (1,156,825)Tutuban to Sta. Rosa 659 - 659 790,560 - 790,560Tutuban to Mamatid 677 - 677 951,228 - 951,228Tutuban to Calamba 54 - 54 106,845 - 106,845

Lond Distance Train (Bicol Express) - - - - - -Bicol Commuter Service 1,430 1,448 (18) 471,474 485,663 (14,189)TOTAL 21,777 20,218 1,559 24,671,954 19,968,784 4,703,170

No. Of Trains Trips No. Of Passengers Carried

10

The comparative data on transportation service rendered by month follows:

2014 2013 Inc/(Dec) 2014 2013 Inc/(Dec)

January 1,724 1,419 305 1,990,331 1,295,826 694,505 February 1,832 1,309 523 1,946,926 1,259,182 687,744 March 2,204 1,341 863 2,237,895 1,310,314 927,581 April 1,960 1,400 560 1,961,039 1,402,142 558,897 May 1,911 1,656 255 2,123,792 1,510,952 612,840 June 1,616 1,628 (12) 1,940,516 1,544,324 396,192 July 1,629 1,747 (118) 1,996,850 1,803,348 193,502 August 1,495 1,567 (72) 1,944,596 1,594,445 350,151 September 1,474 1,624 (150) 1,939,519 1,788,830 150,689 October 1,569 1,678 (109) 2,019,675 1,916,512 103,163 November 1,465 1,642 (177) 2,069,880 1,952,672 117,208 December 1,468 1,759 (291) 2,029,461 2,104,574 (75,133)

TOTAL 20,347 18,770 1,577 24,200,480 19,483,121 4,717,359

No. Of Trains Trips No. Of Passengers CarriedMetro Manila Commuter Service

2014 2013 Inc/(Dec) 2014 2013 Inc/(Dec)

January 120 120 - 39,495 35,859 3,636 February 112 112 - 37,621 34,894 2,727 March 124 120 4 40,635 40,693 (58) April 120 120 - 35,025 36,921 (1,896) May 124 124 - 40,631 42,732 (2,101) June 120 120 - 39,114 40,462 (1,348) July 108 124 (16) 34,278 41,318 (7,040) August 124 124 - 41,063 40,334 729 September 120 120 - 43,480 46,827 (3,347) October 124 124 - 40,365 42,381 (2,016) November 120 116 4 42,999 40,060 2,939 December 114 124 (10) 36,768 43,182 (6,414)

TOTAL 1,430 1,448 (18) 471,474 485,663 (14,189)

No. Of Trains Trips No. Of Passengers CarriedBicol Commuter Service

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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 tensions

Target Completion

Date

Project Status Remarks

% of Com-pletion

Total Cost Incurred to

date 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

3

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

98.28

171,607,118

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

Design and Construction of Travesia Bridge

Guinobatan, Albay


December 22, 2008

6 Original Contract Duration- December 22, 2009 (365 CD) Revised Contract Duration - August 31, 2014

100 69,320,276

100 % Accomplished

Supply and Delivery of Various Communication Equipment

Manila Area

1,493,440 May 30, 2014

- July 30, 2014 100 1,493,440

Completed PS-DBM conducted bidding and Contract Implementation

Supply and Distribution of Ballast

Plaridel-Gumaca Quezon

17,970,807 March 15, 2014

1 June 13, 2014 100 17,970,807


DOTC SUB-SARO PHP250M Program Supply and Delivery of Prestressed Concrete Sleepers(5,570 pcs)

Alabang to Calamba

12,464,657 May 08, 2014

- July 07, 2014 100 12,464,657


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Location


in pesos

Date Started

No. of Ex tensions

Target Completion

Date


% of Com-pletion


date Supply of Huck Bolt Tools and Equipment including Accessories and Huck Bolts

Alabang to Calamba

2,768,613

March 10,

2014

-

June 08, 2014

100

2,768,613


DBM SARO Php359M Program

Renovation of Daraga Station

Daraga, Albay

5,360,677 June 20, 2014

2 Original: October 03,

2014 Revised:

October 30, 2014

96.50 3,768,153

Under Contract Implementation

Renovation of Polangui Station

Polangui, Albay

5,915,731 June 23, 2014


2014 Revised:

October 12, 2014

100 2,686,527

100% Accomplished

Retrofitting of Piers & Abutments

Quezon Area

9,798,510 April 11, 2014

- June 30, 2014 100 4,675,521

100% Accomplished

Painting of Thirty One (31) Steel Bridge Superstructures

Hondagua Area

2,764,100 April 17, 2014

1 Original: July 11, 2014

Revised: July 19, 2014

65.00 414,615


Painting of Thirteen (13) Steel Bridge Superstructures

Lucena Area

2,970,806 April 30, 2014

- July 29, 2014 100 2,970,806

Completed

Painting of Thirty Four (34) Steel Bridge Superstructures

Naga Area Original Contract Amount: 3,518,865 Revised Contract Amount: 3,754,408

May 16, 2014

2 Original: August 24, 2014

Revised: October 02,

2014

100 2,272,835

100% Accomplished

Replacement of Concrete Bridge Slab Deck

Laguna Area

7,415,054 May 21, 2014


Revised: September 04,

2014

96.67 7,118,452


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

Del Gallego, Camarines Sur

17,046,889 June 20, 2014


Revised: August 14, 2014

75.5 5,589,735


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Location


in pesos

Date Started

No. of Ex tensions

Target Completion

Date


% of Com-pletion


date DBM SARO Php359M Program

Regirdering of Three (3) Steel Bridge Superstructures

Quezon Area

9,115,654

June 23, 2014


Revised: August 31, 2014

99.31 5,656,000


Renovation of Travesia Station

Travesia, Albay

8,284,729 July 10, 2014

- November 7, 2014

91.50 6,535,880


Renovation of Ligao Station

Ligao, Albay

5,737,820 July 14, 2014

- October 27, 2014

96.06 4,856,522


Renovation of Iriga Station

Iriga, Camarines Sur


July 18, 2014


2014 Revised:

November 25, 2014

92.44 4,268,033


Regirdering of Two (2) Steel Bridge Superstructures

Laguna Area

7,852,320 July 21, 2014

- September 19, 2014

55.32 1,177,848


DBM SARO Php344M Program

Supply and Distribution of Ballast

Manila & Naga

89,494,000 June 30, 2014

- February 10, 2015

64.57 39,046,232


Construction of Concrete Lined Ditch

Main Line South

8,190,052 July 07, 2014

2 Original: September 25,

2014 Revised:

October 25, 2014

72.17 1,228,506


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

Main Line South

51,888,000 July 08, 2014

2 Original: November 05,

2014 Revised:

December 15, 2014

100 51,888,000

Completed

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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 year’s 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-in-Progress account.

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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 Estimated Useful Life in Years Railways/Tracks

40

Passenger Train Cars 30 Commuter Train Cars 25 Locomotives 20 Station Buildings 20 Bridges 20 Land Improvement 10 Plant & Equipment 10 Office Equipment 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 Corporation’s 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.

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6. PROPERTY, PLANT AND EQUIPMENT

This account is composed of the following:

Land & Land Improvement

Buildings, Roads, Equipment, Furnitures

Transportation Equipment Other Assets Construction in

Progress Total

COST January 01, 2014 40,015,811,072 9,189,157,150 4,565,240,059 315,479,502 2,619,633,988 56,705,321,771 Additions 0 11,755,141 16,605,250 0 70,032,072 98,392,463 Adjustments 0 1,098,396,525 103,435,871 (268,222,642) (1,798,305,455) (864,695,701)December 31, 2014 40,015,811,072 10,299,308,816 4,685,281,180 47,256,860 891,360,605 55,939,018,533

January 01, 2014 2,823,606 1,634,554,152 2,760,888,944 268,220,616 0 4,666,487,318 Depreciation 0 56,209,657 138,776,862 0 0 194,986,519 Adjustments 0 160,582,855 207,075,418 (268,220,616) 0 99,437,657 December 31, 2014 2,823,606 1,851,346,664 3,106,741,224 0 0 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

_____________________________________________________________________________

7. OTHER ASSETS This account consists of: 2014 2013 Non - operating property 9,009,972

9,009,972

Materials - in – transit 6,958,877 6,958,877 15,968,849 15,968,849

Non-operating property consists of unserviceable locomotives, commuter cars, passenger and freight train cars and equipment.

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8. CASH AND CASH EQUIVALENTS The breakdown of this account is as follows:

2014 2013 Cash in banks 181,578,202 175,828,166 Cash on hand

Cash with collecting officers 9,998,638 9,376,539 Cash with disbursing officers 969,148 913,291

Total 10,967,786 10,289,830 192,545,988 186,117,996

9. RECEIVABLES This account includes the following:

2014 2013 Receivables – trade

Accounts receivable – RP & US Government 5,619,926 5,619,926 Receivables – commercial 3,715,901 3,715,901 Receivables – others 248,336 248,336

9,584,163 9,584,163 Less: Allowance for doubtful accounts (9,584,163) (9,584,163)

0 0 Intra-agency and Other Receivables

Rental receivable – Tutuban Properties, Inc. 361,864,988 287,381,048 Rental receivables – other lessees 156,261,552 157,855,478 Due from DBM Procurement Service 16,981,407 0 Due from other GOCC – (LRTA) 4,162,500 7,031,250 Receivables - others 2,068,444 2,068,444 Receivables - utilities 1,689,903 1,689,903 Receivable – La Mallorca Transit 1,320,000 1,320,000 Receivable - sale of land 692,546 692,546

545,041,340 458,038,669 Less: Allowance for doubtful accounts (76,858,086) (76,858,086)

468,183,254 381,180,583 468,183,254 381,180,583

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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 write-off 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: 2014 2013 Advances to contractors 53,114,472 24,027,445 Prepaid expenses 29,722,249 16,874,159 82,836,721 40,901,604

12. MATERIALS AND SUPPLIES INVENTORY This account consists of: 2014 2013 Diesel fuel inventory 4,064,058 7,349,239 Accountable forms inventory 1,794,502 1,794,502 5,858,560 9,143,741

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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

InterestRate

%

No. of Years & Maturity

Date

Loan Amount

Outstanding Balance In Foreign Currency

In Peso 2014 2013

JBIC-PH-P98 2.70 30 May 2019 Y 5,036,657,567 Y 1,105,605,000 409,724,832 572,856,692 JBIC-PH-P119 2.70 30 June 2021 1,854,688,059 588,055,000 217,926,598 287,648,209 EDCF/Korea 2.50 20 May 2034 W 33,183,191,260 W32,353,581,000 1,313,602,948 1,391,265,554 KEXIM-II 5.62 10 May 2020 $ 15,419,865 $ 8,500,942 379,286,552 446,208,330 RZB Austria 2.99 17.5 June 2025 € 2,536,050 € 2,219,043 126,322,525 147,806,294

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

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 2014 2013 Japanese Yen (Y)

Y1.00 =

$0.008306

$0.009545

United States Dollar ($) $1.00 = P44.617 P44.414 Korean Won (W) W1.00 = $0.000910 $0.000944 European Euro (€) € 1.00 = P54.339 P60.8161

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___________________________________________________________________________

15. DEFERRED CREDITS

This account includes the amount of income received before it is earned or realized, as follows: 2014 2013 Advance rental-SMPHI

168,000,000

0

Deferred income-sale of land 131,300,988 128,802,505 Advance rental-Tutuban Properties, Inc. 35,119,569 35,119,569 Deferred credits to income 20,186,815 11,323,254 Advance rental-Pabahay sa Riles Property 15,834,375 15,834,375 Advance rental-SM 700,000 700,000 Other deferred credits 13,908,747 13,908,747 385,050,494 205,688,450

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. 2014 2013 Principal and interest on loans advanced by the BTR 12,738,245,937 12,566,852,268 Interest Expense on advances made by BTR 9,997,552,614 9,826,583,821 Guarantee fee payable 329,528,503 309,646,035 23,065,327,054 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.

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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: 2014 2013 Due to Philippine Ports Authority 18,000,000 18,000,000 Due to Government Service Insurance System 8,607,217 9,753,963 Due to Philhealth 4,889,828 4,883,053 Due to Pag-ibig 91,654 73,209 Due to other government owned and controlled

corporations 2,670 2,670 31,591,369 32,712,895

22

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: 2014 2013 Other payables - miscellaneous 7,686,936 7,468,115 Other payables - NGA 806,010 806,010 Other payables -trust liabilities 129,845 622,318 Other payables – diesel fuel 0 14,554,463

8,622,791 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: 2014 2013

Salaries and wages 68,152,419 65,592,356 Bonus and incentives 6,720,006 6,378,278 Economic assistance and additional compensation 5,111,783 4,837,537 Commutable allowances/RATA 3,193,273 3,174,484

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2014 2013 Clothing / uniform allowance 1,065,000 1,020,000 Cash gift 1,061,500 995,000 Per diem 1,043,500 207,900 Honoraria 884,500 140,000 Overtime pay and night service pay 0 695,900 Personnel contribution and other benefits 15,541,167 16,156,545 102,773,148 99,198,000

27. MAINTENANCE AND OTHER OPERATING EXPENSES This account consists of: 163662695.3

2014 2013 Repairs and maintenance - government facilities 208,443,420 19,431,655 Depreciation 194,769,519 170,646,147 Other services-hire and fire employees 163,662,695 182,377,384 Fuel and lubricants 118,323,258 100,716,089 Security services 52,944,230 46,811,294 Water, illumination and power services 16,236,343 17,247,269 Auditing services 6,729,967 6,564,989 Printing and binding expense 6,601,458 5,150,768 Consultancy services 6,449,227 4,499,682 Supplies and materials 2,230,963 2,907,097 Travelling expenses 1,685,075 1,480,266 Communication expenses 1,648,332 1,519,337 PNP Personnel Allowance 1,262,200 1,261,000 Taxes, duties and fees 1,221,236 24,107 Awards, indemnities and other legal expense 1,027,775 821,310 Advertising expense 758,193 1,200,784 Representation expense 743,177 673,026 Janitorial services 549,500 0 Repairs and maintenance - government vehicles 342,971 369,097 Training expense 332,154 810,077 Cultural and athletic 195,822 0 Bond premium and insurance expense 136,271 12,792 Donation 0 4,000 Miscellaneous and other operating expenses 3,101,112 3,384,033 789,394,898 567,912,203

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28. FINANCIAL EXPENSES

This account pertains to the following

2013 2013 Interest expense on net advances

170,968,792

102,692,992

Interest expense on long-term debts 84,610,129 103,462,961 Guarantee fees 19,882,468 18,753,836 Commitment and other financial charges 9,836,854 397,755 Interest on domestic loan 2,902,084 0 288,200,327 225,307,544

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.

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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 Percentage of Ownership Amount National Government Philippine National Bank Government Service Insurance System Development Bank of the Philippines

94.07 2.37 1.83 1.73

1,411,050,000

35,550,000 27,450,000 25,950,000

100 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 YEAR’S 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.

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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 Nature/Status Financial Consequence

Enson’s Commercial vs PNR RTC Branch 42, Manila

Breach of Contract with Damages

RTC dismissed the complaint and awarded PNR P8million as back rentals . Enson’s appealed to the Court of Appeals. PNR has a good chance of winning.

Manna Properties Corp. vs PNR Court of Appeals

Consignation 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 plaintiff’s evidence on June 25,2014

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

Kanlaon Construction vs PNR Supreme Court

Sum of money with damages Decided with Finality by the Supreme Court in favor of the PNR

PNR vs Natividad Peralta MTC- Taguig Branch 74

Unlawful detainer The structures put up by Peralta were demolished.

Arnulfo Tauro vs PNR RTC-Manila Branch 06

Injunction The RTC dismissed the petition. The RTC order became final and executory.

Foundation Specialist, Inc. vs PNR Court of Appeals

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.

Severo Bolo vs PNR

Breach of contract with damages.

In case of negative verdict, PNR may be made to pay P600,000 as

27

Court Case Nature/Status Financial Consequence RTC Branch 128, Caloocan City

RTC ordered PNR the alleged deficiency of delivery of 53,572 kilos of crap rails and bridges and to pay P25,000 Atty’s fees, pending appeal in the CA.

actual damages, P250,000 as exemplary damages, P25,000 as attorney’s fee.

Heirs of Alfredo Alzate v. Sps. Allan and Divina Llavor, et al. RTC Branch 126, Caloocan City

Reconveyance of structureand damages The pending incident is plaintiff’s Motion to admit third amended complaint.

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

Damages arising from the illegal and unauthorized demolition of improvements owned by Ms. Certeza. The counsel for the plaintiff earlier terminated his direct examination

Infinite Grafix and Outdoor Advertising Inc. vs PNR Pasig City

Consignation. Defendant through counsel moved for the dismissal of the case for violation of forum shopping/ litis pendentia and lack of cause of action.

The case is dismissible based on violation of forum-shopping and lack of action.

Lilia Virata vs PNR RTC Branch 125 Caloocan City

Civil case for damages on train accident filed by an injured Passenger. The next hearing set on April 23,2014 fsentation ointiff’s third witness

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.

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

Specific performance and damages. The case is submitted for resolution.

Case was dismissed for lack of jurisdiction. Plaintiff elevated the case before the court Appeals.

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

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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 The motion to dismiss filed by respondent through counsel is still awaiting for resolution

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 San Fernando, La Union

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.

People vs Leonora Enclano & Dominador Manila

For theft and violation of anti-fencing law.

There is a probability that cases will be dismissed based on reasonable doubt.

___________________________________________________________________ 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.

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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.

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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.

PART II – AUDIT OBSERVATIONS AND

RECOMMENDATIONS

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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

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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 SMI LPMAI Lessor Lessee Assignor Assignee

Undated Deed

of Assignment

Contract of Lease

March 22, 1982

1983Sept. 14, 1993

B A

http://www.google.com.ph/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http%3A%2F%2Fpixgood.com%2Ftalking-icon.html&ei=6XdsVavxB5WouQTmm4LoBA&bvm=bv.94455598,d.c2E&psig=AFQjCNEuk4kLrp2gTCZv_whz-P94QnBprg&ust=1433258091821710

http://www.google.com.ph/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http%3A%2F%2Fpixshark.com%2Ftalking-icon-png.htm&ei=G3psVbGmAYycugSk0IKYDg&psig=AFQjCNF0YVQN3froSDZZzlJ1jWnwimbaiA&ust=1433258657760282

33

SMI LPMAI PNR LPMAI Sublessee / Sublessor / Lessor Lessee Assignee Assignor

LPMAI PNR SMPHI PNR LPMAI

Lessor Lessee Lessor Lessee

1.2.6 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-

Sublease Agreement

July 12, 1994

Contract of Lease

Sept. 14, 1993

Contract of Lease

December 8, 1995

Supplement to Contract of

Lease dated May 2, 2014

December 8, 1995

B A

http://www.google.com.ph/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http%3A%2F%2Fpixshark.com%2Ftalking-icon-png.htm&ei=G3psVbGmAYycugSk0IKYDg&psig=AFQjCNF0YVQN3froSDZZzlJ1jWnwimbaiA&ust=1433258657760282


http://www.google.com.ph/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http%3A%2F%2Fwww.limetalk.com%2Fen%2Ffeatures%2F&ei=PnhsVZraJtK7uAT9l4PgCg&psig=AFQjCNEuk4kLrp2gTCZv_whz-P94QnBprg&ust=1433258091821710


34

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 successor–in-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 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.

1.3.2 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.

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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) 15% or P150.0 million upon execution of this supplement; b) 35% or P350.0 million upon clearing 50% of the leased area by

PNR; and c) 50% or P500.0 million upon total clearing of total leased area and

full turnover. 1.3.4 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 Difference (1,000,000,000) 2.76%

1 99,020,160 99,020,160 2 99,020,160 99,020,160 3 99,020,160 99,020,160 4 99,020,160 108,922,176 5 99,020,160 108,922,176 6 99,020,160 108,922,176 7 99,020,160 119,814,394 8 99,020,160 119,814,394 9 99,020,160 119,814,394 10 99,020,160 131,795,833 11 99,020,160 131,795,833 12 99,020,160 131,795,833

Total 1,188,241,920 1,378,657,689 190,415,769 190,415,769190,415,767

NPV of 12 yr cashflows 1,000,038,826

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

36

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 1st 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, our analysis disclosed the

following::

1.4.1 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.”

1.4.2 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.

1.5 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.

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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.

1.6 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.

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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.

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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 * P 379,581,720

2. Completed project funded by the EPIC II loan * 414,607,224

3. Costs of bridges completed and ready for use in operations * 213,312,689

4. Costs of completed station buildings recommended for reclassification / adjustment in the CY2013 Annual Audit Report * 26,989,034

5. Cost of project already issued with Certificate of Completion and the * final claim for payment was being processed at year-end 2,686,527

6. Recoupment transactions credited to the account * (6,927,354)

7. Costs of on-going projects 35,349,485

8.. Reclassification entries to proper PPE (205,547,303)

9. Adjusting/correcting entries recorded 31,308,581

Balance as of December 31, 2014 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

40

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

Revised Target Date of Completion

% of Completion

Cost Incurred to

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

Total P276,756,811 240,927,394 213,312,689

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

Percentage of

Completion Certified Date of Completion

Amount Charged

to CIP Account a. Cabuyao station 100% October 1, 2013 P 3,002,623 b. Mamatid station 100% October 1, 2013 3,066,533 c. Biñan station 100% December 23, 2013 8,306,823 d. San Pedro station 100% October 1, 2013 6,242,456

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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

Amount Credited to CIP Account

a. Design and Reconstruction of San Cristobal bridge First Claim P ( 9,720,606)

b. Design and Reconstruction of Travesia bridge First Claim ( 6,492,615)

c. Design and Reconstruction of San Cristobal bridge Second Claim ( 4,469,622)

d. Design and Reconstruction of San Cristobal bridge Third Claim ( 6,927,363)

Total 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.

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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 PNR’s 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 PNR’s 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.

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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

Accumulated Depreciation

Net Book Value

Tracks P 7,258,060,535 P 516,032,391 P 6,742,028,144 Station, Office & General Buildings 1,530,971,989 646,830,099 884,141,890 Bridges 966,661,034 441,408,742 525,252,293 Machineries and Equipment 421,438,610 195,832,052 225,606,559 Communication System 108,291,094 50,234,953 58,056,141 Furniture and Fixtures 13,885,553 1,008,428 12,877,125 Total P 10,299,308,816 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 Recording

Dates Estimated Economic Useful Life

Book Value

Machineries and Equipment 1985-2002 10 years P 88,978,037 Station, Office and General Buildings 1981-1990 20 years 11,657,186 Furniture and Fixtures 1988-2002 10 years 119,261,000 Communication System 1981-1998 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

Station, Office and General Buildings 1981 486,658

Total P 3,857,802

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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. 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.

3.7 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.

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c. Rental receivables based on compounded rate of 10% every two years which were regularly billed and recorded in the books but, PNR’s 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 TPI’s 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 PNR’s 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 PNR’s 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. Period Covered

Amount Billed

Date OR No. Amount Collected **

03/31/14 23133 Jan-Mar’14 34,042,870 *279,441,912

03/31/14 6721286 14,650,791

06/11/14 25463 Apr-Jun’14 34,042,870 *298,062,896

07/10/13 6722513 to 16

14,650,791

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10/10/14 25488 Jul 1 to Sept 4,2014

24,208,263 *316,683,881

10/10/14 for period Jul-Sept.

2014

6722542 to 45

14,650,791

10/10/14 25491 Sept. 5 to Oct. 4,2014

11,298,816 * no billing

11/11/14 25510 Oct. 5 to Nov.4,2014

11,396,430 *336,769,076

11/28/14 for period Oct-Dec

2014

4667027 to 30

14,650,791

12/15/14 25515 Nov. 5 to Nov.30,2014

9,834,607 *336,769,076

01/07/15 25519 Dec. 1 to Dec.31,2014

11,347,623 *336,769,076

02/12/15 25535 Jan. 1 to 31, 2015

11,347,623 *353,925,851

02/12/15 25536 Feb. 1 to 28, 2015

11,347,623 *365,273,474

03/04/15 25539 Mar. 1 to 31,2015

11,347,623 *376,621,098

* 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 PNR’s Master Development Plan, and failure to answer TPI’s letter discussing the issue on rental arrearages.

c. PNR is liable to pay for the real estate taxes on the land leased to TPI.

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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 PNR’s recognition of TPI’s contractual rights under the Renewal of Contract of Lease dated 22 December 2009 and a confirmation of TPI’s 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-to- month 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:

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

4.11 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 PNR’s 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,

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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 PNR’s recognition of TPI’s contractual rights under the Renewal of Contract of Lease dated 22 December 2009 and a confirmation of TPI’s position....”

4.15 Management furnished a copy of their latest communication dated May 12, 2015 to

the Office of the Solicitor General, PNR’s 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 non-payment 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.

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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 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.

5.2

Bank Accounts

Balance as of Dec. 31, 2014

Per Budget and Cash Division

Per Books

Per Bank Confirmation

Adjusted Book/Bank

Balance

General Fund DBP C/A 0410-029743-030 107R-19

1,472,512 2,189,722 2,517,781 2,236,321

PVB C/A 0006-008165-001 107R-21

194,266 194,400 194,400 194,400

LBP S/A 371-100-1084 107-T

148,502 148,591 148,591 148,591

DBP TD - 0410-029743-100 107-U

50,469,335 50,469,335 50,469,335 50,469,335

DBP C/A - 0630-029743-030 107R-27

599,640 987,770 987,181 987,181

LBP TD - 3711-0013-60 107-L

50,044,723 50,044,723 50,007,636 50,044,723

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Enterprise Fund- Metro Manila Traffic Receipts DBP C/A 0410-030329-030 107R-22

3,251,196 3,489,476 3,486,093 3,363,693

Subsidy Fund PVB C/A 0060-007220-001 107R-15

41,421,440 41,425,006 41,425,006 41,425,006

DBP C/A 0410-028252-030 107R-18

4,693,567 4,697,627 4,697,627 4,697,627

LBP C/A 371-210-0051 107S

1,911,032 11,890,986 13,182,370 11,890,986

Subsidy Fund for Operations LBP C/A 371-210-0248 107-V

19,711 19,412 19,612 19,412

Project Fund DBP C/A 0410-030119-030 107R-20

4,580,192 4,582,533 4,582,533 4,582,533

Re-Opening of Bicol Lines PVB C/A 0006-007629-001 107R-17

2,764,438 3,093,300 3,093,300 3,093,300

Rehabilitation of PNR Commuter Line DBP-MDS 2-00001-410-8 107R-25

193,287 6,458,674* - 0.00

Subtotal 161,763,839.82 179,691,557.12 174,811,466.02 173,153,109.02

Close and Dormant Accounts

Bank Account Acct. Code Per Books Per Passbook Adjusted Balance PNB C/A 10-450210003-1 107F-14 1,389 - closed acct. PNB CA-46-416-150005-8 107F-12 20,280 - closed acct. PNB SA-215-599058-1 107X 126,395 - 126,395 LBP ATA-0482-1030-65 107W 2,796 - 2,796 PNB CA-276-058-40001-9 ** 107F-8 1,477,678 - closed acct. PNB SA-400-276-05803-5 ** 107-Y 258,107 - closed acct.

Southern Line Deposits *** - 367,111 - Sub total 1,886,645 129,191

Total 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,

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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. GL Code Particulars Balance

CA-276-058-40001-9 107F-8 Balance, Dec. 31, 2013 11,440,245 Less: Recorded in JEV 2014-01-25 (9,959,567) Add: Recorded in JEV 2014-01-24 3,000 Remaining balance to be accounted 1,477,678 SA-276-058-40003-5 107-Y Balance, Dec. 31, 2013 1,685,462 Less: Recorded inJEV 2014-01-26 (1,430,355) Less: Recorded in JEV 2014-01-24 (3,000) Remaining balance to be accounted 258,107 CA-46-416-150005-8 107F-12 Balance, Dec. 31, 2013 24,149 Less: Recorded in Apr. 2014 (CRJ) (3,868) Remaining balance to be accounted 20,280 CA-0060-1000-181-8 Balance, Dec. 31, 2013 330 Less: Recorded in JEV 2014-443 (330) Balance 0 Remaining Balance for Reconciliation as of December 31, 2014 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 Year’s Adjustment 9,959,567 Cash in Bank (107-F8) 9,959,567

5.3.4 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.

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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 Year’s Adjustment account instead of

Accounts Payable;

c. Restate the amounts presented in the prior year’s 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 Year’s 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

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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 Description Amount *

PNB C/A No. 464161500-058 Close Account 20,280

DBP S/A 0410030329-030 Enterprise Fund – Metro Manila Traffic Receipts

125,783

DBP C/A No. 20000-14108 Rehabilitation of PNR Commuter Line – MDS Fund

6,002,177

Total 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.

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5.4.5 Management commented that unrecorded disbursements on DBP C/A 200-

14108 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.

5.5 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. 0410-029743-030. 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) 250,000 Prior Year’s Adjustment (681B) 250,000

5.5.3 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 Year’s 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.

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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

Gross

Amount Witholding Taxes

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

Net Amount Payable

per LDDAP-ADA Legaspi Premium Development Corporation

4,243,512

318,263

3,925,248

JV Ascutia Construction Corp. 1,568,341 127,163 1,441,178 JV Ascutia Construction Corp. 1,959,988 158,918 ***2,118,906 401 Devt. & Construction Corp. 1,825,987 102,712 1,723,275 OCM Steel Corp. 3,750,457 312,538 3,437,919 JV Ascutia Construction Corp. 3,209,609 * 358,346 2,851,262 JV Ascutia Construction Corp. 2,721,854 ** 351,138 2,370,716 Fel-Gene Construction 3,366,000 247,500 3,118,500 Total 22,645,746 1,976,578 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

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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-101-03-001-

2014 issued dated March 20, 2014. In Part II on Advice to Debit Account (ADA) the amount requested to be debited under MDS Sub-Account 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 Amount Debited

per Bank Statement*

Amount Payable

per DV & OR Over

payment Net Amount

Per LDDAP-ADA

03/28/2014 Legaspi Premium Devt. Corp.

4,243,512 3,925,248 318,263 3,925,248

03/28/2014 JV Ascutia Construction Corp.

1,568,341 1,568,341 0 1,441,178


1,959,988 1,959,988 0 2,118,906

Total Overpayment 7,771,840 7,453,577 318,263 7,485,332

* 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

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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 PNR’s MDS account with the DBP.

Date Payee Amount Debited per Bank

Statement *

Amount Payable per DV

Over payment

Per Payee’s Official Receipt

06/30/2014 OCM STEEL Corp.

3,750,457 3,437,919 312,538 3,437,919

06/30/2014 Fel-Gene Construction

3,366,000 3,118,500 247,500 3,118,500

Total Overpayment to Contractors 560,038


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-ADA-101-06-005-2014 that resulted in overstatement of the gross amount paid to JV Ascutia Construction Corporation by P709,484.

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Date Payee Debited per Bank

Statement *

Amount Payable per DV

Over payment

Per Payee’s Official Receipt


3,209,609 2,851,262 358,346 No O.R. provided


2,721,851 2,370,716 351,138 No O.R. provided

Total Overpayment to Contractors 709,484


6.6.1.7 The taxes due for remittance to the BIR per LDDAP-ADA No. PNR-

ADA-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 Per LDDAP-ADA

Per DV Difference

6/30/2014 JV Ascutia Construction Corp. 358,346 231,183 127,163 6/30/2014 JV Ascutia Construction Corp. 351,138 192,220 158,918 Total 709,484 423,404 286,081

6.7 We found the above transactions not in order, hence, Notice of Suspension No.

14–004-107-(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.

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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 COA’s 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 PNR’s 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

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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 COA’s 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.

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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 PNR’s 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

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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 Miescorrail-Desco 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) Agency’s offer for negotiations with selected suppliers, contractors or

consultants 4) Evidence of invitation of observers in all stages of the negotiation

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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 Activity April 10, 2014 PNR BOD approved the negotiated procurement thru BR

No. 030-2014; April 12, 2014 Posting at PhilGEPS portal for schedule of submission

and opening of bids; May 9, 2014 Submission and opening of bids. MDJV was the lone

bidder but disqualified for non-payment of bidder’s fee; May 13, 2014 Another posting at PhilGEPS portal for a second negotiated

bidding; June 3, 2014 Submission and opening of re-bids. MDJV was the lone

bidder and quoted a bid price of P149,999,808.38; June 4, 2014 Results of the evaluation of bids and declaration of MDJV

as the bidder with the lowest calculated bid; June 25, 2014 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);

August 13, 2014 The Notice of Award (NOA) was received by the Heads of the MDJV and submission of performance security was requested;

Sept. 15, 2014 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.

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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.

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.


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 Secretary’s 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.;

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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;

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.

8.4 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 Secretary’s 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;

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On March 29 2012, Mr. Joseph Allan C. Dilay and Mrs. Gina G. Dilay tendered their resignation as members of the Corporation’s 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 Corporation’s 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 re-evaluation, 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

Class Max. Per Meeting (P)

Max. per Year (P)

Max. Per Meeting

Max. per Year (P)

Total Max. (P)

D 10,000 240,000 6,000 144,000 384,000

* up to 20% premium allowed for the Chairman of the PNR Board 9.3 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)

Historical 2010 2011 2012

Assets 13,471,699 13,621,810 53,102,554 Liabilities 24,959,213 25,607,009 25,956,031 Net Worth (11,487,514) (11,985,199) 27,146,523

B. Revenue Streams –

(In P) 2010 2011 2012 Average Rail Revenue 101,985,564 185,992,271 227,885,189 171,954,341 Non-Rail Revenue 139,611,417 168,250,990 169,755,406 159,205,938 Other Income 819,826 2,450,373 567,572,498 190,280,899

Gain on Sale of Assets 222,300 0 290,006,752

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(In P) 2010 2011 2012 Average Gain on Forex 0 272,476,644 Interest Income 597,526 2,450,373 5,089,102 Subsidy from Natl. Govt. 98,655,625 779,995340 128,653,096 335,768,020 Total Revenues 341,072,432 1,136,688,974 1,093,866,189 857,209,198 Total Revenues Net of Subsidy and Unrealized Forex Gain

242,416,807 356,693,634 692,736,449 430,615,630

9.4 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 2013 2012

1,043,500 207,900 268,800

9.5 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 Assets (P) Revenues (P)

A > 100 billion > 10 billion B > 25 billion and < 100 billion > 2.5 billion and < 10 billion

C > 5 billion and < 25 billion > 500 million and < 2.5 billion

D > 1 billion and < 5 billion > 100 million and < 500 million

E < 1 billion < 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 COA-Audited 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

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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.

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 Commission’s 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 PNR’s 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 Auditor’s 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.

10. 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”

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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.

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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.”


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

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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 Lessee Address Amount of Receivable

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

Nestor and Yolanda Dioquino

PNR Site Dagupan, Dagupan Station Grounds

P 327,526

-do- Nestor G. Dioquino PNR Site, Brgy. Mayombo, Dagupan City

14,500

-do- Nestor & Yolanda Dioquino

PNR Site Dagupan, Dagupan Station Grounds

299,802


Lourdes Santos c/o Carolina Nicolas

253 Heroes del ’96, Cal City

622,244

-do- Lourdes Santos c/o Carolina Nicolas


687,720

-do- Lourdes Santos c/o Carolina Nicolas


272,950


Edward Potenciano Bonifacio & Canlalay Streets, Binan, Laguna

579,317

-do- Edward Potenciano Bonifacio & Canlalay Streets, Binan, Laguna

579,317

Return to Sender – Lessee deceased

Engracia Malig c/o Jose Malig

Damortiz, La Union

315,941

-do- Engracia Malig c/o Jose Malig

Damortiz, La Union

315,941


Pedro Balingit M.H. Del Pilar Street Dagupan City

537,791

-do- Pedro Balingit M.H. Del Pilar Street Dagupan City

935,650

-do- Pedro Balingit M.H. Del Pilar Street Dagupan City

734,654

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Result of Confirmation Lessee Address Amount of Receivable

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

Dominador M. Cardenas

25 7th Ave., West Grace Park, Kal City

193,279

-do- Dominador Cardenas


970,316

-do- Dominador Cardenas


452,362

-do- Nilo Cardenas 107 P. Galauran, 7th Ave West, Grace Park, Kal. City

675,780

-do- Nilo M. Cardenas 107 P. Galauran, 7th Ave West, Grace Park, Kal. City

308,947

Return to Sender – Lessee deceased

Romeo M. Cardenas 107 P. Galauran, 7th Ave West, Grace Park, Kal. City

313,947

-do- Romeo M. Cardenas 107 P. Galauran, 7th Ave West, Grace Park, Kal. City

254,577

Confirmation Letter was not mailed- due to incomplete mailing address

Florante Roque Malolos, Bulacan 780,925

Confirmation Letter was not mailed- due to incomplete mailing address

Florante Roque Malolos, Bulacan 780,925

No Confirmation Reply but Confirmation Letter was received by Lucy Luterte per Post Office Registry Return Slip.

Rolleo Luna Ignacio 93 Celery Street Valle Verde 5, Pasig City

182,385

Confirmation Letter was not mailed because there was no available record from AMD

Maurita Villacruzes No available record from AMD

340,053

-do- Maurita Villacruzes -DO- 570,352

-do- Maurita Villacruzes -DO- 287,552

Total 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

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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 Result of Confirmation

Edward Potenciano P 579,317 42 Confirmation Letter was received but no reply sent

Edward Potenciano 579,317 45 - do- Engracia Malig 315,941 43 Deceased Engracia Malig 315,941 46 Deceased

Florante Roque 780,925 164 Unable to confirm because with incomplete mailing address

Florante Roque 780,925 181 -do- P 3,352,366

11.5 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 Amount Per Confirmation Reply

1 A Chan Sugar Corporation P10,156,832 Vacated PNR property 2/28/11; fully paid as of 7/29/11

2 Municipal Govt of San Fernando 9,233,253 Balance is nil 3 City Government of Iriga 8,195,082 No account 4 City Government of San Pablo 7,392,707 Account is nil

5 La Paz Investment Realty Corp. 1,418,228

The company is unable to use the property which is occupied by informal settlers

6 Mun. Government of San Fabian 1,168,687 No more payable to PNR 7 Municipality of Plaridel 34,394,094 No outstanding account Total 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.

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11.6 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.

12. 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 Balance per Books

Recorded Depreciation Net Book Value

Land and Land Improvements P40,015,811,072 P 2,823,606 P 40,012,987,466

Buildings, Furniture and Equipment 10,255,984,332 3,378,538,756 6,877.445,576

Land Transportation Equipment 4,677,391,181 1,524,468,564 3,152,922,617 Other Property, Plant and Equipment 47,256,860 0 47,256,860

Construction-In-Progress 1,383,452,929 0 1,383,452,929

Total P56,379,896,374 P4,905,830,926 P51,474,065,448

The PPE accounts comprised 98.13% of the agency’s 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 non-protection of PNR property against damage or loss and indemnification of recoverable costs if ever natural or man-made calamity would occur.


a. Explain non-compliance with the Property Insurance Law; and

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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 2009-001, 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.

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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

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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 Systems-

As 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.

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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.

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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 DV No. DBP Check No. Amount 06/09/14 OGM-2014-06-962 44040946 P 3,000,000 07/23/14 OGM-2014-07-1295 44041077 3,000,000 10/23/14 OGM-2014-10-2911 41939130 1,000,000 11/18/14 OGM-2014-11-3068 47371872 1,000,000 02/16/15 OGM-2015-02-165 47372002 500,000

Total P 8,500,000

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, PNR’s 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.

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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 agency-that 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,

commercial or agricultural purposes 197,770,730 38

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 –

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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 unit’s 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

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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

PNR’s 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.

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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 PNR’s 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. Management has not responded on the Audit Observation Memorandum.

16. 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.

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16.2 In line with the deposit pick–up 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

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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.-

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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 CY2011 CY2012 CY2013 CY2014 Cost of fuel and lubricants disclosed in the Notes to FS P86,986,094 P112,234,683 P100,716,089

P118,323,258

Verified cost of fuel procured 75,353,600 106,657,228 64,959,800 114,501,700 Percentage of verification 86.6% 95.0% 64.5% 96.8%

17.4 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

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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

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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".

2

Accomplishment Report

GAD Accomplishment Report for CY 2013 submitted

3

Utilization of GAD Budget

Expenses were incurred in pursuance of identified GAD Activities and Targets

4

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

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Particulars Compliance / Non-Compliance Appropriation 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

5

Adoption of GAD Focal Point System

GAD FPS were observed

6

GAD PAPs should be supportive of the Gender issues in the Agency

The specified GAD PAPs of the PNR were supportive of gender issues.

7

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

8

Cost of GAD Projects incurred

GAD expenses incurred were reasonable and not overpriced

9

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 Amount Lacking Document

b) Training expenses P29,100 Office Order authorizing the participants Certificates of Attendance

c) Travelling expenses 9,398 Travel itineraries Certificates of travel completed

d) Honoraria 8,000 Course syllabus/programs of lecture

F. 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.

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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.

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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 Balance Dec. 31, 2013

Amount Issued in 2014

Amount Settled in 2014

Balance Dec. 31, 2014

Suspensions P 121,521,364 218,853,985 337,630,355 P 2,744,994

Disallowances 65,650,892 11,048 11,048 65,650,892

Charges 139,497,028 0 118,817 139,378,211

Total P 326,669,284 218,865,033 337,760,220 P 207,774,097

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Audit Action Beginning Balance Issued Settled

Ending Balance Status

As of December 31, 2014 Date Reference No. Jan. 1, 2014 Dec. 31, 2014

Suspensions:

12/15/2014 NS 14-004-107-(14) P 0 P 2,146,994 P 0 P 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 Contractor’s final billing which had been submitted to the PNR for processing.

08/27/2014 10/20/2014

NS 14-003-107-(14) NSSDC-2014-008 22,048 22,048 0

05/04/2014 08/27/2014

NS 14-002-107-(13) NSSDC-2014-007 215,684,943 215,684,943 0

04/24/2014 08/18/2014

NS 14-001-107-(13) NSSDC-2014-006 1,000,000 1,000,000 0

07/09/2013 03/31/2014

NS 13-001-401-(12) NSSDC-2014-004 329,807 329,807 0

07/09/2013 03/31/2014

NS 13-001-401-(12) NSSDC-2014-002&003 119,897,557 119,897,557 0

03/06/2012 11/24/2014

NS 12-006-107-(10-11) NSSDC-2014-009 96,000 96,000 0

03/06/2012 11/24/2014

NS 12-005-107-(10-11) NSSDC-2014-009 96,000 96,000 0

03/06/2012 11/24/2014

NS 12-004-107-(10-11) NSSDC-2014-009 96,000 96,000 0

03/06/2012 NS 12-003-107-(10-11) 96,000 96,000 0

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11/24/2014 NSSDC-2014-009 02/28/2012 11/24/2014

NS 12-002-107-(10-11) NSSDC-2014-009 156,000 156,000 0

02/27/2012 11/24/2014

NS 12-001-107-(10-11) NSSDC-2014-009 156,000 156,000 0

12/30/2010 NS 2010-05 276,000 276,000 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.

12/30/2010 NS 2010-04 322,000 322,000

Total 121,521,364 218,853,985 337,630,355 2,744,994

Disallowances: 10/20/2014 11/24/2014

ND 14-001-107-(14) NSSDC-2014-010 11,048 11,048 0

07/01/2013 ND 13-001-107-(13) 49,802,995 49,802,995

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.

06/30/2012 ND 12-008-107-(11) 3,783,314 3,783,314

Disallowance on excess payment on payrolls of PNR “hire and fire employees” which was affirmed in CGS-Cluster 3 Decision No. 2015-12 dated March 30, 2015. Currently

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the subject of Petition for Review of the CP under COA CP Case No. 2015-319.

12/06/2010 ND 2010-003 41,168 41,168

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.

01/14/2009 ND 2009-001 11,220,857 11,220,857

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.

06/04/2007 ND 2007-001 802,558 802,558

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.

Total 65,650,892 11,048 11,048 65,650,892

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Charges:

12/05/2013 NC 13-001-107-(12) 20,359,447 20,359,447

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.

08/11/2010 NC 2010-001 564,650 564,650

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.

11/06/2007 NC 2007-010 414,370 414,370 The Notices of Charge Nos. 2007-010 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.

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

The unsettled account of P8,579,374 involving back rentals dropped from the books of accounts and not considered during the sale

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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.

05/30/2007 03/31/2014

NC 2007-009 NSSDC-2014-005 120,015 24,003 96,012

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.

05/30/2007 03/31/2014

NC 2007-008 NSSDC-2014-005 106,800 21,360 85,440

05/30/2007 03/31/2014

NC 2007-007 NSSDC-2014-005 148,875 29,775 119,100

05/30/2007 03/31/2014

NC 2007-006 NSSDC-2014-005 174,715 43,679 131,036

05/17/2007 NC 2007-002 139,750 139,750

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.

02/22/2007 NC 2007-001 71,250 71,250 The sale of unserviceable equipment and spare parts was not appealed

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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.

06/08/2004 NC 2004-001 (2) 106,976,800 106,976,800

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.

Total 139,497,028 0 118,817 139,378,211

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

PART III – STATUS OF IMPLEMENTATION OF PRIOR YEAR’S AUDIT RECOMMENDATIONS

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III STATUS OF IMPLEMENTATION OF PRIOR YEAR’S 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 Observations Recommendations Status of Implementation

1 1. As at December 31, 2013, PNR reported a huge

2. negative operating cash flow at P301.243 million, indicating that it could not

3. meet its debt service requirements to foreign creditors which in the past were advanced by the National Government totalling P22.703 billion, and its unrecorded liabilities and statutory obligations to other government agencies and contractors of at least P1.330 billion.

Under its present state and condition whereby its internally-generated cash was not sufficient to cover its regular operating expenses and capital expenditures, PNR needs substantial amount of subsidy from the National Government yearly and/or other sources of revenues to sustain its operations and to cover the budget deficit.

We recommended that in preparation for the forth coming approval of the bill extending PNR’s Charter for another 50 years, Management: a. undertake a complete physical

inventory of all PNR assets, which to date has not been complied with by Management;

b. cause the appraisal/proper

valuation of assets to have a reasonable estimate of the actual value of the resources of the PNR;

c. formulate plans on improving

the PNR’s financial position, such as collection of receivables from various lessees and vendees of PNR real property; strengthening monitoring control of proceeds from sale of train tickets and collections from non-rail revenue; disposal of unserviceable and obsolete assets no longer used in operations; and, ascertaining other potential sources of 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;

a. Not implemented – reiterated in

Audit observation No. 3

b. Not implemented. Appraisal was undertaken only where the intention was to lease a large parcel of real property and not to provide fair value of the assets in the financial statements.

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.

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e. Comply with our recommendation in the CY 2010 Annual Audit Report that Management develop a Manual of Approvals that would define limits of approving authority and Manual of Standard Operating Procedures as guide in carrying out business operations and financial transactions. To date the Manuals have not been completed.

e. Not implemented. No Manuals on Approval and Operating Procedures completed in 2014. Only loose guidelines and office orders on signatories on certain transactions were issued.

2 4. 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.

5.

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.

Not yet fully resolved. Reiterated under Audit Observation No. 4

3 6. Vague provisions on the lease agreement with the TPI, which pertained to the (a) ownership of building improvements on leased property covered by the original contract; (b) the fairness of percentage share of the government from the income derived by the TPI from third parties; (c) liability on real property taxes during the term of the lease had to be clarified immediately. Also, the disclosure requirement of PAS No. 17 on lease arrangements as of reporting date regarding the contract with the TPI was not complied with.

We recommended that Management:

a. Act speedily in order to clarify

the vague provisions on the contract of lease with TPI, as non-settlement of the issues early may weaken the negotiating position of the PNR as it might be overtaken by the forthcoming implementation of the renewed contract of lease effective on September 5, 2014; and

b. Comply with the disclosure

requirement of PAS 17on lease arrangements as of reporting date regarding the contract with the TPI.

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.

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7.

4 8. The recorded value of Land and Land Improvements at P40.055 billion as of December 31, 2013 was not correctly stated mainly due to:

a. the continuous presentation of parcels of land with zonal valuation of P3.164 billion as PNR assets free of use even though the land titles of which were already in the custody of Home Guaranty Corporation for annotation of the Deed of Assignment and Conveyance;

b. the difference by 112,256.9

square meters per lease contract and the Masterlist of PNR Property on the actual measurement of parcels of land revalued in the books which were leased and restricted for use of the TPI; and

c. doubtful ownership on 71 parcels of land measuring 2,112,429 square meters, the titles of which were reportedly for reconstruction for more than 10 years, already, and the lands valued at P897.779 million sold to homeowners associations covered by five TCTs without entries however, of encumbrances or restrictions in favour of the vendees.

Overstatement by P44.469 million was found in the Land and Revaluation Capital Accounts due to errors in the computation of the zonal values of three parcels of land with total area of 580.4

In view of the foregoing audit observations, we recommended the following:

a. Comply with the requirements of

Section 74(a) of PAS 16; fully disclose in the financial statements the amounts of restrictions on land titles covered with encumbrances and/or restrictions from use;

b. Considering the advance

renewal of the contract of lease with TPI which the current Management of the PNR found onerous, provide the Audit Team with Management’s position regarding the necessity of another entry or memorandum of encumbrance on the land titles that in effect would cancel or amend the previous entries or annotations on the terms and conditions of the lease contract with TPI;

c. Explain the discrepancy noted

on the area of ‘leased premises’; locate the missing TCT No. 45328 and take up the revaluation cost omitted in the books;

d. Provide for the plan or course of action to be taken by the current PNR Management to resolve the issue on the land titles turned over to HGC by PNB for annotation of the Deed of Assignment and Conveyance;

e. Observe consistency, take into account the revaluation of land under OCT 7313;

f. Investigate and provide updated

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

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square meters; and, the Land Improvement account amounting to P5.131 million could not be verified due to the absence of details or descriptions on the items comprising the account.

9.

titles allegedly for reconstruction;

g. Investigate and provide relevant documents on the parcels of land sold to homeowners associations and the NHA;

h. 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

i. Verify the assets comprising

land improvements to establish their validity.

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.

Not implemented.

5 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.

Further, these obligations remained unrecognized in

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.

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. No petition from money claim yet is filed with the Commission by the creditors as necessary supporting documents still being completed. Not yet implemented. The obligations shall be recognized in the books once the source documents are submitted to the Controllership Division.

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the books and/or were not disclosed in the financial statements contrary to Paragraph 14 of PAS 37.

10. 6 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;

b. Accounts Receivable

amounting to P29.508 million had been dormant for 15 and up to 37 years.


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.

7 6 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.

We recommended that the PNR formulate clear accounting policy involving provision or allowance for bad debts.

Not Implemented

8 7 Unreconciled discrepancy ofP12.748 million existed as at year-end between Cash-in-Bank balance of P175.828 million and the results of confirmation with the


a. Require the accountable

officers concerned to account for the noted discrepancy

Partially implemented

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depository banks showing confirmed amount of P163.081 million which was less than the book balance. Management did not strictly abide by the requirement of Section 74 of PD 1445 in keeping the account, as Bank Reconciliation Statements on the different bank accounts maintained by the PNR were incomplete, submitted late and not adequately supported with documents to confirm the veracity of transactions and to properly account for the reconciling items.

8

between the balances per books and confirmed balances by the banks; and take appropriate action for their failure to do so;

b. Submit documents showing the approval by the DOF of keeping government funds or deposits at banks other than the LBP and DBP, pursuant to Department Order No 27-05 dated December 9, 2005;

c. Require the immediate updating of the reconciliation of the balances per banks and 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.

Implemented.

Partially Implemented. Partially Implemented.

9 9 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. The existing process of preparation, verification and audit of payrolls paid thru ATMs involving more than 1,400 personnel was tedious and time-consuming as it involved comparing printed Computerized Payroll

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. We also recommended the following: a. The Controllership Division

should work back and thoroughly verify the transactions under account “Due to Officers and Employees

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

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Summary against the Remittance List for the Pay Period with the names of the employees in the former document listed in alphabetical order by office whereas in the latter document, the employees in the Home Office and all stations of the PNR in Luzon were listed in alphabetical order Corporate wide.

10

– Payroll Payable” to determine the reason behind its abnormal balance; accordingly, effect the necessary accounting adjustments to reflect the correct balance as of reporting date;

b. Management ensure that control measures are in place to prevent the recurrence of anomalous transactions in the disbursement of fund for salaries, with a written diagram or narrative flowchart in the preparation and payment of payrolls thru the bank and thru PNR’s disbursing officer/s.

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

10 11 The accuracy and validity of the balance of CIP amounting to P2.620 billion could not be ascertained due to the absence of record/schedule showing the details of on-going projects comprising the account. The Notes to Financial Statements disclosed only P423.21 million costs of projects being implemented as at year-end. Included in the CIP account balance was the cost of repair and maintenance expenses of P72.197 million which should not be capitalized. On the other hand, what was recorded under CIP were the costs incurred based on the payments made to the Contractors instead of the percentage of completion method of accounting whereby costs are to be recognized in proportion to the stage of completion of contract activity.

12


a. Explain the causes of delays in

the implementation of the projects presented in paragraphs 10.3 and 10.5to justify the imposition or not of liquidated damages; provide copies of the punch-list issued to the contractors in accordance with Section 7 of the IRR on RA 9184;

b. Submit justifications why the

periodic accomplishment and submission of the Project Status Report was not complied with;

c. Verify/Work back on the

transactions previously recorded under the CIP account; and accordingly make the necessary accounting adjustment; and

d. Require regular coordination

among the functional units or offices involved in the

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

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implementation, reporting and accounting of PNR projects.

qualifies as an asset or an expense following the guidelines quoted in the AOM. The assessment shall be indicated in the face of the disbursement voucher for reference.

11 13 The reported year-end 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 PNR’s 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, non-operational, 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 The balance of Land Transportation Equipment 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.

14

In view of the foregoing observations, we recommended the following:

a. For the items presented under

paragraph 11.3.1, adjust to appropriate inventory or expense account;

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;

c. Adjust the entries on

restatement of foreign loans debited to Land Transportation Equipment in accordance with PAS 8 on Accounting Policies, Changes in Accounting Estimates and Errors.

Implemented. The recommended adjusting entries were taken up in the books. Not Implemented. Absence of physical inventory to confirm the existence of assets reiterated in Audit Observation No. 3. Not Implemented.

12 The exact amount of Receivables from Sale of Non-Core Property on


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instalment payment basis could not be determined due to the absence of records to establish the actual amounts already paid by vendees. Moreover, the PNR did not enforce the provisions on terms of payment provided in the Memorandum of Agreements and Conditional Contracts to Sale including the imposition of penalties on delayed payments by the vendees.

15

a. Verify the discrepancy amounting to P45.370 million on the amount received from vendees based on available records and the amount which should have been collected as stipulated in the agreements;

b. Reconcile the records of the

Asset Management Division for each vendees with the records of the Homeowners Associations;

c. Ensure that the Associations

maintain general and individual ledgers of its member buyers indicating payments made to the PNR as provided in the MOA;

d. Assert the right to collect, issue

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

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. 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.

Partially Implemented. Partially Implemented.

13 “Subsidy Fund” of P33.09 million earmarked to finance specific and programmed expenditures was utilized instead to pay for the cost of security services, and reimbursement of fund derived from the proceeds of PNR Hospital which was utilized to pay for expenses in the preceding year. The utilization of fund for purposes other than intended was improper and contrary to Section 4 of PD 1445.


a. Submit justification to the DBM

on utilizing the programmed subsidy fund to reimburse the general fund used to cover other operating expenses including obligations settled in the previous year; and

b. Henceforth, refrain from

juggling and utilizing restricted subsidy fund other than for which granted by the National Government to avoid penal sanctions that may be imposed as this in effect constitutes technical malversation of

Partially Implemented. Request for realignment now being submitted to the DBM. Implemented. No similar audit finding observed in 2014.

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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.

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.

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. 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.

Partially Implemented. Mandatory obligations were given priority.

15 Deficiencies and non-compliance 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 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.

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16 16 The accuracy of collections from daily ticket sales in the average of P8.893 million per month, acknowledged received by the Regular Collecting Officer in the unnumbered PNR Form TD 3-A (Remittance Slip) showing the train number, denomination and amount of cash remitted could not be verified immediately as the same were without accompanying supporting document/s by which to counter check and validate the amount remitted.

In view thereof, we recommended the following:

a. Accompany remittances by

route station agents with certified correct Daily Collection and Sales Report (Form Accounting 1-A) and Daily Sales Form (Accounting 2-A) showing itemized listing of tickets sold with corresponding rates or denomination to facilitate verification of the accuracy of the cash remitted by them and received for deposit by the RCO;

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 97-002 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;

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;

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

e. For monitoring of accountability, require the Controllership Division to keep subsidiary

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.

Partially Implemented.

Partially Implemented

Implemented

Implemented

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ledgers for each collecting and disbursing officer of the PNR.

17 Several deficiencies were noted in the payment of overtime rendered by PNR employees that were contrary to the rules and regulations under COA Circular No. 2012-001 and DBM Budget Circular No. 10, as well as PNR’s Policy on Attendance, Tardiness and Overtime.

17

In view of the foregoing, we recommended that Management:

a. In consideration of the agency’s

limited sources of fund to sustain operations, review the working or shifting schedule of its employees to avoid the rendition of overtime for regular work or activities;

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;

c. Strengthen internal control. Pre-

audit and ensure compliance with the provisions of DBM Circular No. 10 and PNR’s policy guidelines on overtime must be consistently applied.

Implemented. 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. Implemented

18 18 The PNR incurred a total of P29.973 million on monthly interests from October 31, 2006 to October 31, 2013 due to non-remittance to GSIS of government share and employees’ premium contributions within the period prescribed in the IRR of RA 8291. To restore the full benefit that could be availed of based on contributions actually paid for by the employees, Memorandum of Agreement was executed by and between the PNR and the GSIS to restructure the unpaid obligation consisting of unpaid premium


a. Strictly monitor premiums withheld and remittances thereof to the GSIS monthly to maintain accurate accounting records and report of the account Due to GSIS;

b. Comply with the IRR of RA

8291; Promptly remit the GSIS contributions to avoid the imposition of interest on unremitted premiums and suspensions of loan, dividend and retirement privileges; and

c. Settle on time the required

Implemented

Implemented.

Partially Implemented

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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. 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.

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

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

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 non-compliance therewith.

Implemented. Improved policy in hiring of personnel and organize personal information specially on the Personal Identification Numbers

20 20 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 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).

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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 PNR’s 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.

21 21 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 Unsettled audit suspensions, disallowances and charges as of December 31, 2013 amounted to P121.521 million, P65.651 million and P139.497 million, respectively.

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.

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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 Annex A

Paragraph No. - Description 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

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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

lease as defined in par. 6 pay the LESSOR, by way of rental fee for

the premises, in cash, a fixed annual rental equivalent to TWO

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 the premises, in cash, a fixed annual rental equivalent to

114


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 ¾%

401.0M to 600.0M ½%

601.0M to up ¼%

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:

P1.0M to P200.0M 1% of Gross Sales

201.0M to 400.0M P2.0M plus ¾% of any increment

over & above P200.0M up to P400.0 M

401.0M to 600.0M P3.5M plus ½% of any increment

over & above P400.0M up to P600.0 M

601.0M to P1.0B P4.5M plus ¼% 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.

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

115


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 …

1. Effectivity The parties …

…….

This contract shall be subject to approval by higher

government authorities.

The parties …

…….

(deleted)

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