Whether the Local Water Utilities Administration May Use Its "Ring-fenced" Funds to Pay Dividends in Arrears Due the National Government

DOJ OPINION NO. 032, s. 2016 May 16, 2016 Administrator Andres F. Ibarra Local Water Utilities Administration P.O. Box 34, U.P. Post Office, Katipunan Avenue Balara, Quezon City Dear Administrator Ibarra : This pertains to your request for opinion on whether or not the Local Water Utilities Administration (LWUA) may use its "ring-fenced" funds to pay dividends in arrears due to the National Government (NG). You informed us that pursuant to R.A. 7656 (Dividend Law), LWUA is required to declare at least 50% of its annual net earnings as dividends to the NG. However, LWUA failed to remit the required dividend arrearages in the years 2003-2006 and 2009-2012 and it now amounts to Php944.01 million. LWUA sought the approval of the Department of Finance (DOF) for a dividend rate reduction in the amount of Php507.949 million and instalment payment of four and one-half years. The DFA denied the request for rate reduction but instead required LWUA to pay in instalments up to three (3) years until 2018 (Php314.67 per year). Most importantly, DOF "suggested" to LWUA that it may use its "ring-fenced" proceeds of refinancing of Water Districts (WD) loans to pay off its dividends to the NG. These ring-fenced proceeds refer to proceeds of refinancing WD loans with LWUA by Government Banks. Further, these loans were either funded from NG subsidies or Official Development Assistance (ODA) funds. As we speak, these proceeds now amounts to Php1,714 million. n As per, LWUA Board Resolution No. 125 Series of 2011, (Annex 2) proceeds of refinancing of WD Loans shall be "ring-fenced" and utilized according to a prioritization scheme as may be adopted by Management from time to time subject to the Board of Trustees approval. As a rule, proceeds shall not be used for operational expenses but shall be reinvested to any or a combination of the following: 1. Regular loan to WDs; 2. Liquidation of maturing local and and foreign loans; and 3. Other similar non-operating expenditures. The Commission on Audit (COA), in its Audit Observation No. (DP) 2013-04 (12) dated 1 April 2013, noted the use of the "ring-fenced" proceeds is contrary to Section 3 (1) of P.D. 1445, which defines a Special Fund as a sum of money or other resources set aside for the purpose of carrying out specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations, and constitutes an independent fiscal and accounting entity. This Department agrees with COA that the ring fenced proceeds cannot be used to pay off LWUA's dividends to the NG. "Ring-fenced" proceeds were set aside for a specific purpose under LWUA Board Resolution No. 125 Series of 2011 and thus it must only be used for that end. Using it to pay off LWUA's dividends to the NG may constitute Technical Malversation under Article 220 of the Revised Penal Code, since it involves using public funds already appropriated by law/ordinance for a public use other than that for which such fund has been appropriated by law. Clearly, Board Resolution No. 125 Series of 2011 provides that the proceeds shall not be used for operational expenses but shall be reinvested to any or a combination of the following: 1. Regular loan to WDs; 2. Liquidation of maturing local and foreign loans; and 3. other similar non-operating expenditures. Appropriating it for any other public use is tantamount to technical malversation. Assuming for the sake of argument that Board Resolution No. 125 Series of 2011 is not considered an appropriating law, using it for payment of dividends may be considered a violation of Article 217 of the RPC (Malversation) since disposal of the same is without right. Such use must first be subject to the Board of Trustees' approval. Also, another looming concern is LWUA's failure to remit the required dividends (Php944.01 million) without any explanation. This constitutes a violation of Section 3 of RA 7656 and Article 217 of the RPC. Paragraph 3 of Article 217, RPC, states that failure of a public officer to have duly forthcoming any public funds or property with which he is chargeable, upon demand by any duly authorized officer, shall be prima facie evidence that he has put such missing funds or property to personal use. CAIHTE Very truly yours, (SGD.) RICARDO V. PARAS III Chief State Counsel n Note from the Publisher: Copied verbatim from the original document.