Classifying LWUA Consult, Inc. (LCI) as Dissolved/Liquidated/Inactive

September 11, 2014 GCG MEMORANDUM ORDER NO. 2014-08 CLASSIFYING LWUA CONSULT, INC. (LCI) AS DISSOLVED/LIQUIDATED/INACTIVE WHEREAS, the LWUA CONSULT, INC. (LCI) is a wholly-owned subsidiary of the LOCAL WATER UTILITIES ADMINISTRATION (LWUA) and was incorporated with the Securities and Exchange Commission (SEC) on 07 December 2009 under SEC Registration Number CS200918943; WHEREAS, LCI is presently classified in Annex A Classification by Sectors , under the category of Utilities and Communications Sector; WHEREAS, LCI's primary purpose is to engage in and carry on a general business of system management, consultancy, technology research, and special services to enhance the capabilities of water utilities through water resource development, surveys, engineering studies, water quality monitoring, sewerage development and other technology transfer arrangement; WHEREAS, the LCI, through a decision made by the Management and its parent corporation has ceased operating since 2011 and LWUA Office Order No. 120.11 created LWUA Consult Task Force to effect completion of LCI's remaining projects and transition of financial transactions and obligations within the period of 2 months; WHEREAS, Section 5 (a) of Republic Act (R.A.) No. 10149, empowers the GCG to "evaluate the performance and determine the relevance of the GOCC, to ascertain whether such GOCC should be reorganized, merged, streamlined, abolished or privatized, in consultation with the department or agency to which a GOCC is attached"; HcaDIA WHEREAS, Section 5 (b) of R.A. No. 10149, empowers the GCG to "Classify GOCCs into: (1) Development/Social Corporations; (2) Proprietary Commercial Corporations; (3) Government Financial Investment and Trust Institutions; (4) Corporations with Regulatory Functions; and (6) Others as may be classified by the GCG, without prejudice to further sub-classifications in each category and/or any other classification based on parameters as it may find relevant or material such as, but not limited to, industry type. The classification shall guide the GCG in exercising its powers and functions as provided herein"; NOW, BE IT RESOLVED, that the LWUA CONSULT, INC. (LCI) shall be reclassified as "Dissolved/Liquidated/Inactive" under the Governance Commission's ANNEX A CLASSIFICATION OF GOCCS BY SECTORS. DONE, in the City of Makati, this 11th day of September 2014. BY AUTHORITY OF THE COMMISSION: (SGD.) CESAR L. VILLANUEVA Chairperson Governance Commission for GOCCs (SGD.) MA. ANGELA E. IGNACIO Commissioner Governance Commission for GOCCs (SGD.) RAINIER B. BUTALID Commissioner Governance Commission for GOCCs ATTACHMENT GOCC Profile (As of 11 September 2014) GENERAL Name : LWUA CONSULT INCORPORATED (LCI) Principal Address : LWUA Building, Katipunan Avenue, Balara, Quezon City Classification : Subsidiary, SSL-Exempt Sector : Utilities Date of Creation : 7 December 2009 No. of BOD Members : Nine (9) Chairman : N/A Date of Appointment : N/A President : N/A Date of Appointment : N/A Purpose : To engage in and carry on a general business of system management, consultancy, technology research and special services to enhance the capabilities of water utilities through water resources development, surveys, sewerage development and other technology transfer arrangements, either alone or jointly with and for other companies, associations and entities or persons. Parent : Local Water Utilities Administration (LWUA) FINANCIALS (operational from 2010 to 2011 only) No. of Personnel : 59 personnel also employed by the LWUA 2011 Asset Value : P14.99 Million 2011 PS Cost : P.77 Million Income Liabilities 2011 Net Loss : P1.55 Million 2011 Liabilities : P3.04 Million From Previous Year : 92% decrease From Previous Year : 41% decrease Ave. Net Loss : P10 Million Ave. Liabilities : P4.11 Million Subsidy Net Worth 2011 NG Subsidy : N/A 2011 Net Worth : P11.95 Million From Previous Year : N/A From Previous Year : 6.3% decrease Ave. NG Subsidy : N/A Ave. Net Worth : P12.35 Million LWUA Consult Incorporated (LCI) I. Brief History and Background 1. Corporate Profile. Through LWUA Board Resolution Nos. 152 and 360 series of 2009, the Water Technology Resource and Development Center, Inc. (The Center), was created as a wholly-owned subsidiary of LWUA. Its corporate name was subsequently changed to LWUA Consult, Inc. (LCI). The Securities and Exchange Commission (SEC) issued LCI's Certificate of Incorporation on 07 December 2009 under SEC Registration No. CS200918943. With its own corporate structure, LCI is distinct from its parent corporation, the Local Water Utilities Administration (LWUA), but dependent on the latter for policy direction. LCI became non-operational on FY 2011 by virtue of a LWUA Office Order 120.11 which created the LWUA Consult Task Force pursuant to Management's decision to immediately cease operations of LCI. The following documents were issued relative to the formation and operationalization of the LCI: aTIEcA 1.1 L WUA Board of Trustees Resolution (Resolution) No. 152 s. of 2009. 1 Created "The Center" as a wholly-owned subsidiary of LWUA which is responsible for developing minimum performance and quality standards, and provide technical training assistance to water utilities. 1.2 Resolution No. 360, s. of 2009. 2 Approved pertinent information concerning the incorporation of The Center (i.e. primary purpose, principal office, incorporators, number and nominees for directors and officers). Its authorized capital stock is P500 Million divided into 500,000 shares with a par value of P1,000 per share. Paid-up capital amounts to P31,250,000. 1.3 Memorandum from the Executive Secretary. 3 Signified that the Office of the President (OP) interposes no objections to the creation of The Center since LWUA Chairman maintains the OGCC opinion that creation of a subsidiary is "essentially covered under LWUA's necessary, implied or incidental power to furnish technical assistance to local water utilities as provided under P.D. 198." 1.4 Resolution No. 608, s. of 2009. 4 Changed the corporate name of The Center to "LWUA Consult, Inc." 1.5 Resolution No. 609, s. of 2009. 5 Directed the deposit of P31,250,000 paid-up capital in the Express Savings Bank Inc. (ESBI), Cabuyao Branch and authorized Acting Administrator Daniel Landingin and Acting Deputy Administrator Wilfredo Feleo as signatories of said account. 1.6 Resolution No. 635, s. of 2009. 6 Decreased the authorized capital stock of LCI from P500 Million to P200 Million. 1.7 Resolution No. 745, s. of 2009. 7 Authorized Chairman Prospero Pichay, Jr. and Acting Administrator Daniel Landingin to represent LWUA's entire shares in the LCI. 1.8 Resolution No. 137, s. 2010. 8 Authorized Chairman Pichay to represent and vote on LWUA's share in the outstanding capital stock of the LCI in the latter's Special Stockholders' Meeting. aEHTSc 2. Principal Office. LCI's principal office is located at LWUA Building, Katipunan Avenue, Balara, Quezon City. 3. Purpose. "To engage in and carry on a general business of consultancy, system management, technology research and special services to enhance the capabilities of water utilities through water resource development, surveys, engineering studies, water quality monitoring, sewerage development and other technology transfer arrangement, either alone or jointly with or for other corporations, companies, associations and entities or persons, and in the pursuance of the foregoing purposes, hire or engage the services of engineers, professionals, or workers under such arrangement suitable to the needs of the corporation." 4. Composition of the Board and Management. The governing board is composed of nine (9) directors, while the Management is headed by a President assisted by an Executive Vice-President (VP) and three (3) VPs. Before it became non-operational, the following are the members of LCI's governing board: 9 Name Position Prospero A. Pichay, Jr. Chairman Eduardo A. Bangayan Member Aurelio O. Puentevella Member Daniel I. Landingin Member Proceso T. Domingo Member Emmanuel B. Malicdem Member Edwin T. Ruiz Member Arnaldo Espinas Member Wilfredo M. Feleo Treasurer 5. Parent Corporation. LWUA was created on 25 May 1973 by virtue of Presidential Decree (P.D.) No. 198, amended by P.D. Nos. 768 and 1479, as a specialized lending institution for the promotion, development and financing of water supply systems in provincial cities and municipalities outside of Metropolitan Manila. In 1987, LWUA's mission and area of responsibility were expanded to include provision of Level II service (communal faucet system) through the Rural Waterworks and Sanitation Associations (RWSAs) in areas where Level III systems (individual household connection) were not feasible. LWUA's principal office is currently located at MWSS-LWUA Complex, Katipunan Avenue, Balara, Quezon City. ICHcTD 6. Organizational Structure. LCI is headed by the President assisted by an Executive VP. The main operational branches are headed by 3 VPs namely: VP for Operations, VP for Business Development and VP for Administration and Finance. Each branch is composed of two (2) departments. Presented below is LCI's organizational structure: Through Resolution No. 002, s. of 2010, 10 the LCI Board confirmed the appointment of the following LCI key officials after their election in the stockholders' meeting held on 15 December 2009: Name Position Engr. Proceso T. Domingo President and CEO Engr. Edwin T. Ruiz Executive Vice-President Engr. Armando T. Fernandez Vice-President for Operations Engr. Alfredo B. Espino Vice-President for Business Development Atty. Ma. Elena R. Te Vice-President for Administration and Finance 7. Personnel Complement. At the onset of LCI's operations, LWUA mobilized sixty (60) of its personnel "to initially man the structure [of LCI] for its immediate operationalization" in addition to their regular duties and responsibilities. 11 Two (2) subsequent LWUA Office Orders 12 further mobilized fourteen (14) of its personnel to supplement LCI's manpower. As represented by LWUA, LCI did not hire additional employees other than the LWUA personnel on detail. 13 In the submitted List of LCI Personnel as of 31 December 2010, there are a total of 69 employee positions, of which 59 are filled and 10 are vacant. cHESAD 8. Compensation Structure. LCI follows the salary structure of LWUA; a Salary Standardization Law (SSL) covered GOCC, although it is SSL exempt for being a non-chartered GOCC. Salary grades (SGs) of personnel ranges from SG-4 to SG-30. As represented by LWUA, 14 LCI employees were LWUA personnel on detail thus they do not receive additional salaries. Contrary to this statement, the following resolutions were made by the LCI Board providing for salary rates, allowances and benefits: 8.1 Parameters for Budget Preparation. LCI Resolution No. 003 s. of 2010 dated 13 January 2010 approved the following relevant parameters necessary in the preparation 2010 LCI Corporate Operating Budget (COB): Salary rates are fixed at amounts in accordance with SSL-3 (second tranche monthly salary schedule); Except for the position of President, the payroll budget represents the difference between the amount fixed under the first item and the actual compensation received from LWUA; The President will enjoy the same benefits presently enjoyed by the LWUA Administrator; Entitlement of all key officers and employees to similar benefits, bonuses and other forms of financial assistance given to existing LWUA employees subject to the same limitation under the second item; P3,000 representation allowance per month and P1,000 per diem per meeting for each members of the Board; aHTcDA The appointed Legal Counsel/Acting Secretary and Recording Secretary of the LCI Board are entitled to P500 monthly honorarium; and Entitlement to extraordinary and miscellaneous expense (EME) for all holders of managerial positions and above which is the difference between the amounts actually paid by the LWUA (except for the position of President). 8.2 Travel Allowance. Through LCI Resolution No. 016 s. of 2010 dated 16 March 2010, the Board approved travel allowance of LCI key officials and employees subject to existing rules and regulations. 8.3 Incentive Allowance. LCI Resolution No. 019 s. of 2010 dated 06 April 2010 approved the grant of incentive allowance to all LWUA officials/employees designated on concurrent basis to the LCI, effective on January 2010 with the following monthly rates: Position Amount Vice-President & up - P2,000.00 Department Manager - 3,000.00 Division Manager & below - 3,500.00 At least 50% actual attendance in a month entitles an LCI employee to a full incentive while a pro-rata computation will be used for those with less than 50% attendance. Project employees' entitlement on the other hand, depends on submitted attendance reports properly certified by their project/area managers. 8.4 Representation and Transportation Allowance (RATA). LCI Resolution No. 026 s. of 2010 dated 24 May 2010 granted RATA equivalent to 40% of basic salary in LCI effective January 2010 to thirteen (13) LCI personnel with SG ranging from 24 to 26 who are not holders of division/department manager positions in the LWUA. ECDaTI 8.5 Based on the 2011 COA Audit Report, LCI accrued the following related expenses: Personal Services 2010 2011 (7 months) Incentive Allowance 1,605,512 771,963 RATA 918, 250 - Board Expenses 232,000 - Other Benefits 15,400 - MOOE EME 15,352,255 1,409,431 Travel Expenses Local 423,967 26,269 total 18,547,384 2,207,663 ======== ======= 9. List of Assets. Fixed assets are primarily composed of office equipment such as computers, software, printers, etc. amounting to P684,330. 15 II. Operations 10. Primary Objective. LCI's purpose is to engage in and carry on a general business of system management, consultancy, technology research, and special services to enhance the capabilities of water utilities through water resource development, surveys, engineering studies, water quality monitoring, sewerage development and other technology transfer arrangement. 11. Projects and Accomplishments. Based on 12 February 2014 submission of LWUA, the following projects were undertaken by LCI: CTEaDc Water District/ Project Contract Cost Operations Completion Billed Cost Remarks Owner (P) Fund Released Date (P) by LCI (P) Cantillan Drilling of One 1,540,000.00 607,214.62 3 Jul 2010 1,110,002.20 (Surigao del Sur) Test/Prod. Well Binmaley Drilling of One 188,850/mo 8-Oct-10 491,561.31 (Pangasinan) Test/Prod. Well Meycauayan Drilling of Two (Bulacan) Test/Prod. Wells St. Francis Well 4,968,000.00 1,626,470.82 Suspended 686,000.00 P1,070.93 (Lease Contract) by WD (Nov bank deposit 2010) on hold by PDIC Caingin Well 1,470,319.97 4 Feb 2011 2,411,840.00 P26,612.33 (Lease Contract) bank deposit on hold by PDIC Giorno Homes Drilling of One 570,000.00 465,445.75 30 Nov 2010 533,420.00 (Lipa City) Test/Prod. Well Tuguegarao Drilling of One 1,057,400.00 1,115,567.30 22 Dec 2010 1,308,600.00 (Cagayan) Test/Prod. Well (Lease Contract) Binmaley Drilling of One 188,850.00/mo 9 Mar 2011 628,870.50 (2nd well) Test/Prod. Well (Equipment/ Manpower Rental) (Camarines Sur) Drilling of Three 4,756,800.00 1,361,255.00 Well 3: Test/Prod. Wells Deferred; (Lease Contract) P21,453.03 Cadlan Well 17 Jan 2011 1,308,600.00 bank deposit La Purisima Well 10 Jun 2011 628,870.50 on hold by PDIC San Carlos Drilling of One 2,970,000.00 1,417,050.57 P156,056.93 (Pangasinan) Test/Prod. Well (Operations bank deposit Fund); 30 Mar 2012 2,735,100.00 on hold by 1,051,188.00 PDIC (Casings/ Screen) (Batangas City) Drilling of One 1,537,300.00 1,181,984.02 12 Mar 2012 1,494,500.00 P201,530.03 Test/Prod. Well bank deposit on hold by PDIC 12. Cessation of Operations in 2011. 12.1 LWUA Acting Administrator approved Memorandum dated 28 July 2011 of the Executive VP of LCI recommending to i) return the function of well-drilling projects to LWUA Special Project Office; ii) reconstitute LCI Board for a final and transitional meeting to facilitate transfer of all fiscal and management discretion to LWUA; and iii) all future negotiations for proposed projects be undertaken by LWUA's respective area of operations. 16 12.2 LWUA Office Order 120.11 17 created the LWUA Consult Task Force pursuant to Management's decision to immediately cease operations of LCI, to effect completion of remaining projects, transition of financial transactions and obligations, and complete the same within the period of 2 months. III. Financial Condition 13. Capital Structure. LCI's authorized capital stock is P200,000,000 divided into 200,000 shares with a par value of P1,000 per share. Its Articles of Incorporation presents the following subscribed and paid-up capital: AHECcT Name % Share No. of Subscribed Paid-up Shares Capital Capital Subscribed LWUA 99.964% 124,955 P124,955,000 P31,238,750 Prospero A. Pichay, Jr. 0.004% 5 5,000 1,250 Eduardo A. Bangayan 0.004% 5 5,000 3-Jun-03 Aurelio O. Puentevella 0.004% 5 5,000 1,250 Daniel I. Landingin 0.004% 5 5,000 1,250 Proceso T. Domingo 0.003% 4 4,000 1,000 Emmanuel B. Malicdem 0 4 4,000 1,000 Wilfredo M. Feleo 0.003% 4 4,000 1,000 Edwin T. Ruiz 0.003% 4 4,000 1,000 Arnaldo M. Espinas 0.003% 4 4,000 1,000 Enrique Senen G. Montilla 0.004% 5 5,000 1,250 Total 100.000% 125,000 P125,000,000 P31,250,000 ======= ======== ========== ========= 14. Financial Highlights. Account 2010 2011* Average In Million Pesos Assets 17.94 14.99 16.47 Liabilities 5.18 3.04 4.11 Net Worth 12.75 11.95 12 Revenues 6.83 1.17 4 Expenses 25.33 2.72 14 PS Cost 2.77 0.77 2 Net Income/(Net Loss) (18.50) (1.55) (10.03) Source: COA Audited Financial Statements (FS). * Operations for a seven (7) month period only. During its initial year of operation in 2010, LCI earned a total revenues of P6.83 Million, of which P6 Million (88%) emanates from Well Drilling Projects. 7 months of operation in 2011 generated P1.16 Million in revenues from leak detection services. In almost two years of operations, expenses are more than thrice its revenues, resulting in a net loss for LCI. Bulk of 2010 expenses pertains to Extraordinary and Miscellaneous Expense (EME) amounting to P15.35 Million (61%). COA noted that LCI's Fixed Assets (P515,530) and Supplies (P10,600) were turned-over to LWUA in 2012. Further, accounts receivables of P7 Million are under LWUA management discretion particularly the subsequent billings and collections from well-drilling projects. cITCAa 15. Significant COA Audit Findings. Among the notable observations made by the COA in its 2010 and 2011 audit are the following: 15.1 Activities undertaken imply that LCI is just an extension of LWUA. Majority of LCI's revenues were earned from well drilling projects and leak detection services. Such activities are not directly relevant in carrying the general business of LCI in the attainment of its purpose (i.e. general business consultancy, system management, technology research and special services), vision (i.e. as catalytic agent and driver for commanding the presence of LWUA as a world class organization), and mission (i.e. provide world class technical expertise to LWUA). The COA recommended that LCI undertake projects that will contribute to the attainment of vision, mission and purpose for which it was created and which are separate and distinct from that of LWUA, its parent corporation. 15.2 LCI funds were maintained in a non-government depository bank. LCI maintained its bank accounts with Express Savings Bank, Inc. (ESBI) amounting to P5.2 Million in 2010 which is not in accordance with DOF Order No. 27-05 dated 09 December 2005 prohibiting government agencies to deposit government funds in banks other than government depository banks, except upon securing DOF approval. LCI argued that its parent corporation LWUA has substantial investments in ESBI and is represented in its Board of Directors. COA maintained its position since (i) proper authority from the DOF is still necessary and (ii) the investment of LWUA in ESBI is subject to an audit observation memorandum. 18 In 2011, the balance of P68,788 with ESBI remained unrecovered subsequent to the closure of the latter in 07 August 2011. HAaDcS 15.3 Propriety of expenses, allowances and benefits. In 2010, incentive allowances, RATA, per diem and other personnel benefits (i.e. executive check-up) amounted to P2.77 Million and EME of P14.59 Million was distributed to 6 Department Managers, 3 VPs, 5 BODs, President, Vice Chairman and Chairman. Payment of incentives and RATA were made from board resolutions without authority from the OP. COA noted that LCI should limit its expenditures to those necessary in the attainment of its purpose and operations. In addition, failure to submit Corporate Operating Budget (COB) to the DBM renders all payments of allowances and benefits without legal basis. 15.4 Grant of incentive allowance in violation of E.O. No. 7 s. of 2010. In 2011, incentive allowance amounting to P771,963 was granted to LCI employees in violation of Executive Order (E.O.) No. 7 imposing a moratorium on increases in salaries, allowances, incentives, and other benefits, unless specifically authorized by the President of the Philippines. IV. GCG Evaluation 16. Duplicates Functions of LWUA. Among LWUA's main functions under P.D. No. 198, s. of 1973 19 are to (i) furnish technical assistance and personnel training programs for local water utilities; and (ii) effect system integration, joint investment and operation, district annexation and de-annexation whenever economically warranted. Pursuant to the same, LWUA earns revenues from interests on loan assistance and conduct of feasibility studies, well drilling projects, and engineering studies. In the momentary duration of LCI's operations, revenues were derived from well drilling projects and leak detection services. As noted earlier, COA observed that well-drilling, an activity which LCI chiefly drew income from, is a function of LWUA taken-over by LCI after its incorporation. SACHcD 17. Operations Heavily Dependent on LWUA. LCI was created to complement LWUA in its task of promoting and developing water utilities yet it was heavily dependent on LWUA for the expertise it requires to carry out its own business. Entire manpower is drawn from its parent company, with the employees carrying out LCI functions on top of their regular duties and responsibilities in LWUA. LCI also made use of LWUA equipment at no cost in the performance of its services which the management considered as assistance from its parent corporation. 18. Not Financially Viable. LCI operated at an average net loss of P10 Million from 2010 to 2011 which was mainly caused by payment of non-operating expenses, such as EME (P14.5 Million) and allowances/benefits (P2.7 Million). Further examination of MOOE in CY 2010 amounting to P22.56 Million showed that 16% was spent for professional services while 65% for EME. While costs incurred for professional services can be considered as income generating activity following LCI's purpose and objectives, the same cannot be said for EME. 19. Non-operational since 2011. LCI ceased operations in 2011 after Acting Administrator Salvador Ner approved the memorandum from the Executive VP recommending several actions which renders the LCI dormant. Thereafter, LWUA Consult Task Force was created to effect the completion of remaining projects along with smooth transition of all its financial transactions and obligations. 20 V. Recommendation 20. Based on the foregoing, it is recommended that the LCI be classified as Dissolved/Liquidated/Inactive under Annex A Classification of GOCCs by Sectors . It is proposed that properties and liabilities of the LCI be assumed by its parent corporation, the LWUA and in line with the provisions of the Corporation Code of the Philippines, formal dissolution of LCI should be pursued with the SEC in coordination with LWUA. cSEaTH Footnotes 1. Dated 30 June 2009. 2. Dated 25 August 2009. 3. Dated 07 October 2009, signed by E.S. Eduardo Ermita. 4. Dated 10 November 2009. 5. Dated 10 November 2009. 6. Dated 17 November 2009. 7. Dated 15 December 2009. 8. Dated 30 March 2010. 9. LWUA website, retrieved from http://www.lwua.gov.ph/news/news_feb_10/News_/lwua_consult.htm, accessed on 12 September 2014. 10. Dated 13 January 2010. 11. LWUA Office Order No. 256.09 dated 29 December 2009. 12. LWUA Office Order Nos. 257.09 and 108.10 dated 29 December 2009 and 1 July 2010 respectively. 13. Per telephone conversation with Atty. Elena Te of LWUA Legal Office on 6 February 2014. 14. Per telephone conversation with Atty. Elena Te of LWUA Legal Office on 6 February 2014. 15. LCI Fixed Asset Inventory Report as of 31 December 2011. 16. LWUA submission dated 20 January 2014. 17. Dated 01 August 2011. 18. Audit Observation Memoranda Nos. 09-005 and 2010-006 dated 30 March 2010 and 15 March 2011 respectively, 2011 Annual Audit Report. 19. The Provincial Water Utilities Act of 1973 dated 25 May 1973. 20. However, per LWUA, there are no records of any report from the Task Force as of 20 January 2014.