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part 2 - SPECIAL REPORT
Favored suppliers bag AFP deals

By Yvonne T. Chua, Luz Rimban
Inquirer
Last updated 01:25am (Mla time) 01/09/2007


(Second of three parts, read part 1)

AS HE prepared to leave the Department of National Defense last November, then Defense Secretary Avelino Cruz asked concerned citizens to closely guard the P10-billion fund that will be released for the Armed Forces of the Philippines' latest modernization plan called the Capability Upgrade Program.

To be sure, reforms designed to safeguard AFP funds are already being put in place. There is the 10-point Philippine Defense Reform Program meant to improve DND and AFP operations and manpower. A defense acquisition committee and internal audit offices have been established. Representatives of the private sector, such as the Makati Business Club and the Bishops-Businessmen's Conference, have been allowed to observe bidding procedures. Measures to streamline procurement procedures throughout the AFP are being implemented.

Despite these reforms, government auditors and defense and budget officials worry that a culture of inefficiency and corruption continues to plague the AFP. A string of problematic transactions illustrates why they say reforms in the AFP are going to be an uphill battle:

In 2003, the government authorized the AFP to purchase 12,000 units of handheld very high frequency radios worth P900 million for the Philippine Army. The voice-encrypted radios are basic equipment that could spell life and death for soldiers in the field. But after three years, the DND and AFP still have not resolved whether to buy them by direct contracting or public bidding.

Last year, the Army asked the Department of Budget and Management Procurement Service to purchase, through public bidding, some 1,400 sets of tires for trucks worth more than P12 million. After the notice of award was issued to the winning bidder, the Army blocked the awarding of the contract. The purchase remains stalled.

Since 2000, the Army has refused to honor a P201-million contract to repair 30 Scorpion tanks that would have given soldiers added firepower in the field. The budget, meanwhile, for the repair is dwindling, with millions of pesos having gone to storage fees for spare parts and to bank charges.

"If the AFP can't resolve these problems, how much more the bigger contracts under the AFP Modernization Program (AFPMP)?" asked an official involved in AFP procurement contracts.

Indeed, officials in the defense and budget departments fear that scarce government resources may go to waste because of bad procurement practices that remain uncorrected in the AFP.

A study done in 2006 by the Government Procurement Policy Board (GPPB) found "a high level of noncompliance" by the AFP with Republic Act No. 9184, the Government Procurement Reform Act. The law is intended to streamline government purchases and prevent corruption that has arisen out of procurements.

"There is no integrated or comprehensive strategy to implement procurement reforms in line with RA No. 9184 in the AFP," said the GPPB report.

Splitting purchase orders

The GPPB assessment noted deviations from procurement procedures in the AFP, and the military's preference for shopping, using cash advance, and direct contracting over public bidding, as well as for splitting purchase orders. These problems are likewise documented in annual audits done on the Army, Navy and Air Force by the Commission on Audit.

The GPPB's attention was also drawn to the creation of multiple bids and awards committees under the various service commands and the lack of a pool of competent and trained personnel for assignment to the AFP bids and awards committee.

Officials also point to other problems. One is that military officers lack the financial, management and technical expertise required to handle multibillion-peso transactions which, some say, arose partly from the AFP's decades of dependence on the United States for the bulk of its defense spending on materiel until the American bases in the Philippines were closed in 1992.

To make matters worse, a hierarchical organization, like the AFP, with its bonds of brotherhood and code of silence, discourages transparency and scrutiny of misdeeds, according to those interviewed for this report.

And while the AFP top brass wrangle over knotty contracts, equipment on which the lives of ordinary soldiers depend remains lacking in the field.

Handheld radios

The minimum requirement for Army units is tactical communication, including simple handheld radios, which allow secure contact between units. The AFP's total requirement for handheld radios is 14,002 units.

In November 2003, the AFP was allowed to purchase 12,046 VHF/FM radios worth P930.8 million under the AFP Modernization Program's Re-Prioritized Projects Lists for 2000 and 2002. This was supposed to supplement the 1,946 already purchased from Harris Corp., an American firm.

The AFP, under then Chief of Staff Gen. Narciso Abaya, recommended that the radios be bought, again from Harris Corp., this time through direct contracting for interoperability and security reasons. Abaya's proposal was approved by then Defense Secretary Eduardo Ermita, endorsed by then Justice Secretary Simeon Datumanong and then Director General Romulo Neri of the National Economic and Development Authority.

The negotiations were completed and a contract ironed out nearly a year later in October 2004. A new set of officials led by then Presidential Legal Counsel Avelino Cruz moved into the DND and decided to refer the contract to the GPPB. The GPPB recommended the renegotiation of the contract in keeping with RA No. 9184.

In April 2005, Abaya signed an amended contract with Harris and sent this to Cruz who, in turn, sent it to the GPPB for review. By this time, President Macapagal-Arroyo had issued an order requiring government contracts of at least P500 million to be submitted to the GPPB to determine whether they are exempt from public bidding.

The GPPB declared that the radios were best procured through public bidding. It also ruled that without Cruz's approval and certification that the contract was exempt from public bidding, it had to be bid out.

For direct contracting

The AFP, now under Gen. Hermogenes Esperon Jr., stands firm on direct contracting as the mode to procure the radios. The DND's defense acquisition committee and its bids and awards committee, meanwhile, had recommended to Cruz shortly before he quit his post the purchase of the units through negotiated procurement.

The fate of the contract lies with Ms Arroyo, concurrently the defense secretary. As head of the procuring agency, her approval is needed for the contract to move.

In the meantime, one procurement official said: "Our soldiers in the field are complaining due to lack of communication equipment ... That's why in combat operations, lagi tayo nahuhuli (we always lag behind)."

Scorpion tanks

In December 2000, the British company Alvis Logistics clinched the P201-million contract to supply spare parts and maintain the Army's 30 Combat Vehicle Reconnaissance (CVR) Tracked Scorpion tanks. Then AFP Chief of Staff Gen. Angelo Reyes approved Alvis Logistics' price list.

Funded out of the contingency fund of then President Joseph Estrada, the contract provided a 30-percent or P60-million down payment to Alvis Logistics, whose exclusive distributor in the Philippines is Bairam Enterprises. As with the supplier's previous contracts with the Army, the rest of the payment was to be released on a staggered basis, upon delivery of the spare parts and repair of the tanks.

But when Alvis Logistics delivered the first shipment worth about P40 million in April 2001, the Army, then under Maj. Gen. Efren Abu, refused to release the amount, raising allegations of overpricing and insisting that the British firm first use up the P60 million down payment. Reyes, by then the defense secretary, suspended the contract.

Bairam representative Rosario Ong later filed charges with the Ombudsman for the military in connection with the Scorpion tanks contract. News reports at the time quoted her as asking the Senate blue ribbon committee to investigate Reyes' alleged abuse of authority, and accusing him of wanting to give the contract to another supplier.

When Eduardo Ermita became defense secretary in 2003, he ordered the Army to honor its contract with Alvis Logistics. The COA, meanwhile, recommended that the supplier be partially paid on top of the down payment. The Army, however, refused to release another payment--whether full or partial--for the spare parts.

Sources familiar with the contract said the DND and Ong finally came to a settlement. Ong withdrew the case with the Ombudsman with the understanding that the contract would be implemented as originally agreed upon. Apparently, the settlement in the end fell through.

By August 2004, when Cruz became defense secretary, the GPPB, to which the issue had been raised, ruled that Alvis Logistics should first exhaust the downpayment it had gotten. Still insisting on payment per delivery, Alvis Logistics has refused to ship the rest of the spare parts and send its technicians to repair the tanks.

Letters of credit

All this time, the P141 million that remained of the contract has been sitting idle at Land Bank of the Philippines, where a letter of credit had been opened as mode of payment. It does not earn interest because, based on rules of the Bankers Association of the Philippines, "deposits against foreign and domestic letters of credit are received by banks merely as collateral security, consequently, no interest is to be allowed on said deposits."

Instead, the government has had to pay the bank several hundreds of thousands of pesos for every renewal. Earlier, it had to pay storage fees to the international airport for holding the spare parts while it argued its case with Bairam.

The Scorpion tanks contract was not awarded under the AFPMP, but the risks of letter of credit payments are not lost on the special COA team that looked into the modernization procurements. After all, most transactions entered into by the program with foreign suppliers are covered by such payments, including purchases of squad automatic weapons and the initial batch of Harris radios, refurbishing of Jacinto Class Patrol Vessels, and the procurement of a Geographical Information System.

"(The) amount of contracts funded out of modernization funds and paid through letters of credit are deposited in full in advance at the drawee bank even before the actual delivery of the subject of the contract, which usually takes as long as seven months, therefore depriving the agency of the beneficial use of the fund," the COA team said.

As the experience with the Scorpion tanks demonstrates, letters of credit can be left lying in banks earning no interest for as long as six years. A regular COA audit found last year that the Army had 11 other idle LCs with LandBank after foreign contractors failed to deliver the goods. "Considering the meager resources of the (Army), we are concerned that government funds and resources are wasted," the COA said.

Lack of expertise

Defense and budget officials attribute the procurement malpractice prevalent in the AFP not only to a lack of financial expertise but also to a lack of experience and knowledge of what items exactly they are procuring.

The DBM Procurement Service, which buys common supplies for government agencies, cites the contract to purchase 1,458 sets of tires for Army trucks. Last year, the Army asked the DBM-PS to procure the tires through public bidding for an approved budget of P8,720 each or a total of P12.7 million. Unfortunately, beyond the size and the ply, it did not indicate any other specifications.

A bidding conducted in February 2006 failed because bidders submitted incomplete documents. Another bidding was conducted in May. Because the Army did not have any other specifications, the DBM-PS did not require a testing of the items. "There was nothing to test because the Army did not specify the chemical composition, bursting strength, tensile strength, extent of elasticity, air capacity. Nobody (in the Army) knows that," said DBM-PS Executive Director Estanislao Granados.

Based on the specs the Army itself gave, the DBM-PS issued a notice of award to Prisma Gold, the lowest bidder which had complied with the specs and offered to supply each tire set for P7,232.80. But the Army opposed the awarding, claiming an overprice. One of the losing bidders, a company called Capital, had submitted to the Army a canvass of quotations that were lower than Prisma's--after the bidding. To this day, the dispute remains unresolved.

Procurement officials say that up to now, the military still has no clear-cut specifications even for simple items that fall under combat, clothing and individual equipment (CCIE) like combat shoes, which are made either of canvas or nylon, and for exactly what shade of green and camouflage are the clothing material they use for uniforms.

"The camouflage has five different colors there, including brown, green, black, khaki. If one color doesn't match, reject. Sakit ng ulo (It makes your head ache)," Granados said.

As a result, procurements for these simple items get stalled for as long as two years, as in the case of P9.8 million worth of safety boots the Navy needs. The items have still not been bid out after the Navy failed to submit the specifications to the DBM-PS.

Delayed deliveries by the DBM-PS are borne out in COA reports. By the end of 2005, it still had to deliver CCIE and other items amounting to P597.9 million to the Army; P97.7 million to the Navy; and P72 million to the Air Force.

This lack of expertise has been a hallmark of AFP procurement, according to budget and defense officials. It has caused ill-advised purchases such as the 402 Squad Automatic Weapons, which were bought without the belt-fed ammunition.

"Ano 'yan? Batuta? (What are those? Police batons)?" an exasperated defense official equipped when he learned of the incomplete purchase.

Dependent on suppliers

Because of this lack of expertise, the military tends to become dependent on suppliers who dictate what items to buy and what the specifications are, usually tailor-made to match their own product lines.

Military suppliers interviewed for this report say it is common knowledge in the DND and AFP that with each reorganization in the military, a new general brings in his own set of favored suppliers who corner procurement contracts while that official and his subordinates or Philippine Military Academy classmates remain in the service.

Usually, suppliers start developing relationships with military officials early in their careers. "Major pa lang ang mga yan, inaalagan na bilang kontak (We nurture the relationships even when they are still majors)," said one supplier.

Relationships such as these develop to the point where the supplier gets to dictate the items that the military should purchase, usually from the supplier himself or herself, in the process influencing the unit's plans and priorities.

"Of course, there is a bidding, pero pag alam mo na may anointed supplier, 'di ka na sasali (If you know the anointed supplier, you don't join anymore)," said another supplier who now no longer wants to do business with the AFP.

Send-off checks

This practice enriches the select group of suppliers while leaving out other legitimate companies. When the general retires, these suppliers also chip in to give him a fat send off paycheck, known in military circles as "pabaon," suppliers said.

But the lines between the military and its suppliers are sometimes blurred, especially when a supplier is a retired general or colonel, or the wife of either a retired or active official. Suppliers can easily point to a number of defense manufacturing firms whose representatives are former high-ranking officials of the AFP.

Former AFP comptroller Carlos Garcia is one AFP official who had many dealings with suppliers. Garcia, found guilty by court-martial of amassing ill-gotten wealth, is serving a two-year prison term.

His wife Clarita, in defending her husband's questionable wealth, had said: "My husband also receives cash for travel and expenses in Europe and Asia that are awarded contracts for military hardware. He also receives gifts and gratitude money from several Philippine companies that are awarded military contracts to build roads, bridges and military housing."

"Garcia was not an anomaly in the AFP," said a bureaucrat who has dealt with the AFP many times. "There are a thousand Garcias in the AFP, but only one got caught." (To be concluded Wednesday.)



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To sit down with these men and deal with them as the representatives of an enlightened and civilized people is to deride ones own dignity and to invite the disaster of their treachery - General Matthew Ridgway