COA pushes for cancellation of e-Card deal

I kept this in draft form and was unable to post this yesterday. The article below illustrates the dangers of "outsourcing" functions without proper analysis conducted by the affected government agency. As you can see, if you were in UnionBank's shoes, this development is frustrating since they must have already spent good money in developing the system. Oversights or shortcuts on due diligence can haunt you in years to come. Better to be careful and to be slow but sure.

BUSINESSWORLD
MANILA, PHILIPPINES | Monday, February 28, 2005

State auditor pushes GSIS-UnionBank e-Card deal cancellation

By Kristine L. Alave, Reporter

The Commission on Audit (CoA) has recommended the cancellation of the Government Service Insurance System's (GSIS) multi-billion contract with the Union Bank of the Philippines, which authorized the latter to provide services for the state pension fund's electronic card (e-Card) system. At the same time, government auditors pushed for the suspension of e-Card services.

In a 14-page report dated Jan. 21, the five-member CoA audit team, led by lawyer Leonor D. Boado, said the bidding process was flawed and that the eCard contract was "disadvantageous" to the government.

"In view of the foregoing,we recommend that the contract of GSIS with the UBP [UnionBank] on the e-Card project be rescinded and the project's implementation be aborted," the CoA's findings said.

The GSIS eCard is an identification card and an automated teller machine card rolled into one, which GSIS members can use to encash their benefits.

In exchange for UnionBank's services, GSIS was obliged to pay the Aboitiz-owned bank a minimum balance requirement of P1 billion and a monthly service fee one-fourth of 1% of the total loans granted (except housing loans).

PROCEDURAL FLAWS

The audit report noted that GSIS did not conduct a public bidding for the e-Card. Instead, it only issued letters of invitation for offers to the Land Bank of the Philippines (Landbank), Development Bank of the Philippines, Philippine National Bank and verbal invitations to Bank of the Philippine Islands, Metrobank, and Equitable PCI Bank, without specifying the approved budget, requirements, instructions to bidders, and other criteria for eligibility. Neither did it conduct a pre-bid conference with the invited banks and had discrepancies in the deadlines it imposed.

Furthermore, GSIS did not notify the Department of Justice (DoJ) and the National Economic Development Authority (NEDA) of its intention to hold a limited source bidding instead of a public bidding, a violation of the Government Procurement Reform Act. For government contracts involving an amount at least P300 million, an agency seeking to be exempted from the bidding process must get first the approval of the DoJ and the NEDA.

Justice Sec. Raul M. Gonzalez, however, said the absence of a DoJ opinion does not automatically invalidate the contract between GSIS and UnionBank. "I don't think it is illegal," he told BusinessWorld yesterday

In a telephone interview, Mr. Gonzalez said the normal procedure would be for a government agency to seek the DoJ's opinion, but added failure to do so does not necessarily mean the contract is not lawful.

"I don't think that is enough basis," he said, without elaborating.

The DoJ renders legal opinion only to parties who ask for it.

'GREAT HASTE'

The state auditors also scored the "great haste" with which the GSIS approved the contract. While the other banks submitted their proposals and requirements as early as February, when the state insurance company sounded its call, UnionBank only submitted its proposal and presented its commercial plan on May 17, five days before the deadline. On May 20, 2004, prior to the recommendation to the GSIS Board of Trustees and the Monetary Board approval of the UnionBank's feasibility study, the contract was approved.

With the awarding of the contract to the private bank, the government, through the Landbank, stands to lose P1.27 billion in seven years, CoA said. The amount represents P632.87-million loan processing fees and P670.75 million in interest earnings.

The CoA report pointed out that UnionBank has no capability to handle the demands of GSIS's 1.5 million members because of its limited number of branches and ATMs in the country. CoA noted that seven months after the project was launched, most of the clients' benefits and dividend payments were still being paid through checks and that the e-Card internet website is "at times offline" defeating its original purpose to eliminate queues and ease transactions.

Whereas Landbank maintains 503 ATMs and has interconnections with ExpressNet and Megalink member-banks, UnionBank only has 98 ATMs. Landbank also has proven itself capable of servicing the needs of a large institution as it maintains 80% of the national agencies' accounts. As of late last year, UnionBank has no branches in 16 GSIS field offices, 51 provinces and six National Capital Region cities, CoA said.

'INACCURATE'

GSIS officers, led by its chief operating officer Reynaldo P. Palmiery, refuted the CoA's findings, describing it as "inaccurate."

They urged the GSIS to dissolve the audit team and set aside the findings, "on the ground thatmembers of the team have shown manifest bias and partiality and personal hostility in their actions against the GSIS and its officials."

The auditing team also prejudged the project and had already formed negative conclusions on it without hearing the officials' side, the GSIS said.

They also maintained that the bidding process was above-board and defended UnionBank's competence, saying UnionBank is a member of Megalink and has connections to Bancnet and ExpressNet, which gives GSIS members access to over 5,700 ATMs nationwide.

In an interview with BusinessWorld, UnionBank Executive Vice-President Edwin Bautista expressed confidence of keeping the contract with the GSIS.

"As far as we are concerned, we were awarded and made investments. There is nothing new in these issues. These are the same issues raised several months back when we are still in the pilot stage. We have issued close to 500,000 cards," he said.

Mr. Bautista did not disclose the amount of the bank's investments.

GSIS has claimed the issuance of e-Card by UnionBank would cut the pension fund's administrative expenses by P250 million a year. It said it tapped the bank since it "submitted the most competent technical proposal and the most cost-efficient and advantageous" for GSIS. -- with reports from Ruby Anne M. Rubio and Ma. Elisa P. Osorio