90-10 passport deal queried

The Commission on Audit (CoA) questioned the profit-sharing scheme in the Joint Venture Security Printing Agreement (JVSPA) between state-owned APO Production Unit Inc. (APO) and United Graphic Expression Corporation (UGEC) for the electronic passport printing project.

APO was supervised by Presidential Communications Operations Office Secretary Herminio Coloma when the deal was signed while UGEC is controlled by billionaire Iñigo Zobel.

CoA said APO should have obtained a higher share in the JVSPA instead of the 90-10 agreement in favor of UGEC. The sharing ratio becomes 80-20 if net sales reached P600 million. If net sales reach P900 million, a 70-30 ration in favor of UGEC will be followed with equity remaining at same sharing agreement.

The CoA report said UGEC earned more from the joint venture compared with APO.

UGEC earned P669.77 million for the lease of the machines used for the e-passport printing and P223.881 million for its share in the project.

On the other hand, APO only received P100.235 million as its share from the venture aside from the lease payments on land.

“Had APO just leased the machines, APO would have earned what the JV has earned,” said CoA.

APO insisted that it is more advantageous for UGEC to lease the machines for the e-passport printing project. APO maintained that it is fair for the UGEC to get bigger earnings as it invested on high-end machines and it has the technical expertise on the project.

The audit agency said on 24 February 2014, DFA wrote a letter to government-owned printers, which are APO, Bangko Sentral ng Pilipinas (BSP) and the National Printing Office (NPO), for the procurement of the new e-passport system.

BSP said it was not interested in undertaking the project and APO was the sole printer that expressed interest in the project.

On 5 May 2014, UGEC submitted an unsolicited proposal to APO to organize and establish the joint venture that will upgrade the Batangas plant into a high-security printing facility.

Under the agreement, APO contributed 10 percent of leasehold rights in the Batangas plant equivalent to 3,200 square meters of the factory valued at P21.5 million.

CoA also cited the joint venture agreement provision stating that “the parties agreed that high security printing projects that are part of APO’s mandate shall be performed in the Batangas plant,” including all high-security printing contracts.

The agency said with the timeline of the events, “it is believed” that APO and UGEC were already aware the e-passport services will be awarded to APO for a 10-year contract.

“This is why the JV covers more or less the same period. Hence, at the time of the JV’s creation in November 2014, APO has already a captured market for high-security printing services amounting to billions of pesos,” CoA explained.

“APO did desire to obtain high-value projects, since the new Board of Trustees assumed office in 2010, and took steps to realize that goal, but it never knew that the e-Passport project would be awarded to it in March 2014, as these kinds of project would have to go through tedious processes (as the DFA and APO did when they sought the approval of the DBM, DoST-ICTO, GPBB, etc.),” APO explained.

CoA insisted that APO should renegotiate an increase in its share of the profit through an amendment in the joint venture agreement.

Moreover, the audit agency called out the agreement as they found out that the machines used in the BIR project under the lease agreement on 2 October 2013 between APO and UGEC were transferred to the e-passport JV as UGEC’s contribution.

CoA found that the machines that APO leased from UGEC from 12 August 2014 to 12 August 2015 were transferred to the joint venture on 5 January 2015 pursuant to the JVSPA, adding that “it showed that the machines were already used for a period of almost five months prior to the transfer to the JV.”

APO, on the other hand, said the guidelines do not require the APO-UGEC joint venture to own all the machines for the passport printing project and it does not also provide that they were prohibited to lease machines for the project.