PNR entered ₱300 Million Supply contract without Bidding; DOJ said “VOID” Illegal contract

The Department of Justice (DOJ) questioned the absence of public bidding in the supply contract that the state-run Philippine National Railways (PNR) has sealed with a Korean firm for the repair of the PNR's south line .

In an 8-page legal opinion, Justice Secretary de Lima cast doubt on the validity of the US$6.77 million (300 Million) Supply contract with Pandrol Korean Limited for the purchase of rail fastening, clips and insulators for the repair of PNR's main line.

"A contract granted without the competitive bidding required by law is void, and the party to whom it is awarded cannot benefit from it," De Lima said.

De Lima gave the opinion after PNR General Manager Junio Ragragio sought the DOJ's legal position on the contract, which was entered into by the former PNR management in 2009.

Ragragio cited the March 2010 memorandum issued by Marilyn Balbin, the auditor from Commission on Audit (COA), after discovering that the contract was executed through negotiation and not through a public bidding, which is required in procurement activities of state-run agencies, like PNR.

Safety issues, contract violations

In his letter to the DOJ, Ragragio revealed that the remainder of Pandrol's supply contract remains unimplemented and may compromise safety in the operations of the rail system.

"In as much as the rail fastening system, the clips and insulators are necessary to provide exceptional holding force, superior dynamic fatigue strength and stable creep resistance necessary to fasten rail to railroad ties (sleepers), and for the purpose of ensuring safe operations, it is imperative that the issue as to the legality of Pandrol supply contract be finally resolved," Ragragio said.

PNR records show that out of the 170,000 pieces of rail fastening system stated in the supply contract, only 80,000 sets were delivered and paid by the PNR.

To address and maintain the tracks safe for train operations, the PNR entered into a supply contract with a 3rd entity — Nikka Trading — which agreed to supply 50,000 sets of anti-vandal concrete sleepers, rail fastening assembly for a unit price of US$36.60 per set or a total contract price of US$1.83. This is US$8.35 cheaper than the unit price offered by Pandrol.

PNR decided to bid out the 40,000 remaining sets of rail fastening system, but Pandrol insisted that it cannot bid them out as it would constitute a violation of their supply contract.


Pandrol added that it holds an international patent, which covers the Philippines, in relation to the rail fastening products. It said the product that Nikka Trading supplied is a non-genuine Pandrol product but contains the same patented special feature as that of genuine Pandrol.

The matter, according to Pandrol, has already been brought to the attention of the previous PNR board and to the Department of Transportation and Communications (DOTC), which oversees PNR.

Ragragio said in his reply letter to Pandrol that the requirement to justify the direct contracting for the rail fastening products were not complied with.

Ragragio added that Pandrol's claim that the current PNR board favors Nikka is without basis considering that the present management is not privy to the contract with the latter.

On the other hand, the PNR chief that Pandrol's assertions that it has supplied for all rail lines in the country such as LRT 1, LRT2, MRT3, PNR South Commuter Line and South Rail, fails to mention that the mode of procurement adopted by concerned agencies was competitive biddings and not direct contracting.

The PNR also questioned the composition of the previous board that recommended the alternative mode for the supply of the said items.

Ragragio noted that Pandrol was represented by lawyer Jaewoo Chung who is the stepson of PNR's Department Manager for Administrative and Finance, lawyer Lynna Goyma Chung, who was a member of the PNR-BAC that allowed the direct contracting.

In light of PNR's predicament, the agency tried to get COA's opinion on whether its findings can be used as valid ground not to honor Pandrol's undelivered rail fastening products.

The COA, however, begged off from issuing an opinion on the matter, prompting the PNR to elevate the matter before the DOJ.

The project

The rehabilitation of the PNR Main Line South covers 443 kilometers along the national railway line in the southern part of Metro Manila running from San Pedro to Legaspi in the southern tip of Luzon Island and involves the procurement and rehabilitation of tracks, bridges and rolling stocks.

Given the scope of and cost involved in the rehabilitation plans, which have been in the drawing board since the 1970's, the project was divided. The Korean-funded section covers the Southrail line from Manila to Calamba City, while the Chinese-funded section covers the line from Calamba to Legazpi and further on to Matnog, Sorsogon.

According to a report by JICA Japan International Cooperation Agency (JICA), which granted concessional loans for the project, two rounds of bidding of the different aspects of the project were declared a failure. "Bidding price from all of the companies were close to double the estimates made by PNR based on the detailed design," it said.

In the second round of bidding, which the JBIC requested, "various measures were taken to keep project expenses within the amount covered by the loan," JBIC wrote. This was when direct procurement from the Pandrol was first considered.

"There were changes to the list of procurement items (signal systems and some of the communications equipment were removed) and changes to procurement methods (Pandrol rail fastening parts were procured directly from the manufacturer)," JBIC said.

However, all the resubmitted bids were again rejected "as they greatly exceeded the original estimates by around 1.7 times."

Running out of time since "construction needed to be started right away," JBIC said "it was decided that the scope of the project would have to be greatly reduced." The project was limited to the area between Lucena and Naga, "given PNR's budgetary restraints, and effectiveness," and that "direct direct negotiations were started."

"As a result, the track improvement project was reduced to the area between Lucena and Naga, contracts were made for the procurement of Pandrol rail fastenings directly from the manufacturer, and installation of signal equipment and station repairs were removed from among the items covered by the loan," the Japanese funder wrote.  

With report from

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