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Executive Summary

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Executive Summary EXECUTIVE SUMMARY Introduction The Philippine National Construction Corporation (PNCC), previously known as the Construction Development Corporation of the Philippines (CDCP), was granted the franchise to construct, operate and maintain the North Luzon Expressway (NLEX), South Luzon Expressway (SLEX) and Metro Manila Expressway by virtue of PD No. 1113 issued on March 31, 1977, as amended by PD No. 1894 issued on December 22, 1983. The debt- to-equity conversion pursuant to and under the directives of LOI 1295 promulgated on February 23, 1983 gave the Government majority ownership of the Company. From 1987 to 2001, PNCC still engaged in some construction business but this resulted in losses. Since 2002, the Company has veered away from active involvement in construction operations, and focused more on the operation and maintenance of its tollways. However, further financial difficulties prevented PNCC from operating and maintaining its tollways in a manner required of a public utility. Therefore, starting in 1995, PNCC entered into Joint Venture Agreements (JVAs) that resulted in the division of the Tollways into three portions, the North Luzon Expressway (NLEX), the Skyway, and the South Luzon Expressway (SLEX). On February 10, 2005, PNCC turned over the Operation and Maintenance (O&M) of the North Luzon Tollways to the Manila North Tollways Corporation (MNTC), while the O&M for the South Metro Manila Skyway was turned over to the Skyway Operation and Maintenance Corporation on December 31, 2007. Prior to the expiration of the franchise of PNCC on April 30, 2007, the Company submitted to Congress all the requirements needed for the renewal of the same, but it was not able to get the required Senate approval. The Toll Regulatory Board (TRB) issued a Toll Operation Certificate to PNCC on April 30, 2007 for the O&M of the SLEX and to collect toll fees, in the interim, after its franchise expiration. The PNCC handed over the O&M of the SLEX to Manila Toll Expressway System Inc. on May 2, 2010. Scope and Objectives of Audit The audit covered the accounts, transactions and operations of PNCC for calendar years 2014 and 2013. It was aimed at expressing an opinion on the financial statements, and at determining the Company’s compliance with pertinent laws, rules and regulations, as well as the efficiency and economy of operations. Financial Highlights Comparative Financial Position (In million pesos) Increase 2014 2013 (Decrease) Assets 12,464,327 12,441,326 23,001 Liabilities 12,574,876 12,326,462 248,414 Equity (Capital Deficiency) (110,549) 114,864 (225,413) i Comparative Results of Operations (In million pesos) Increase 2014 2013 (Decrease) Revenue 207,485 2,763,570 (2,556,085) Employee Costs 34,664 36,706 (2,042) Operating expenses 398,524 295,732 102,792 Profit (loss) before tax (225,703) 2,431,132 (2,656,835) Deferred tax expense 0 778,186 (778,186) Net profit (loss) (225,703) 1,652,946 (1,878,649) Independent Auditor’s Report on the Financial Statements We rendered an adverse opinion on the PNCC’s financial statements because of the recognition of the unconverted debt of P5.552 billion as part of equity and the non- recognition of the interest and penalties thereon of P52.066 billion and P52.482 billion as of December 31, 2014 and 2013, respectively. Summary of Observations and Recommendations The following are the other significant observations and the corresponding recommendations: 1. Potential rental income of approximately P446.941 million was not maximized on the 129,548 sq.m. property of PNCC located at the Financial Center Area (FCA) in Pasay City. We recommended that Management: a) Expedite the formulation of a policy on the lease of PNCC properties; b) Negotiate with tenants/prospective leases for the most favorable terms for the PNCC; c) Consider public bidding in the lease of the vacant portions of the FCA property to maximize the PNCC’s revenues thereon; d) Ensure that all lease contracts include a stipulation for the payment of interest/penalty by the lessees in case of late payment of monthly rental; and e) Undertake marketing strategies to generate income on the idle portions of the FCA property. ii 2. Results of confirmation of receivables disclosed a variance of P207.135 million. We recommended that Management identify the causes of the discrepancy; reconcile with the debtors’ records; and take up the necessary adjustments. 3. A parcel of land owned by the PNCC located in North Expressway, Bocaue, Bulacan with a total area of 847 sq. m. is not titled/registered under its name. We recommended that Management expedite the registration of the parcel of land and secure TCT in the name of PNCC to protect its interests over the property. Summary of Suspensions, Disallowances and Charges as of Year-end As of December 31, 2014, the unsettled Notices of Suspension and Disallowance amounted to P80,100 and P519.630 million, respectively. Of the unsettled Notices of Disallowance (NDs) in the amount of P519.630 million, Petitions for Review for two NDs in the aggregate amount of P91.696 million were filed with the Commission Proper, while six Appeals on NDs totaling P4.990 million were denied by the Cluster Director. The rest are still under appeal with the Director of Cluster 4, Corporate Government Sector. Status of Implementation of Prior Year’s Audit Recommendations Out of the 28 prior year’s recommendations, 6 were implemented, 13 were partially implemented, and 9 were not implemented. iii .
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