NATIONAL HOUSING CORPORATION, PETITIONER, VS. COMMISSION ON AUDIT AND ARTURO D. DADUFALZA, IN HIS CAPACITY AS COA DIRECTOR, TECHNICAL SERVICES OFFICE, RESPONDENTS.

Foreign loans usually obligate the debtor country to hire
expatriate consultants. This part of
the package makes these loans more onerous. The petition at bar assails the disallowance by the respondent COA of a
contract extending the services of a foreign consultant on the ground that his
work could well be performed by Filipinos. It cannot succeed.

There are no uncertainties
on the facts of the case. Our government forged an agreement on
financial cooperation with the Republic of Germany. On April 10, 1981, a Loan and Project Agreement was executed
between the Republic of the Philippines as “Borrower” and the
National Housing Authority (NHA) as “Project Sponsor” on the one
hand, and the Kreditanstalt Fur Weideraufbau (KFW) on the other hand, for Urban
Housing Dagat­-Dagatan Project II A/B.^[1] The
agreement empowered the NHA and the KFW to determine the details of the project
as well as the goods and services to be financed from the loan. They hired the services of Engineer Brian W.
Murdoch of Kinhill Pty. Ltd. (Kinhill), a foreign corporation organized under
the laws of Australia.

In 1987, the KFW proposed to extend the contract of Engr. Murdoch
for another year. The NHA Board of
Directors approved only a 3-month extension, from March 9 to June 9, 1987.^[2]
It also directed its management to make representations with KFW to replace
Engr. Murdoch with a local consultant after June 9, 1987 if the project would
still be unfinished. The 3-month
consultancy contract was submitted to the National Economic Development
Authority (NEDA) for approval.^[3] On
April 1, 1987, NEDA approved the contract with the following observations:

“This Office has no objection to the approval of the
contract. His (NHA – General Manager)
attention is called however on the previous observations made by this Office in
the review of previous extension of services of Engr. Murdoch that Engr.
Murdoch has been the consultant of NHA since August 1978 or about 8 years now
and that considering the relatively simple supervision work required for the
finishing stages of the Dagat-Dagatan Project, NHA should have considered
hiring local consultant. It is expected
that this extension of services of Engr. Murdoch is the last and that NHA shall
make representations with KFW to substitute a qualified local consultant for
Engr. Murdoch after expiration of the contract if a consultant for the project
is still necessary.”

On April 10, 1987, NHA and Kinhill executed the consultancy
contract (original) covering the months of March 9 to June 9, 1987. It involved the amount of US $30,800.00
(foreign cost) and P123,690.00 (local cost).

The 3-month contract, however, did not satisfy KFW. It wanted a 12-month contract. In June 1987, it got what it wanted. NHA and Kinhill signed a First Supplemental
Contract. It extended the consultancy
contract for nine (9) more months from June 9, 1987 to March 8, 1988. Its total cost was US $85,500.00 (foreign
cost) and P332,850.00 (local cost).

The Urban Housing Dagat-Dagatan Project II was not completed as
scheduled. On December 15, 1987, a
request was made for an extension of the Loan Agreement for another year. KFW agreed provided the consultancy contract
with Kinhill would be extended until the end of December 1988. NHA did not appear to have much choice. On May 8, 1988, it signed a Second Supplemen­tal
Contract extending the contract of Kinhill
for another eight (8) months, from April 4 to December 4, 1988. Its total cost was US $78,500.00 (foreign) and P315,000.00
(local).

The Loan Agreement was supposed to have expired on December 4, 1988. Nonetheless, there was another request for its extension for a period of six (6) months. KFW had no
objection but again conditioned its approval on the extension of the
consultancy services of Kinhill also for a
period of six (6)
months. This resulted in the signing on February 23, 1987 of the Third
Supplemental Contract which extended Kinhill’s consultancy services from
January 4 to July 3, 1989. Its cost was
US $58,200.00 (foreign) and P250,000.00 (local).

NHA’s legal difficulties started when the Third Supplemental
Contract was reviewed in post audit by the Technical Services Office
(TSO). The contract was disallowed in
view of the following findings:

“This has reference to the review of the Third Supplemental
Contract dated February 23, 1989 involving the amount of US$58,200.00 (foreign
cost) plus P250,000.00 (local cost) in the contract amount and covering an
exten­sion of six (6) months issued in favor of Kinhill Pty. Ltd. relative to
the Consulting Services for Technical Assistance to National Housing Authority
(NHA) under the Kreditan­stalt Fuer Wiederaufbau (KFW) Loan for Dagat-­Dagatan
Project.

“Please be informed that the Consultant’s monthly rate was
established as reasonable, however, the review conducted disclosed the
following observations:

a.    Based on submitted documents, it was noted
that this supplemental contract has no approval from KFW and the Secretary of
Public Works and Highways as required in Article III, Paragraph 3.02 of the
contract and Section 3 of Executive Order No. 164 dated May 5, 1987.

b.    The output requirements are not specified
and there is no PERT/CPM^[4]
Network Diagram or equivalent program of work, thus there is no clear basis for
NHA’s evaluation of the consultant’s accomplishment for purposes of
payment. (Note: Appendix “AA” only reflects
objectives).

c.    There is no contract provision for
liquidated damages in case of delay in project completion attributed to direct
fault of the consultant.

“In addition we reiterate our opinion that the KFW components
of the Dagat-Dagatan Project involves simple design and construction procedures
and it being in its finishing stage, requires simple engineering advisory
services that can be undertaken by NHA or DPWH in-house technical staff or at
the most a local consultant. However,
perus­al of the documents submitted showed NHA was compelled to continue the
consultancy serv­ices of Kinhill, otherwise, NHA cannot get reimbursement from
the KFW loan to pay their contractors. (underscoring supplied)

“It was also noted that in this supplemental contract the
Management did not take into consideration the results of our review made on
the previous contracts contained in our Memorandum dated September 7, 1988.

“In view of the above observation, it is recommended that the
contract be disallowed in audit.

“Likewise, it is informed that the review of the selection and
the manner of award and the evaluation concerning all reimburseable direct
expense of the consultant are left with the Auditor.

“Attention is invited to the attached Consultancy Contract
Review dated April 11, 1989, which is self-explanatory.

“sgd.
EDITHA A. DE LA CRUZ

Assistant
Commissioner

Officer-in-Charge

Technical Services Office”

On November 26, 1990, NHA requested for reconsideration. It offered the following explanations:

“ISSUE NO.
1. –     This
Supplemental Contract has no approval from KFW and the Secretary of the Public
Works and Highways.

“ANSWER: 1.1. –  On KFW approval, attached for
your reference is a copy of KFW telex of no objection, dated December 22, 1988
“EXHIBIT A.” The reply, action of KFW is usually communicated thru
telex. Perusal of all previous
consultancy con­tracts would support this. Furthermore, let it be informed that it was KFW’s requirement why this
consultancy Contract was engaged despite our earlier manifestation that we hire
local consultants “EXHIBIT B.”

1.2 –   On
the approval by the Secretary of the Department of Public Works and Highways
xxx the Third Supplemental Agreement was approved by the NHA Board under
Resolution No. 1231^[5]
of March 13, 1987 (sic) “EXHIBIT C.”

It may be pointed out at
this juncture, that the main reason why the consultancy had to be extended was
due to the delay in the completion of the KFW-Funded River Bank Improvement
Works, which was directly implemented by the Department of Public Works and
Highways, hence, the presence of the foreign consultant was with the knowledge
and acquiescence of the DPWH.

“ISSUE NO.
2. –       The
output requirements are not specified … or equivalent program of work … thus
there is no clear basis for … payment.

“ANSWER:       In
the original Consultancy Contract, as well as the First and the Second
Supplemental Contract Agreements, the main basis for determining the
consultant’s responsibility have been defined in the Terms of Reference which
specified the technical assistance to be provided by the Consultant to the
National Housing Authority under the KFW Loan Agreement, to wit:

Assistance to the
National Housing Authority for the Dagat-Dagatan Project in the form of
engineering designs, contract documentation, project programming, supervision
and monitoring procedures, evaluation and concurrence on contractor’s billings
and institutional arrangements with regards associated agencies. In addition, responsibility will include all
associated functions necessary for the timely and satisfactory completion of
the revetment works along the river banks in which the Department of Public
Works and Highways is the responsible agency.

In this respect, since
it is a prerequisite that all billings to be processed for payment to the
contractors have to be certified by the consultant, it is the direct
responsibility of the consultant to monitor, the consultant to monitor, verify
and evaluate all the aspects of the project implementation for contracts funded
by KFW Loan. This process will assure
the NHA and KFW that disbursement are effected only to cover works
accomplishment in accordance with plans and specifications.

“ISSUE NO. 3 –    There is no contract provision
for liquidated damages in case of delay in project completion attributed to the
fault of the consultant.

“ANSWER:         We
reiterate in full our previous explanation for this particular observation:

“It is confirmed
that there is no contract provision for liquidated damages. However, there is a contract provision for
termination for default or for convenience of NHA. Further, considering that the contract has already expired and there
has been no record of consultant’s faults or delays in the project implementation,
the required provision on liquidated damages has become moot and
academic.”

“With respect to your opinion
that the KFW components of the Dagat-Dagatan
involve simple design and construction procedures,
etc., let this be of record that
we are 100% in accord with your
observation. However, the
hiring of an expartriate consultant is
mandated under the Loan Agreement to which
NHA must adhere to, unless otherwise authorized.”
(Underscoring ours)

On February 28, 1991, TSO Director Arthur Dadufalza denied the
reconsideration. He opined:

“1.  Although not stated in the contract that there
is no need for the approval of the DPWH Secretary, Section 3 of Executive Order
No. 164 dated May 5, 1987 requires the said approval.

“2.  The consultant’s responsibility which they
mentioned, as specified in the Terms of Reference was general. The output requirements are not specified
and there is no PERT/CPM Network Diagram or equivalent program of work, hence,
we still believed that there is still no basis for NHA’s evaluation of the
consultant’s accomplishments for purposes of payment.

“3.  It was confirmed by NHA that there is really
no contract provision for liquidated damages. It so happened that the contract has expired and there has been no record
of consultant’s fault or delay, thus, the required provision may be considered
moot and academic. However, it is
recommended that for future projects, the provisions should be
specified/stipulated.

“4.  The main reason for
the disallowance is that there is no
more need for a foreign consultant in
the final project stage since the remaining
work components of the Dagat­-Dagatan Project
which involved simple design and construction
procedure and it being in the finishing
stage, required simple advisory services that
can be undertaken by NHA or DPWH in-house
technical staff or at the most, a
local consultant. The
findings was further reinforced by the
statements of the NEDA in the attached
1st Indorsement dated April 1, 1987 xxx
bearing on its no objection to the
approval of the original contract:

“xxx                           xxx                               xxx.”

“The NHA agreed and is 100%
in accord with the observation. However, we do not
find in the documents/records submitted that
NHA has made stronger representation with
the KFW for the hiring of a local
consultant (or at all) as required by
the NEDA.” (Underscoring ours)

On May 15, 1991, the COA, in its Decision No. 1895, affirmed
Director Dadufalza’s findings except as regards the lack of provision for
liquidated damages which was considered moot and academic.

NHA filed the instant petition for certiorari where it
raises the following issues:

“a.  Whether or not the COA acted beyond its
constitutionally granted powers by disallowing a duly entered contract, valid,
regular, with all the formalities of law.

“b.  Corollary to the above, is whether or not COA
acted beyond its constitutionally granted powers by disallowing a contract on
the basis of its self-proclaimed and considered defects on the contract not
otherwise provided for in its sets of regulations promulgated pursuant to the
mandate of the Constitution.

“c.  Whether or not COA, by virtue of the powers
granted to it under the Constitution, substitute its own judgment or
disposition in lieu of the decision of the management or governing body of
government entities.”

The petition lacks merit.

The power of the Commission on Audit to audit and examine
government expenditures is enshrined in Section 2 (1), Article IX-D of the 1987
Constitution, viz.:

“Section 2. (1) The Commission on Audit shall have the power,
authority, and duty to examine, audit and settle all accounts pertaining to the
revenue and receipts of, and expenditures or uses of funds and property, owned
or held in trust by, or pertaining to, the Government, or any of its subdivision,
agencies, or instrumentalities, including government-owned or controlled
corporations with original charters, or on a post audit basis: (a) constitutional bodies, commissions, and
offices that have been granted the fiscal autonomy under this Constitution;
xxx.”

The Constitution also granted to COA the power to
“promulgate accounting and auditing rules and regulations, including those
for the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or uses of government funds and
properties.”^[6]

Pursuant to the said constitutional mandate, COA promulgated Circular
No. 88-55-A dated September 8, 1985
defining the term “unnecessary” expenditures, viz.:

“The term pertains to expenditures which could not pass the
test of prudence or the diligence of a good father of a family, thereby
denoting non-responsiveness to the exigencies of the service. Unnecessary expenditures are those not
supportive of the implementation of the objectives and mission of the agency
relative to the nature of its operation. This would also include incurrence of expenditure not dictated by the
demands of good government, and those the utility of which cannot be
ascertained at a specific time. An
expenditure that is not essential or that
which can be dispensed with without loss or damage to property is considered
unnecessary. The mission and thrust of
the agency incurring the expenditures must be considered in determining whether
or not an expenditure is necessary.” (Italics ours)

In Caltex Philippines, Inc. v. COA,^[7]
We recognized the authority of COA to disallow irregular, unnecessary,
excessive, extravagant or unconscionable (IUEEU) expenditures. We ruled: “Since the COA is responsible for the enforcement of the rules and
regu­lations, it goes without saying that failure to comply with them is a
ground for disapproving the payment of the proposed expenditure.”

There can be no dispute on the proposition that the continued
extension of the services of Engr. Murdoch as a foreign consultant constitutes
at the very least an unnecessary expense.

Crystal clear from the records is that the nature of the terminal
phase of the Dagat-Dagatan project does not require the expertise of a foreign
consultant. As early as April 1, 1987,
the necessity of extending the services of Engr. Murdoch has been questioned by
NEDA “considering the relatively simple supervision work required for the
final stages of the project.”^[8] This
observation was echoed by COA in its post audit review of the First and Second
Supplemental Contracts,^[9] viz:

“In addition, it is our opinion that the KFW components of the
Dagat-Dagatan Project involves simple design and construction procedures, and
it being in its finishing stage, requires simple advisory services that can be
undertaken by NHA or DPWH in-house technical staff or at the most a local
consultant. Hence, the NHA should have
made stronger representations with the KFW for the hiring of a local consultant
(or none at all) as required by NEDA.”

Petitioner itself has taken the position
that the services of Engr.
Murdoch can be dispensed with and can well be done by Filipinos. In 1987, petitioner’s Board already directed
its management to make representations with KFW to replace Engr. Murdoch with a
Filipino consultant if the project would still be unfinished. Again, in its memorandum dated November 26,
1990, petitioner categorically admitted that the KFW components of the
Dagat-dagatan Project involved simple designs and construction procedures which
could easily be handled by a local consultant. Despite all these admissions, petitioner proceeded to extend the unneces­sary
services of Engr. Murdoch as it consummated the disputed Third Supplemental
Contract. The amount of money that was
spent for the unnecessary services of Engr. Murdoch speaks for itself.

Petitioner argues that the renewal of the loan agreement with the
KFW would have been jeopardized if it did not agree to the extension of the
services of Engr. Murdoch. The short
answer to this argument is that the imperative necessity to comply with the
command of our Constitution prohibiting unnecessary expenses of public funds is
beyond compromise. No amount of the
almighty dollar can justify anybody, especially foreigners, to mangle the
mandates of our fundamental law. The
postulates of our Constitution are not mere platitudes which we should honor
only in rhetorics but not in reality. In fine, the power to contract a foreign loan does not carry with it the
authority to bargain away the ideals of our Constitu­tion.

IN VIEW WHEREOF, the petition for certiorari
is dismissed.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Griño-Aquino,
Regalado, Davide, Jr., Romero, Nocon, Bellosillo, Melo, Quiason, and Vitug, JJ., concur.

^[1]
Rollo, p. 184. DM 12,000,000
(twelve million Deutches Mark) was originally alloted for the project. This was increased to DM16,000,000 in a
Supplemental Loan Agreement.

^[2]
Resolution No. 1231 dated March 13, 1987

^[3]
Rollo, p. 91.

^[4]
Performance Evaluation and Review Technique/Critical Path Method.

^[5]
The Third Supplemental Agreement was approved by the NHA Board under Resolution
No. 1621 dated January 10, 1989. Resolution No. 1231 dated March 13, 1987 refers to NHA Board of
Directors’ approval of the April 10, 1987 original consultancy contract.

^[6]
Section 2 (2), Article IX-D, 1987 Constitution.

^[7]
G.R. No. 92585, May 8, 1992, 208 SCRA 726, 746.

^[8]
Rollo, p. 92.

^[9]
Rollo, p. 203.