ESTABLISHING THE FRAMEWORK FOR REFORMS IN THE GOCCs
Sponsorship Speech on GOCC Governance Act of 2011

(S.B. No. 2640, An Act To Promote Financial Viability And Fiscal Discipline In Government-Owned Or Controlled Corporations And To Strengthen The Role Of The State In Its Governance And Management To Make Them More Responsive To The Needs Of Public Interest And For Other Purposes)

by Senator Franklin M. Drilon

(January 26, 2011)

Mr. President, Distinguished Colleagues:

INTRODUCTION

Since the 1970s, the Philippine Government has been establishing Government Owned and Controlled Corporations, or GOCCs, to accomplish development objectives, particularly economic and social services, and infrastructure development. Many of these GOCCs took on a life of their own, and pursued objectives independently of any government policy. A number of them are plagued by incompetence and corruption, becoming a burden and a drain on our meager public resources.

Today, we have 157 GOCCs. Many of them operate like independent republics. Some of them have burdened this Government with tons of indebtedness, with NFA's P177 B debt on top of the list. Others, like the MWSS, have awarded themselves with so many bonuses that they have run out of the alphabet in labeling these bonuses.

President Benigno S. Aquino III, in his first State of the Nation Address, shocked the nation when he revealed the outrageous bonuses at the MWSS. In the words of the President: "Ang karaniwang manggagawa hanggang 13th month pay plus cash gift lang ang nakukuha. Sa MWSS, aabot sa katumbas ng mahigit sa tatlumpung buwan ang sahod kasama na ang lahat ng mga bonuses at allowances na nakuha nila."

President Aquino's SONA formed the basis for our filing of P.S.R. No. 66, directing the Senate Committee on Finance, jointly with the Committee on Government Corporations and Public Enterprises, to conduct inquiries, in aid of legislation, into the activities of the GOCCs.

The nation was outraged when we exposed, in the course of our inquiry, the staggering salaries, bonuses, and allowances of some GOCC officers and directors, and the hundreds of millions of pesos worth of stock option plans and profit share denominated as Directors' Fees in private corporations where pension funds were invested. We confirmed that members of the Board of Directors of certain GOCCs have allocated for their benefit obscene bonuses that went as high as the equivalent of 26 months, despite the poor financial condition and staggering losses - Php3.5 Billion in the case of MWSS - - of these corporations. We also discovered excessively generous and scandalous retirement schemes. For example, in the case of Manila Economic and Cultural Office, or MECO, Directors can retire after only two (2) years of service, with a retirement pay of Php600,000 per year of service.

Mr. President, public office is a public trust. The need has never been more apparent than now to address the issue of such excessive and unwarranted monetary remuneration including benefits and perks accruing to the Board of Directors and top officials of GOCCs. We must exact transparency and accountability from our public officials, who have not faithfully discharged their duties as managers of public enterprises designed to contribute to national progress.

The inability of public enterprises, such as GOCCs, to contribute to development arose not only from their inefficiencies due to their monopoly or protected status but also because of lax governance and oversight. The checks-and-balances that come with private ownership - - that is, the pressures that shareholders and external directors can exert on managers to improve efficiency, that capital markets can exert on companies to allocate scarce resources economically and to operate within "hard budget" constraints, and that managers who are responsible to shareholders and outside directors can exert on workers to improve productivity - - are all usually missing from public enterprises. ¹

The need for much-needed reforms in the government corporate sector to make it effective vehicle in achieving social and economic progress becomes more apparent once we take into account the role that GOCCs play in our economy.

In 2009, total expenditures of GOCCs are equivalent to 28% of the total expenditures of the national government. GOCC assets, at P5.557 trillion in 2009, also exceed NG Assets at P2.879 trillion. The 2009 Annual Financial Report of the Commission on Audit also indicates that out of the P475.296 billion Inter-Agency Receivables of the National Government, 91% or P433.383 billion are due from GOCCs.

In its 2009 consolidated audit report on GOCCs, the COA reported that subsidy income provided to GOCCs by the NG and other government agencies amounted to approximately P7.6 billion in 2009, but taxes paid by the GOCCs amounted only to approximately P6.7 billion, which is even lower by 17.26 percent from prior year's levels. In addition, while the GOCCs declared a total dividend of approximately P14.6 billion. This amount is still P249.95 million less than the 2008 level.

As a result of the inquiry on GOCCs operations and compensation structure, this Senate Bill No. 2640 is now being submitted for consideration to this Chamber.

Reinventing public enterprises in any country should begin with a comprehensive performance review and the formulation of a government strategy for reform. Governments are unlikely to be successful in restructuring public enterprises unless they develop a strategy that sets out a clear vision for how GOCCs are expected to contribute to development and defines clear missions and performance criteria for each public enterprise. ²

The proposed GOCC Governance Act intends to rationalize the structure, existence and operations of the GOCCs. It is designed to reform the government corporate sector, improve corporate governance of GOCCs, and exact from them efficient and effective public service.

We outline below the bill's most significant features.

1. COVERED PUBLIC ENTERPRISES.

Apart from Government Owned or Controlled Corporations, which generally refers to corporate entities where at least a majority of the outstanding capital stock is owned by the government, the bill also covers Government Instrumentalities with Corporate Powers (GICP) / Government Corporate Entities (GCE), which, as defined by the Supreme Court in MIAA vs. Court of Appeals (GR No. 155650, July 20, 2006), refers to an instrumentality of government, which is neither a corporation nor an agency integrated within the departmental framework, but vested by law with special functions or jurisdiction, endowed with some, if not all corporate powers, administering special funds, and enjoying operational autonomy usually through a charter. Examples of GICP / GCE would be MWSS, LWUA, PDIC.

2. GOVERNING BODY.

There are 157 GOCCs in our bureaucracy today. Not a single government office supervises them. A governing body for GOCCs, to be called Governance Commission for Government Owned or Controlled Corporations (GCG), is created under the bill. The GCG shall be composed of the Secretaries of the DBM, DOF & NEDA, and two (2) private sector representatives. The GCG is, among others, authorized to identify other necessary skills and qualifications required for Appointive Directors and recommend to the President a shortlist of suitable candidates for Appointive Directors; evaluate the performance and determine the relevance of the GOCC, and recommend to the President the reorganization, merging, streamlining, abolition or privatization of a GOCC under a clear set of standards defined in the bill; and coordinate and monitor the operations of GOCCs to ensure alignment and consistency with national development policies.

3. GOCC COMPENSATION AND POSITION CLASSIFICATION SYSTEM.

SB 2640 provides for the creation of a Compensation and Position Classification System, specific to GOCCs. It recognizes that GOCCs are a special group, which requires a special classification system different from that provided under the Salary Standardization Law (SSL). A constant issue in the compensation of GOCC directors, officers and employees is the request for exemption from the SSL wherein a GOCC will claim that the qualifications and jobs performed by its directors, officers and employees are different from those performed by other "government employees". These exemptions, in the form of grant of authority to the Board to fix the salaries, compensations and benefits of its personnel -which always includes fixing benefits for the board members themselves- have resulted into exorbitant and excessive compensations, bonuses and allowances granted by some GOCCs to its employees, officers and directors.

At least 27 GOCCs have been granted exemption from the SSL by their charters. Once the Compensation and Position Classification System for GOCCs is in place, no GOCC shall be exempted from the system. Thus, excessive pays, allowances, bonuses and the like will no longer be possible. The GCG may recommend, subject to the approval of the President, additional allowances or bonuses for certain position titles, giving due consideration to the necessity for such allowances and the good performance of the GOCC.

4. FIT AND PROPER RULE.

Section 19 of the bill provides that all members of the Board and the Chief Executive Officer shall be qualified by the "fit and proper" test to be determined by the GCG. To maintain the quality of management of the GOCCs, the GCG, in coordination with the relevant government agencies, shall subject to the approval of the President, prescribe, pass upon and review the qualifications and disqualifications of individuals appointed as directors or elected Chief Executive Officer of the GOCC, and shall disqualify those found unfit. Further, the members of the Board of GOCCs shall serve for one year only, mirroring the best practices in private corporations while instilling greater accountability in their public corporate counterparts.

Directorships and senior managerial positions in GOCCs are often viewed as political patronage positions for retired military and high level civil servants or for relatives and friends of powerful political leaders. The appointment of non-experts and inexperienced policy directors in institutions that require decision makers with indispensable and specific skill sets lead GOCCs to operate with soft budget constraints, leading to inefficiency, low levels of productivity, and financial losses. ³

5. CONCEPT OF CORPORATE OPPORTUNITY.

The proposed law adopts the concept of "corporate opportunity" under the Corporation Code. It sets forth the manner in which directors or officers, who breach their fiduciary duty, are to be made liable for the profits which they have misappropriated to themselves to the prejudice of the GOCC. This bill imposes an obligation on the part of the directors or officers to remit to the GOCC any such benefit or profit. If they fail to do so, they shall be required to restitute such amounts without prejudice to any administrative, civil or criminal action filed against them. The penalty of imprisonment and a fine twice the amount is imposed on the officers or directors if they fail to restitute such amounts.

The bill also stresses the role of the GOCC directors and officers as mere trustees with respect to the monies or properties of the GOCC. Being mere trustees, they cannot appropriate for themselves any of the realized profits or benefits made from the investment of the GOCC to private corporations or other GOCC's. We have seen this happen in the case of the Social Security Commission where the Commissioners appropriated for themselves millions in stock options and directors' fees which rightly belonged to the trust funds of the Social Security System. As spelled out in the bill, such monies or properties belong to the GOCC and not the director or officer handling such.

6. PER DIEMS, ALLOWANCES AND BONUSES.

Finally, the bill provides for limitations on the per diems, allowances and bonuses which directors may receive or appropriate for themselves. The bill makes it clear that directors are not entitled to compensation as directors, but may be entitled to reasonable per diems only. The bill limits the bonuses a director may receive, to not more than two (2) months salary of the CEO of the GOCC. In case of outstanding performance on the part of the director and the GOCC, the President of the Philippines is authorized to approve additional bonuses.

SB 2640 is a legal and political framework for GOCC management to help it determine the nature of the relationship that exists between various public authorities and the conditions that will enable them to achieve their goal with efficiency. Our role is to establish effective and appropriate legal and regulatory frameworks that simplify and streamline legal structures for GOCC operations, specify obligations, protect the rights of stakeholders, and create standards and procedures for effective internal and external auditing, transparent and accurate accounting, and public financial disclosure. ⁴

CONCLUSION

Mr. President, SB 2640 establishes the framework for reforms in the GOCCs. The days when the 157 GOCC boards can act independently of the national government are finally over. We are confident that once this bill becomes a law, the excesses and abuses we saw in the operation of the GOCCs will all be a thing of the past. Indeed, what we hope to see are Government Owned or Controlled Corporations operating profitably and contributing significantly to the welfare of our people, with the end in view of improving the quality of public services and substantially contributing to national development.

Thank you Mr. President.

Footnotes:

1 Organization for Economic Cooperation and Development, Reforming the Economies of Central and Eastern Europe, Paris: OECD, 1992. David Shambaugh, "China in 1991: Living Cautiously," Asian Survey, Vo. XXXII, No. 1 (1992): 19-31.

2 Dennis A. Rondinelli. "Can Public Enterprises Contribute to Economic Development? A Critical Assessment and Alternatives for Management Improvement". Public Enterprises: Unresolved Challenges and New Opportunities: Publication based on the Expert Group Meeting on Re-inventing Public Enterprise and their Management. 27-28 October 2005. New York

3 Richard M. Kennedy and Leroy P. Jones, "Reforming State-Owned Enterprises: Lessons of International Experience, Especially for the Least Developed Countries," Working Paper NO. 11, Vienna, Austria: United Nations Industrial Development Organization, 2003; As quoted from Dennis A. Rondinelli. "Can Public Enterprises Contribute to Economic Development? A Critical Assessment and Alternatives for Management Improvement."

4 Public Enterprises: Unresolved Challenges and New Opportunities: Publication based on the Expert Group Meeting on Re-inventing Public Enterprise and their Management. 27-28 October 2005. New York

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