Republic of the Philippines COMMISSION ON ELECTIONS Intramuros, Manila MEMORANDUM FOR : COMM. LUCENITO N.

TAGLE, CHAIRMAN 2013 STEERING COMMITTEE COMM. ELIAS R. YUSOPH, MEMBER 2013 STEERING COMMITTEE COMM. CHRISTIAN ROBERT S. LIM, MEMBER 2013 STEERING COMMITTEE COMM. AUGUSTO C. LAGMAN, MEMBER 2013 STEERING COMMITTEE EXPIRATION OF THE OPTION TO PURCHASE UNDER THE 2009 AES CONTRACT WITH SMARTMATIC-TIM 6 February 2012

FROM : RE :

DATE :

-----------------------------------------------------------------------------------------------------------------------The issue of whether or not the Commission should exercise the Option to Purchase (OTP) under the 2009 AES Contract is being considered by this Commission based solely on the alleged savings therefrom but without taking into consideration its legal ramifications. The Commission seems to have ignored the legal issue of whether or not the Option to Purchase under the 2009 AES Contract subsists. Moreover, this Office continues to have reservations on the purported savings given concerns on the assumptions made, particularly on the current market price of various PCOS machines. With all due respect to the members of the Commission, it is this Offices opinion that there is no longer an existing OTP which the Commission may exercise. Smartmatic-Tims offer of a revised extended option to purchase in its April 1, 2011 letter is in fact and in law a mere offer to sell. Such offer to sell, being separate and distinct from the 2009 AES contract, cannot be accepted in light of the legal requirement to conduct the procurement of all goods and services by public bidding (Republic Act 9184) Moreover, acceptance of the offer to sell may constitute an act punishable under the Anti-Graft and Corrupt Practices Act (Republic Act 3019).

FACTS: As expressly stated in the Request for Proposal for the 2010 AES and clarified by various Bid Bulletins, an OTP by component shall be offered by the bidder which OTP shall be decided by the COMELEC on or before 31 December 2010. Thus, in the 2009 AES Contract with Smartmatic-Tim, the OTP on the goods listed in Annex L of said contract (which includes 82,200 PCOS units, 1725 CCS units) shall be exercised by COMELEC on or before 31 December 2010. Moreover, the option price for each item is also indicated in Annex L. The total OTP price is Php2,130,635,048.15. On September 2010, COMELEC did exercise the OTP for the special elections by purchasing 920/PCOS and 36/CCS at a cost of Php24,599,191.371.

Item

Unit Purchase Option 124.55 20,049.58 548.03 332.90 332.90 31.07 6.66

Quantity

Total Purchase Option

PCOS KIT PCOS SW PCOS Machines Alternative Power Removable Memory Spare Activation Paper Rolls Ballot Marking pen TOTAL OTHERS Modem CCS Canvassing unit Digital Signature Printers (canv) Modems Alternative power CCS manual TOTAL OTHERS Addtl toners Memory Card Plastic crates Power Strip TOTAL

920 920 920 1,840 920 4,600 36,800

Php

Php

114,588.97 18,444,616.29 504,187.60 612,530.15 302,265.08 142,923.70 245,012.06 20,371,123.85

3,036.31

920

Php

2,793,403.41

22,340.50 247.79 3,140.77 1,770.55 4,197.55 109.05

36 108 36 36 36 36

Php

Php

804,258.10 26,760.78 113,067.89 63,739.75 151,111.77 3,925.82 1,162,864.11

3,550.00 1,000.00 500.00 1,500

36 72 36 36

Php

Php

127,800.00 72,000,00 18,000.00 54,000.00 271,800.00

The COMELEC did not exercise the OTP for the remainder of the goods on or before 31 December 2010. Thus, the OTP expired on 31 December 2010 and beginning 1 January 2011, there was no longer any existing OTP for the consideration by the COMELEC. However, as early as 18 December 2010, SMARTMATIC-TIM unilaterally offered to extend the OTP until 31 March 2011. No action was taken by the Commission on this initial offer.2 Thereafter, in a letter dated 1 April 2011, Smartmatic-Tim proposed a Revised Extended Option to Purchase effective until 31 December 2011 where the original option price shall be maintained subject to certain conditions, i.e., quantity purchased will be the entire 81,820 units of PCOS and all the other goods under the original Annex L-OPT3. COMELEC is to cover warehouse and security costs at P84M. In April 2011, apparently believing that an OTP still exists and, despite the fact the House of Representatives had already approved a bill on the postponement of the ARMM elections while the Senate was currently tackling its own version of a similar bill legislative measures that were announced as priority bills by the Office of the President, the Commission began negotiations with Smartmatic-Tim for the 2011 ARMM elections. On 28 April 2011, the
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Minute Resolution No. 11-0086 of COMELEC En Banc Meeting dated 18 January 2011

Item

Unit Purchase Option Php 124.55 124.55 8,128,339.09 20,049.58 3,036.31

Quantity

Total Purchase Option

EMS & PCOS EMS SW PCOS SW EMS Machines PCOS Machines Modem TOTAL CCS Public website Canvassing unit Server-Comelec Server-Congress Central Servers Back-up Server Server - KBP,etc Printers (canv) Alternate power Modems TOTAL GRAND TOTAL

83,925 81,280 1 81,280 47,080

10,453,130.03 10,123,686.73 8,128,339.09 1,629,630,100.00 142,949,383.03

Php 464,238.27 22,340.50 809,707.63 809,707.63 4,345,069.61 3,005,508.45 2,682,287.05 3,140.77 4,197.55 1,770.55

1 1544 1 1 1 1 1 1546 1546 2224

Php 464,238.27 34,493,736.05 809,707.63 809,707.63 4,345,069.61 3,005,508.45 2,682,287.05 4,855,637.78 6,489,410.98 3,937,700.41

Php 1,863,177,642

Commission signed a Term Sheet with Smartmatic-Tim where 3,923 PCOS units and 110 CCS units with 400 BGANs (not included in the original OTP), among others, were purchased for P130,941,733,20 along with 3,500 ballots boxes for P17,120,845.00 (not part of the OTP), election and stress test consumables in the amount of P50,369,931.71 (not part of the OTP) and technology related services worth P755,976,206,32 (not part of the OTP), without the conduct of public bidding, for a total cost of P954,408,716.874. In an En Banc meeting held on 10 May 2011, the undersigned moved to reconsider the purchase due to concerns on the costs thereof per financial proposal. In a vote of 6-1, the motion was lost with only Commissioner Velasco expressing his reservation on the financial proposal.5 A little over a month later, the Commission decided to forego the automation of the ARMM elections6 and, on 1 June 2011, served notice of cancelation to Smartmatic-Tim. SmartmaticTim is presently demanding the amount of P60M from the COMELEC as expenses pursuant to a proviso in the 2011 ARMM Term sheet where the COMELEC committed, in case of cancellation, to pay Smartmatic-Tim at least 10% of the services contracted. With the cancellation of the ARMM elections, on 23 September 2011, Smartmatic-Tim again wrote the Commission to follow up on their 1 April 2011 letter regarding the status of the pending option to purchase of the PCOS machines and other equipment used during the 2010 Automated Elections but,at the same time, informed the Commission that there will be a 20% price increase for the items eligible for purchase which increased price shall be maintained until 31 December 2011. With the price increase, the total purchase price for the goods is now P2,235,813,171.30.7
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Smartmatic also proposed Php583,853,610.34 for non-technology related services and another P142,015,911.58 (average) for ballot printing. Thus, its total proposal for the ARMM 2011 Regional elections is P1,680,278,238.79 which is 15 per cent of the total budget of the 2010 elections (at P11Billion). The ARMM has only 5% of the entire electorate of the Philippines.
5 6

COMELEC En Banc Minute Resolution No. 11-0536 Minutes Resolution No. 11-577 of COMELEC En Banc meeting held on 31 May 2011.

Item EMS & PCOS EMS SW PCOS SW EMS Machines PCOS Machines Modem TOTAL CCS Public website Canvassing unit Server-Comelec Server-Congress

Original Price Php

OPT

Unit

Revised Extended OPT Unit Price Php 149.56 149.56 8,128,339.09 24,059.50 3,643.57

Quantity

TOTALS

124.55 124.55 8,128,339.09 20,049.58 3,036.31

83,925 81,280 1 81,280 47,080

12,543,756.03 12,543,756.03 9,754,006.90 1,955,556,120.00 17,539,259.64 Php 2,161,541,566.65

Php

Php 464,238.27 22,340.50 809,707.63 809,707.63

Php

557,085.93 26,808.60 971,649.16 971,649.16

1 1544 1 1

Php

557,085.93 41,392,483.26 971,649.16 971,649.16

The PMO for the 2013 Elections is now proposing that the Commission En Banc exercise the Option to Purchase the Smartmatic-Tim goods. RATIONALE: 1. It is undeniable that the OTP under the 2009 AES Contract expired on 31 December 2011. There was no agreement between the parties, i.e. COMELEC and Smartmatic-Tim, to extend the same. In its letter dated 23 March 2011, Smartmatic-Tim acknowledged that the OTP expired last 31 December 2010 without COMELEC formally responding to its offer to extend the OTP. Smartmatic-Tim further stated that there is no legal basis exists for an option to purchase beyond the original contract. Again, in its letter dated 1 April 2011, Smartmatic-Tim declared that it had no obligation to sell these equipment to COMELEC anymore and that it will immediately start marketing these PCOS to other countries, and we dont have any need of keeping them further in the Philippines. 2. There is nothing in the RFP of the 2009 AES Contract that allows for an extension of the OTP. Thus,an extension of the OTP, which includes in this instance a change in the option price/s, cannot be entered into by the COMELEC as such would constitute a substantive amendment of the provisions of the 2009 AES Contract which is not allowed following the rulings of the Supreme Court:
Thus, it is contrary to the very concept of public bidding to permit a variance between the conditions under which bids are invited and those under which proposals are submitted and approved; or, as in this case, the conditions under which the bid is won and those under which the awarded Contract will be complied with. The substantive amendment of the contract bidded out, without any public bidding -- after the bidding process had been concluded -- is violative of the public policy on public biddings, as well as the spirit and intent of RA 8436. The whole point in going through the public bidding exercise was completely lost. The very rationale of public bidding was totally subverted by the Commission.

Central Servers Back-up Server Server - KBP,etc Printers (canv) Alternate power Modems TOTAL GRAND TOTAL

4,345,069.61 3,005,508.45 2,682,287.05 3,140.77 4,197.55 1,770.55

5,214,083.54 3,606,610.14 3,218,744.46 3,768.93 5,037.06 2,124.66

1 1 1 1546 1546 2224 Php

5,214,083.54 3,606,610.14 3,218,744.46 5,826,765.34 4,725,240.50 4,725,240.50 74,271,604.65

Php 2,235,813,171.30

[Information Technology Foundation of the Philippines, et.al., petitioners v. COMELEC, et.al., respondents; G.R. No. 159139 January 13, 2004]
By its very nature, public bidding aims to protect public interest by giving the public the best possible advantages through open competition. Thus, competition must be legitimate, fair and honest. In the field of government contract law, competition requires not only bidding upon a common standard, a common basis, upon the same thing, the same subject matter, and the same undertaking, but also that it be legitimate, fair and honest and not designed to injure or defraud the government. An essential element of a publicly bidded contract is that "all bidders must be on equal footing, not simply in terms of application of the procedural rules and regulations imposed by the relevant government agency, but more importantly, on the contract bidded upon. Each bidder must be able to bid on the same thing." As pointed out by the Court in Agan, if the winning bidder is allowed to later include or modify certain provisions in the contract awarded such that the contract is altered in any material respect, then the essence of fair competition in the public bidding is destroyed. A public bidding would be a farce if, after the contract is awarded, the winning bidder may modify the contract and include provisions which are favorable to it that were not previously made available to the other bidders. The government cannot enter into a contract with the highest bidder and incorporate substantial provisions beneficial to him, not included or contemplated in the terms and specifications upon which the bids were invited. Aside from protecting public interest by giving the public the best possible advantages through open competition, "[a]nother self-evident purpose of public bidding is to avoid or preclude suspicion of favoritism and anomalies in the execution of public contracts." Such bias or partiality and irregularities may be validly presumed if, as in this case, after a contract has been awarded, the parties carry out changes or make amendments thereto which gives the winning bidder an edge or advantage over the other bidders who participated in the bidding, or which makes the signed contract unfavorable to the government. Thus, there can be no substantial or material change to the parameters of the project, including the essential terms and conditions of the contract bidded upon, after the contract award. The Court acknowledges that a winning bidder is not precluded from modifying or amending certain provisions of the contract bidded upon. However, such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. Hence, the determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether the contract, when taken as a whole, would contain substantially different terms and conditions that would have the effect of altering the technical and/or financial proposals previously submitted by other bidders. The alteration and modifications in the contract executed between the government and the winning bidder must be such as to render such executed contract to be an entirely different contract from the one that was bidded upon.

[Power Sector Assets and Liability Management Corp., petitioner V. Pozzolanic Phils. Inc., respondent. GR 183789, 24 August 2011

3. It important to note that in its 1 April 2011 letter , Smartmatic-Tim informed the COMELEC of a 10% price increase on the PCOS which would then be priced at P22,054.54 good until September 30, 2011 (original price under the OPT was P20,049.58 per unit), but, at the same time, proposed that it is amenable to a revised option to purchase valid until December 31, 2011 where the original price shall be maintained on condition that COMELEC will purchase all the remaining goods and COMELEC shall cover the warehousing and security costs at P84Million. Then again, in its September 23, 2011 letter, Smartmatic-Tim informed COMELEC that the price of the goods is now increased by 20%. If there was really a valid and legitimate extension of the OTP under the 2009 AES Contract, SMARTMATIC-TIM cannot impose new prices/conditions other than those originally agreed upon. 4. From the foregoing discussion, Smartmatic-Tims proposed revised and extended option to purchase is in fact and in law a unilateral offer to sell the remaining goods covered by the original OTP. An "offer", in law, is a proposal to enter into a contract (Equatorial Realty Development, Inc. & Carmelo & Bauermann, Inc., vs. Mayfair Theater, Inc., G.R. No. 106063 November 21, 1996 citing Rosenstock vs. Burke, 46 Phil. 217). Acceptance of the same would mean a perfected contract comes into existence a new contract of sale and not an extension of the 2009 AES contract. Hence, the Commission cannot accept said offer for to do so would circumvent the requirement of public bidding for all procurements as mandated by Republic Act No. 9184 or the Government Procurement Reform Act. 6. To reiterate, acceptance, either express or implied, was not and cannot be given by the Commission with respect to SMARTMATIC-TIMs offer to sell the goods covered by the original OPT. Thus, acceptance by this Commission of Smartmatic-Tims unilateral offer to sell will constitute an act punishable under the Anti-Graft and Corrupt Practices Act: it gives a private party unwarranted benefits, advantage or preference in the discharge of official or administrative function through manifest partiality, evident bad faith or gross inexcusable negligence; or, consists of knowingly approving or granting any license, permit, privilege or benefit in favor of any person not qualified for or not legally entitled to such license, permit, privilege or advantage.

Thank you.

AUGUSTO C. LAGMAN Commissioner

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Copy Furnished: Chairman Sixto S. Brillantes Comm. Rene V. Sarmiento Comm. Armando C. Velasco Chairman Louis Napoleon C. Casambre, COMELEC Advisory Committee Dir. Jose M. Tolentino, Jr., COMELEC Executive Director Dir. Bartolome J. Sinocruz, Jr., Deputy Director for Operations Dir. Jeannie Flororita, ITD COMELEC Dir. Esmeralda Ladra, Law Department

Republic of the Philippines COMMISSION ON ELECTIONS Intramuros, Manila RE : Supplement to 6 February 2012 Memorandum (EXPIRATION OF THE OPTION TO PURCHASE UNDER THE 2009 AES CONTRACT WITH SMARTMATIC-TIM)

DATE : 17 February 2012 -----------------------------------------------------------------------------------------------------------------------For purposes of clarifying the statement made on page 4 of my 6 February 2012 Memorandum addressed to the Law Department, which reads:
In an En Banc meeting held on 10 may 2011, the undersigned moved to reconsider the purchase due to concerns on the costs thereof per financial proposal. In a vote of 6-1, the motion was lost with only Commissioner Velasco expressing his reservation on the financial proposal.

Quoted hereunder is a portion of Minute Resolution 11-0536 relative to the voting issue on whether or not to automate the 8 August 2011 ARMM Elections: RESOLVED, moreover, to put on record the voting on the issue raised by Commissioner Lagman on whether or not to automate the August , 2011 ARMM Elections:
Chairman Brillantes, Commissioner Sarmiento, Tagle, Velasco, Yusoph, and Lim all voted for automation using PCOS machines for the August 8, 2011 ARMM Elections. Commissioner Lagman voted for automated elections in the ARMM but not using PCOS machines. Commissioner Velasco expressed his reservation as to the financial proposal of Smartmatic-TIM.

Thank you. AUGUSTO C. LAGMAN Commissioner

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