Smuggling at NFA bared

(First of two parts)

MANILA, Philippines–“Legalized smuggling.”

This was how the audit team hired by the National Food Authority (NFA) described the government’s rice importation program in the last three years of the Gloria Macapagal-Arroyo administration, which saw a rice crisis, soaring prices and huge losses for the grains agency.

A copy of the report prepared by a three-member team said the implementation of the private sector-financed (PSF) importation from 2008 to 2010 turned out to be a huge liability for the government.

It was marked by irregularities such as an uneven playing field among rice traders and fictitious firms that submitted bids, the report said.

The audit team, composed of Jesus P. Posadas, Oscar A. Torralba and Arthur O. Juan, said it was “jolted” by NFA’s financial statements, describing these as unbelievable.

“PSF as implemented effectively legalized smuggling,” the report said, noting that it was not coincidental that the period saw huge losses and debts for the agency. The losses were placed at tens of billions of pesos.

The NFA, tasked with stabilizing the price of the staple and ensuring that the country has enough buffer stocks, allows traders and farmers’ cooperatives to import the grain via its private sector-financed importation program.

The private companies, which had to get priority cards under a first-come, first-served basis, paid the NFA fees in exchange for importing the grain tax-free.

From 2008 to 2010, the NFA allowed commercial rice traders to import a total of 1.4 million metric tons. It asked the Fiscal Incentives Regulatory Board, on behalf of the traders, a tax exemption worth P20 billion.

Cartel

The audit team said it found many “red flags” in the PSF importation program during the period.

For one, the auditors realized that there were elements of a “cartel” among rice traders. The first-come, first-served basis rule was violated as some bidders received permits despite being absent or late in the queue. The names of contact persons on the manager’s checks submitted by different companies to the NFA were also the same, they said.

The companies that were given import licenses also turned out to be fictitious.

Dummy traders

“Apparently, the PSF importation was centrally orchestrated in violation of the NFA first-come, first-served rule and rationale of PSF. NFA utilized the first-come first-served rule for favored bidders,” the report said.

It said fictitious parties were awarded quotas in 2010 in violation of NFA policy guidelines.

The use of dummy traders to participate in the importation program caught the attention of President Benigno Aquino III. In January, Mr. Aquino, who was given a copy of the report, ordered an inquiry in response to the findings of the audit team.

Favored importers

The probe looked into the 10 groups in Pangasinan province that participated in the 2010 importation and were cited by Mr. Aquino.

The importers from Pangasinan were identified as Sta. Rosa Farm Products Corp., Pure Feeds Corp., Longos Proper MPC, Hillside MPC, Unzad MPC, Cabaritan MPC, La Tupiguera MPC, Pasileng Sur MPC, Eastern Binalonan MPC and D’Highlight Agri-Business MPC.

NFA Administrator Angelito Banayo had expressed surprise over the Pangasinan traders’ interest in importing rice when the province was one of the country’s top producers of the grain. He said the cooperatives were not even registered with the government.

The NFA report said 18 traders, including eight from Cebu, were allowed to purchase a total of 200,000 MT through the agency last year.

The Cebu importers were identified as Radegonda Vallejo, Chevy Bacaltos, Edisa Cabuenas, Jugy Obando, Jerome Tan, Othoniel Acquiatan, Marivic Ventura and Glenn Ernesto Pacana.

Check numbers

While the names of these companies’ representatives on the manager’s checks submitted to the NFA were different, the check numbers from the cooperatives in Pangasinan were in consecutive sequence. “It’s too much of a coincidence,” the audit team said.

La Tupiguera, for instance, issued two checks under the name of Melvin T. Delos Reyes. The serial numbers on the checks were 5370 and 5371.

The manager’s checks that followed the sequence 5372, 5373 and 5374 were also received by the NFA. The checks came from Pasileng Sur MPC. Its representative was identified as Ernesto Servillo.

Unzad MPC and Hillside MPC, represented by Jaime Blanco and Analyn Blanco, respectively, sent checks numbered 6336, 6337, 6338, 6339, 6340, 6341 and 6342.

A similar method was employed in 2009. That year, cooperatives such as Nagkakaisang Mamayan, Laong MPC, Macangcong MPC, and Kabuhayan MPC issued vouchers in sequence.

Sofia Guzman

Records also showed that some traders in 2009 had one representative as shown by the name on several manager’s checks. Eastern Sta. Maria MPC, Pindangan Estate, Lleno’s Ricemill and Cabusay Ricemill were all represented by Sofia Guzman.

In 2008, at the height of the rice shortage, the National Bureau of Investigation charged Guzman and several others with hoarding, price manipulation and diversion of government rice stocks after a raid on warehouses in Metro Manila.

Refund of fees

These traders, the auditors said, paid the NFA a “service fee” for their license to import rice.

However, the fees were given back to the same companies that claimed the refunds were part of their incentives for delivering the staple early. This practice deprived the NFA of revenues, the report said.

“Service fees, originally intended as revenue collection of NFA and for the purpose of equalizing the pricing gap of NFA import relative to PSF import were refunded at liberal discretion of NFA,” the report said.

In 2010, the 18 companies paid the NFA a total of P400 million in service fees. The agency returned about P298 million to the traders.

Rebates questioned

The auditors questioned the practice of giving rebates, noting the NFA did not have a mechanism back then to monitor the importation of the private traders.

The NFA could neither ascertain if the rice imports entered the country early or if they were sold below market price. The traders, according to the audit team, did not report to the NFA after getting their import permits.

“PSF imports are processed in the name of NFA, hence, the NFA has direct or indirect liability to suppliers and to the BoC/BIR [Bureau of Customs/ Bureau of Internal Revenue]. But NFA has no oversight or regulatory leverage on disposition of imports,” the report said.

Big profits

“PSF importer enjoys the same subsidy as NFA gets for its direct import, but PSF parties sell theirs at commercial prices and keep the profits entirely for themselves, duty and tax-free,” the audit noted.

By doing so, the national government not only subsidized the rice businesses of “real and fictitious” traders, it also allowed them to gain big profits in the market at the expense of taxpayers.

Private sector importation was not the only “red flag” that caught the attention of the audit team when it examined the procurement process to trace the surge in the agency’s debt to P120 billion as of December 2010.

The report said the country’s purchase of rice in the last decade was marred by wrong timing, over-importation, off-the-mark estimates of per capita consumption and poor rice intelligence and management, which all contributed to the price increases, shortage and mounting debts.

Like oil, rice is sensitive to world events and market speculation. Agricultural and policy decisions of rice sellers and buyers like the Philippines are closely monitored as they affect the global price of rice.

Wrong timing

As the world’s biggest rice importer, it was in the interest of the Philippines to buy at the lowest price if possible.

But in the past decade, the audit found out that the country bought rice under questionable schemes that compelled it to pay premium and significantly way above benchmark prices.

The auditors said they were flabbergasted by the adjustments the NFA made in 2004-2005 to buy rice at the latter part of the year when it was the “lean months” for rice exporters like Thailand and Vietnam.

If a country needs to buy rice from these producers, the best time to order it is the first quarter of the year when harvests kicked in.

The practice of importing rice in the last quarter of the year was repeated in 2009. The government ordered 2.2 million MT of rice from Thailand, Vietnam and Pakistan from Nov. 4, 2009 to Dec. 15, 2009.

There were four bidding sessions conducted in that period, a method that pushed prices upward and put the government at a disadvantage, the auditors said.

“Why order in the lean months and why that much bulk? Of course, you will have to pay premium for it,” the auditors said.

Records from the NFA showed that during this period, the Philippines paid as much as $692/MT when it ordered 61,565.875 MT from Vietnam.

Banayo said this was about $200 more than the prevailing global market price in the first half of the year. The increment, he noted, was too much, even if freight and interests costs were factored in.