July 20, 2009

COA DECISION NO. 2009-064

SUBJECT

:
Request of Hon. Tomas R. Osmea, City Mayor, Cebu City for Concurrence on the
Proposal of the City of Cebu for the Sale of a Portion of Its Reclaimed South Road
Properties (SRP), Through the System of Unsolicited Proposal/Swiss Challenge Scheme
Analogous to that Under the Build-Operate-Transfer (BOT) Law

DECISION

FACTS OF THE CASE

The South Reclamation Project (now known as the South Road Properties) is a component of the
Metro Cebu Development Project Phase III (MCDP III). The SRP was funded by a JPY12.291B loan to the
Land Bank of the Philippines through the Overseas Development Assistance (ODA) from the Japan Bank
for International Cooperation (JBIC).
The City Government of Cebu, the implementor of the project, provided for the loan's Peso
counterpart, paid the guarantee fee annually to the Department of Finance and assumed full
responsibility for the repayment of the loan to the LBP.
By virtue of Presidential Proclamation No. 763 dated 20 January 2005, a portion of the SRP covering
an area of 2,956,629 square meters was designated as a Special Economic Zone. This issuance was
followed by Presidential Proclamation No. 843 dated 16 May 2005 which, among others, transferred the
ownership of the said portion of the SRP to the City Government of Cebu, and declared this area as
alienable and disposable. The Department of Environment and Natural Resources Secretary was also
directed to issue a Special Patent in the name of the City Government of Cebu subject to the conditions
stated in the Proclamation.
Thereafter, special patents were issued for the said land: Special Patent No. 3693 dated 13
September 2005 covering an area of 2,100,740 square meters and Special Patent No. 3716 dated 20
December 2006 covering an area of 95,645 square meters, for a total of 2,196, 385 square meters.
On 22 August 2007, the Sangguniang Panlungsod of Cebu promulgated Resolution. No. 07-406
resolving to dispose by sale through public bidding 31.9189 hectares or 319,189 square meters, of the
said land covered by TCT No. PT 13350 issued by the Register of Deeds of Cebu City.
In a letter dated 28 August 2007 for then COA Chairman Guillermo N. Carague, Cebu City Mayor
Tomas R. Osmea requested for COA's concurrence for the planned sale through bidding of the above
property covered by TCT No. PT 13350 adopting the unsolicited proposal/Swiss Challenge Variant
Scheme under the Build-Operate-Transfer law.
In her comment on the above request, under Memorandum dated 5 September 2007, the Assistant
Commissioner, Local Government Sector (LGS) raised the issue of the inalienability of the subject land,
stating: "The characterization that the entire area is alienable and disposable cannot prevail over the
Constitutional provision that limits alienable property of the public domain to agricultural lands."
Acting on the request, the Director, Legal and Adjudication Oce Local, denied the same in his
letter dated 15 February 2008. The denial was also upon these grounds:
a.

That the disposal of said property is governed by Sections 379 to 381 of Republic Act (R.A.)
No. 7160 and its Implementing Rules and Regulations (IRR) under Title V and COA Circular
No. 92-386 dated 20 October 1992.

b.

The request to dispose of said property through unsolicited proposal/Swiss Challenge cannot
be given due course, the same being not one of the modes of disposal allowed by law.

c.

The property to be disposed of should, likewise, be appraised by the Regional Technical

Services Oce (RTSO), COA Regional Oce No. VII pursuant to COA Memorandum No. 92313A dated 16 November 1992.

Mayor Osmea submitted a request for reconsideration dated 10 June 2008 stating that the SRP is
not unserviceable land and it was reclaimed with the sole purpose of accelerating economic growth in
Cebu City. The request, however, was denied in a letter dated 9 October 2008.
In the meantime, the Cebu City Awards Committee issued Resolution No. 07-019 dated 19
December 2007 setting the appraised values of the land, viz.: Southeastern side of Cebu South Coastal
Road (CSCR) at P10,000/sq. m.; Northwestern side along the Cebu South Coastal Road & the Mambaling
Access Road at P8,300/sq. m.; All other properties within the Commercial Area of the South Road
Properties at P7,000/sq. m.
Subsequently, the City of Cebu, through its Acting Mayor Michael L. Rama led the herein appeal. In
support thereof, appellant submitted City Ordinance No. 2154 entitled "An Ordinance Prescribing
Guidelines and Procedures for Entering Into Joint Venture Agreements."
ISSUES
1.

Whether or not the SRP is alienable and disposable.

2.

Whether or not the SRP properties may be sold through a joint venture scheme with a private
entity subject to a Swiss Challenge.

DISCUSSION
This Commission interposes no objection to the alienability of the land in question in view of
Presidential Proclamation No. 843 dated 16 May 2005. This proclamation amended Proclamation No. 200A, Series of 1967 which reserved certain parcels of land of the public domain located in San Nicolas,
Pardo (now part of Cebu City) and Tangke, Talisay (now Talisay City) for national improvement purposes;
reserved a portion (2,956,629 square meters) of these parcels of land as the Cebu City South
Reclamation Project (SRP); transferred its ownership to the City Government of Cebu; and declared the
area alienable and disposable.
Anent the second issue, there are two types of government transactions where the Swiss Challenge
Method or its analogous variation is allowed as provided under existing laws.
The rst is a Joint Venture Agreement between the government and private entities under
Executive Order (E.O.) No. 423 dated 30 April 2005. Under Section 5.8 of the Guidelines and Procedures
of E.O. No. 423, a Competitive Challenge is allowed wherein third parties are invited to submit
comparative proposals to an unsolicited proposal. The private sector entity that submitted the unsolicited
proposal is accorded the right to match any superior oer given by a comparative private sector
participant. Section 4.1 of the guidelines, however, expressly excludes local government units from their
coverage. It provides:
"4.1

These guidelines shall apply to all government-owned and/or controlled corporations

(GOCCs), government corporate entities (GCEs), government instrumentalities with corporate
powers (GICPs), government nancial institutions (GFIs), state universities and colleges (SUCs),
as dened under Section 5.0 and which are expressly authorized by law or their respective
charters to enter into JV Agreements. Local Government Units (LGUs) are not covered by these
Guidelines." (underlining supplied)

The second type of government transactions where the Swiss Challenge is allowed is the BuildOperate-Transfer agreement under R.A. No. 6957, otherwise known as "An Act authorizing the Financing,
Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector", as amended by
R.A. No. 7718. Section 4-A of the law provides:
"Section 4-A.
Unsolicited Proposals. Unsolicited proposals for projects may be accepted
by any government agency or local government unit on a negotiated basis: Provided, That, all the
following conditions are met: (1) such projects involve a new concept or technology and/or not part
of the list of priority projects, (2) no direct government guarantee, subsidy or equity is required, and
(3) the government agency or local government unit has invited by publication, for three (3)
consecutive weeks, in a newspaper of general circulation, comparative or competitive proposals
and no other proposal is received for a period of sixty (60) working days: Provided, further, That in
the event another proponent submits a lower price proposal, the original proponent shall have the
right to match that price within thirty (30) working days."

To convince this Commission of the propriety of the appeal, appellant oered City Ordinance No.
2154 entitled "An Ordinance Prescribing Guidelines and Procedures for Entering Into Joint Venture
Agreements". Appellant strongly pins its hope on this ordinance for the reversal of the stand of the Legal
and Adjudication Office Local.
A review of the ordinance shows that the herein proposed land sale through the Swiss Challenge
Scheme could not t in the joint venture agreement contemplated therein. Otherwise stated, a joint
venture under the ordinance could not be a legal means to sell the SRP under the Swiss Challenge
Method, as discussed hereunder.
A joint venture (JV) as defined by City Ordinance No. 2154, is a "contractual arrangement whereby a
private sector entity or a group of private sector entities on one hand, and the City Government on the
other hand, contribute money/capital, services, assets (including equipment, land or intellectual
property), or a combination of any or all of the foregoing. Parties to a JV share risks to jointly undertake an
investment activity in order to accomplish a specic, limited or special goal or purpose with the end view
of facilitating private sector initiative in a particular industry or sector, and eventually transferring
ownership of the investment activity to the private sector under competitive market conditions. It
involves a community or pooling of interests in the performance of the service, function, business or
activity, with each party having a right to direct and govern the policy in connection therewith and with a
view of sharing both prots and losses, subject to the agreement by the parties." (Section 5, Denition of
Terms)
On the other hand a sale is dened as "a contract whereby one of the parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain
in money or its equivalent. (Article 1458, New Civil Code)
It is therefore clear from the foregoing denitions that the sale by the City of Cebu of the land
covered by TCT No. PT 13350, cannot be done through a joint venture and the City Ordinance which was
designed for a joint venture in an investment activity and not for the sale of property, cannot apply.
Nevertheless, while City Ordinance No. 2154 could not be a legal justication for the sale through
Swiss Challenge, there had been precedents in the adoption of the Swiss Challenge in the sale of
government property.
Thus, in the proposed sale through Swiss Challenge of Equitable-Philippine Commercial and
Industrial Bank (EPCIB) shares of stock owned by the Social Security System (SSS), the Department of
Justice (DOJ), under Opinion No. 93, S. 2004, although it declined to give a categorical opinion since
the parties had already gone to court at the time did not object thereto. It even cited DOJ Opinion No.
55, S. 2003, 27 June 2003 which answered in the affirmative the same issue, which we quote:
"Regarding the corollary query raised by the DOF on whether the PMO/PRC can give the option to
buy the property to the sub-lessees after the right to buy shall have been assigned to them by the

buy the property to the sub-lessees after the right to buy shall have been assigned to them by the
Lessee, and whether the oers of the sub-lessees can be subjected to a Swiss Challenge by way of
compliance with the requirement of public bidding under existing laws, rules and regulations
requiring public bidding, our answer is in the affirmative.
xxx xxx xxx
"At any rate, for as long as the Swiss Challenge proposal approximates the nature and requirements
of a public bidding which are essentially transparency and competitiveness, we are of the opinion
that PMO/PRC can subject the sub-lessees' offers to such Swiss Challenge.
"Pursuant to Proclamation No. 50, both the PMO and the PRC are mandated to generate 'maximum
cash recovery' for the National Government in all of their disposition eorts. Consistent with this
mandate and in line with the government's policy of transparency and competitive bidding in
awarding government contracts, the PMO/PRC can, and should, require that the oers of the sublessees, as assignees of the lessee's right to buy, be subject to Swiss Challenge (also called price
challenge) to ensure that the government gets the best price for its Makati property and thereby,
'generate maximum cash recovery' for the National Government.
"In a letter dated April 13, 2004, SSS sought conrmation from the Commission on Audit (COA)
whether or not COA Circular No. 89-296, which generally required that government assets should
be disposed of through public bidding, applies to the transaction if entered into with BDO.
"In its reply, the COA stated that 'since activities in the stock exchange which oer to the general
public stocks listed therein, the proposed sale, although denominated as negotiated sale
substantially complies with the general policy of public auction as a mode of divestment. This is so
for shares of stock are actually being auctioned to the general public every time that the stock
exchanges are openly operating."

Unfortunately, when the legality and propriety of the Swiss Challenge to dispose of the SSS shares
in EPCIB, giving the Banco de Oro the right to match the price of the highest bidder, was directly
questioned, the Supreme Court declined to rule on the issue on the ground that the same has become
moot and academic. (Sergio R. Osmea III, et al. vs. SSS, 533 SCRA 313, 13 September 2007)
However, in Manila Prince Hotel vs. GSIS, 267 SCRA 408, 3 February 1997, the losing bidder, Manila
Prince Hotel, was allowed to match the price of the winning foreign bidder, in accordance with the Filipino
First Policy of the Constitution. While at rst glance, this case may be outside the scope of this instant
case, there appears a little similarity in the concept of price matching between the two cases. In the
Manila Prince Hotel case, giving the losing bidder the right to match the price of the highest bidder is, to
a certain extent, similar to the concept of the Swiss Challenge, where the original proponent is also given
the right to match the price of the highest bidder. The Swiss Challenge is nothing more than price
matching. Hence, whatever may be the reason for the price matching in the Manila Prince Hotel case, the
fact remains that such price matching exists in our jurisdiction.
On the practical side, the Swiss Challenge is just a variation of the entire public bidding process. In
the present case, a public bidding for the sale of the subject land would be conducted. The only difference
is that the highest responsive bidder is not automatically awarded the contract since he has still to
hurdle the added step the price challenge of the original proponent who rst oered to buy the land.
This additional requirement can be likened to the exercise by the City of Cebu, through its Bids and
Awards Committee, of its rule-making power. Surely, the BAC is not precluded from prescribing
additional rules of the public bidding it conducts. The important thing here is that there is a competitive,
open and regular public bidding conducted for the purpose.
In Chavez v. PEA and AMARI Bay Development Corp. , 384 SCRA 152, 9 July 2002, it was held that "
[A]ssuming the reclaimed lands of PEA are classied as alienable or disposable lands open to disposition,
and further declared no longer needed for public services, PEA would have to conduct a public bidding in
selling or leasing these lands. PEA must observe the provisions of Sections 63 and 67 of C.A. No. 141
requiring public auction . . . Moreover, under Section 79 of P.D. No. 1445 , . . . the government is required
to sell valuable government property through public bidding."
While the subject land may be sold through public auction under Sections 379 and 380 of the Local
Government Code, this Commission does not interpose the sale of the property through Swiss Challenge
after conducting public bidding for the reasons earlier propounded, and provided the three basic
principles before a public bidding may be considered valid and legal, as held in JG Summit Holdings, Inc.
vs. CA (345 SCRA 143, 20 November 2000) case, cited in said DOJ Opinion No. 93, S. 2004, are present,
namely:
1.

Offer to the public;

2.

An opportunity for competition; and

3.

A basis for comparison of bids.

In addition, the following conditions should also be satisfied:

1.

That the entire oer of the original proponent should be included in the Invitation to Bid and
should be discussed during the pre-bid conference.

2.

That before accepting any unsolicited proposal and commencing the public bidding, the
appraised values as set by the Committee on Awards should be subject to the prior review
and concurrence by the COA. This prior review and concurrence should obviate any question
on the reasonableness of the price that will unduly delay the awarding of the contract.

3.

That the bidding processes, procedures and controls prescribed under R.A. No. 9184, insofar
as applicable to the instant case, be strictly observed by the City of Cebu.

4.

That only the portion of the SRP covered by Special Patent Nos. 3693 dated 13 September
2003 and 3716 dated 20 December 2006 will be sold by the City of Cebu.

2003 and 3716 dated 20 December 2006 will be sold by the City of Cebu.
RULING
WHEREFORE, premises considered, this Commission does not interpose any objection to the
proposed sale through the Swiss Challenge Method of a portion of the SRP covered by TCT No. PT 13350,
subject to compliance by the City of Cebu of the aforementioned conditions. In addition, each particular
sale contract disposing of any or all of the subject property shall be subject to separate COA approval as
provided for under the last paragraph of Section 380 of R.A. No. 7160.
(SGD.) REYNALDO A. VILLAR
Chairman
(SGD.) JUANITO G. ESPINO, JR.
Commissioner
Copy furnished:
Mayor Tomas R. Osmea
Cebu City
The Assistant Commissioner
Legal Services Sector
This Commission
The Regional Director
COA Regional Office No. VII
Cebu City