with annotations feliciano vs coa.pdf

7/1/2015 SUPREMECOURTREPORTSANNOTATEDVOLUME419

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VOL. 419, JANUARY 14, 2004 363Feliciano vs. Commission on Audit

G.R. No. 147402. January 14, 2004.*

ENGR. RANULFO C. FELICIANO, in his capacity asGeneral Manager of the Leyte Metropolitan Water District(LMWD), Tacloban City, petitioner, vs. COMMISSION ONAUDIT, Chairman CELSO D. GANGAN, CommissionersRAUL C. FLORES and EMMANUEL M. DALMAN, andRegional Director of COA Region VIII, respondents.

Commission on Audit Jurisdiction The COAs auditjurisdiction extends not only to government agencies orinstrumentalities, but also to governmentowned and controlledcorporations with original charters as well as other governmentowned or controlled corporations without original charters.TheConstitution and existing laws mandate COA to audit allgovernment agencies, including governmentowned and controlledcorporations (GOCCs) with original charters. An LWD is aGOCC with an original charter. x x x The COAs audit jurisdictionextends not only to government agencies or instrumentalities,but also to governmentowned and controlled corporations withoriginal charters as well as other governmentowned orcontrolled corporations without original charters.

Same Same The determining factor of COAs auditjurisdiction is government ownership or control of the corporation.The determining factor of COAs audit jurisdiction isgovernmentownership or control of the corporation. In PhilippineVeterans Bank Employees UnionNUBE v. Philippine VeteransBank, the Court even ruled that the criterion of ownership andcontrol is more important than the issue of original charter.

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* EN BANC.



364

364 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

Corporation Law Congress cannot enact a law creating aprivate corporation with a special charter Since privatecorporations cannot have special charters, it follows that Congresscan create corporations with special charters only if suchcorporations are governmentowned or controlled.In short,Congress cannot enact a law creating a private corporation with aspecial charter. Such legislation would be unconstitutional.Private corporations may exist only under a general law. If thecorporation is private, it must necessarily exist under a generallaw. Stated differently, only corporations created under a generallaw can qualify as private corporations. Under existing laws, thatgeneral law is the Corporation Code, except that the CooperativeCode governs the incorporation of cooperatives. The Constitutionauthorizes Congress to create governmentowned or controlledcorporations through special charters. Since private corporationscannot have special charters, it follows that Congress can createcorporations with special charters only if such corporations aregovernmentowned or controlled.

Same Local Water Districts Local Water Districts (LWDs) arenot private corporations because they are not created under theCorporation Code.Obviously, LWDs are not private corporationsbecause they are not created under the Corporation Code. LWDsare not registered with the Securities and Exchange Commission.Section 14 of the Corporation Code states that [A]ll corporationsorganized under this code shall file with the Securities andExchange Commission articles of incorporation x x x. LWDs haveno articles of incorporation, no incorporators and no stockholdersor members. There are no stockholders or members to elect theboard directors of LWDs as in the case of all corporationsregistered with the Securities and Exchange Commission. Thelocal mayor or the provincial governor appoints the directors ofLWDs for a fixed term of office.

Same Same LWDs can validly exist only if they aregovernmentowned or controlled.LWDs exist by virtue of PD198, which constitutes their special charter. Since under theConstitution only governmentowned or controlled corporationsmay have special charters, LWDs can validly exist only if they aregovernmentowned or controlled. To claim that LWDs are private



corporations with a special charter is to admit that their existenceis constitutionally infirm.

Same Same LWDs derive their legal existence and powerfrom PD 198.Unlike private corporations, which derive theirlegal existence and power from the Corporation Code, LWDsderive their legal existence and power from PD 198.

Same Same The Sangguniang Bayan may establish awaterworks system only in accordance with the provisions of PD198.The Sangguniang Bayan may establish a waterworkssystem only in accordance with

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VOL. 419, JANUARY 14, 2004 365

Feliciano vs. Commission on Audit

the provisions of PD 198. The Sangguniang Bayan has no powerto create a corporate entity that will operate its waterworkssystem. However, the Sangguniang Bayan may avail of existingenabling laws, like PD 198, to form and incorporate a waterdistrict, Besides, even assuming for the sake of argument that theSangguniang Bayan has the power to create corporations, theLWDs would remain governmentowned or controlledcorporations subject to COAs audit jurisdiction. The resolution ofthe Sangguniang Bayan would constitute an LWDs specialcharter, making the LWD a goyernmentowned and controlledcorporation with an original charter.

Same Same The board directors and other personnel ofLWDs are government employees subject to civil service laws andantigraft laws.The government owns and controls LWDs. Thegovernment organizes LWDs in accordance with a specific law,PD 198. There is no private party involved as coowner in thecreation of an LWD. Just prior to the creation of LWDs, thenational or local government owns and controls all their assets.The government controls LWDs because under PD 198 themunicipal or city mayor, or the provincial governor, appoints allthe board directors of an LWD for a fixed term of six years. Theboard directors of LWDs are not coowners of the LWDs. LWDshave no private stockholders or members. The board directors andother personnel of LWDs are government employees subject tocivil service laws and antigraft laws.



SPECIAL CIVIL ACTION in the Supreme Court.Certiorari.

The facts are stated in the opinion of the Court.Nathanille P. Roa for petitioner.The Solicitor General for respondents.

CARPIO, J.:

The Case

This is a petition for certiorari1 to annul the Commission on

Audits (COA) Resolution dated 3 January 2000 and theDecision dated 30 January 2001 denying the Motion forReconsideration. The COA denied petitioner Ranulfo C.Felicianos request for COA to cease all audit services, andto stop charging auditing fees, to Leyte Metropolitan WaterDistrict (LMWD). The COA also de

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1 Under Rule 64 of the 1997 Revised Rules of Court.

366

366 SUPREME COURT REPORTS ANNOTATEDFeliciano vs. Commission on Audit

nied petitioners request for COA to refund all auditing feespreviously paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIIIaudited the accounts of LMWD. Subsequently, LMWDreceived a letter from COA dated 19 July 1999 requestingpayment of auditing fees. As General Manager of LMWD,petitioner sent a reply dated 12 October 1999 informingCOAs Regional Director that the water district could notpay the auditing fees. Petitioner cited as basis for hisaction Sections 6 and 20 of Presidential Decree 198 (PD198),

2 as well as Section 18 of Republic Act No. 6758 (RA

6758). The Regional Director referred petitioners reply tothe COA Chairman on 18 October 1999.



On 19 October 1999, petitioner wrote COA through theRegional Director asking for refund of all auditing feesLMWD previously paid to COA.

On 16 March 2000, petitioner received COA ChairmanCelso D. Gangans Resolution dated 3 January 2000denying his requests. Petitioner filed a motion forreconsideration on 31 March 2000, which COA denied on30 January 2001.

On 13 March 2001, petitioner filed this instant petition.Attached to the petition were resolutions of the VisayasAssociation of Water Districts (VAWD) and the PhilippineAssociation of Water Districts (PAWD) supporting thepetition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COAsaudit jurisdiction over local water districts in Davao CityWater District v. Civil Service Commission and Commissionon Audit,

3 as follows:

The abovequoted provision [referring to Section 3(b) PD 198]definitely sets to naught petitioners contention that they areprivate corporations. It is clear therefrom that the power toappoint the members who will comprise the members of the Boardof Directors belong to the local executives of the local subdivisionunit where such districts are located. In contrast, the members ofthe Board of Directors or the trustees of a private

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2 As amended by Presidential Decrees Nos. 768 and 1479.3 G.R. Nos. 9523738, 13 September 1991, 201 SCRA 593.

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corporation are elected from among members or stockholdersthereof. It would not be amiss at this point to emphasize that aprivate corporation is created for the private purpose, benefit, aimand end of its members or stockholders. Necessarily, saidmembers or stockholders should be given a free hand to choosewho will compose the governing body of their corporation. But this



1.

2.

3.

is not the case here and this clearly indicates that petitioners arenot private corporations.

The COA also denied petitioners request for COA to stopcharging auditing fees as well as petitioners request forCOA to refund all auditing fees already paid.

The Issues

Petitioner contends that COA committed grave abuse ofdiscretion amounting to lack or excess of jurisdiction byauditing LMWD and requiring it to pay auditing fees.Petitioner raises the following issues for resolution:

Whether a Local Water District (LWD) createdunder PD 198, as amended, is a governmentownedor controlled corporation subject to the auditjurisdiction of COAWhether Section 20 of PD 198, as amended,prohibits COAs certified public accountants fromauditing local water districts andWhether Section 18 of RA 6758 prohibits the COAfrom charging governmentowned and controlledcorporations auditing fees.

The Ruling of the Court

The petition lacks merit.The Constitution and existing laws

4 mandate COA to

audit all government agencies, including governmentowned and controlled corporations (GOCCs) with originalcharters. An LWD is a GOCC with an original charter.Section 2(1), Article IXD of the Constitution provides forCOAs audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power,authority and duty to examine, audit, and settle all accountspertaining to the revenue and receipts of, and expenditures oruses of funds and property, owned or held in trust by, orpertaining to, the Government, or any of its subdivisions,agencies, or instrumentalities, including government

_______________



4 Section 26, Government Auditing Code of the Philippines.

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owned and controlled corporations with original charters, and ona postaudit basis: (a) constitutional bodies, commissions andoffices that have been granted fiscal autonomy under thisConstitution (b) autonomous state colleges and universities (c)other governmentowned or controlled corporations and theirsubsidiaries and (d) such nongovernmental entities receivingsubsidy or equity, directly or indirectly, from or through thegovernment, which are required by law or the granting institutionto submit to such audit as a condition of subsidy or equity.However, where the internal control system of the auditedagencies is inadequate, the Commission may adopt suchmeasures, including temporary or special preaudit, as arenecessary and appropriate to correct the deficiencies. It shall keepthe general accounts of the Government and, for such period asmay be provided by law, preserve the vouchers and othersupporting papers pertaining thereto. (Emphasis supplied)

The COAs audit jurisdiction extends not only togovernment agencies or instrumentalities, but also togovernmentowned and controlled corporations withoriginal charters as well as other governmentowned orcontrolled corporations without original charters.

Whether LWDs are Private or GovernmentOwned and Controlled Corporations with Original ChartersPetitioner seeks to revive a wellsettled issue. Petitionerasks for a reexamination of a doctrine backed by a longline of cases culminating in Davao City Water District v.Civil Service Commission

5 and just recently reiterated in

De Jesus v. Commission on Audit.6 Petitioner maintains

that LWDs are not governmentowned and controlledcorporations with original charters. Petitioner even arguesthat LWDs are private corporations. Petitioner asks theCourt to consider certain interpretations of the applicablelaws, which would give a new perspective to the issue ofthe true character of water districts.

7

Petitioner theorizes that what PD 198 created was theLocal Waters Utilities Administration (LWUA) and not



the LWDs. Petitioner claims that LWDs are createdpursuant to and not created directly by PD 198. Thus,petitioner concludes that PD 198 is not an originalcharter that would place LWDs within the

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5Supranote 3.6 G.R. No. 149154, 10 June 2003, 403 SCRA 666.7 Rollo, p. 7.

369


audit jurisdiction of COA as defined in Section 2(1), ArticleIXD of the Constitution. Petitioner elaborates that PD 198does not create LWDs since it does not expressly direct thecreation of such entities, but only provides for theirformation on an optional or voluntary basis.

8Petitioner

adds that the operative act that creates an LWD is theapproval of the Sanggunian Resolution as specified in PD198.

Petitioners contention deserves scant consideration.We begin by explaining the general framework under

the fundamental law. The Constitution recognizes twoclasses of corporations. The first refers to privatecorporations created under a general law. The second refersto governmentowned or controlled corporations created byspecial charters. Section 16, Article XII of the Constitutionprovides:

Sec. 16. The Congress shall not, except by general law, provide forthe formation, organization, or regulation of private corporations.Governmentowned or controlled corporations may be created orestablished by special charters in the interest of the common goodand subject to the test of economic viability.

The Constitution emphatically prohibits the creation ofprivate corporations except by a general law applicable toall citizens.

9 The purpose of this constitutional provision is

to ban private corporations created by special charters,which historically gave certain individuals, families orgroups special privileges denied to other citizens.

10



In short, Congress cannot enact a law creating a privatecorporation with a special charter. Such legislation wouldbe unconstitutional. Private corporations may exist onlyunder a general law. If the corporation is private, it mustnecessarily exist under a general law. Stated differently,only corporations created under a general law can qualifyas private corporations. Under existing laws, that

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8Ibid., p. 29.9 See National Development Company v. Philippine Veterans Bank,

G.R. Nos. 8413233, 10 December 1990, 192 SCRA 257.10 BERNAS, THE 1987 CONSTITUTION OF THE REPUBLIC OF

THE PHILIPPINES: A COMMENTARY 1181 (2003).

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general law is the Corporation Code,11 except that the

Cooperative Code governs the incorporation ofcooperatives.

12

The Constitution authorizes Congress to creategovernmentowned or controlled corporations throughspecial charters. Since private corporations cannot havespecial charters, it follows that Congress can createcorporations with special charters only if such corporationsare governmentowned or controlled.

Obviously, LWDs are not private corporations becausethey are not created under the Corporation Code. LWDsare not registered with the Securities and ExchangeCommission. Section 14 of the Corporation Code states that[A]ll corporations organized under this code shall file withthe Securities and Exchange Commission articles ofincorporation x x x. LWDs have no articles ofincorporation, no incorporators and no stockholders ormembers. There are no stockholders or members to electthe board directors of LWDs as in the case of allcorporations registered with the Securities and ExchangeCommission. The local mayor or the provincial governorappoints the directors of LWDs for a fixed term of office.This Court has ruled that LWDs are not created under theCorporation Code, thus:



(a)

From the foregoing pronouncement, it is clear that what has beenexcluded from the coverage of the CSC are those corporationscreated pursuant to the Corporation Code. Significantly,petitioners are not created under the said code, but on the contrary,they were created pursuant to a special law and are governedprimarily by its provision.

13

(Emphasis supplied)

LWDs exist by virtue of PD 198, which constitutes theirspecial charter. Since under the Constitution onlygovernmentowned or controlled corporations may havespecial charters, LWDs can validly exist only if they aregovernmentowned or controlled. To claim that LWDs areprivate corporations with a special charter is to admit thattheir existence is constitutionally infirm.

Unlike private corporations, which derive their legalexistence and power from the Corporation Code, LWDsderive their legal

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11 Batas Pambansa Blg. 68.12 Republic Act. No. 6938. Seealso Republic Act No. 6939 or the

Cooperative Development Authority Law.13Supranote 3.

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existence and power from PD 198. Sections 6 and 25 of PD198

14 provide:

Section 6. Formation of District.This Act is the source ofauthorization and power to form and maintain a district.For purposes of this Act, a district shall be considered as aquasipublic corporation performing public service andsupplying public wants. As such, a district shall exercisethe powers, rights and privileges given to privatecorporations under existing laws, in addition to thepowers granted in, and subject to such restrictionsimposed, under this Act.

The name of the local water district, which shall includethe name of the city, municipality, or province, or region



(b)

(c)

(d)

(e)

(f)

(g)

thereof, served by said system, followed by the wordsWater District.A description of the boundary of the district. In the case ofa city or municipality, such boundary may include alllands within the city or municipality. A district mayinclude one or more municipalities, cities or provinces, orportions thereof.A statement completely transferring any and allwaterworks and/or sewerage facilities managed, operatedby or under the control of such city, municipality orprovince to such district upon the filing of resolutionforming the district.A statement identifying the purpose for which the districtis formed, which shall include those purposes outlined inSection 5 above.The names of the initial directors of the district with thedate of expiration of term of office for each.A statement that the district may only be dissolved on thegrounds and under the conditions set forth in Section 44 ofthis Title.A statement acknowledging the powers, rights andobligations as set forth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer thatthe local legislative body has the power to dissolve, alter or affectthe district beyond that specifically provided for in this Act.

If two or more cities, municipalities or provinces, or anycombination thereof, desire to form a single district, a similarresolution shall be adopted in each city, municipality andprovince.

x x x

Sec. 25. Authorization.The district may exercise all thepowers which are expressly granted by this Title or whichare necessarily implied from or incidental to the powersand purposes

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14 As amended by PD 1479.

372




herein stated. For the purpose of carrying out the objectives ofthis Act, a district is hereby granted the power of eminentdomain, the exercise thereof shall, however, be subject to reviewby the Administration. (Emphasis supplied)

Clearly, LWDs exist as corporations only by virtue of PD198, which expressly confers on LWDs corporate powers.Section 6 of PD 198 provides that LWDs shall exercise thepowers, rights and privileges given to private corporationsunder existing laws. Without PD 198, LWDs would haveno corporate powers. Thus, PD 198 constitutes the specialenabling charter of LWDs. The ineluctable conclusion isthat LWDs are governmentowned and controlledcorporations with a special charter.

The phrase governmentowned and controlledcorporations with original charters means GOCCs createdunder special laws and not under the general incorporationlaw. There is no difference between the term originalcharters and special charters. The Court clarified this inNational Service Corporation v. NLRC

15by citing the

deliberations in the Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session isresumed. Commissioner Romulo is recognized.

MR. ROMULO. Mr. Presiding Officer, I am amending myoriginal proposed amendment to now read as follows:including governmentowned or controlled corporationsWITH ORIGINAL CHARTERS. The purpose of thisamendment is to indicate that government corporationssuch as the GSIS and SSS, which have original charters,fall within the ambit of the civil service. However,corporations which are subsidiaries of these charteredagencies such as the Philippine Airlines Manila Hoteland Hyatt are excluded from the coverage of the civilservice.

THE PRESIDING OFFICER (Mr. Trenas). What does theCommittee say?

MR FOZ. Just one question, Mr. Presiding Officer, By theterm original charters, what exactly do we mean?

MR. ROMULO. We mean that they were created by law, byan act of Congress, or by special law.

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15 G.R. No. L69870, 29 November 1988, 168 SCRA 122.



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MR. FOZ. And not under the general corporation law.MR. ROMULO. That is correct. Mr. Presiding Officer.MR. FOZ. With that understanding and clarification, the

Committee accepts the amendment.MR. NATIVIDAD. Mr. Presiding Officer, so those created

by the general corporation law are out.MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil ServiceCommission,

16 the Court reiterated the meaning of the

phrase governmentowned and controlled corporationswith original charters in this wise:

By governmentowned or controlled corporation with originalcharter, We mean government owned or controlled corporationcreated by a special law and not under the Corporation Code of thePhilippines. Thus, in the case of Lumanta v. NLRC (G.R. No.82819, February 8, 1989, 170 SCRA 79, 82), We held:

The Court, in National Service Corporation (NASECO) v.National Labor Relations Commission, G.R. No. 69870,promulgated on 29 November 1988, quoting extensively from thedeliberations of the 1986 Constitutional Commission in respect ofthe intent and meaning of the new phrase with original charter,in effect held that governmentowned and controlled corporationswith original charter refer to corporations chartered by special lawas distinguished from corporations organized under our generalincorporation statutethe Corporation Code. In NASECO, thecompany involved had been organized under the generalincorporation statute and was a subsidiary of the NationalInvestment Development Corporation (NEDC) which in turn wasa subsidiary of the Philippine National Bank, a bank chartered bya special statute. Thus, governmentowned or controlledcorporations like NASECO are effectively, excluded from thescope of the Civil Service. (Emphasis supplied)

Petitioners contention that the Sangguniang Bayanresolution creates the LWDs assumes that theSangguniang Bayan has the power to create corporations.This is a patently baseless assumption. The LocalGovernment Code

17 does not vest in the Sangguniang



Bayan the power to create corporations.18 What the Local

Gov

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16Supranote 3.17 Republic Act No. 7160.18 SeeSection 447 of the Local Government Code on the powers of the

Sangguniang Bayan.

374


ernment Code empowers the Sangguniang Bayan to do is toprovide for the establishment of a waterworks systemsubject to existing laws. Thus, Section 447(5)(vii) of theLocal Government Code provides:

SECTION 447. Powers, Duties, Functions and Compensation.(a) The sangguniang bayan, as the legislative body of themunicipality, shall enact ordinances, approve resolutions andappropriate funds for the general welfare of the municipality andits inhabitants pursuant to Section 16 of this Code and in theproper exercise of the corporate powers of the municipality asprovided for under Section 22 of this Code, and shall:

x x x

(vii) Subject to existing laws, provide for the establishment, operation,maintenance, and repair of an efficient waterworks system to supplywater for the inhabitants regulate the construction, maintenance, repairand use of hydrants, pumps, cisterns and reservoirs protect the purityand quantity of the water supply of the municipality and, for thispurpose, extend the coverage of appropriate ordinances over all territorywithin the drainage area of said water supply and within one hundred(100) meters of the reservoir, conduit, canal, aqueduct pumping station,or watershed used in connection with the water service and regulate theconsumption, use or wastage of water

x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworkssystem only in accordance with the provisions of PD 198.The Sangguniang Bayan has no power to create a corporateentity that will operate its waterworks system. However,



the Sangguniang Bayan may avail of existing enablinglaws, like PD 198, to form and incorporate a water district,Besides, even assuming for the sake of argument that theSangguniang Bayan has the power to create corporations,the LWDs would remain governmentowned or controlledcorporations subject to COAs audit jurisdiction. Theresolution of the Sangguniang Bayan would constitute anLWDs special charter, making the LWD a goyernmentowned and controlled corporation with an original charter.In any event, the Court has already ruled in Baguio WaterDistrict v. Trajano

19that the Sangguniang Bayan

resolution is not the special charter of LWDs, thus:

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19 212 Phil. 674 127 SCRA 730 (1984).

375


While it is true that a resolution of a local sanggunian is stillnecessary for the final creation of a district, this Court is of theopinion that said resolution cannot be considered as its charter,the same being intended only to implement the provisions of saiddecree.

Petitioner further contends that a law must create directlyand explicitly a GOCC in order that it may have an originalcharter. In short, petitioner argues that one special lawcannot serve as enabling law for several GOCCs but onlyfor one GOCC. Section 16, Article XII of the Constitutionmandates that Congress shall not, except by generallaw,

20 provide for the creation, of private corporations.

Thus, the Constitution prohibits one special law to createone private corporation, requiring instead a general lawto create private corporations. In contrast, the sameSection 16 states that Governmentowned or controlled,corporations may be created or established by specialcharters. Thus, the Constitution permits Congress tocreate a GOCC with a special charter. There is, however,no prohibition on Congress to create several GOCCs of thesame class under one special enabling charter.

The rationale behind the prohibition on private



corporations having special charters does not apply toGOCCs. There is no danger of creating special privileges tocertain individuals, families or groups if there is onespecial law creating each GOCC. Certainly, such dangerwill not exist whether one special law creates one GOCC, orone special enabling law creates several GOCCs. Thus,Congress may create GOCCs either by special chartersspecific to each GOCC, or by one special enabling charterapplicable to a class of GOCCs, like PD 198 which appliesonly to LWDs.

Petitioner also contends that LWDs are privatecorporations because Section 6 of PD 198

21 declares that

LWDs shall be considered quasipublic in nature.Petitioners rationale is that only private corporations maybe deemed quasipublic and not public corporations. Putdifferently, petitioner rationalizes that a publiccorporationcannot be deemed quasipublic because such corporationis already public. Petitioner concludes that the term quasipublic can only apply to private corporations. Petitionersargument is inconsequential.

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20 Emphasis supplied.21 As amended by PD 1479.

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Petitioner forgets that the constitutional criterion on theexercise of COAs audit jurisdiction depends on thegovernments ownership or control of a corporation. Thenature of the corporation, whether it is private, quasipublic, or public is immaterial.

The Constitution vests in the COA audit jurisdictionover governmentowned and controlled corporations withoriginal charters, as well as governmentowned orcontrolled corporations without original charters. GOCCswith original charters are subject to COA preaudit, whileGOCCs without original charters are subject to COA postaudit. GOCCs without original charters refer tocorporations created under the Corporation Code but areowned or controlled by the government. The nature or



purpose of the corporation is not material in determiningCOAs audit jurisdiction. Neither is the manner of creationof a corporation, whether under a general or special law.

The determining factor of COAs audit jurisdiction isgovernment ownership or control of the corporation. InPhilippine Veterans Bank Employees UnionNUBE v.Philippine Veterans Bank,

22 the Court even ruled that the

criterion of ownership and control is more important thanthe issue of original charter, thus:

This point is important because the Constitution provides in itsArticle IXB, Section 2(1) that the Civil Service embraces allbranches, subdivisions, instrumentalities, and agencies of theGovernment, including governmentowned or controlledcorporations with original charters. As the Bank is not owned orcontrolled by the Government although it does have an originalcharter in the form of R.A. No. 3518,23 it clearly does not fall underthe Civil Service and should be regarded as an ordinarycommercial corporation. Section 28 of the said law so provides.The consequence is that the relations of the Bank with itsemployees should be governed by the labor laws, under which infact they have already been paid some of their claims. (Emphasissupplied)

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22 G.R. No. 67125, 24 August 1990, 189 SCRA 14.23 Under Section 3 of Republic Act No. 7169 which took effect on 2

January 1992, the operations and changes in the capital structure of theVeterans Bank, as well as other amendments to its articles ofincorporation and bylaws as prescribed under Republic Act No. 3518,shall be in accordance with the Corporation Code, the General BankingAct, and other related laws.

377


Certainly, the government owns and controls LWDs. Thegovernment organizes LWDs in accordance with a specificlaw, PD 198. There is no private party involved as coownerin the creation of an LWD. Just prior to the creation ofLWDs, the national or local government owns and controlsall their assets. The government controls LWDs because



under PD 198 the municipal or city mayor, or theprovincial governor, appoints all the board directors of anLWD for a fixed term of six years.

24 The board directors of

LWDs are not coowners of the LWDs. LWDs have noprivate stockholders or members. The board directors andother personnel of LWDs are government employeessubject to civil service laws

25 and antigraft laws.

26

While Section 8 of PD 198 states that [N]o publicofficial shall serve as director of an LWD, it only meansthat the appointees to the board of directors of LWDs shallcome from the private sector. Once such private sectorrepresentatives assume office as directors, they becomepublic officials governed by the civil service law and antigraft laws. Otherwise, Section 8 of PD 198 would contra

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24 Section 3 (b) of PD 198 provides:

(b) Appointing Authority.The person empowered to appoint the members of theBoard of Directors of a local water district depending upon the geographiccoverage and population makeup of the particular district. In the event that morethan seventyfive percent of the total active water service connections of localwater districts are within the boundary of any city of municipality, the appointingauthority shall be the mayor of the city or municipality, as the case may beotherwise, the appointing authority shall be the governor of the province withinwhich the district is located: Provided, That if the existing waterworks system inthe city or municipality established as a water district under this Decree isoperated and managed by the province, initial appointment shall be extended bythe governor of the province. Subsequent appointments shall be as specified asherein.

If portions of more than one province are included within the boundary of thedistrict, and the appointing authority isto be the governor, then the power toappoint shall rotate between the governors involved with the initial appointmentsmade by the governor in whose province the greatest number of serviceconnections exists.

25 Baguio Water District v. Trajano,supranote 20 Davao City WaterDistrict v. Civil Service Commission,supranote 3.

26 Morales v. People, G.R. No. 144047, 26 July 2002, 385 SCRA 259.

378




vene Section 2(1), Article IXB of the Constitution declaringthat the civil service includes governmentowned orcontrolled corporations with original charters.

If LWDs are neither GOCCs with original charters norGOCCs without original charters, then they would fallunder the term agencies or instrumentalities of thegovernment and thus still subject to COAs auditjurisdiction. However, the stark and undeniable fact is thatthe government owns LWDs. Section 45

27 of PD 198

recognizes government ownership of LWDs when Section45 states that the board of directors may dissolve an LWDonly on the condition that another public entity hasacquired the assets of the district and has assumed allobligations and liabilities attached thereto. Theimplication is clear that an LWD is a public and not aprivate entity.

Petitioner does not allege that some entity other thanthe government owns or controls LWDs. Instead, petitioneradvances the theory that the Water Districts owner is theDistrict itself.

28 Assuming for the sake of argument that an

LWD is selfowned,29 as petitioner describes an LWD, the

government in any event controls all LWDs. First,government officials appoint all LWD directors to a fixedterm of office. Second, any per diem of LWD directors inexcess of P50 is subject to the approval of the Local WaterUtilities Administration, and directors can receive no othercompensation for their services to the LWD.

30 Third, the

Local Water Utilities Administration can require LWDs tomerge or consolidate their facilities or operations.

31 This

element of government control subjects LWDs to COAsaudit jurisdiction.

Petitioner argues that upon the enactment of PD 198,LWDs became private entities through the transfer ofownership of water facilities from local government units totheir respective water districts as mandated by PD 198.Petitioner is grasping at straws. Privatization involves thetransfer of government assets to a private entity. Petitionerconcedes that the owner of the assets transferred underSection 6 (c) of PD 198 is no other than the LWD

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27 As amended by PD 768.28 Rollo, p. 16.29Ibid.



30 Section 13, PD 198.31 Section 43, PD 198.

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itself.32 The transfer of assets mandated by PD 198 is a

transfer of the water systems facilities managed, operatedby or under the control of such city, municipality orprovince to such (water) district.

33 In short, the transfer is

from one government entity to another government entity.PD 198 is bereft of any indication that the transfer is toprivatize the operation and control of water systems.

Finally, petitioner claims that even on the assumptionthat the government owns and controls LWDs,

34 Section 20

of PD 198 prevents COA from auditing LWDs.Section 20of PD 198 provides:

Sec. 20. System of Business Administration.The Board shall, assoon as practicable, prescribe and define by resolution a system ofbusiness administration and accounting for the district, whichshall be patterned upon and conform to the standards establishedby the Administration. Auditing shall be performed by a certifiedpublic accountant not in the government service. TheAdministration may, however, conduct annual audits of the fiscaloperations of the district to be performed by an auditor retainedby the Administration. Expenses incurred in connection therewithshall be borne equally by the water district concerned and theAdministration.

35

(Emphasis supplied)

Petitioner argues that PD 198 expressly prohibits COAauditors, or any government auditor for that matter, fromauditing LWDs. Petitioner asserts that this is the import ofthe second sentence of Section 20 of PD 198 when it statesthat [A]uditing shall be performed by a certified publicaccountant not in the government service.

36

PD 198 cannot prevail over the Constitution. No amountof clever legislation can exclude GOCCs like LWDs fromCOAs audit jurisdiction. Section 3, Article IXC of theConstitution outlaws any scheme or devise to escape COAsaudit jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the



Government or its subsidiary in any guise whatever, or anyinvestment of public funds, from the jurisdiction of theCommission on Audit. (Emphasis supplied)

_______________

32 Rollo, p. 644.33 Section 6(c) of PD 198, as amended by PD 768.34Supra, note 2.35 Section 20 of PD 198, as amended by PD 768.36 Rollo, p. 9.

380


The framers of the Constitution added Section 3, ArticleIXD of the Constitution precisely to annul provisions ofPresidential Decrees, like that of Section 20 of PD 198, thatexempt GOCCs from COA audit. The following exchange inthe deliberations of the Constitutional Commissionelucidates this intent of the framers:

MR. OPLE: I propose to add a new section on line 9, page 2 of theamended committee report which reads: NO LAW SHALL BEPASSED EXEMPTING ANY ENTITY OF THE GOVERNMENTOR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANYINVESTMENTS OF PUBLIC FUNDS, FROM THEJURISDICTION, OF THE COMMISSION ON AUDIT.

May I explain my reasons on record.We know that a number of entities of the government took

advantage of the absence of a legislature in the past to obtainpresidential decrees exempting themselves from the jurisdiction ofthe Commission on Audit, one notable example of which is thePhilippine National Oil Company which is really an empty shell.It is a holding corporation by itself, and strictly on its ownaccount. Its funds were not very impressive in quantity butunderneath that shell there were billions of pesos in a multiplicityof companies. The PNOCthe empty shellunder a presidentialdecree was covered by the jurisdiction of the Commission onAudit, but the billions of pesos invested in different corporationsunderneath it were exempted from the coverage of theCommission on Audit.

Another example is the United Coconut Planters Bank. The



Commission on Audit has determined that the coconut levy is aform of taxation and that, therefore, these funds attributed to theshares of 1,400,000 coconut farmers are, in effect, public funds.And that was, I think, the basis of the PCGG in undertaking thatlast major sequestration of up to 94 percent of all the shares inthe United Coconut Planters Bank. The charter of the UCPB,through a presidential decree, exempted it from the jurisdiction ofthe Commission on Audit, it being a private organization.

So these are the fetuses of future abuse that we are slayingright here with this additional section.

May I repeat the amendment, Madam President: NO LAWSHALL BE PASSED EXEMPTING ANY ENTITY OF THEGOVERNMENT OR ITS SUBSIDIARY IN ANY GUISEWHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS,FROM THE JURISDICTION OF THE COMMISSION ONAUDIT.

THE PRESIDENT: May we know the position of theCommittee on the proposed amendment of Commissioner Ople?MR. JAMIR: If the honorable Commissioner will change thenumber of the section to 4, we will accept the amendment.

381


MR. OPLE: Gladly, Madam President. Thank you.MR. DE CASTRO: Madam President, point of inquiry on the

new amendment.THE PRESIDENT: Commissioner de Castro is recognized.MR. DE CASTRO: Thank you. May I just ask a few questions

of Commissioner Ople.Is that not included in Section 2 (1) where it states: (c)

governmentowned or controlled corporations and theirsubsidiaries? So that if these governmentowned and controlledcorporations and their subsidiaries are subjected to the audit ofthe COA, any law exempting certain government corporations orsubsidiaries will be already unconstitutional.

So I believe, Madam President, that the proposed amendmentis unnecessary.

MR. MONSOD: Madam President, since this has beenaccepted, we would like to reply to the point raised byCommissioner de Castro.

THE PRESIDENT: Commissioner Monsod will please proceed.MR. MONSOD: I think the Commissioner is trying to avoid the



situation that happened in the past, because the same provisionwas in the 1973 Constitution and yet somehow a law or a decreewas passed where certain institutions were exempted from audit.We are just reaffirming, emphasizing, the role of the Commissionon Audit so that this problem will never arise in the future.

37

There is an irreconcilable conflict between the secondsentence of Section 20 of PD 198 prohibiting COA auditorsfrom auditing LWDs and Sections 2(1) and 3, Article IXDof the Constitution vesting in COA the power to audit allGOCCs. We rule that the second sentence of Section 20 ofPD 198 is unconstitutional since it violates Sections 2(1)and 3, Article IXD of the Constitution.

On the Legality of COAs Practice of Charging Auditing FeesPetitioner claims that the auditing fees COA chargesLWDs for audit services violate the prohibition in Section18 of RA 6758,

38 which states:

Sec. 18. Additional Compensation of Commission on AuditPersonnel and of other Agencies.In order to preserve theindependence and

_______________

37 Record of the Constitutional Commission, Vol. I, pp. 606607.38 Compensation and Position Classification Act of 1989.

382


integrity of the Commission on Audit (COA), its officials andemployees are prohibited from receiving salaries, honoraria,bonuses, allowances or other emoluments from any governmententity, local government unit, governmentowned or controlledcorporations, and government financial institutions, except thosecompensation paid directly by COA out of its appropriations andcontributions.

Government entities, including governmentowned orcontrolled corporations including financial institutions and localgovernment units are hereby prohibited from assessing or billingother government entities, including governmentowned orcontrolled corporations including financial institutions or local



government units for services rendered by its officials andemployees as part of their regular functions for purposes of payingadditional compensation to said officials and employees.(Emphasis supplied)

Claiming that Section 18 is absolute and leaves nodoubt,

39 petitioner asks COA to discontinue its practice of

charging auditing fees to LWDs since such practiceallegedly violates the law.

Petitioners claim has no basis.Section 18 of RA 6758 prohibits COA personnel from

receiving any kind of compensation from any governmententity except compensation paid directly by COA out of itsappropriations and contributions. Thus, RA 6758 itselfrecognizes an exception to the statutory ban on COApersonnel receiving compensation from GOCCs. In Tejadav. Domingo,

40 the Court declared:

There can be no question that Section 18 of Republic Act No. 6758is designed to strengthen further the policy x x x to preserve theindependence and integrity of the COA, by explicitlyPROHIBITING: (1) COA officials and employees from receivingsalaries, honoraria, bonuses, allowances or other emolumentsfrom any government entity, local government unit, GOCCs andgovernment financial institutions, except such compensation paiddirectly by the COA out of its appropriations and contributions,and (2) government entities, including GOCCs, governmentfinancial institutions and local government units from assessingor billing other government entities, GOCCs, governmentfinancial institutions or local government units for servicesrendered by the latters officials and employees as part of theirregular functions for purposes of paying additional compensationto said officials and employees.

x x x

_______________

39 Rollo, p. 11.40 G.R. No. 91860, 13 January 1992, 205 SCRA 138.

383




The first aspect of the strategy is directed to the COA itself, whilethe second aspect is addressed directly against the GOCCs andgovernment financial institutions. Under the first, COA personnelassigned to auditing units of GOCCs or government financialinstitutions can receive only such salaries, allowances or fringebenefits paid directly by the COA out of its appropriations andcontributions. The contributions referred to are the cost of auditservices earlier mentioned which cannot include the extraemoluments or benefits now claimed by petitioners. The COA isfurther barred from assessing or billing GOCCs and governmentfinancial institutions for services rendered by its personnel aspart of their regular audit functions for purposes of payingadditional compensation to such personnel, x x x. (Emphasissupplied)

InTejada,the Court explained the meaning of the wordcontributions in Section 18 of RA 6758, which allows COAto charge GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost ofaudit services which are based on the actual cost of the auditfunction in the corporation concerned plus a reasonable rate tocover overhead expenses. The actual audit cost shall includepersonnel services, maintenance and other operating expenses,depreciation on capital and equipment and outofpocketexpenses. In respect to the allowances and fringe benefits grantedby the GOCCs to the COA personnel assigned to the formersauditing units, the same shall be directly defrayed by COA fromits own appropriations x x x.

41

COA may charge GOCCs actual audit cost but GOCCsmust pay the same directly to COA and not to COAauditors. Petitioner has not alleged that COA chargesLWDs auditing fees in excess of COAs actual audit cost.Neither has petitioner alleged that the auditing fees arepaid by LWDs directly to individual COA auditors. Thus,petitioners contention must fail.

WHEREFORE, the Resolution of the Commission onAudit dated 3 January 2000 and the Decision dated 30January 2001 denying petitioners Motion forReconsideration are AFFIRMED. The second sentence ofSection 20 of Presidential Decree No. 198 is declared VOIDfor being inconsistent with Sections 2 (1) and 3, Article IXD of the Constitution. No costs.

_______________



41Ibid.

384

384 SUPREME COURT REPORTS ANNOTATEDZamora vs. Caballero

SO ORDERED.

Davide, Jr. (C.J.), Puno, Vitug, Panganiban,Quisumbing, YnaresSantiago, SandovalGutierrez,AustriaMartinez, Corona, CarpioMorales, Callejo, Sr.,Azcuna and Tinga, JJ., concur.

Judgment and resolution affirmed, second sentence ofSec. 20, PD 198 void for being inconsistent with Secs. 2(i)and 3, Art, IXD of the Constitution.

Note.The exercise of the power of respondent Court ofAppeals, to decide administrative cases invokingexpenditure of public funds involves the quasijudicialaspect of government audit. (Uy vs. Commission on Audit,328 SCRA 607 [2000])

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