PGMC asks Aquino to intervene in PCSO lotto row

MANILA, Philippines – Berjaya-led Philippine Gaming Management Corp. (PGMC), which operates and leases online lottery machines in Luzon, wants President Benigno Aquino III to intervene in its legal row with the state-run Philippine Charity Sweepstakes Office (PCSO).

“We will appeal to the president regarding this case before planning to pursue suing PCSO. We are preparing to sue them if we have to,” PGMC legal counsel Jose Bernas said in a roundtable meeting on Tuesday, April 2.

PGMC, the local gaming unit of Malaysian conglomerate Berjaya Bhd., is questioning the state-run charity organization’s decisions during the past months favoring rival Pacific Online Systems Corp., company partly-owned by Sy-led Belle Corp.

Among the PCSO decisions that PGMC is contesting are:

• the extension of Pacific Online’s contract for another 2 years after expiring in March 2013 
• permission for Pacific Online to do business in the Luzon business area, which PGMC claimed as exclusively theirs

Bernas said that the contract extension is a violation of Republic Act 9184 or the Procurement Reform Act of the Philippines.

“There was no bidding. Pacific Online just submitted a disclosure to the stock exchange last week saying that their contract has been extended. If there is (a bidding), PGMC w(ould have) participate(d) in the bid,” he said.

One of the governing principles in the Procurement Reform Act is the “transparency in the procurement process and in the implementation of procurement contracts”.

PGMC claimed that the contract extension was a violation of this provision due to the lack of bidding.

The bidding should have happened in 2012 since full roll out of contracts takes about 6 months to a year and that all interested parties should have been notified, Bernas stressed. 

In a disclosure submitted by Pacific Online to the Philippine Stock Exchange (PSE) last Tuesday, March 26, the company said that they, along with PCSO, have “agreed to extend the term of (Pacific Online’s) Equipment Lease Agreement (ELA)” starting April 1, 2013 to July 31, 2015.

The disclosure also highlighted that Pacific Online will retain its “online lottery operations in the Visayas and Mindanao regions” upon the effectivity of the extension.

Bernas said that PGMC sent a letter to PCSO expressing their willingness to take on the contract of the online lottery operations in Visayas and Mindanao, which would have been available had not PCSO and Pacific Online reached the agreement on the contract extension. PGMC’s contract is valid until August 2015.

PCSO, however, has not given their answer to PGMC’s interest, according to Bernas.

Exclusivity

Another issue PGMC is questioning PCSO about is the geographic exclusivity claim of their operations. Bernas said that PGMC has contractual exclusivity over Luzon.

“We have contractual exclusivity over Luzon, that stands on the contract. The breaching of this (provision) is a complete disregard of rules,” Bernas said.

He cited the installation of Pacific Online of around 700 lottery machines in different parts of Luzon, particularly in Palawan, from July 2012 to around January 2013. This would cost PGMC around P1 billion in revenues, Bernas added.

In November 2012, the Philippine Daily Inquirer reported that PCSO disputed the claims of PGMC regarding the geographic exclusivity of the company’s operations in Luzon, saying such claim is “erroneous”. PCSO said that the clause is only until 2007 so the claim has no legal basis anymore.

This after PGMC filed a contempt case against PCSO officials before the Makati Regional Trial Court for allowing Pacific Online to operate in some parts of Luzon.

Bernas, in a press release in December 2012, said that PGMC is set to take all the “necessary legal steps to thwart the efforts of (PCSO) to financially weaken the company.”

He said that PCSO “told” PGMC early in 2012 to reduce its rental rates to 6.5% from 10% and that their contract will only be good for the remainder of 2014. PCSO then amended their demand and said that the rate will be 7.85% but PGMC should shoulder the paper cost, amounting to about 1.5% of overall costs. This will bring down PGMC’s rate down to 6.35%, lower than the initially proposed 6.5%.

This is in stark contrast with the reduction in rate demanded by PCSO to Pacific Online. The reduction sees the standard 10% to about 9.85% of Pacific Online’s rental rate, which went lower to about 7.7% as part of the contract extension agreement by the company and PCSO. The company will also shoulder the paper cost.

This 7.7% rental rate, according to Pacific Online’s disclosure, is to “further boost the funds available for PCSO’s charitable activities”.

With this reduction in the rental rate, plus shouldering the paper costs, Bernas hinted that Pacific Online’s revenues may significantly go down. Pacific Online’s revenue in 2012 amounted to about P1 billion with the 10% rental rate and operating costs at around P500 million.

With the reduced rental rate (7.7%) plus the paper costs (1.5% to 2%), revenue is expected to hit at around P700 million with operating costs, including the P180 million paper costs. Net profit will just hit at around P20 million, according to Bernas’ calculations

In 2012, PGMC reported a revenue of about P20 billion. With the 10% rental rate agreement with PCSO, the company’s net profit amounts to a little less than P2 billion.

Berjaya Philippines, local arm of Malaysian leisure giant Berjaya Bhd, holds the distribution rights in the Philippines of famed Japanese car brand, Mazda, food outlet Papa John’s and the social network-turned-gaming-site Friendster. – Rappler.com