P1 billion in tobacco funds misused

Aries C. Rufo

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Auditors found Ilocos Sur – mostly under Luis "Chavit" Singson – misused, misappropriated, or failed to account for at least P1.3 B of the tobacco fund

WHITE ELEPHANT. Funded by the tobacco tax collection, this tomato processing plant in Ilocos Sur has not processed a single tomato. Photo by Aries Rufo

Ombudsman Conchita Carpio-Morales on Thursday, July 4, announced that she had ordered the filing of graft charges against former Ilocos Sur governors Luis “Chavit” Singson and  Deogracias Victor Savellano, who misused more than P26 million of the province’s share in the tobacco excise tax proceeds. It’s a small amount to be indicted for. In this Newsbreak report published on May 4, 2009, we showed how the provincial government – mostly under Singson – in fact misused, misappropriated, or failed to account for at least P1.3 billion of the tobacco fund. Four tobacco-producing provinces receive 15% of the tobacco excise tax collection: Abra, Ilocos Sur, Ilocos Norte, and La Union. Among them, it was in Ilocos Sur where government auditors found white elephant projects and questionable expenses.


ILOCOS SUR, Philippines – In Santa town in this province, a huge tomato processing plant stands in a deserted area. The silence of the place is eerie, and visitors can only guess how it was as a beehive of activity for a decade or so.

The fact, however, is that it has not processed a single tomato since it was built in 1999. Residents derisively call it the province’s version of the Bataan Nuclear Power Plant.

The unused tomato processing plant, constructed to the tune of P332 million, is one of the poorly thought-out projects financed by government funds that were supposed to improve the economic condition of tobacco farmers.

It is one of the projects worth a total of at least P1.3 billion that government auditors found were either misappropriated, misused, or remained unaccounted for by the provincial government of Ilocos Sur in a span of seven years, based on available records.

The amount could be bigger, considering that it has been receiving share in the tobacco excise tax for 16 years now, or since 1993, but the only available findings of the Commission of Audit (COA) are from 1999 to 2005.

Republic Act 7171, or “An Act to Promote the Development of the Farmers in the Virginia Tobacco-Producing Provinces,” was enacted in 1992 through the efforts of Ilocos Sur Rep. Luis “Chavit” Singson (who would become governor for nine years after that). It mandates that the provinces of Ilocos Sur, La Union, Ilocos Norte, and Abra get 15 percent of the taxes on Virginia type A cigarettes collected by the national government.

Lion’s share

We focused our investigation on Ilocos Sur because it has been getting the lion’s share of the tobacco excise tax fund for local governments. It is also where government auditors found cases of blatant misuse of the funds, repeatedly committed over the years, and have remained unresolved until now.

La Union Rep. Victor Ortega told Newsbreak that the15-percent tax share is divided as follows: 50 percent for Ilocos Sur; 20 percent, La Union; I5 percent, Ilocos Norte; and 5 percent, Abra. The share corresponds to the volume of tobacco produced by each province.

According to available data from the Department of Budget and Management, the four provinces got a combined tobacco excise tax share of P10.057 billion from 1999 to 2007. Based on the sharing scheme among the provinces, half of the amount—P5.02 billion—went to Ilocos Sur.

Tobacco Excise Tax Share of Ilocos Region
Year Amount (in billion pesos)
1999 1.77
2000 1.262
2001 1.255
2002 1.237
2003 .100
2004 1.480
2005 2.119
2006 .677
2007 .157
TOTAL 10.057
SOURCE: Department of Budget and Management

Ilocos Sur Governor Deogracias Victor Savellano said that the tobacco tax share is divided this way: 40 percent for the provincial government; 30 percent, municipal governments; and 30percent, district representatives.

If, based on this formula, the provincial government received P3 billion from 1999 to 2006, then a third of that amount was found by COA to have been misused or unaccounted for. In that period, Singson was governor for five years; Savellano, for three.

National notoriety

The tobacco excise tax was largely uncontroversial since its inception, but gained national notoriety in 2000 when it was used as a basis for the impeachment of President Joseph Estrada.

Singson, then on his last term as governor, alleged that Estrada took P130 million of the province’s P200-million tobacco excise tax share, and Estrada’s crony Charlie “Atong” Ang (Singson’s rival for the control of the botched Bingo 2-Ball, a legal version of jueteng) pocketed P25 million from the excise tax.

Estrada was ousted in January 2001 and convicted of plunder in September 2007. Ang, who admitted to his crime, was found guilty of corruption of public official and was sentenced to six years in prison.

However, Singson’s accusing Estrada of treating the tobacco excise tax as a personal fund is like the pot calling the kettle black. Before he blew the whistle on President Estrada, Singson had already been investigated for misusing Ilocos Sur’s tobacco tax fund.

In 1999, a special audit of the province’s share in the excise tax was conducted on the behest of the Ilocos chapter of the Integrated Bar of the Philippines. The audit covered the period from January 1996 to June 1999.

By December 1999, or a month before Estrada’s downfall, the National Bureau of Investigation had recommended to the justice department the filing of plunder charges against Singson in connection with a P170-million cash advance from the tobacco excise tax share.

Overpriced plant

RA 7171 is specific with the kinds of projects that the LGUs can fund with their share from the tobacco excise tax:

  • Cooperative projects that will increase the tobacco farmers’ income.
  • Development of alternative farming system.
  • Agro-industrial projects that will be co-managed and eventually owned by tobacco farmers.
  • Infrastructure projects, such as farm-to-market roads.

None of the Ilocos Sur projects worth P1.3 billion fell under these classifications, the COA findings indicate.

A total of P86.142 million from the province’s tobacco tax share from1996 to 1999 was initially appropriated for the construction of the tomato paste plant. It was augmented by a P245.887-million loan from the Philippine National Bank. The plan was to source the payments to the PNB from succeeding remittances from RA 7171.

COA found the construction project overpriced by P24.7 million, benefiting a private contractor, NS International Inc. The contractor was paid P73.5 million for civil works when the evaluated cost was only P48.7 million. COA sought a refund of the overprice.

Funding private entity

The provincial government also left to the discretion of NS International Inc. how proceeds from the PNB loan would be appropriated. The contractor, in turn, failed to substantially document a total of P123million in “chargeable expenses,” the COA report noted.

We gathered from provincial sources that the PNB loan has ballooned to P1billion, including interests, from the original P245.887 million, allegedly due to the provincial government’s failure to pay the loan. Governor Savellano wouldn’t confirm it, and said he was “not sure” how much the provincial government now owes the PNB.

The provincial government also created the corporation Ilocos Sur Tomato Paste Plant Inc. (ISTPP) to manage the tomato paste plant. The COA found, however, that the Sangguniang Panlalawigan did not authorize the creation of ISTPP. This created a situation where the provincial government was financing a private project.

Securities and Exchange Commission records show that the incorporators of ISTPP were private individuals, but Singson, representing the provincial government, was the major stockholder.

In its reply to COA, the provincial government stressed that some civil works items were not reflected in the submitted program of work, thus the additional expenses. It admitted, however, that there were procedural lapses in documenting the implementation of the project “due to unforeseen circumstances,” which it did not identify or explain.

Savellano, while admitting that the tomato paste plant had been idle for years, says it is now being rented out for P100,000 a month to a foreign firm. “At least, it is now making some revenue,” he says. If information on the unpaid PNB loan is true, however, that rental might be just enough to pay the monthly interests with the bank.

Barns and cash advances

Thirty-four tobacco flue-curing and re-drying facilities were constructed using money from RA 7171, but, like the tomato paste plant, they were attended by hasty, irregular transactions.

In 1998, the Sangguniang Panlalawigan appropriated P76 million for the construction of 34 flue curing barns. Yet, a contract was awarded to Fastduc Builders for P360.6 million.

The provincial government explained that there was indeed insufficient appropriation for the project, but it was banking on future tobacco tax shares from the national government to cover the difference. It said the urgency and nature of the project necessitated the hasty process. “Procedural lapses should not defeat the noble purpose of the project especially when there was no damage or injury caused to the government,” it said.

The COA was convinced that damage or injury to the public was committed, and that it appears private interests were served. Auditors found that the cost for the 34 barns was overpriced by P28 million.

The report also took note of cash advances totalling P190 million that were granted to Singson for supposed payment for the flue-curing barns. The COA said the cash advances should not have been allowed since “these were not intended for petty expenses and the disbursement exceeded P15,000,” as set forth in a COA Circular in February 1997.

The COA said Singson failed to present liquidation documents for the cash advances. It was only in August 2000, when Singson’s relationship with Estrada began to sour, that he presented documents.

Dubious NGO

EMPTY-HANDED. The tobacco fund is intended to help improve the lives of tobacco farmers. They remain poor despite billions of pesos received by Ilocos Sur. Photo by Aries Rufo

Replying to the findings, the provincial government said that the governor had the authority from the Sangguniang Panlalawigan to enter into a contract. It said time was running out on the project, thus justifying the emergency releases to Singson.

The COA said the provincial government failed to produce documents that would show that the equipment for the tobacco barns were purchased using Singson’s cash advances.

Some P300 million of the RA 7171 fund was granted to a non-government organization, which did not have the expertise to assist the provincial government in its projects. In 1998, the Southern Ilocos Sur Federation of Tobacco Based Cooperatives, which had assets of only P215,000, got the financial assistance, supposedly to operate the tomato paste plant.

Of the P300 million given to the federation, a total of P110.178 million were not properly documented. Its president, despite repeated requests, failed to submit the required papers to support its expenses. Of this amount, some P5 million granted to the NGO’s president remained unliquidated, the report said.

In2001, Singson ended his nine-year stint as governor, and his protégé Savellano succeeded him. In Savellano’s watch, the findings and recommendations of the special COA report were forgotten, and alleged irregularities in the use of RA 7171 funds continued.

ISTPPI: Regular beneficiary

In2003, the COA found that “improper charges” totalling P45.7 million were made by the provincial government against the tobacco excise tax fund.

That year, the Ilocos Sur government also gave financial assistance of P37million to the Ilocos Sur Tomato Paste Plant Inc. (ISTPPI) that was not supported by liquidation reports. Further investigation showed that the financial assistance was regarded as a donation instead of a loan to the ISTPPI.

In 2004, the COA report noted disbursements totalling P85.6 million improperly charged against the tobacco excise fund.

Moreover, the provincial government granted another financial assistance to ISTPPI, this time amounting to P20 million, despite the latter’s failure to liquidate the financial assistance it got in 2003.

Another NGO, Buying and Bulk Curing Center in Sinait, Ilocos Sur, got P31million as financial assistance. Investigation showed that it was an undertaking of the provincial government.

In 2005, when Singson had returned as governor, the provincial government made another improper diversion totalling P72.5 million, the COA found. For the third year, ISTPPI got P19.6 million, in spite of two previous COA recommendations disallowing it from receiving any funds.

Ilocos Norte more judicious

The misuse of Ilocos Sur’s tobacco funds appears more blatant when compared to how another beneficiary province, Ilocos Norte, used its tobacco excise tax share during that period.

Based on COA reports from2004 to 2006, Ilocos Norte was more prudent and judicious in using the fund. During the audit period, the provincial government used most of its tobacco fund to construct farm-to-market roads and rehabilitate agricultural facilities. Fifty-five of the 76 projects funded by the tobacco excise tax were deemed to directly affect the farmers.

Thirty-one projects involving the asphalting of roads and construction of new bridges were undertaken in 2004 and 2005.

Ten of the projects in 2006 were directly useful to the farmers. These included construction of the P1.6-million worth communal irrigation system, and the acquisition of tobacco barns and purchase of fertilizers and supplies at P5.5 million.

In contrast, Ilocos Sur used the tobacco fund on spare parts and repair of service vehicles used by the Office of the Governor, the purchase of 1,000 t-shirts, the purchase of canned goods, and cash advances for the wages of contractual workers, among other “disallowed” expenses.

Ilocos Sur also purchased office supplies and construction materials for the provincial capitol, constructed a badminton court, and paid P6.4million to a public relations firm using the tobacco fund.

Special treatment

Savellano, who re-assumed the gubernatorial post in 2007, says he has not been using the funds from RA 7171 after the DBM’s re-computation last year shrunk the four provinces’ share in the tobacco excise tax collection. Ilocos Sur got only P48 million in 2008. “I don’t care anymore about the fund. It is too little now,” Savellano told Newsbreak in an interview.

To date, the charges against Singson over the misuse of the tobacco fund are pending before the Ombudsman. No charges have been filed against provincial officials and private entities who treated the fund like their personal money.

Since 1999, concerned citizens in Ilocos Sur had hoped that the COA findings would be a first step toward holding erring officials and individuals accountable. But Edsa Dos happened, and Singson, the longest caretaker of RA 7171 funds, became President Gloria Arroyo’s fair-haired boy and star witness against Estrada.

The special treatment includes the national government turning a blind eye to the plunder of Ilocos Sur’s tobacco funds. – Rappler.com 

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