Ex-Northrail chief wanted contract terminated

MANILA, Philippines – A former official of the North Luzon Railways Corp. (Northrail) recommended the termination of the contract with the Chinese firm after it unilaterally suspended the construction work and demanded close to $300 million in additional costs to continue the project.

Arsenio Bartolome III, former president and chief executive officer of Northrail, said contractor China National Machinery and Equipment Corp. Group (CNMEG) made it onerous for the Philippine government to continue the project after it decided to ask for additional compensation in the midst of construction.

Bartolome, before he resigned from his post at Northrail in June, wrote to President Arroyo last April 24, stating various “options for future directions” on Phase 1 of the Northrail project since CNMEG threatened to terminate its contract with the Philippine government if the latter would not comply with its demands,
including the additional amount.

CNMEG’s letter of June 3, signed by its director general for international engineering projects Zhang Chun, came after it unilaterally suspended construction activities last Feb. 1.

CNMEG cited the delays on access to the existing Philippine National Railways’ right of way, additional right of way, provision of temporary land for construction, confirmation of preliminary engineering design, among other issues.

Critics of the project said nothing much had been done on the project and yet in its letter, the Chinese contractor already made “variation orders” that would cost $299.4 million as of March 31.

“Any reoccurring extra cost and adjustments to the contract price after March 31, 2008 will be calculated separately,” the letter from the Chinese firm said.

Bartolome recommended, among others, the termination of the contract with CNMEG, noting the unilateral suspension of construction activities.

He said the suspension was not in compliance with the contract agreement as well as “project negative slippage of more than 15 percent.”

Bartolome said this would be a ground for termination of the contract under the governing provisions of Republic Act 9184 or the Government Procurement Reform Act.

Bartolome said the government could actually reduce the construction cost of the project even without paying the additional $299.4 million being demanded by CNMEG.

He said CNMEG could assign the contract in whole or in part thereby substantially completing the civil work components of Phase 1 of the Northrail project in 2010 within the agreed cost of $1.008 billion – $421.05 million for Section 1 and $673.67 million for Section 2.

“Project design, using internationally accepted standards and complying with the Philippine standards and laws, can be optimized;, thereby reducing construction cost,” he said.

Bartolome said there are other contractors, local or international, who are willing to accept the task of optimizing engineering designs to reduce the cost of the project.

He said Northrail could review the project and identify components that could be reduced so as to “realign savings therein for realignment and utilization in civil works.”

Among other things, Bartolome proposed that the National Housing Authority (NHA) start relocating the settlers in Section 2 of the project and complete its acquisition of the right of way for Section 1 by September this year.

Bartolome urged the government to resolve the issue immediately since P1.02 million has been paid in financing charges for the loan agreement covering the Northrail project.

CNMEG suspended its construction activities pending resolution of issues concerning project design, additional right of way acquisition, utility relocation and probable variation orders and cost overruns.

Despite the suspension of construction activities, CNMEG committed to work on the preparation of documents relevant to project designs.

At the time he wrote the letter, Bartolome said CNMEG had yet to submit any documentation to support its claims relative to the variation orders.

“The contract provides that variation orders shall be covered by the NEDA (National Economic and Development Authority) Guidelines which require reference documents such as Preliminary Engineering Design, Bill of Quantities and Project Implementation Schedule. However, as of this date, none of the required documents have been finalized by CNMEG and approved by Northrail. As such, Northrail has no basis to consider and subsequently approve variation order proposals,” Bartolome said.

Last Feb. 16, Bartolome said he met with CNMEG officials along with Trade Secretary Peter Favila and Ambassador Tomas Alcantara in Shenzhen, China to resolve the issues.

He said a workshop between Northrail and CNMEG was held from March 25 to April 1 to confirm the design schemes and technical parameters.

But the agreements were reached only on 42 items while 16 items were deferred for legal discussion and four items required further technical review.

On April 9, Bartolome said a legal workshop was again conducted but still Northrail and CNMEG did not reach any agreement after the Chinese contractor failed to present documentation to validate claims of variations in design schemes and parameters.

Conflicting ‘official’ statements

Bartolome’s successor, chairman and chief executive officer Edgardo Pamintuan, initially said CNMEG withdrew from the Northrail project.

Pamintuan later clarified that the project would push through after all.

Pamintuan noted, however, that the cost of the entire project, which is supposed to be funded from a $400-million loan from the Chinese government, was likely to be adjusted amid variations in its design, rise in cost of materials and currency fluctuations, among other factors.

Pamintuan said he had been meeting with officials of the Chinese embassy and CNMEG regarding the engineering aspects of the project.

“I still have to look into the financial concerns, but there’s definitely no termination, no cancellation of the project with China,” said Pamintuan, who was appointed to head Northrail only last week.

He said there was nothing final yet on how much the cost of the railway project would be, amid reports that Chinese officials were poised to file an international suit over the nonpayment of cost overruns and other violations of contract on the railway project that was initially estimated to cost $503 million, including right-of-way cost.

Pamintuan confirmed the $299.4-million additional cost being demanded by CNMEG but dismissed it as “water under the bridge as talks are now underway with Chinese government officials on all pertinent issues.”

He said the variations on the design affecting cost of project are a normal occurrence in infrastructure.

The railway project’s price overrun includes an $88.63-million adjustment arising from project “variations” and work quantities, and $210.77-million additional compensation for the extra costs resulting from the variations.

Pamintuan said the cost of the project was also affected by unexpected right-of-way problems along the rail paths, particularly in Bulacan where Chinese designers designated titled lands for depots and stations that were not initially foreseen.

Pamintuan added the government contract with CNMEG could not be started unless the Northrail had cleared the entire pathway from Caloocan to Clark in Pampanga.

In its June 3 letter or “notice of demand,” CNMEG said Northrail failed to take necessary “satisfactory steps” to comply with the terms of the contract within 30 days from receipt of their demand.

In the event that Northrail fails to remedy each of the breaches it enumerated within 60 days, “CNMEG may, without prejudice to the exercise of any other rights or remedies which may be available to it, terminate the contract,” it said.