Republic of the Philippines

COMMISSION ON AUDIT
Office of the Director – Corporate Government Sector Cluster 4
Commonwealth Avenue, Quezon City

CAPTAIN JIM C. SYDIONGCO AND

JOCELYN L. CHING
Appellants,

-versus-

REBECCA C. ARNESTO, AND

SALVACION D. DELOS ANGELES
Appellees.
x-----------------------------------------x

APPEAL MEMORANDUM
(to the Notice of Disallowance No. 19-012-(2018)
dated 28 August 2019)

APPELLANTS, by undersigned counsel, to this Honorable Director, respectfully

submit this Appeal Memorandum and for this purpose, aver, that:

PARTIES

1. Appellant CAPTAIN JIM C. SYDIONGCO (hereinafter referred to as

“Director General”) is the Director General of the Civil Aviation Authority of the Philippines
(hereinafter referred to as the “Authority”). He may be served summons, letters, and orders
of the Director at the Civil Aviation Authority of the Philippine, MIA Road corner Ninoy
Aquino Avenue, Pasay City, Metro Manila 1300.

2. Appellant JOCELYN L. CHING is the Chief, Finance Department of the

Civil Aviation Authority of the Philippines. She may be served summons, letters, and orders
of the Director at the Civil Aviation Authority of the Philippines, MIA Road corner Ninoy
Aquino Avenue, Pasay City, Metro Manila 1300.

3. Appellees REBECCA C. ARNESTO and SALVACION D. DELOS

ANGELES are the respective Audit Team Leader and Supervising Auditor of the
Commission on Audit, Civil Aviation Authority of the Philippines who issued the assailed
Notice of Disallowance No. 19-012-(2018) dated 28 August 2019.

Appeal Memorandum to Director

(to the Notice of Disallowance No. 19-012-(2018)
Page 1 of 18
 TIMELINESS

4. This Appeal Memorandum is submitted pursuant to the Notice of

Disallowance No. 19-012-(2018), which was received by the Appellants on 4 September
2019. The Appellants have six (6) months from the receipt of such or until 4 March 2020
within which to file their Appeal Memorandum pursuant to Section 4, Rule V of the 2009
Revised Rules of Procedure of the Commission on Audit. Having submitted the instant
Appeal Memorandum before such date, the Appeal Memorandum is timely filed.

PREFATORY STATEMENT

5. The Authority has been mindful and sympathetic to the plight of CAAP
personnel who passed away in the line of duty and in service to the country. Though there are
benefits under existing laws, it appears the same are insufficient to recognize the years of
dedicated service shown by such decedent-employees. Traditionally, co-workers raise funds
for the bereaved family by “passing the hat” and even then, the amounts raised are merely
nominal. Clearly, there is a need to augment the benefits of employees but the Authority is
also mindful that any additional benefit of employees must undergo a rigid application with
the Governance Commission for GOCCs and the Office of the President.

6. In 2018, the Civil Service Commission (CSC) conferred post-humus the

“Parangal sa Lingkod Bayani” to CAAP personnel Sabu Espina who passed away due to
Typhoon Yolanda. Mr. Espina was sent on travel to Tacloban Airport to repair a firetruck and
unfortunately, he was among those who tragically passed during such a calamity. To honor
his family, CAAP extended employment to his child while the CSC gave a scholarship and
financial assistance to the former. This unfortunate experience only highlights the sad reality
that not enough is given to employees of the Authority especially if they die while on duty;

7. In this regard, the offer of United Coconut Planters Bank (UCPB) and
Cocolife, a Government-Owned and Controlled Corporation (GOCC) supervised by the
Presidential Commission on Good Government and the Governance Commission for GOCCs
was considered as they presented an investment vehicle for the idle funds of the Authority
with an extended benefit, at no cost to the government, a group life insurance policy to all
permanent plantilla employees of the Authority below 65 years of age. The group life
insurance is free and offers PhP 30,000.00 cash coverage with PhP 3,000 burial assistance to
the heirs of all CAAP plantilla personnel. At the time of this writing, heirs/families of three
(3) CAAP personnel, who unfortunately met their untimely demise, were able to avail the
benefits of the policy;

Appeal Memorandum to Director

(to the Notice of Disallowance No. 19-012-(2018)
Page 2 of 18
 8. At its very core, this policy is deeply rooted from the strong desire of the
Authority to promote the welfare of its employees and to improve their working conditions
within what is legally permissible. The Authority considered the advantage of the investment
to not be limited in monetary gain alone but more importantly – the welfare of the employees;

NARRATION OF FACTS

9. On 30 September 2008, the CAAP Board of Directors issued CAAP Board

Resolution No. 08-0071, authorizing the Director General and/or any Finance Officer he may
designate to deposit in or withdraw from UCPB, thus:

“WHEREFORE, RESOLVE, as it is hereby RESOLVED, that

the United Coconut Planters Bank (UCPB) is hereby authorized
as a depository bank of CAAP earnings and that the Director
General and/or any Finance Officer he may designate be
authorized to deposit in or withdraw from said depositary bank.”

10. On October 2009, the CAAP Board of Directors issued CAAP Board
Resolution No. 2009-0112, designating the Director General and/or the CAAP Finance
Officer as the appropriate officials to open the Trust Accounts with the Land Bank or other
government depository banks, and make withdrawals from the income thereof for CAAP’s
use or reinvestment, thus:

“WHEREFORE, RESOLVE, as it is hereby RESOLVED,

that the CAAP through the Director General and/or any Finance
Officer that he may designate be authorized to open a Trust
Account with the Land Bank of the Philippines and with such
other government depository banks, and make withdrawals from
the income thereof for CAAP’s use or reinvestment consistent
with the principles of sound stewardship of government funds.”

11. On 24 May 2017, the CAAP Board of Directors issued CAAP Board
Resolution No. 2017-0093, authorizing the Director General to invest CAAP funds both in
peso and dollar currencies in special saving account, time deposit account, trust account and
other investment facilities, thus:

1
A copy of the CAAP Board Resolution No. 08-007 is attached hereto as Annex “A”
2
A copy of the CAAP Board Resolution No. 09-011 is attached hereto as Annex “B”
3
A copy of the CAAP Board Resolution No. 2017-009 is attached hereto as Annex “C”
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 3 of 18
 “NOW, THEREFORE, the Board of Directors of the Civil
Aviation Authority of the Philippines (CAAP) authorizes the
investment of its funds both in peso and dollar currencies on
special savings account, time deposit account, trust account
and other investment facilities such as but not limited to
government securities through Land Bank of the Philippines
(LBP), and United Planters Bank (UCPB), other authorized
government depositary banks, and other Government Securities
Eligible Dealers (GSED), as CAAP may deem appropriate,
subject to existing government regulations;

RESOLVED FURTHER, that the Director General is authorized

to sign, in behalf of CAAP, the documents required by the
Bangko Sentral ng Pilipinas (BSP), Securities and Exchange
Commission (SEC) and Anti-Money Laundering Council
(AMLC) on investments, which are but not limited to the
following: Special Power of Attorney’ Bureau of Treasury –
Investor’s Undertaking (IU); Client Suitability Assessment
(CSA); Risk Disclosure Statement (RDS); Client Agreement
(CA); and other Documentary requirements.” (Emphasis
Supplied)

12. The Authority received a letter date 7 August 2018 4 from UCPB offering the
UCPB-Cocolife Zenith Plant for its consideration. The UCPB-Cocolife Zenith Plan 5 is a
single pay peso-denominated variable life investment product which has the following
characteristics, to wit:
- Has a minimum guaranteed earnings of 3% net under Guaranteed Fund that
secures principal amount of the investment;
- Has potential growth as much as 4.42% net for five years under combined Fixed
Income Fund and Guaranteed Fund Allocations;
- Life Coverage with an increase of 125% from the invested fund, should death
occur with respect to the elected Key Officers, all proceeds shall be received by
the Authority;
- Guaranteed Partial or Full Withdrawal of living benefit which is equal to the
amount of Accumulated Account Value from the policy’s earnings;
- Basic Group Life coverage to all plantilla employees.

4
A copy of the Letter dated 7 August 2018 is attached hereto as Annex “D”
5
A copy of the Zenith Plan is attached hereto as Annex “E”
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 4 of 18
 13. When the Cocolife proposal was presented in July 2018, CAAP also had Peso
investments with Landbank and UCPB with rates as follow:

KIND OF PLACEMENT RATE

Treasury Bills 3.20% - 4.0%
High Yield / Special Savings Accounts 1.40% - 1.450%
Trust Account (Trustee fee – 0.09%) 1.825%

14. The UCBP-Cocolife Zenith Plan was presented to the CAAP Board of
Directors as part of its agenda in its regular board meeting on 13 December 2018. The CAAP
Board of Directors were fully informed of the details of the policy, the actions of
management relative to the medical evaluation of the designated key men, the financial
information of the investment, and the free benefit of group life insurance for all CAAP
plantilla personnel as extended by UCPB-Cocolife in consideration of the investment. The
members of the Board interposed no objection to the investment proposal and thus it was
deemed approved.6

15. After thorough evaluation and recommendation by the relevant services of the
Authority, such was subsequently approved by the Director General as he was authorized to
do so pursuant to CAAP Board Resolution No. 2017-009.

16. The Appellees issued Audit Observation Memorandum (AOM)7 dated 11

February 2019 assailing the UCBP-Cocolife Zenith Plan. In response thereto, the Authority
replied with a Letter dated 13 June 20198 to address the matters indicated in the subject
AOM.

17. The Appellees then issued Notice of Disallowance No. 19-012-(2018) dated
28 August 2019, disallowing in audit the Five Hundred Million Peso (PhP500,000,000.00)
UCPB-Cocolife Zenith Plan Investment pursuant to the following reasons, to wit:

a. Absence of Board Approval contrary to Section 24 of R.A. No. 9497;

b. Absence of in-depth study prior to investment; and
c. Inadequate criteria in the selection of the 10 Keymen of CAAP.

STATEMENT OF THE ISSUES

18. Whether or not the Notice of Disallowance No. 19-012-(2018) dated 28

August 2019 assailing the Five Hundred Million Peso (PhP500,000,000.00) UCPB-Cocolife
Zenith Plan Investment is erroneous under the circumstances;
6
A copy of the Minutes of the Board Meeting is attached hereto as Annex “F”
7
A copy of the AOM dated 11 February 2019 is attached hereto as Annex “G”
8
A copy of the Letter dated 13 June 2019 is attached hereto as Annex “H
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 5 of 18
 19. Whether or not CAAP Board approval is still required considering the
comprehensive authority previously given to any Director General;

20. Whether or not an in-depth study was conducted prior to investment and if
such is a requirement for CAAP to exercise the power to invest;

21. Whether or not the computation of the return on investment in T-Bonds and T-
Bills as presented by the Appellees is correct; and

22. Whether or not the criteria in the selection of the 10 keymen of CAAP is
inadequate and if such is also a requirement for CAAP to exercise the power to invest.

DISCUSSION

The Notice of Disallowance No. 19-

012-(2018) was improper and/or
incorrectly issued

23. The referenced Notice of Disallowance was improperly and/or incorrectly

issued by Appellees because it does not conform with the purpose for which notices of
disallowance are issued. A notice of disallowance is only issued for audits of disbursements,
which the investment placement in Cocolife is not considered.

24. COA Circular No. 2009-006, dated 15 September 2009 prescribing the use of
2009 Rules and Regulations on Settlement of Accounts (RRSA) defines the following terms
under Section 4 thereof:

 Disallowance – the disapproval in audit of a transaction, either in whole or

in part. The term applies to the audit of disbursements as distinguished
from “charge” which applies to the audit of revenues/receipts.

 Charge – an inclusion or addition to an accountability pertaining to the

assessment, appraisal or collection of revenues, receipts and other income
such as that arising from under-appraisal, under assessment or under-
collection. As distinguished from “disallowance” which refers to the audit
of expenditures, the term “charge” is generally used in connection with
the audit of revenues/receipts.9 (Emphasis supplied)

9
Section 4. Definition of Terms, COA Circular No. 2009-006 dated 15 September 2009.
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 6 of 18
 25. The debiting and crediting of PhP500 Million from UCPB P. Ocampo Branch
to Cocolife is an investment and not a disbursement, thus the issuance of Notice of
Disallowance No. 19-012-(2018) dated 28 August 2019 is not the proper remedy.

26. A Notice of Charge is likewise not applicable because there was no under-
appraisal as this amount is not a property for appraised for selling; nor under-assessment,
because the PhP500 Million was not under-valued since the rate is standard in the market; nor
under-collection, as there is no collection of revenue yet.

27. There is no doubt that the Auditors acknowledged the placement to Zenith
Plan is an investment as it explicitly stated when it compared the Landbank T-Bonds and T-
Bills. The primary difference between a plain insurance and an investment is that the
insurance is an expense, while investment has been defined as a contract, transaction or
scheme, whereby a person invests his money in a common enterprise and is led to expect
profits primarily from the efforts of others. 10 The PhP500 Million placed in Zenith Plan is
expected to earn interest, therefore, an investment.

28. Section 5.3 of the same COA circular provides:

“The audit and examination of transactions pertaining to an account

shall be done in accordance with laws, rules, regulations, and standards
to determine whether these transactions may be allowed, suspended,
disallowed, or charged in audit. In case an audit decision cannot as yet
be reached due to incomplete documentation/information, or if the
deficiencies noted refer to financial or operational matters which do
not involve pecuniary loss, an Audit Observation Memorandum
(AOM) shall be issued.
XXX

5.3.3 A transaction is charged in audit when the correct amount

of revenue/receipt due to the government is not received by the
agency as a result of underappraisal/assessment/collection.
An NC issued for the uncollected amount. (Emphasis supplied)

29. In addition, the investment in Cocolife is in accordance with the fundamental

principles governing financial transactions pursuant to Presidential Decree (P.D.) No. 1445,
otherwise known as the Government Auditing Code of the Philippines:

10
SEC v. Santos; G.R. No. 195542. March 19, 2014.
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 7 of 18
 30. Section 4 of P.D. No. 1445 provides for the following fundamental principles
of financial transactions of any government agency, to wit:
1. No money shall be paid out of any public treasury of depository except in
pursuance of an appropriation law or other specific statutory authority.
2. Government funds or property shall be spent or used solely for public
purposes.
3. Trust funds shall be available and may be spent only for the specific
purpose for which the trust was created or the funds received.
4. Fiscal responsibility shall, to the greatest extent, be shared by all those
exercising authority over the financial affairs, transactions, and operations of
the government agency.
5. Disbursements or disposition of government funds or property shall
invariably bear the approval of the proper officials.
6. Claims against government funds shall be supported with complete
documentation.
7. All laws and regulations applicable to financial transactions shall be
faithfully adhered to.
8. Generally accepted principles and practices of accounting as well as of
sound management and fiscal administration shall be observed, provided that
they do not contravene existing laws and regulations.

31. The investment in Cocolife adheres to the above-mentioned principles in the

following manner:

a. The PhP 500 Million was invested in the furtherance of the corporate
powers of the Authority, it being in the public interest and in accordance
with the public convenience and necessity;
b. The PhP500 Million was invested to yield more interest to augment the
CAAP Fund for operation as it enjoys fiscal autonomy;
c. Laws and regulations applicable to this transaction was faithfully adhered
to, that is, investing to another GOCC as required by the BSP, as well as
the Board authorization as per R.A. No. 9497; and
d. The recording of the transaction was observed according to the generally
accepted accounting principles and practices.

Therefore, the investment is in accordance with P.D. No. 1445.

32. Taking into consideration the aforementioned provisions, since the Cocolife
Zenith Plan Investment is not in violation of any laws, rules, regulations, or standards, the

Appeal Memorandum to Director

(to the Notice of Disallowance No. 19-012-(2018)
Page 8 of 18
issuance of an AOM is not well applicable. The deficiencies noted does not involve yet a
pecuniary loss.

33. Appellants are not liable to PhP500 Million since the amount is still intact
with the Cocolife, which is also a GOCC.

The UCPB-Cocolife Zenith Plan was

approved by the CAAP Board of
Directors

34. To be sure, the Appellees recognize that the UCPB-Cocolife Zenith Plan
placement was presented to the CAAP Board of Directors on 13 December 2018 without
objections from its members, that the Secretary Certificate dated 3 July 2017 authorized the
Authority to invest its funds both in peso and dollar currencies on special saving account,
time deposit account, trust account and other investment facilities such as but not limited to
government securities through LBP, and the UCBP, other Authorized Government
Depository Banks (AGDBs), and other Government Securities Eligible Dealers (GSED) as
CAAP may deem appropriate. Moreover, the CAAP Manual of Approvals and Board
Resolution No. 2017-009 granted full authority to the Director General to invest CAAP’s idle
funds in investment instruments with banks. Notwithstanding the above, the Appellees still
opine that the UCPB-Cocolife investment placement lacks approval of the CAAP Board.

35. It should be noted that pursuant to Section 23 (h) of R.A. No. 9497, the CAAP
Board has the power to invest its funds and other assets in such areas, ventures, and projects
within its reasonable discretion and business judgment, thus:
“xxx
SEC. 23. Corporate Powers. - The Authority, acting through the
Board, shall have the following corporate powers: xxx
xxx
(h) To invest its funds and other assets in such areas, ventures,
and projects as it may deem wise;
xxx” (emphasis supplied)

36. Furthermore, pursuant to Section 24 (i) of the same statute, the Authority is
empowered, through the Board, to invest in any business venture the Board may deem
appropriate, thus:
“xxx
SEC. 24. Powers of the Board. - The Board shall have the
following general powers:
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 9 of 18
 xxx
(i) Invest such of the Authority's funds that are not immediately
required for operating expenses, or other immediate obligations in
any business venture the Board may deem appropriate, or in
such secured note, government securities, and other
negotiable instruments that satisfy the guidelines prescribed by
the Board. Funds of the Authority shall be deposited in such
commercial and universal banks as the Board may determine,
subject to the requirements of existing laws. The Board shall
designate the officials authorized to deposit in or withdraw funds
from such depository banks;
xxx” (emphasis supplied)

37. A perusal of the above-quoted provisions reveal that the Authority is given
liberty to invest in any business venture the Board may deem appropriate, including in
variable life insurance, subject to the guidelines prescribed by the Board itself.

38. The plain text of Section 24 (i) of R.A. No. 9497 is clear and explicit. The
Authority, through its Board, has the power to invest its funds that are not immediately
required for its operations, its saving, in any business venture subject only to its own
guidelines. There is no room for interpretation. A perusal of the entire grant of power to
invest by CAAP highlights that CAAP is not restricted from entering into investments with
private commercial and universal banks.

39. Such has been delegated by the CAAP Board of Directors to the Director
General pursuant to CAAP Board Resolution No. 2010-19 and CAAP Board Resolution No.
2017-009. Opposed to the contention of the Appellees, the Director General’s delegated
authority from the Board of Directors to invest the Authority’s idle funds is not limited solely
to investments in government securities and time deposits. CAAP Board Resolution No.
2017-009 provides:

“NOW, THEREFORE, the Board of Directors of the Civil

Aviation Authority of the Philippines (CAAP) authorizes the
investment of its funds both in peso and dollar currencies on
special saving account, time deposit account, trust account
and other investment facilities such as but not limited to
government securities through Land Bank of the Philippines
(LBP), and United Planters Bank (UCPB), other authorized
government depositary banks, and other Government Securities
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 10 of 18
 Eligible Dealers (GSED), as CAAP may deem appropriate,
subject to existing government regulations;

RESOLVED FURTHER, that the Director General is authorized

to sign, in behalf of CAAP, the documents required by the
Bangko Sentral ng Pilipinas (BSP), Securities and Exchange
Commission (SEC) and Anti-Money Laundering Council
(AMLC) on investments, which are but not limited to the
following: Special Power of Attorney; Bureau of Treasury –
Investor’s Undertaking (IU); Client Suitability Assessment
(CSA); Risk Disclosure Statement (RDS); Client Agreement
(CA); and other Documentary requirements.” (Emphasis supplied)

40. A reading of the above-quoted CAAP Board Resolution reveals that the
Director General is authorized to invest the Authority’s funds in other investment facilities
not solely limited to government securities.

41. Nonetheless, the UCPB-Cocolife investment placement was presented to the

CAAP Board of Directors as part of its agenda in its regular board meeting on 13 December
2019. The CAAP Board of Directors were fully informed of the details of the policy, the
actions of management relative to the medical evaluation of the designated keymen, the
financial information of the investment, and the free benefit of group life insurance for all
CAAP plantilla personnel as extended by UCPB-Cocolife in consideration of the investment.
The members of the Board interposed no objection to the investment proposal and thus it was
deemed approved.

42. Although the Authority is indeed authorized to invest its idle funds in
placement and instruments other than government securities and time deposits pursuant to
Sections 23 and 24 of R.A. No. 9497, the investment placement and/or funds of CAAP with
the UCPB-Cocolife Zenith Plant, pursuant to the respective policies, may only be invested in
government securities and instruments identified under the Peso Fixed Income Fund and Peso
Bond Fund, thus:

PESO FIXED INCOME FUND The Peso Income Fund seeks to provide regular
interest income, consistent with its policy to preserve
(80%)
capital and to maintain liquidity of tis investments,
through diversified portfolio of high grade bonds
and/or evidence of debt of the Philippine Government
or government-controlled and owned corporation or
solvent corporations and institutions.
PESO EQUITY FUND (0.00%) The Peso Equity Fund seeks to maximize income

Appeal Memorandum to Director

(to the Notice of Disallowance No. 19-012-(2018)
Page 11 of 18
 consisted with its policy to preserve capital and to
maintain liquidity of its investments through
diversified portfolio of high-quality listed equity issues
– blue chips and growth stocks listed in the Philippines
Stock Exchange.
PESO BOND FUND (20%) The Peso Bond Fund seeks to provide regular interest
income, consistent with its policy to preserve the
capital and to maintain liquidity of its investments,
through diversified portfolio such as Treasury
Notes/Bills, Certificates of Indebtedness issued by the
Bangko Sentral ng Pilipinas and other governments
securities or bonds and evidence of indebtedness or
obligations, the servicing and repayment of which are
fully guaranteed by the Republic of the Philippines or
any of its instrumentalities.
PESO GUARANTEED FUND The Peso Guaranteed Funds is a separate balanced
fund with the objective of having an optimum balance
(0.00%)
of return and risk through investments in high-grade
bonds and/or evidence of debt. The fund earns interest
based on the rate declared by the company, but not less
than the minimum Guaranteed Fund Interest Rate of
3.0%, subject to applicable withdrawal charges, if
withdrawn.

1. In summary, the Authority’s investment in the UCBP-Cocolife Zenith Plan

has been approved by the Board and thus its discretion that such is the business venture it
deems appropriate. Worth of the note that despite the grant of authority to CAAP by its
enabling law, the investment done by CAAP was through a government depositary bank –
UCPB, and a GOCC – Cocolife. Furthermore, the investment placement authorized by
CAAP through the Zenith Plan likewise are investments in government securities, treasury
bonds, and other certificates of indebtedness of the government itself.

The Appellees committed reversible

error in claiming that no in-depth
study was conducted prior to the
investment and that such is a
requisite to exercise the power to
invest by the Authority

2. The Appellees then note that the Authority failed to submit the result of any
study regarding other investment option pertaining to the Five Hundred Million Peso amount
invested in the UCPB-Cocolife Zenith Plant and further asserted that the Authority could
have invested the same in Treasury Bonds and/or Treasury Bills which would have yielded
higher returns.

Appeal Memorandum to Director

(to the Notice of Disallowance No. 19-012-(2018)
Page 12 of 18
 3. While no report was submitted to the Commission for its perusal, such does
not negate the fact that an in-depth study of the UCPB-Cocolife Zenith Plan Investment
juxtaposed with other investment options was conducted by the relevant services of the
Authority. It bears stressing that the Authority regularly deposits its excess funds in
investment placements whose terms are most advantageous to it among the following
government financial institutions – Landbank and UCPB.

4. In the case of the UCPB-Cocolife Zenith Plan, the same was made after a
thorough evaluation of the offer and legal capacity of UCPB and Cocolife. Among the
factors that supported the investment are the following key information:

a. UCPB is an authorized government depositary bank pursuant to DOF DO

No. 01-2015;
b. Cocolife is a government owned and controlled corporation pursuant to
GCG – Classification of GOCCs by Sector;
c. UCPB and Cocolife have a license to offer investment instrument pursuant
to BSP Bancassurance; and
d. The investment placement and/or funds of CAAP with the Zenith Plan
may only be invested in government securities and instruments as
regulated under DOF Circular No. 141-95 as identified under the Peso
Fixed Income Fund and Peso Bond as evidenced from Cocolife’s letter
confirmation dated 07 August 2018.

5. Furthermore, the Appellee’s insistence that the Authority should have invested
the same in the Bureau of Treasury (BTr) T-Bonds and/or T-Bills is misplaced. Firstly, the
rates provided for by the BTr are not available directly to the public. These rates are offered
to “selling agents” or banks that are accredited by the BTr to offer the bonds to the public.
However, the bond rates to the public may not be the same or are observed to be lower than
those published by the BTr. Nevertheless, the Authority has identified treasury bonds as the
allowable investments where the CAAP fund can be placed under the Peso Fixed Income
Fund or Peso Bond Fund or the UCPB Coco-life Zenith Plan.

6. Secondly, the Appellee’s assertion would unnecessarily bind or render inutile

the business discretion of CAAP management. Furthermore, the Authority has investment
funds worth Eleven Billion Pesos (PhP 11,000,000,000.00). Such funds must be diversified
across several investment portfolios to spread the risk and also maximize returns.

7. Thirdly, the Appellee’s position that funds that are not invested in the
maximum rate available are immediately disadvantageous does not hold water. It is submitted
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 13 of 18
that the benchmark in comparing interest rates of investible funds is not the strongest
performing interest rate but the interest rate of the savings account should such excess funds
remain idle. Otherwise stated, the business discretion of the Management should be that it has
chosen to earn more through investments than letting the excess funds of the Authority
remain idle.

8. Fourthly, COA Auditor’s stated in AOM 2019-06 (2018) dated 11 February

2019, to wit: “Management should bear in mind that CAAP being a GOCC, should dwell on
public service and not for profit. Moreover, it is important that the funds are easily and
conveniently accessed by CAAP if needed without restrictions on withdrawals due to longer
maturity date.” However, restrictions on withdrawals can also be brought about by higher
interest rate. Should the Authority invest the fund with higher interest rate as averred by the
Auditors, CAAP shall be exposed to high pre-termination fee if fund is withdrawn
unexpectedly.

9. Lastly, it must be emphasized that R.A. No. 9497 explicitly authorizes the
Authority to invest in “any business venture or in such secured note, government securities,
and other negotiable instruments that satisfy the guidelines prescribed by the Board.” This
grant of power emphasizes CAAP’s fiscal autonomy. The Authority, through its Board of
Directors, has sole discretion to invest in any business venture it deems appropriate.
Requiring the submission to the Commission of a study prior to any investment as well as
insisting that the Authority invest elsewhere supplants the Authority’s discretion where to
invest its funds vested by CAAP’s organic law to its Board of Directors.

10. The COA observation and/or disallowance directly hit the business of a
GOCC, Cocolife for this matter. CAAP investment to Cocolife is not only a support to
government financial institutions, but as well as to promote their product which in effect will
contribute to the government coffers. It will establish trust and confidence for the public to
invest in the same.

The computation of the return on

investment in T-Bonds and T-Bills by
the Appellees is erroneous.

11. The Appellees, in the ND,11 is of the position that investing the P500 million
in the T-Bonds and T-Bills could have yielded a higher return on investment compared to the
value of the funds where COCOLIFE invested/allocated the P500 Million. The Appellees
claim further that the Authority could have earned 131% more if the amount was invested in

11
Paragraph 1.8, ND No. 19-0(2018), dated 28 August 2019.
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 14 of 18
T-Bonds and 110% more if placed in T-Bills. The Authority respectfully begs to disagree. It
bears stressing that the tenor/term of investing through T-Bills in Lanbank is good only for
one (1) year.12 Therefore, the assumption of computing the income based on rate of 5.323%
per annum as presented by the Appellees is not guaranteed to be available during the five (5)
– year period of placement. The rate given was actually quoted for 91 days only. Hence, the
computed total income would not be possible unless the 5.323% is constant or the rate
increases. Currently, the rate for T-Bills decreased at 3.4%.

12. Furthermore, the computation of income of the Authority for T-Bills using the
template of Landbank13 shows a total income of Eighty Four Million Four Hundred Eighty-
Eight Thousand Eight Hundred Four Pesos and Twenty-Nine Centavos (P84,488,804.29) for
five (5) years, which is much less than the One Hundred Seventeen Million Two Hundred
Fifty-Eight Thousand One Hundred Sixty-Two Pesos (P117,258, 162) computation of the
Appellees and less than the One Hundred Six Million Seven Hundred Eighty-Two Thousand
Five Hundred Sixteen Pesos (P106,782,516) computation for COCOLIFE. Nevertheless, as
stated above, the 5-year income computation presented by Appellees is not possible since T-
Bills are only for short terms and the rates vary.

13. On the other hand, a computation of income of the Authority for T-Bonds,
also using the template computation of Landbank, for five (5) years approximates at One
Hundred Four Million Two Hundred Eighty-Seven Thousand Four Hundred Twenty-Two
Pesos and Fifty-One Centavos (P104,287,422.51) which is likewise less than the amount
computed by the Appellees for COCOLIFE. Moreover, a perusal of the indicative rates for
government securities on secondary market value December 17, 2018 as provided by
Landbank14 shows that the Retail Treasury Bonds (RTBs) is not available for the volume of
P500 Million placement.

14. Additionally, Landbank advised the Authority that rates and availability are
subject to change. This means that quotations may change immediately if transaction is not
done outright and that the quoted rates are only indicative. On the other hand, the RTBs
issued by the BTr in December 2018 have seven (7) or ten (10) years maturity. 15
Consequently, an untimely withdrawal of bond placements, should emergency fund requires,
will only expose the Authority for higher pre-term charges if placed under longer term with
higher rate. This follows the investment principle that the higher the rate, the higher the
risks.

12
Table 1, Page 3, ND No. 19-0(2018), dated 28 August 2019.
13
A copy of the template computation of Landbank is attached hereto as Annex “I”.
14
A copy of the email dated 14 December 2018 of Landbank for indicative rates is attached hereto as Annex “J”
15
Copies of the Summary of Award issued by the Bureau of Treasury Auction Committee showing seven (7)
and ten (10) years maturity are hereto attached as Annexes “K” and “L”, respectively.
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 15 of 18
The Appellees committed reversible
error in concluding that the criteria
in the selection of the 10 Keymen of
CAAP is inadequate and that such is
a requisite to exercise the power to
invest by the Authority.

15. The Appellees doubt the necessity for the Authority to insure its key men.
Furthermore, they are of the opinion that the selected key men are inessential to the
operations and accomplishment of the mandate of the CAAP and not vital in the achievement
of the Category 1 rating under the Federal Aviation Administration International Aviation
Safety Assessment Program.

16. It should be reiterated that the UCPB-Cocolife investment placement was

made through the product called Zenith Plan. In essence, it is an investment-insurance
program defined and regulated by the Insurance Commission (IC) and the BSP. As an
investment instrument carrying an insurance policy, such is under the regulatory framework
of the IC which among others mandate the highest degree of diligence in the determination of
risk and insurable interest.

17. The Zenith program attaches its insurance interest in designated key men
whereby the insurable interest of the Authority is centered on the life and productivity of its
top officers. The theory is that the loss of life on one Authority’s key officials would result
into a significant loss on the part of the Authority to seek immediate insurance compensation.

18. CAAP Management proposed that the key officials to be considered as key
men would be officers from the rank of Department Manager and above. The proposed key
men would be officers were directed to undertake a comprehensive medical evaluation to
determine if their health would qualify them to be insured under the policy. Among the 30
officers who took the medical examination, Cocolife evaluated that only 10 officials would
be acceptable for purposes of insurance.

19. Contrary to the assertions in the Notice of Disallowance, the selected key men
are essential to the operations of the Authority and crucial to uphold its mandate in upholding
the safety and efficiency of the Philippine civil aviation industry. While the Authority does
not discount the importance of its other employees, these key men are policy and decision
makers who mold the direction of the Authority as a whole. They are vital in drafting and

Appeal Memorandum to Director

(to the Notice of Disallowance No. 19-012-(2018)
Page 16 of 18
enforcing CAAP policies to elevate the Authority to Category 1 rating under the Federal
Aviation Administration International Aviation Safety Assessment Program.

20. Finally, this Authority recapitulates with emphasis that the Notice of
Disallowance No. 19-012-(2018) was improper and/or incorrectly issued for not being in
conformity with the purpose for which notices of disallowance are issued. The UCPB-
Cocolife Zenith Plan was duly approved by the CAAP Board of Directors. Further, investing
the P500 Million in T-Bonds or T-Bills with Lanbank does not guarantee a higher yield as the
computation of the Appellees is erroneous. Lastly, the criteria in the selection of the 10
Keymen of this Authority is adequate and in accordance with acceptable insurance principles.
The UCPB-Cocolife Zenith Plan is an investment duly made by the Authority in accordance
with applicable laws, therefore rendering the same lawful, proper, and advantageous to the
Authority. Verily, the ND contesting such must be set aside for having no factual and legal
basis.

PRAYER

WHEREFORE, premises considered, APPELLANTS most respectfully pray to the

Honorable Director the following:

1. That this Appeal Memorandum be given due course;

2. That the Notice of Disallowance No. 01-012-(2018) dated 28 August 2019 be set
aside;
3. Other reliefs just and equitable are likewise prayed for.

Respectfully submitted. Pasay City for Quezon City. 22 November 2019.

CAPTAIN JIM C. SYDIONGCO

Director General
APPELLANT
Civil Aviation Authority of the Philippines
MIA Road corner Ninoy Aquino Avenue
Pasay City, Metro Manila, Philippines 1300

JOCELYN L. CHING
Chief, Finance Department
APPELLANT
Civil Aviation Authority of the Philippines
MIA Road corner Ninoy Aquino Avenue
Appeal Memorandum to Director
(to the Notice of Disallowance No. 19-012-(2018)
Page 17 of 18
 Pasay City, Metro Manila, Philippines 1300

Copy furnished:

Rebecca C. Arnesto
OIC – Audit Team Leader (Team NCR-03)
Commission on Audit – CAAP
Office of the Auditor
Civil Aviation Authority of the Philippines

Salvacion D. Delos Angeles

Supervising Auditor
Commission on Audit – CAAP
Office of the Auditor
Civil Aviation Authority of the Philippines

Appeal Memorandum to Director

(to the Notice of Disallowance No. 19-012-(2018)
Page 18 of 18