THE MANY SINS AND MYSTERIES OF MRT-3
Earnings from the lucrative “development rights” would cover losses on the rail side of the business. But that was a myth.
ONCE AGAIN, an old rickety train system mislabelled as MRT-3 is in the news, threatening our Christmas celebration like Grinch.
To understand the MRT- 3’s current predicament and recurring problems, one has to look at its sordid past that is shrouded in mystery and colored by money.
It began in 1989 as an unsolicited proposal to the Philippine National Railways ( PNR), then evolved into a Build-Lease-Transfer Agreement in November 1991. How it became an official contract was a mystery by itself.
Will MRT-3’s fortune change in Duterte’s time?
ORIGINAL SIN
Back in 1989, a Manila-based Jewish businessman (who likes to brag he has yet to meet a Filipino he cannot bribe) submitted an unsolicited proposal to PNR.
It was received like the horse given to Troy by the Greeks — the first to ride on the newly minted Build- Operate-Transfer Law ( Republic Act 6957). The proposal snaked its way to the then Department of Transport and Communications (DoTC), which promptly conducted a tender — where a Hong Kong- registered company capitalized at $998 got anointed.
With Palace prodding, a new group of investors “kicked out” the original sinner with a “pabaon” of about $33 million. Out with EDSA LRT Consortium, in with Metro Rail Transit Corporation (MRTC).
The contract underwent at least seven revisions — as some well-meaning bureaucrats tried to remedy the atrocious features of the project, whose cost later ballooned to $675.5 million from $160 million. The last amended contract was dated Aug. 8, 1997, but I think it was not the last.
UNMASKING THE PPP MODALITY
The Build-Lease-Transfer (BLT) contract shielded MRTC from commercial or market risk. It would make money regardless of ridership, a guaranteed 15% return after tax, sweetened with the sovereign guarantee of the Philippine Republic.
In the current parlance of Public-Private Partnership (PPP) project practitioners, it was structured as a capacity-fee payment, a more appealing name for “take-or-pay” modality. The capacity is a minimum of 22 trains (3-car/ train) per hour in exchange for the fixed lease payments.
To deliver on its commitment, MRTC took responsibilities for maintenance and spare parts via its affiliate. It had the features of a “wet lease” arrangement, except that operations personnel would be hired by the Lessee ( which was DoTC). More than 600 employees were hired by DoTC on a contractual or casual basis.
It is a wonder that after 10 years of employment, more than two-thirds of these personnel remained as “casuals” — the kind of “Endo” arrangement this current administration wants to abolish.
During construction, MRTC officials went to town — boasting about the “first mass transit project” to be built at no cost to the government. Earnings from the lucrative “development rights” would cover losses on the rail side of the business.
By 2003, this no-subsidy myth crumbled, and government had to scramble for the rental payments that were nonexistent in DoTC’s budget. This omission became the seed for the third sin. But that will come later.
WHERE HAVE ALL THE MONIES GONE?
Revenues from property developments underpinned the no-subsidy myth.
By 2017, the government share from “development rights” should have amounted to more than P500 million — based on Annex A-2 of the BLT contract.
But where did the money go? No one could tell me.
One could only deduce that another amendment to the 1997 contract transpired between 2002 and 2010 as to cut off or divert the incomes from TriNoma and other station-related commercial developments. This to me is the second mortal sin committed in the name of MRT-3.
From the get-go, MRT3 started its transit life on a fragmented set up — a business model that guaranteed future headaches.
Rail revenues goes to the national treasury, rather than flowed back to the operating entity. Expenses need an annual allowance from Congress, dominated by persons who cannot dissociate a “coupler” from salacity. Maintenance is outsourced to another entity. Non-rail revenues is nowhere to be found.
After construction, MRTC had no more incentive to take care of the assets, except sit back, collect rental payments, and rechannel them to creditors and equity holders. Nobody was left to look after sustaining the economic life of the system.
MULTI-LAYERED DEBTS
The third sin committed in the name of MRT-3 was the securitization of the future lease payments or the equity rental payments (ERP) — with the tacit consent of the DoTC.
It can be explained this way: Instead of waiting for your measly retirement checks from Social Security System, you go to your friendly pawn shop who pays you a lump sum amount, and takes your place on the monthly queue.
On the surface, it is nothing more than a textbook case of receivables financing — except done to the second and third order derivatives. The tricky part of the deal was retention of residual rights; like selling your house but still retaining some rights over who gets to occupy the building.
There were payment hiccups on the ERP, caused in part by a government that initially swallowed the no-subsidy myth. This was a breach of material obligation that gave rise to arbitration proceedings in Singapore, and for the ERP bonds to suffer value downgrades.
The financial crisis of 2008 also forced holders of those bonds to hold a fire sale. A large portion of those bonds were in the hands of the vultures of Wall Street.
For purposes of simplicity, they were in possession of a bond with a face value of $ 100, but could be sold only at $20.
Vulture funds — which, among others, specialized in making money out of the misfortunes of poor countries — saw an opportunity.
Losing the case in Singapore could trigger a cross default in other Philippine loans totally unrelated to MRT-3. The government panicked. And the vultures’ $20-worth of paper rose in value, say $40.
Not to be outdone, our local vultures joined the party. Their dummy firms in the British Virgin Islands became the buyer for $40, with credit provided by Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP). The latter two government financial institutions ( GFIs) then purchased the same bonds for $ 80, in the hope of getting $100 at maturity.
By participating in the financial merry- go- round, the GFIs exceeded the limits of their own charters. An Executive Order had to be issued to provide a legal cover for a transaction that has the appearance of propriety.
With his Wharton credentials, it was no wonder that then DoTC secretary Mar Roxas found and push aggressively for the Equity Value Buyout (EVBO) of MRTC.
But the Senate smelled something fishy, and threw a monkey wrench that stopped the greasy wheels of EVBO — albeit, temporarily.
Everybody made money — from the vultures of Wall Street and their local versions, to the two GFIs, including some powerful individuals. The paradox, however, is this. Why allocate $1 billion in the national budget for EVBO that would give windfall to the GFIs, but not a single cent going into badly needed improvements of the MRT-3 system? At the current exchange rate, that would be more than enough to rebuild the MRT-3 system from scratch. And yet, at the end of the financial exercise, control over MRTC remained elusive. When the dust cleared, who ended up paying for all these? Everybody made money, except poor Juan dela Cruz.
GAME OF MAINTENANCE CHAIRS
To its credit, MRTC managed to make available 22 trains in service continuously.
By the 10th year of operation, the system needed major rehabilitation and called for a repricing of the maintenance contract between MRTC and Sumitomo-TES Philippines.
However, the acolytes of Daang Matuwid saw gold at the darkened shop floors of the depot; they took out MRTC from the equation and booted out Sumitomo, which had a fully functioning computerized system for maintenance management.
The overt explanation was that the Sumitomo contract had expired, and something had to be done. Mysteriously, it omitted the fact that the contracts for LRT-1 and LRT-2 were also on extended runs.
With a stroke of the pen, then DoTC secretary Joseph Emilio A. Abaya launched a game of musical chairs — starting with an interim contractor that had yellow lineage, replaced by another outfit that has the DNA of the first one.
Should MRT- 3 go back exante, i.e., before the bright boys of Roxas and Abaya ran the system down? Another round of a game of maintenance chairs?
With no rail industry to speak of, the country’s technical expertise grew out of the three railway lines — which, unfortunately, has very little commonalities. Thus, a public tender would be akin to scouring for someone who can repair a Lamborghini in a sea of jeepney mechanics.
MOVING FORWARD
Privatization of the entire MRT3 system is the only sensible way forward. This is the path already blazed on LRT-1 and its extension to Bacoor.
A new concessionaire can be granted a long-term contract, say 25 years, to rehabilitate the system and double its capacity in two years. It may take around $400 million to do this.
But the PPP-track will not be a walk in the park. Expect a turbulent ride, more severe than what MRT-3 riders now experience.
Owing to space constraints, this piece was shortened. To read the full version, which provides more insight and details into MRT-3 operations, please visit the link http://bit.ly/MRTsins or use a smartphone to scan the QR code.