Is MRT 7 a replay of MRT 3 mess?

The more I dig into what is going on with MRT 7 the more it is beginning to look like a replay of the MRT 3 mess. Finance Secretary Cesar Purisima had the right reasons for subjecting it to intense scrutiny.

I followed up my questions on what has happened to MRT 7 with Secretary Purisima and this is his response:

“When we assumed office, the MRT 7 contract had already been awarded, but the DOF had not yet issued a performance undertaking. Certain cost adjustments, which have implications for the payments government owes the MRT 7 proponent, had not yet been calculated, and had not yet received NEDAICC approval, as required under the contract itself. DOF could not issue a performance undertaking without knowing the precise amounts which government would have to pay after those cost adjustments.

“Furthermore, there were contract provisions which were vague and thus exposed the government to significant risk, and DOF sought clarifications to these provisions. The government and the MRT 7 proponent have discussed these clarifications and are now documenting these clarifications.

“The contract itself requires that the project be re-submitted to NEDA-ICC for approval if financial closure is not achieved by a certain deadline- and the deadline passed without financial closure. DOTC has already resubmitted the project, with the cost adjustments and the final amounts of payments due from the government to the MRT 7 proponent, to NEDA-ICC for the required approval, and documentation of the needed contract clarifications is proceeding in parallel.”

While we should be glad the long pending proposal is finally moving, I get the feeling there is danger we, the taxpayers, will be fried in our own fat. That happened with MRT 3 where private sector proponents got themselves a guaranteed profit, took everything else that earned anything for themselves and left government with a subsidy to cover and an O and M contract to pay for.

Sec. Purisima still didn’t answer my question on what constituted “performance undertaking” in his expanded response. And Ramon Ang was telegraphic when I texted him about it.

Though he conceded that he does not know the details of the MRT 7 contract, Tong Payumo, the author of the original BOT law insisted to me that no government guarantee is allowed in a project like MRT 7. That makes this thing they call “performance undertaking” sound suspicious.

A “performance undertaking” is a disguised government guarantee, albeit indirect. The BOT law was amended by Speaker Jose de Venecia in 1994. The original Payumo version was clear: unsolicited offers cannot enjoy government guarantees. In the revised law, the word “direct” was inserted implying that “indirect” guarantees are not prohibited and thus allowed.

My source told me that the MRT 7 contract stipulates that government must pay a capacity fee. It is like government hiring a bus operator to tell it how many buses are needed and for the operator to supply those buses at a guaranteed price. Whether the buses are full, or with zero passengers, the government keeps proponent whole. The issue of fare is irrelevant to proponent. That’s MRT3 all over again.

That also sounds to me like the much hated “take or pay” provision in the power supply contracts during the last part of FVR’s watch. Napocor signed up more capacity than we could reasonably use even after a World Bank warning and we ended with the highest power rates in the region because we were paying for power we didn’t use. We are still paying for that as “stranded costs” in PSALM’s universal charge.

That means MRT 7 proponent, San Miguel, cannot lose. Like the power producers, it does not assume market risk. RSA told me the performance undertaking they are asking is part of the revised BOT Law. With that undertaking, San Miguel can go to any bank and use it as collateral.

That does not seem right. I have heard RSA say he needs no government guarantee for MRT 7. We ought to make him stand by that statement with the clarification that it covers both direct and indirect guarantees. If he makes a mistake in calculating passenger demand on MRT 7 and ends up with excess capacity, that should be his problem, not the taxpayers’.

Tong Payumo says that while “take or pay” is not a direct guarantee on loans, it is a virtual guarantee against commercial risks which the investor, and not the government, should cover.

Sec. Purisima’s response to my query concedes that the government will be paying something. In short, the proponent will recoup his investments from government if he is unable to get it from the market.

I asked my source to do a rough calculation of subsidy involved and he came out with the conclusion that “if the subsidy on MRT-3 is P50 per passenger, the MRT-7 will entail at least P100 per passenger.”

If that is the case, DOTC, DOF and NEDA should throw out the unsolicited proposal of San Miguel and reconsider alternatives to MRT 7. I have heard experts say that from a transport standpoint, MRT 7 is not the most cost efficient in that corridor. My source insists Commonwealth Avenue is wide enough to accommodate a BRT (Bus Rapid Transit) at 1/4 the cost to serve the demand there.

I am willing to concede a government “performance undertaking” that would assure San Miguel and its banks that regulatory bodies responsible for hearing petitions for user- charge adjustments or fare rates act in a timely and decisive manner, after carefully weighing competing efficiency and equity concerns. That’s fair to investors.

There should have been more transparency on this deal. Until I started asking what happened to MRT 7, I thought the bureaucrats are just being slow as usual. It turns out they had valid concerns that should have been made public. The secrecy makes it possible for horrible deals to happen as it did happen with MRT 3 and the power deals during FVR’s watch.

But even now, I am still just guessing with the help of sources who have seen the contract. The NEDA review should be thorough, answer our concerns and made public.