Legal woes peril MRT3 rehab

Don’t believe anything DOTC or even Malacanang spokespersons say about the rehab of MRT3 happening any time soon. Serious legal problems have prevented them from doing anything much so far, and I see nothing positive that would change prospects in the near future.

DOTC officials are at a loss on what to do. It even seems they are ignoring Executive Order 126 signed by P-Noy himself that authorized the buyout of the Metro Rail Transit Corporation (MRTC) way back in Feb. 28 last year.

According to MRTC officials, no one in government has talked to them even once about how to implement the EO. Funny that DOTC Sec Jun Abaya keeps on saying he will de-privatize MRT3. The big question that follows is, does government have the money to buy out the private sector owners of MRTC? I get the feeling that if they knew they could do this, they would have done it already a long time ago.

There is a formula under the agreement on how to compute what government must pay MRTC for a complete de-privatization. The figure I am hearing is in the neighborhood of $1 billion. That’s about P43 billion. That’s a lot of money.

Here is how a transport expert knowledgeable on the matter reacted to that prospect in an e-mail to me over a year ago:

“From a layman’s viewpoint, the government is paying more than $1 billion for physical assets booked at less than $600 million, but about 50 percent of which it already owned theoretically. My personal beef about this deal is that not a single train will be added on EDSA, assuming everything done so far are legal and moral.

“Given the record so far of the Roxas team at DOTC, it would take a long time for them to pursue the next steps leading to expansion in capacity. Thus, I expect no improvement in train services on Edsa until the end of P-Noy’s term.”

Indeed, even the awarding of the supply of new rail cars to a Chinese supplier is being contested by MRTC in an arbitration case in Singapore. It supposedly violates the BLT contract with government which reserves that right for MRTC.

Theoretically, MRTC can prevent DOTC from using those new train cars on the MRT3 system which still belongs to MRTC. MRTC claims they have been telling government of their readiness to buy new rail cars over a decade ago but have been ignored until now.

To understand the complicated legal background of MRT3, let us pick up details documented in EO 126.

EO 126 starts with the information that DOTC entered into a Build-Lease-Transfer agreement with MRTC for the construction of MRT3. As such, government is supposed to pay lease or rental for MRT3 also known as Equity Rental Payments or ERP.

EO 126 notes that about 77 percent of the original shareholders of MRTC securitized their interest over Equity Rental Payments (ERP) under the BLT Agreement which effectively divested them of their economic interest in MRTC. Ownership rights however, have largely not been affected.

In 2008 and 2009, MRTC issued Equity Value Buyout (EVBO) Notices to DOTC pursuant to Section 7.7 of the BLT Agreement that requires the government to purchase MRTC’S right, title and interest in MRT3 because government failed to perform its obligations. An arbitration case was filed by MRTC in Singapore against the government due to, among others, failure of the government to timely pay ERPs.

EO 126 noted that to avert arbitration and gain control of the MRTC Board, DBP and Land Bank were instructed to acquire shares of stock and other securities representing economic interest in MRTC.

Despite DBP and LBP’s acquisitions, the arbitration case remains pending. Government continues to heavily subsidize operations because then President Erap decided on a lower fare than was earlier agreed upon as economically viable.

The BLT Agreement constrains capacity expansion, the EO claims, due to the right of first refusal afforded MRTC to supply additional Light Rail Vehicles or LRVs. But what is so wrong with letting MRTC to do just that? It would have prevented suspicions of corruption like the one raised by the Czech Ambassador.

DBP and LBP, because they are subject to prudential regulations of the BSP which prohibits banks from indefinitely holding non-allied investments, have been ordered to divest those MRT3 security notes.

EO 126 notes that the Department of Finance, DOTC, DBP and LBP recommended implementation of the EVBO pursuant to the terms of the BLT Agreement. P-Noy instructed all those government agencies “to proceed with the implementation of the EVBO of MRTC…”

The agencies were ordered to do the following things:

Acquire all outstanding shares of stock and other securities issued by MRTC and/or entities owning the MRT Line 3 Project (equity purchase) or all rights, title and interests of MRTC in the MRT Line 3 project (asset purchase) pursuant to the BLT Agreement.

Execute a Compromise Agreement between the government and MRTC and submit that to the Arbitration Committee in Singapore.

Settle local tax liabilities of MRTC, which under the BLT shall be borne by the government and, terminate the BLT Agreement.

The DOF was authorized to raise funding of the EVBO and its components and provide for government borrowings.

Nothing has happened since the EO was signed by P-Noy… at least that’s what the MRTC people are telling me. They said not one meeting on the EO had been held.

A month before the EO was issued, Tomas T. de Leon Jr, of the DBP wrote DOTC Sec Abaya in his capacity as chairman/president of MRTC. I noticed some interesting information in that letter.

The responsibility for the procurement of a maintenance provider was transferred to DOTC on DOTC’s request. But MRTC emphasized that the Terms of Reference of procurement is still subject to their approval as is the choice of maintenance contractor itself. MRTC officials today claim they have been totally ignored on everything by DOTC.

Under the BLT, an “All Risk Industrial Insurance” must be secured for MRT3 and DOTC is responsible for obtaining the insurance cover and paying the premium. The last insurance cover lapsed December 8, 2012 and the entire system was without any insurance cover issued by a duly authorized insurance company for six months until eventually resolved.

One sticking point was that GSIS reportedly refused to insure MRT3 because the maintenance provider was not authorized by the original equipment manufacturer as required by policy. MRT3 management was happy enough to get their favorite insurance provider, but I understand GSIS was ordered to insure MRT3 regardless of who is providing maintenance services. I guess Malacañang was afraid of another opportunity to mock Daang Matuwid.

Insurance aside, MRT3 is operating at great risk not just to the system but also to the passengers. The number of rail cars running has also been drastically cut.

Even if it is assumed they still use the original number of cars, they would be carrying more passengers than capacity design allowed. Worse, there are now less cars carrying some 150,000 more passengers than designed, increasing wear and tear and danger to life and limb.

A good example is that braking accident that injured passengers some weeks ago. MRT GM Vitangcol blamed the driver for the accident. Here is what happened:

The trains are equipped with automatic train protection (ATP) which is a safety measure that works with the signaling system. Because the signaling system gave up its ghost a long time ago, drivers are instructed to disable the automatic train protection system. They now communicate over two way radio to regulate train dispatch from station to station.

The driver supposedly forgot to disable the ATP. Because the ATP could not communicate with the signaling system, it stopped the train as it is supposed to do for safety reasons.

One wonders how long MRT3 can survive on stop gap measures. Dangerous but we are even proud of how we can improvise… the jeepney mentality. Puede pa yan!

The way it looks, MRT3 riders will get no relief from the pain of riding the MRT3 for the rest of PNoy’s term. They also face increasing risks daily as the aging system gets abused more.

This is why I had been saying government should have agreed to the proposal of Manny Pangilinan to take away the legal problems and offer to provide the capex needed to modernize MRT3. That was three years ago. Instead, Mar Roxas as DOTC secretary bravely said government will do it. Yabang lang pala! Hindi naman kaya.

One other thing… I hear the money set aside to pay for the rail cars was under DAP. If the SC declares DAP unconstitutional, where will they get the money from? As it is, I heard COA is questioning the use of those funds initially deposited with LRTA to buy rail cars for MRT3, a private company.

No wonder I also heard the increasingly nervous Chinese supplier is asking for a revision of the contract so that government will pay most of the contract costs before work starts. The Chinese company had been monitoring the legal problems of MRT3 and they are afraid they will suffer the NorthRail experience.

It is horrible how DOTC has failed to implement projects well. Why are Filipino managers doing great in the private sector but a total mess in government?

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco