Gov’t takeover best option to save MRT system — paper

The government could mount a rescue on the cash-strapped Manila Metro Rail Transit System (MRT) by acquiring its private partner’s equity share or project assets along with the unsecured shares of the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP) in it to maintain a cheap mode of transportation for residents in the capital, a Forensic Law and Policy Strategies Inc. (Forensic Solutions) paper said.

The think tank said the rescue package is anchored on the government’s buyout of the MRT from Metro Rail Transport Corp. (MRTC) to continue providing a cheap yet fast mode of transportation to millions of Filipino commuters traversing the country’s foremost, crescent-shaped artery that runs from Quezon City all the way to Manila.

Forensic Solutions said in its first policy paper on government corporations that the Department of Transportation and Communications (DoTC) could save the financially-strapped MRT through the scheme and run on its own the transit system, which comprises 13 stations over a nearly 17-kilometer stretch of Epifanio de los Santos Avenue (Edsa).

Such a buyout alone could finally plug the financial hemorrhage being experienced by MRT, according to the think tank headed by former Justice Secretary Alberto Agra, who had also served as head of both the Office of the Solicitor General (OSG) and the Office of the Government Corporate Counsel (OGCC).

The paper stressed that the Aquino administration has to take decisive steps to save the MRT because “while the system itself has not been financially viable, the combined social and economic benefits of having such a system in place far outweigh the monetary equivalent of the government subsidies expended to support its operations.”

A government buyout would terminate not just what Forensic Solutions described as the “onerous” Build-Lease-Transfer (BLT) Agreement, which had hamstrung the DoTC from meeting its financial obligations, but also the costly litigation process initiated by the private investors to collect overdue Equity Rental Payments (ERPs) from the DoTC.

Otherwise, the only way for government to keep MRT afloat — and running for metrofolk commuters — is to scrap its billion-peso subsidies, either in part or in whole, and impose a long-deferred, steep fare hike that would severely hurt ordinary rail users, said Forensic Solutions in its fourth policy paper co-written by Agra and lawyer Faye Josephine Miguel Rañola.

The Agra-led Forensic Solutions is a think tank offering services in the fields of policy, law reform, advocacy and governance. It provides forensic studies and viable legal options for clients to best navigate executive, administrative, legislative and judicial inquiries.

Ranola is a banking law expert who was former OSG state solicitor and court attorney of the Supreme Court.

As then-solicitor general, Agra shepherded earlier this year the negotiations between the MRTC Board, which is controlled by DBP and LBP, and contractor Sumitomo Corp. that led to the Japanese company’s accession to certain technical and financial terms. These include Sumitomo’s reimbursement of excessive maintenance fees paid by DoTC, its payment of wheel retrofilling or replacement of MRT train wheels, and its upgrading of the Taft Avenue station from a three-train pocket track to the required four-train pocket track.

Forensic Solutions earlier released three policy papers either proposing novel ways to improve water resources management and reverse the country’s perennial water woes, ensure constitutionally-guaranteed privacy rights plus other safeguards in the lifestyle check ordered by President Aquino on big-time tax dodgers, and fine-tune the price or “Swiss challenge” into a highly competitive form of public bidding by way of congressional action.

Agra and Rañola said in the fourth policy paper that one more option is for the DoTC and MRTC to agree to end the expensive arbitration proceedings abroad and modify the BLT terms. But this approach will not completely free the government from this BLT deal that requires it to cough up ERP or rental fees for MRTC equivalent to a 15 percent profit or return on its equity and to shoulder the pertinent tax payments, both for the duration of the 25-year agreement, they added.

MRT has been neck-deep in red ink because it charges a low fare of P10 to P15 per single trip depending on distance, which means the government has been subsidizing fares that Forensic Solutions estimated at P45 per passenger.

As a result of the 25-year lock-in IRR arrangement tucked in the BLT pact in 1997 when the dollar-peso rate was just $1 against P26, MRT manager Roberto Lastimoso told Congress in 2005 that the transit company’s monthly financial obligations totaled $3.3 million or roughly P150 million as against its gross earnings of only P130 million.

The DoTC’s failure to settle its ERP payments on time eventually prompted MRT’s private investors to take separate legal actions against the Philippine government before the International Chamber of Commerce (ICC) in Singapore and the International Center for the Settlement of Investment Disputes (ICSID) in Washington DC.

To mitigate the cost of these arbitration proceedings, then-President Arroyo directed the DBP and LBP to purchase shares of stock, notes, and securities representing MRTC equity giving the banks a combined 75 percent controlling stake in MRTC.

But Agra and Rañola hastened to add in their policy paper that it was a sound business decision for DBP and LBP to purchase MRT 3 Notes back then, because given the financial crisis at that time, any financial instrument like the MRT 3 Notes that yielded a guaranteed profit of 15 percent was a “golden opportunity” for investors.

Of “paramount consideration” in a save-the-MRT program, they said, are “the onerous provisions of the BLT Agreement such as the 15 percent IRR (Internal Rate of Return) guaranteed by the government, the liability for taxes assumed by DoTC, and the obligations and liabilities of a common carrier also assumed by DoTC.”

“The contemplated buy-out of MRTC, either through the purchase of all its shares or the acquisition of the project assets of MRTC, should extinguish the BLT Agreement and free the government from the onerous provisions therein,” Agra and Rañola said. “Furthermore, the buy-out and transfer of the project to the DoTC should take into account the buy-out mechanism provided in the BLT Agreement, the complex securitization structure, and ultimately the take out of the equity interest of DBP and LBP.”

They noted that, “Alternatively, the DoTC and MRTC can agree on a settlement of their claims and the closure of the arbitration proceedings.”

“As part of the (proposed DoTC-MRTC) settlement agreement,” they said, “the parties can explore possible amendments to the BLT Agreement in preparation for the eventual re-privatization of the MRT 3. In the meantime, the National Development Co. may take out the unsecuritized shares owned by DBP and LBP, while the banks continue to hold the MRT III Notes.”

Unless a buyout is made, Agra and Rañola said, “an inevitable measure is to raise fares to address the shortfall in the fare box revenues. The government currently subsidizes fares at an average rate of P45 per passenger, which means that if the subsidy were removed, the regular fare would be P60.”

“Whether the present administration will adopt a total users pay policy to do away with the subsidies for the MRT 3 or an incremental fare increase is a decision that should be carefully calibrated in light of the political and social pulse,” they stressed. “At any rate, an increase in fare rates has to undergo the process of notice and public hearing prescribed by the Administrative Code.”

The DOTC proposed to more than triple the MRT fare from the P10-P15 range to the P17-P34 band as early as 2000, but Malacañang thumbed down this fare hike plan even if the rail rates were lower than bus fares.

In 1991, the DOTC awarded the BLT contract to the EDSA LRT Corporation, Ltd. (ELCL) for the MRT Project. Four years later, a consortium purchased 85% of voting stocks in ELCL through the EDSA LRT Holdings Inc. (ELHI).

ELHI then put up MRT Development Co. (MRT DevCo), which acquired development and commercial rights to develop the 16-hectare depot site and rail stations as well as the right to develop the air space above these stations.

Also in 1995, ELCL changed its name to Metro Rail Transit Corporation Ltd. (Metro Rail), and then put up a subsidiary, MRTC, to design, construct and maintain the Phase 1 of the MRT 3 Project.

The construction and development of the MRT 3 Project was financed through loans from various lenders including Export-Import Bank of Japan, Investicni A Postovni Banka, and A.S. (succeeded by Ceskoslovenska Obchodni Banka). These loans were assumed by the Philippine government as direct obligor. –Daily Tribune