What’s behind MRT-3’s problems

I’m sorry to say that the problems of the MRT-3 cannot be solved by government VIPs, including Transportation Secretary Joseph Abaya and Sen. Grace Poe riding the train to see how commuters suffer before and during the trips. (They suffer very much.) The problem is congenital. The elevated train system is like a two-headed monster: It has one body (the train line) but has two heads—one belongs to the owners and the other belongs to the operator; and the two heads are quarreling.

The owners of MRT-3 is the Metro Rail Transit Corp. or MRTC, and its operator is the Department of Transportation and Communications through a project management office called MRT3. And they are quarreling and have taken their quarrel to court. The problems can be solved only by the arbitration court in Singapore if it moves fast enough.

Background: The construction of MRT-3 train line was started in 1996 under a build-lease-transfer agreement. It was completed and MRT-3 started operations in December 1999. It was built by a Filipino consortium composed of: Fil-Estate Management, a subsidiary of the Sobrepeña family’s property and preneed business; Ayala Land; Greenfield Development Corp. of United Laboratories; Ramcar Inc. of the Agustines family; and Anglo-Phil Holdings Corp. associated with the Ramos family, owners of National Book Store.

It was leased to and operated by the government through the DOTC for 25 years, after which it would be transferred to and fully controlled by the latter.

The Filipino investors infused $190 million in equity and obtained loans worth $462 million from a group of international and local banks with a sovereign guarantee from the Philippine government.

MRTC was assured of an after-tax, after debt-service, after-expense return of 15 percent on their investments every year. The government also committed to pay escalating rental fees for 25 years.

Sumitomo of Japan was chosen as the maintenance contractor which then subcontracted the services to TES Phils. The original contract was for a period of 10 years, was extended for a 3-6 month term and then another 9-month term.

In October 2012, the maintenance contract was awarded to PH Trams and CB&T. In September 2013, the contract was awarded to APT & Global Inc. The latter contract will expire on Sept. 5, 2014, and another bidding will be held.

In 2002, some members of the consortium—the Sobrepeñas and the Agustines group—were having financial difficulties and decided to cash in by tapping the capital markets and packaged their future payments into zero-coupon bonds. The Ayalas eventually got out of the consortium. The MRTC bonds became very attractive because they carried a 15-percent interest rate. The receivables that back these bonds will come from the Philippine government and are covered by sovereign guarantees and, therefore, are considered a safe investment. Now, the government’s lease payments are paid to the bondholders as coupon payments.

When MRT-3 started operations in December 1999, the approved fare was P30 per passenger. But ridership was only 40,000 in its first few months of operation although it was designed for a daily capacity of 300,000. So the Estrada administration reduced the fare to P15 maximum and P10 minimum, which increased ridership to 400,000 a day. The Arroyo administration continued to implement the same fare rates, forcing the government to put out a subsidy to meet the agreed rental payments to the consortium.

Moreover, the subsidies fluctuated with every drop in the foreign exchange rate because the rentals were denominated in dollars while revenues were in pesos.

The government said it has paid MRTC P35.2 billion since 2000. Throughout that time, MRTC did not acquire new coaches or upgraded key systems of the line, like the crucial signaling and ticketing systems because, it said, the government did not pay its rent promptly. By 2009, the DOTC-MRTC relationship was already becoming acrimonious and MRTC filed an arbitration suit against the Philippines in Singapore because of the delayed rental payments.

The following year, President Aquino issued orders to expand the MRT-3 capacity by buying new coaches but the build-lease-transfer agreement gives the owners, MRTC, the right of first refusal.

More later.