Turn MRT crisis into opportunity

The timing and manner of the MRT (Metro Rail Transit) and LRT (Light Rail Transit) rate hikes for which Transportation Secretary Joseph Emilio Abaya is being criticized is not the only problem with the controversial mass transit system. It is merely the most blatant symptom of the mismanagement of a public utility jointly run by government and the private sector.

The increases hiked the maximum fares on LRT 1, LRT 2 and MRT 3 by 50, 66 and 87 percent, respectively. Based on the 2013 Annual Poverty Indicators Survey, residents in Metro Manila spend around P42 a day on transportation—6.6 percent of the household budget.

Zooming in on those earning P20,000 a month, the transport cost per day is around P27. If they are using MRT from North Avenue to Taft, they will see their transport expenses shoot up by almost 96 percent.

Minimum-wage earners have it worse: spending about P18, they face a staggering 144-percent increase.

What has particularly infuriated commuters is that Abaya himself admitted that the fare hike would not go to system improvements. Instead, it will be used to pay P600 million in monthly fees to the concessionaire that owns MRT 3.

Even members of Congress were up in arms since during the 2015 budget deliberations as they already agreed to a P17.26-billion subsidy. Sen. Grace Poe called the move “treacherous” since Abaya could have requested additional subsidy instead of sticking it to the riding public.

Byzantine structure, BLT

The MRT mess shows the many things that can go wrong in a public-private partnership. The public got a rude shock  when it got a glimpse of the byzantine structure of the MRT: a private consortium owns it, the Department of Transportation and Communications (DOTC) operates it and another private contractor maintains it.

The history of this partnership stems from a 25-year build-lease-transfer (BLT) agreement  between the DOTC and MRT Corp. (MRTC) in 1997, at a time when the fervor for privatization of public services was at its height—during the Ramos administration.

MRTC was to construct the project in accordance with DOTC specifications. After completion, MRTC will lease it to the DOTC, which would then operate the system.

Ironically, the DOTC cannot invest in the railway since all investments on facilities has to come from MRTC. When the DOTC attempted in 2014 to acquire 48 light rail vehicles (LRVs), MRTC petitioned and won a “temporary order of protection” from the Makati Regional Trial Court.

Private sector capture

But why won’t MRTC want the DOTC to buy additional rail vehicles? It turns out that MRTC wants to supply the LRVs itself. This sudden behavior after a decade of underinvesting has a context—48 percent of MRTC is now under the control of Manuel V. Pangilinan’s Metro Pacific Investment Corp. (MPIC).

The government’s initiative went against Pangilinan’s grand plan of capturing the metro’s rail and road system. (MPIC’s subsidiary, Metro Pacific Tollways Corp., already controls 63 percent of all the toll roads in the country.)

MPIC proposed to invest $300 million as early as 2011 to expand the capacity of MRT 3 while taking over the government subsidy, in addition to $350 million to acquire equity and procure some of MRTC bonds.

On the face of it, the offer looked good. But there’s a hefty price. MPIC wanted guaranteed fares with periodic increases, 18-percent rate of return and an extension of the concession agreement by 15 years.

The problem was that the DOTC lacked the moral ascendancy to take MPIC to task for its maneuvering since it was thoroughly mired in charges of corruption and incompetence.

Questionable bids

When the DOTC first attempted to take bids to supply new LRVs in 2012, it was hit with allegations of high-level bribery. Czech Ambassador to the Philippines Josef Rychtar claimed that MRT 3 general manager Al Vitangcol III had demanded a $30-million bribe in exchange for Czech firm Inekon Group bagging a $174-million contract to supply 52 new LRVs.

The Chinese railway giant Dalian Locomotive and Rolling Stock Co., owned by the China North Railway (CNR) Group, ended up winning the bid, but the circumstances led to strong suspicions that the bidding was fixed. First, CNR was a first-time LRV builder.

Second, CNR and its “rival” bidder, China South Railway’s Zhuzhou Electric Locomotive Co. Ltd., used to belong to the same corporation and are both controlled by the Chinese government.

Skimping on maintenance

The problem went beyond the purchase of LRVs. When the MRT was built, MRTC and Sumitomo entered into a 10-year “maintenance agreement.” The DOTC claims that many of the problems are due to the failure of MRTC to compel Sumitomo to make the necessary capacity adjustments.

After Sumitomo, PH Trams-CB&T took over as “temporary maintenance provider” for more than 10-and-a-half months before being replaced by Global-Autre Potre Technique Global Inc (APT). The two years under the two contractors saw a rapid decline in the quality of MRT 3 services due to incompetence and skimping. Only 50 out of 73 LRVs are left running. They cannibalized decommissioned cars for spare parts. The sensor-based signaling system was replaced by walkie-talkies.

Three options

At the moment, the future of the metropolitan rail system is in limbo. There are three competing routes. One is ownership, operation, and maintenance by government of both MRT and LRT. Second is control of MRT and LRT by different private concessionaires. The third is control of both lines by the same concessionaire.

The second option appears to be favored by the government. It has moved to buy out MRTC, with government-owned banks now owning over 80 percent of MRT bonds. The plan seems to be to buy out the current concessionaire, then bid out the system to another private entity.

The third option would unite the two systems under one private concessionaire, the goal of the Pangilinan-led consortium. While dismissing Pangilinan’s offer, the DOTC awarded the contract to control and run the LRT 1 extension to the Pangilinan-Ayala consortium for 32 years.

With the core of the MRT-LRT regional system controlled by the Pangilinan-led conglomerate, one can easily imagine future lines coming under its control. Is this the future we want?

The private sector has had a chance to prove itself over the last 20 years with the MRT and it has come up with a significantly poorer performance than the government-run LRT. Why subsidize the private sector for poor service?

The time is ripe, many would argue, for a government-run metro service along the lines of the MTR in Hong Kong and the MRT in Singapore, which have become synonyms for efficiency and passenger satisfaction.

Efficient mass transport

That a government-run system can function as efficiently as in Singapore and Hong Kong is easier said than done. The Chinese have a saying that a journey of a thousand miles begins with a single step.

The following are some suggested steps to begin this transformation:

1. Accept the fact that public services must be subsidized

Public services in a country where the majority of the users are poor must not be operated under the neoliberal principles of privatization and full cost recovery propagated by Asian Development Bank and the World Bank, two institutions that exert enormous influence over government’s fiscal policies.

Before the neoliberal ideological takeover, subsidizing public services was seen as government’s duty to its marginalized citizens, one that was paid for through transfer payments drawn from taxes imposed on the richer sectors of the population. This is a widely accepted and legitimate principle and practice that the government must return to and uphold.

2. Subsidies for the public must be paid for by transfer payments

For Abaya to rail against the costs of subsidizing the riding public is misguided. Perhaps, he should be faulting the Bureau of Internal Revenue for being ineffective in collecting taxes from the more comfortable sections of the population and the Department of Budget and Management for its wrong priorities. With the tax effort coming to only 13.6 percent—among the lowest in Southeast Asia—we urgently need reform in our tax policies.

To be fair, the inability to collect income and wealth taxes from the better off did not begin with the Aquino administration. It is, however, this administration’s duty to improve tax collection and reverse a longstanding trend, as it promised early on in its tenure, rather than have an increasing burden of necessary public service expenditures fall on the struggling middle class and the poor.

3. Establish accountability

The government must investigate MRTC and its current owner, MPIC. In the immediate, it can demand reparations for the economic and social costs incurred in the process. It must investigate maintenance contractors Sumitomo, PH-Trans and Global APT over the failure of MRT to provide safe and adequate service.

4. Make sure that buyout will not translate to private sector subsidy

For the 2016 budget in relation to the buyout and rehabilitation of MRT 3, the House of Representatives and the Senate must include a proviso that the government cannot resell the railway, in whole or in part.

Also, the costs of MRTC’s failure to fulfill contractual obligations as well as liabilities due to negligence must be incorporated in the buyout. We must prevent another case of public money being spent to financially and physically rehabilitate a neglected public utility so it can be
“marketable.”

The government should be subsidizing the public, not private consortia like the Indonesian-controlled Pangilinan Group.

5. Encourage employers to internalize transport costs

In addition to transfer payments from tax revenues, employers can be made to compensate their employees who are forced to shoulder the MRT fare hikes. The government can ask the Regional Tripartite Wage and Productivity Board of the National Capital Region to implement a cost-of-living allowance adjustment of P26 to incorporate the added burden of the fare hike.

The company can also opt for voluntary issuance of MRT stored value cards to their employees and provision of other benefits, including company-sponsored transport services via service vehicles. To be fair, the government can then work out reasonable fiscal incentives to participating firms.

6. Capture the market “rents” generated by transport nodes

Currently, the private sector is able to benefit from the agglomeration of people along transport nodes like MRT and LRT stations, generating free “rents” that translate into corporate profit. Retail malls, for instance, enjoy the flow of people into these transport nodes. Some even invested (legitimately or unscrupulously) to ensure that transport nodes are connected to them.

The public should charge the private sector for this “service.” A government-controlled MRTC can charge connecting malls proportional to the mall traffic it contributes.

Hong Kong’s MTR understands that the primary strength of public transport is its ability to pool people. It has monopolized access to what the establishments consider their customers. So instead of sharing this access freely, it negotiates with the retail industry wherein it receives a percentage of the mall’s profit and property development fees or co-owns the mall itself.

In fact, DOTC’s buyback initiative can be a start of a state-owned MRT emulating Hong Kong’s vertical integration model. MRT can procure connected malls and shopping complexes and build where there is none. The revenues can finance further improvement in facilities and capacity expansion.

Crisis into opportunity

The above are but a few principles and existing arrangements that can serve as initial steps toward solving the mass transit problem. There are many others.

The current crisis of the mass transit system may well be a blessing. As the saying goes, a mistake only hurts you if you do not learn from it. This crisis is an opportunity to initiate the establishment of a well-planned regional mass transit system.

(James Matthew Miraflor is a fellow of Active Citizenship Foundation and a graduate student of the University of the Philippines College of Engineering. Walden Bello is a representative of Akbayan in the House of Representatives.)