De La Salle-College of Saint Benilde School of Multidisciplinary Studies Consular and Diplomatic Affairs Department
THE EFFECTIVENESS AND EFFICIENCY OF THE BUILD-OPERATE-TRANSFER (BOT) SCHEME IN THE PHILIPPINE CONTEXT OF ECONOMIC DEVELOPMENT
(A CASE STUDY)
Maria Victoria Y. Sibal (LL1) Philippine Public Administration (PHIPUBA) 10 December 2007
Page 2 of 33
TABLE OF CONTENTS
HEADING
PAGE
I. Statement of the Problem
4
II. The Role of the Philippine Government in Development
4
A. Government as the Central Planning Authority
5
B. Access to Various Financing Resources
5
III. The Build-Operate-Transfer (BOT) Scheme
6
A. Build-Operate-Transfer Law
6
B. BOT and the Philippine Government
8
IV. The Manila Metro Railway Transit (MRT-3) System A. Significance V. The MRT-3 System and the BOT Agreement
9 9 11
A. Stipulations and Timeline of the BOT Agreement
11
B. Phases of the BOT Agreement
12
1. Phase-1 a. Figure 1. Phase-1 Project Brief 2. Phase-2
13 14 14
a. Figure 2. Total Project Cost
15
b. Figure 3. Financing Features of the Project
16
c. Figure 4. Projected Cashflows of the Project
17
VI. Commendations and Potential Legal Liabilities
18
A. Planning of the Project
18
B. Stipulations of the BOT Agreement
18
VII. Current State of Operation
20
A. Financial Woes
20
B. Fare Subsidy
20
Page 3 of 33
C. Unnecessary Spending VIII. Proposed Solutions
21 22
A. Buy-out: MRT Takeover
22
B. Construction of the MRT-7
23
C. Pasig Ferry
24
D. Privatization
24
E. Types of Ticketing
25
1. Flash Pass
25
2. G-Pass
25
3. Smart Pass
26
F. Wrap Advertising
26
IX. Recommendations for Proposed Solutions
26
A. Transport in Hong Kong
27
B. Mass Transit Railway
27
C. Removal of Fare Subsidy
28
D. Raising Public Awareness
28
E. Reduction of Unnecessary Spending
31
X. Critiques: BOT Agreement in the Philippine Context
31
XI. References
32
Page 4 of 33
A case study on the effectiveness and efficiency of the Build-Operate-Transfer (BOT) scheme in the Philippine context of economic development*
HOW EFFICIENT AND EFFECTIVE HAS THE BUILD-OPERATE-TRANSFER (BOT) SCHEME BEEN IMPLEMENTED IN THE CONSTRUCTION AND OPERATION OF THE
MANILA METRO RAILWAY TRANSIT (MRT-3) SYSTEM?
The Role of the Philippine Government in Development As the single biggest spender and consumer, the government of any country is in a position to influence operation of the economic system—and it does. The Philippine government, in particular, takes charge of setting in place the national development plan, as well as approves the enabling laws, orders, ordinances, and memoranda that promote and regulate movements in the economy. In a country where a strong social philosophy permeates the economic system, government involvement in business is so evident that economic development seems to depend mostly on government rather on private business initiative. A diminished role of government in economic activities—as advocated by those who believe in laissez faire—may not be seen as suitable or favorable for countries that are still in its developing stages (like the Philippines); which is why there are sectors in society that have seen and let government to grow so much in its concern to encroach on private business.
* Disclaimers: (1) Actual statistics acquired were not in consolidation due to its unavailability but, instead, were integrated accordingly; and (2) the term “build-operate-transfer” (BOT) is to be used in correlation with “buildlease-transfer” (BLT) with certain discretion.
Page 5 of 33
Government as the Central Planning Authority The effectiveness and efficiency must theoretically be observed through how the government manages to manifest its aptitude in planning, implementation, and enforcement. Being the central planning authority, the Philippine government operates by formulating a national development plan via assembling and integrating sector plans prepared by government departments and local governments, with the participation of the private sector—within the Philippine context, the central authority for planning is the National Economic and Development Authority (NEDA). It is in the planning of the whole economy that the government acquires its very potent role in economic development, which is in fact considered to be a role inherent to government by many economic and political thinkers (Wade, 1990).
With particular notice to the transportation sector, many projects spearheaded by the government—including the Manila Metro Railway Transit (MRT or MRT-3)—and the direction of its planning was appropriately oriented to the mission of improving the quality of life (more convenient means of transport), development of the area (through introduction of infrastructure), expansion of employment, redistribution of wealth, and—which, in the personal opinion of the presenter, is most important—the promotion and engagement of investment and the encouragement of economic control by the citizens.
Access to Various Financing Resources The government access to funding of its development projects and programs is vast. It can turn to external sources when necessary. Certain government undertakings that could not be funded from domestic sources are implemented with funds granted by foreign governments and foundations (Kurihara, 1967). Sometimes these are specified in the bid for loans from international lending institutions like the Asian Development Bank (ADB) or the International Monetary Fund-World Bank (IMF-WB). There are also instances, like in the case of the Philippines, wherein the government would largely depend on budget and capital allocations through official development assistance (ODA) from other countries. One of our biggest sources of ODA, in terms of railway infrastructure development, is Japan.
Page 6 of 33
Governments of developing countries, such as the Philippines, have used the floating of bonds to finance their infrastructure development. Such bonds have been offered to the domestic and foreign markets with substantial results. In countries where the government had kept a large number of government proprietary business, the disposition of the firms to the private sector had been used as a source of funds. In the development of the infrastructure, special assessment— which is the passing on to property owners the project cost of improvements—can be used to supplement actual local finance capabilities. At the same time, the government can make use of its borrowing capacity to develop infrastructure and income-generating projects. Working with this particular perspective, theoretically, a budget ceiling must be accurately identified approximated so as to avoid dealing with the scenarios of budget misallocation and inefficient utilization of resources.
The Build-Operate-Transfer Scheme
In order to accelerate the construction of much-needed infrastructure for development, the governments of developing countries have made use of the build-operate-transfer (BOT) scheme. The Philippine government, wanting to make use of such scheme, passed Republic Act No. 6957 (the Build-Operate-Transfer Law—with later amendments by R.A. No. 7718) which was approved on July 1990 to cover highways, bridges, interchanges, tunnels, mass transit facilities, navigable inland waterways, railways, airports, power generation, power distribution, telecommunication, irrigation, water supply, sewerage, drainage, health infrastructure, land reclamation, dredging, industrial estates, markets, slaughter houses, fish ports, incinerators, landfill and related facilities.
Build-Operate-Transfer Law According to R.A. No. 6957—with its respective amendments by R.A. No. 7718—build-operatetransfer is to be defined as:
Page 7 of 33
“A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding these proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years: Provided, That in case of an infrastructure or development facility whose operation requires a public utility franchise, the proponent must be Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos.
The build-operate-and-transfer shall include a supply-and-operate situation which is a contractual arrangement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals.”
Likewise, build-lease-transfer is to be respectively defined as:
“A contractual arrangement whereby a project proponent is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which
* Some scholars of Philippine economic development and political thinkers have used the concepts of BOT and BLT interchangeably; a similar treatment of the said concepts shall thus apply to this particular study.
Page 8 of 33
ownership of the facility is automatically transferred to the government agency or local government unit concerned.”
In addition to promoting the development of infrastructure, the BOT law also provides for the use of Filipino labor in BOT projects by both foreign and Filipino contractors. It further specifies that project funding by a foreign contractor cannot be obtained from Philippine sources in excess of twenty percent (20%) of the total project cost and that Filipino labor should be recipients of technology transfer and training from the project. Only when a particular type of worker is not available domestically shall the contractor be allowed to hire non-Filipinos in the construction of the BOT project.
BOT and the Philippine Government The BOT is a contractual arrangement between a contractor and a national government agency or a local government unit (LGU), whereby the former undertakes the financing and construction of a specific project, and after operating it for a fixed period of time turns it over to the latter. To recover investment and provide for operating and maintenance costs, the contractor is allowed to charge users of the facility the appropriate tolls, fees, rentals, and other charges.
This scheme is the government’s way to make the private sector do what the government should do. It is the harnessing of the private sector’s desire to earn from investment. Some thinkers consider this as the manifestation of private investment in infrastructure development. The basic consideration is that a project will be allowed under this scheme because the government deems it necessary for development, and not because it is viable to the contractor.
Despite its advantages, the BOT scheme must be viewed with realism—especially in an attempt to infuse it within the Philippine context (given the track record of the Philippine government with project planning and its corresponding budgeting). It is the public that really pays for the project in the long run through the tolls paid. If the project were to be a government tollcollecting facility, the public would have earned the revenue for themselves. Infrastructure and facilities tend to be well maintained at the early stage of operation but minimally kept towards the time when the term of contract is to end because, by this time, the contractor is—
Page 9 of 33
supposedly—maximizing profit. An infrastructure or facility that has been in use for twenty-five to thirty years would be so badly depreciated despite maintenance that it would need total replacement or reconstruction.
The Manila Metro Railway Transit (MRT-3) System
The Manila Metro Railway Transit (MRT or MRT-3) forms part of Metro Manila's rail transport infrastructure, known as the Strong Republic Transit System (SRTS), and overall public transport system. One of its original purposes was to decongest Epifanio de los Santos Avenue (EDSA), one of Metro Manila's main thoroughfares and home to the MRT, and many commuters who ride the MRT also take road-based public transport, such as buses, to reach the intended destination from an MRT station. MRT has been only partially successful in decongesting EDSA, and congestion is further aggravated by the rising number of motor vehicles. The expansion of the system to cover the entire stretch of EDSA is expected to contribute to current attempts to decongest the thoroughfare and to cut travel times.
Significance Metro Manila has traditionally been the center of industrial and economic activity of the Philippines. The rapid urbanization of Metro Manila dramatically increased traffic in the central business district and adjoining areas. Before the MRT-3 Phase-1 Project, metropolitan commuter transport had been mainly conducted through the heavily and chronically congested roads. A large increase by all modes was expected as a result of buoyant economic activity in the mid1990s, which in turn caused further transportation and environmental problems. In order to improve the conditions then and to minimize exacerbation of those conditions, the Philippine government looked into taking some measures to increase the capacity of its urban transportation and transit systems.
EDSA is the busiest transportation corridor in Metro Manila in terms of passenger traffic and commercial activity. It extends from the Macarthur Highway at Monumento Circle, Caloocan City, in the north of Metro Manila to Taft Avenue in the south. It forms a semi-circular ring road
Page 10 of 33
connecting with a number of radial roads that lead to the metropolitan central business districts. EDSA cuts across the cities of Caloocan, Quezon, Mandaluyong, Makati, and Pasay, as well as the municipality of San Juan. There are also major centers of commerce and urban activity adjacent to the EDSA corridor, which include Monumento/Balintawak, North Avenue, Cubao, Ortigas, Shaw, Guadalupe, Makati and Baclaran. EDSA is the backbone of Manila’s ground transportation system and one of the highest volume roads in the world. Today, over 400,000 vehicles traverse the EDSA corridor transporting up to 1,200,000 passengers a day. Passenger traffic grew at an average rate of 9% per annum between 1985 and 1990. Going forward, a conservative grow rate in excess of 5% per annum was forecast for the Metropolitan Manila area. MRTC’s ridership projections were based on an estimated 2% growth rate per year. Many solutions for improving the then existing traffic flow and air quality problems of the EDSA corridor were studied by the Government of the Philippines through the DOTC. These problems were barriers to the further economic development of the Philippines and impediments to the quality of life for Metro Manila’s population. The Urban Transport Development Program (UTDP) concluded that the best solution to the then worsening traffic problems along EDSA in the 1990s was a mass rail transit system. The UTDP study concluded that passenger demand for public transportation would soon exceed the capacity of a bus transportation system, thus requiring a high capacity rail-based transit system to handle growing passenger demand. The EDSA Rail Transit system is the cornerstone of the DOTC’s integrated strategy for alleviating the chronic traffic congestion in Metro Manila and along the EDSA corridor in particular. The system was designed to carry initially in excess of 600,000 passengers per day or 185 million passengers per year initially, and is expandable to accommodate over 900,000 passengers per day or 300 million passengers per year. The DOTC awarded the contract to Metro Rail Transit Corporation Ltd. (MRTC), formerly EDSA LRT Corporation Ltd., to build, lease/operate, and transfer the EDSA Rail Transit system under the BOT laws of the Republic of the Philippines.
Page 11 of 33
Upon completion and commissioning of the system, MRTC will deliver it to DOTC by way of a 25-year lease during which DOTC will be responsible for operating the system. MRTC will provide technical management assistance, maintenance and repair services.
The MRT-3 System and the BOT Agreement The MRT is operated by the MRTC, a private company operating in partnership with the Department of Transportation and Communications (DOTC) under a BOT agreement.
Stipulations and Timeline of the BOT Agreement Construction started on September 16, 1997 after the MRTC signed an amended turnkey agreement with a consortium of companies, which included Mitsubishi Heavy Industries and Sumitomo Corporation, and a local company, EEI Corporation, which was subcontracted for civil works. A separate agreement was signed with CKD Doprovni Systemy (of Prague, the Czech Republic) on rolling stock. MRTC also retained the services of ICF Kaiser Engineers and Constructors to provide program management and technical oversight of the services for the design, construction management and commissioning.
In the 1990s, the MRTC was awarded a BOT contract by the DOTC. The DOTC would have ownership of the system and assume all administrative functions, such as the regulation of fares and operations. DOTC oversaw technical supervision of the project activities covered by the BOT contract between the DOTC and MRTC, and inspected and checked whether the project was constructed in accordance with the approved plans, specifications, standards and costs.
The MRTC would have responsibility over construction and maintenance of the system and the procurement of spare parts for trains. In exchange, the DOTC would pay the MRTC monthly fees for a certain number of years to reimburse any incurred costs.
Page 12 of 33
During construction, the MRTC oversaw the design, construction, equipping, testing, and commissioning. This included the supply of the light rail vehicles, track, signaling, communications, power distribution, and the furnishing of other necessary equipment, facilities, and spare parts. MRTC was also responsible for constructing the necessary civil works for the system including fixed guideways, passenger stations, power substations, LRV storage depot and maintenance facilities, and other facilities required to make the light rail transit system operational.
As stipulated by the BOT agreement, TES Philippines, Inc. (TESP), a subsidiary of Mitsubishi Heavy Industries, was established on April 30, 1999 as a subcontractor of MRTC to execute the maintenance work under the Maintenance Agreement. Being the maintenance work provider to the MRT III, TESP’s main task is to provide service, maintenance and repair of transportation equipment and facilities. It is principally responsible for the operation of MRT Depot and the Maintenance of the Vehicles, Signal, Tracks and Guideway Structure, the different Stations and Substations, the Overhead Catenaries System, and the various Communication Systems.
The DOTC also sought the services of SYSTRA, a French consultant firm, with regards to the technical competence, experience and track record in the construction and operations.
On December 16, 1999, the initial section, from North Avenue to Buendia, opened, followed on July 20, 2000 by the remainder, from Buendia to Taft Avenue.
Phases of the BOT Agreement The formal agreement governs the relationship between MRTC and DOTC during the Project’s two major phases: the construction phase and the revenue service phase. During the construction phase, MRTC was obliged to construct the project (Phase 1) and to complete that construction by a certain date. The construction was to be accomplished in accordance with the specifications and drawings approved by the DOTC and the completed system capable of achieving certain capacity requirements. MRTC was also obligated to provide all equipment that was to be used in the system, including the rail vehicles.
Page 13 of 33
There were certain stipulations that need to be taken duly note of, that of which poses a great possibility to already undermine the efficiency of the project. The DOTC’s obligations during the construction phase included granting MRTC access to the project site (including relocating squatters and other persons from the depot area) and ensuring that certain work to be performed by the Department of Public Works and Highways (DPWH) was completed properly and on time. In addition, the DOTC accepted the responsibility for certain events that could delay completion of the system. Should such events occur, DOTC would be responsible for paying the costs of the event and the delay it causes, and the date by which MRTC is obliged to complete construction would be adjusted.
After completion, MRTC was obligated to lease the system to DOTC, who would operate the system, with MRTC providing the maintenance. DOTC was required to make payments of rental fees to MRTC, and these were broken down into several different portions. One significant part was intended to repay the loans taken out to finance the project (debt rental fees).
1. Phase-1: Construction Period Ran from the moment that work, including design work, on the Project began and ended on the date (Completion Date) that the rail system was certified as having successfully completed all Commissioning Tests.
MRTC was obligated to construct Phase-1 of the Project and complete that construction by July 31, 1999 with the completion of certain testing and training required by January 31, 2000 (Final Completion Deadline). However, due to issues requiring more time on the part of DOTC to solve, these deadlines were extended but MRTC successfully met project completion in any case.
Page 14 of 33
Figure 1. Phase-1 Project Brief
MRTC Transit Corporation
Department of Transportation and
(MRTC)
Communication (DOTC)
Coordination with DOF and NEDA for Invested $190.0 million in the project.
approval of BLT Coordination with the DPWH, MMDA and Local Government Units (LGUs) for project implementation.
Equity Rental payments started in August
Coordinate with MMDA for traffic
2000.
management.
Phase I system is fully operational & serving
Secure Right-of-Way (ROW) along EDSA,
an average of 250,000 passengers per day. This
North Triangle Depot and Station entrances.
was above projected ridership for the first year.
2. Phase 2: Revenue Period Begins on the Completion Date and continues until the 25th anniversary of the Completion Date.
Project Funding Components The structural components of the financing plan (Total Project Cost or TPC) were organized to include the following: (a) Engineering, Procurement, and Construction (EPC) costs; (b) the DOTC administrative budget; (c) the MRTC’s Construction Budget; (d) Project Contingency; (e) Financing Fees and Insurance Risk Premium; and (f) Interest During Construction (see Fig. 2 at the next page).
Page 15 of 33
Figure 2. Total Project Cost
This is the budget component portfolio as computed and respectively submitted by the MRTC. This does not include any reference to ODA, but mostly foreign direct investment (FDI).
Page 16 of 33
Figure 3. Financing Features of the Project
This is the projected means of allocating and directing finances for equity rentals, repayments, operating and management (O & M) costs, and interest payments.
Page 17 of 33
Figure 4. Projected Cashflows of the Project
The table above conveniently integrates cash flow streams, over a 25-year period, for equity rentals, revenues, principal repayments, interest, operating and maintenance costs, and cumulative subsidies.
1—Revenues assuming that average fare is pegged at PhP 25 in year 2, growing at 6% 2—Revenues assuming that average fare is pegged at PhP 20 in year 1, growing at 6% Note: Assume that Php 50 = 1 USD
Page 18 of 33
Commendations and Potential Legal Liabilities
The project in itself, regardless of its highly significant utility and purpose, is not without its own share of flaws and problems. Combining the precariousness of the project structure—wherein one misstep may both literally and figuratively derail both construction and eventual operation of the project—and the less-than stellar record of Philippine public administration with respect to the efficient and effective overseeing of development projects coming to completion, then there always will bound to be mishaps, inconsistencies, and discrepancies within the seemingly airtight BOT agreement.
Planning of the Project The planning is, as usual, meticulous and detailed, down to the most minuscule of system operations. The project description is immaculate, and the laying down of the timeline from construction to operation to the eventual transfer is evidently impeccable. Roles were clearly dished out—the DOTC and MRTC clearly knew their accountabilities in every stage of the operation, and the foreign contractors and companies knew exactly their financial and technical responsibilities—which they lived up to. The government agencies involved and the private sector in engagement were in coordination with the planning and primary implementation, and agreed to pledge support from either side.
Supply agreements and maintenance agreements were laid on the table. The EPC contract was very well in place, and both the contractor and the MRTC are clearly aware of each other’s obligation to each other, and to the project.
Stipulations of the BOT Agreement One of the key financial aspects of the BOT Agreement was that the DOTC is obligated to make rental payments for debt servicing irrespective of whether the Project was completed or whether its is operating or maintained successfully. The BOT Agreement clearly stipulates that the debt rental payments equal to all amounts due under the loan agreements, including upon any acceleration, and are of an “absolute and unconditional” nature. This already prompts the very possible scenario that the government (DOTC) might be held financially accountable for the
Page 19 of 33
project, in the case of a failure or discontinuation of the project. The government clearly does not have it in good faith that they will be able to see the said project through, factoring in the possibility of glitches. The point of the BOT scheme is to provide a means of economic development for the country and even theoretically generate income, but definitely not to increase the chances of gaining another economic burden. Another key problem would be the given terms for termination. If the EPC Contract and execution of the Work are terminated, MRTC is required immediately to release the performance guarantee and the warranty bonds and, upon demand of the Contractor, to pay to the Contractor the portion of the Contract Price represented by the Work completed at the date of termination and certain other specified amounts. MRTC does not have the back-up funds to pay whatever remainder of the Contract Price might be (according to the projected cash flows), in the event that it decided to have a contract termination of at least 15 years. Another factor that should be taken into account is the possible variations and changes in contract price, especially with respect to cost of capital, labor, and mode of production. If any variation results in an increase or a decrease in the Contractor’s cost, such increase or decrease will be passed on to MRTC. On the other hand, the Contractor may make changes that enhance the reliability or performance of the rail transit system. However, MRTC is under no obligation to agree to any change that might increase the Contract Price, extend the Taking-Over Deadline or modify any warranties by the Contractor under the EPC Contract. In addition, if the Philippine Peso cost of labor and materials increases at an annual rate of 20% or more from the corresponding months of the preceding year for more than six consecutive months and such increase has a material adverse impact on the Contractor’s cost of performing the Work, MRTC and the Contractor will meet to discuss an equitable adjustment to the Contract Price. Any such adjustment will not, however, exceed any corresponding increase in rental fees payable to MRTC under the BOT Agreement.
Page 20 of 33
Current State of Operation
The MRT has been plagued with problems, almost exclusively, in the financial aspect. It has only been in operation for even barely half of its contractual lease, and already it is currently seeing itself in dire straits, in more ways than one.
Financial Woes MRT General Manager Roberto Lastimoso has recently admitted in an interview that the MRTC Transit Authority (MRTA), the DOTC subsidiary operating MRT, is eight months behind the lease rental payments. The delayed amount of payment is approximately P1.4 billion. Not to mention that also their maintenance payment obligations to TESPI Corporation is four months behind as well. This adds to their operation deficit the amount of P335 million.
The MRT currently operates on a difference of P100 million in the assets of MRT vis-à-vis its obligations. Even if MRT earns about P135 million per month in revenues and another P20 million per month from the development rights payments, its obligation to MRTC is still about P250 million per month.
The lease, which the government currently pays in subsidy amounts to about $3 million a month, will be increased to $5 million after five years and $10 million by the end of the contract. It must be stressed that the government can no longer make the subsidies from the proceeds of revenues generated in the operation of the MRT.
Fare Subsidy Recall that before MRT 3 started operations in 2000, the calculated fare that was approved was about P30 per passenger. The Estrada administration, however, decided to charge only somewhere between P9 and P15 because that’s what they thought the passengers would be able to afford.
When President Arroyo took over, her officials decided to continue subsidizing the fares. The subsidy comes from the national government budget, and needs to go through the usual time-
Page 21 of 33
consuming government appropriation and disbursement routes. Unlike the debt rental payments, which are covered by automatic appropriations in the national budget, the lease rentals are not.
That explains the late payments, but not why the allocated budgets are still inadequate to cover the lease rental dues even when the budget is disbursed on time. But according to the local rating agency monitoring debt instruments like the MRTC bonds, subsidy received from the national budget in 2006 was only P1.2 billion, or half the requested subsidy of P2.1 billion for that year. They expect the subsidies for 2007 will also not be enough.
A report released early this year said, “The government agency is not likely to achieve a significant reduction in past due rentals without increasing national government budget subsidies to MRT operations, as fare box revenues of the MRT 3 system are not sufficient to fully pay monthly [lease rental payments].”
The government shells out at least P6.8 billion every year to subsidize the operations of the rail system. Instead of each passenger paying P60 for the entire distance, the passenger pays only P15. The government pays for the balance of P45. Besides this subsidy, the government also spends another P250 million a month in maintenance fees.
The budgeted subsidy itself needs to be adjusted because when the project was finalized in 1997, the going rate of the peso to the dollar was P27. Currently, even if the peso rates are stronger in the P48-level coming from previous highs of P54, the discrepancy is still too wide. All the obligations—the lease rentals, maintenance, and the debt rental—are denominated in US dollars, but the revenues from the fare box are in pesos.
Unnecessary Spending A critical shortage of tickets has prompted MRT management to cut into two most of the old tickets and reuse these as manual passes for train rides, Roberto Lastimoso said.
In August of 2005, the MRT 3 started using tickets bearing the face of ousted President Estrada but pulled out the electronic cards after the agency reportedly got into trouble with Malacanang.
Page 22 of 33
The pullout of 400,000 Estrada electronic cards in mid-July immediately led to a shortage of tickets. Lastimoso said the agency needed 800,000 tickets a day so it won't have to retrieve from the machines. But around that time only 245,000 tickets were usable. Tickets were retrieved four times a day. When even that was not enough, the management resorted to cutting up the tickets.
MRT 3, which carries about 420,000 passengers each day, is hard-pressed for funds, according to Lastimoso, which was why it has a hard time financing even the production of the electronic cards. The agency is seeking a P20-million budget for a one-year supply of tickets but often, the budget gets channeled to items like salaries and other operational expenses.
In the end, winning bidder Digicom had printed out 800,000 cards for P10 million.
Proposed Solutions
Solutions, to address the concerns of the MRT, have been proposed by almost every sector in the country—the government, private sector, and civil society. Proposals have ranged from those that affect the macro-economic level (budget extensions and subsidy allowances) to those that seek to invade microcosm of an individual member of society (fare increase). Most solutions have been designed to address the budget deficit governing the operations of the MRT.
Buy-out: MRT Takeover By buying out MRTC’s $865-million debt now, the Philippine government stands to save approximately $500 million. The interest on MRTC’s debt is at 12.5 % to 15 %. With interest rates at present very much lower (approaching 2 %), the government can borrow now, pay off the debt and save money on interest payments.
Furthermore, the government can buy more trains to service the passengers. As can be seen every day, the present number of trains and coaches cannot accommodate the hordes of
Page 23 of 33
passengers who want to ride in them. Travel time in the elevated rails is much faster than in the buses on the traffic-choked EDSA below. The purpose of the rail system is really to lessen road traffic, which wastes so much imported fuel with rapidly rising prices.
If the government owns the rail system, then it would have an incentive to buy more trains not only to earn more, but to service more passengers. The latter, after all, is the primary purpose of government while the primary motive of private companies is profit.
But where will the cash-strapped government get the money to pay the $865-million debt? According to Finance Secretary Margarito Teves, five banks have already offered to finance the buyout. This loan will be at a single-digit interest rate, much lower than the present 12.5-15%. Besides, with the present high exchange rate of the peso to the dollar, the government will save millions now by paying the debt now which is payable in dollars.
Construction of the MRT-7 The said railway connects the existing MRT line from SM North EDSA in Quezon City, passing through Commonwealth and Quirino Avenues, all the way to San Jose del Monte in Bulacan. This may prompt an even higher passenger service rate for the MRT; seeing that statistics show that some 850,000 people traverse the said thoroughfares on a daily basis.
Moreover, in connection to the previous solution for the proposed MRT takeover, an estimated $500 million in savings may be available to finance the said construction of the MRT-7—that is, if the government acts fast enough to buy-out the MRT now.
Page 24 of 33
Pasig Ferry In connection to the Strong Republic Transit System project of President Gloria MacapagalArroyo, it may be observed through the course of the case study that not only should existing and future railway infrastructures be exclusively meant for integration, but also other means of transportation within the metro, if it can be helped.
The Pasig River runs straight through Metro Manila area, and there are very strategic locations for ferry docks and stations that can facilitate easy transfer from one mode of public transportation to the other. Say, for instance, the Guadalupe ferry dock to conveniently connect with the Guadalupe MRT station. This will definitely boost revenue through increased commuter traffic converging from different modes of transportation.
Privatization Ironic how the statement goes—the Philippine government voluntarily selling out its assets for private bidders just so it can take over the operations of the MRT—for around a cool $865 million.
Aside from bank financing, BOT agreements, ODA and/or FDI, the government plans to generate funds for infrastructure and development through sale of its assets, amounting to at least P70 billion. Eight months into the year 2007, the government has already managed to raise P42.9 billion, and hope to breach its projected revenue by the year-end.
Major assets sold this year include the government indirect stake in Philippine Long Distance Telephone (PLDT) Co. worth P25.2 billion, a 20% stake in PNOC-Energy Development Corp. worth P16.6 billion, and its remaining interest in the Philippine National Bank worth P998 million.
Other assets to be sold this year include the government’s remaining 40% stake in PNOC-EDC worth P37 billion, the Fujimi property in Japan worth P3 billion, and the 60-hectare old Iloilo airport in the town of Mandurriao worth P1.2 billion.
Page 25 of 33
For next year, the government hopes to raise P39 billion from the sale of major assets. Assets lined up for privatization include the government’s 24% stake in food and beverage giant San Miguel Corp., its 10% interest in Lopez-controlled Manila Electric Co., the 500-hectare National Bilibid Prisons in Muntinlupa City, and the 100-hectare property of Food Terminal Inc. in Taguig City.
Types of Ticketing
FLASH PASS—the system formerly utilized the "Flash Pass", a pass for use on all three rapid transit lines in the Metro Manila area. The pass costs 250 pesos and may be used for multiple rides on any of the metro lines for one week. The system was introduced on April 19, 2004.
A Flash Pass consists of two parts: a card, known as a Flash Pass Card, and a ticket, known as a Flash Pass Coupon. Both components are complementary: a Flash Pass Card is issued when buying a Flash Pass Coupon for the first time and a Flash Pass Coupon must be used with its corresponding Flash Pass Card. The one-week validity period of a Flash Pass Coupon only corresponds to the Flash Pass Coupon, since a Flash Pass Card does not expire.
It was believed that the Flash Pass was a precursor to a unified ticketing system utilizing contact-less smart cards, similar to the Octopus card in Hong Kong and the EZ-Link card in Singapore. However, this project has since been dropped. Instead, passengers simply show their Flash Pass coupon to the gatekeeper who will manually open the gate once validated.
G-PASS—In July 2006, Globe Telecom introduced the G-Pass as an alternative to entering the MRT. The G-Pass uses a stored-value RFID chip that is tapped on a sensor on top of the fare gates upon entry and exit from the MRT, instead of a ticket which is inserted through the gate's ticket slot. The chip can be reloaded with MRT fare credits using G-Cash or through a G-Pass reloading booth usually located near a station's ticket counters. The product is not exclusive to Globe subscribers; however, being a Globe
Page 26 of 33
subscriber avoids the queues when reloading a G-Pass, since Globe subscribers can reload using G-Cash. A G-Pass costs 100 pesos, with 50 pesos worth of free credits upon initial purchase. G-Passes can be purchased at all MRT stations, and RFID sensors for these passes have already all been installed at MRT stations. To use a G-Pass, at least 16 pesos worth of credits must remain in the chip, corresponding to the maximum MRT fare of the same amount because the system deducts credits after exiting the station of your destination. A maximum of 2000 pesos can be loaded on a G-Pass.
SMART MONEY PAY PASS—In March 2007, Globe Telecom's main competitor, Smart Communications, forged a partnership with MetroPass Systems to allow MRT passengers to use the upcoming Smart Money PayPass card to pay for their ride. The system has not been installed yet on any MRT station and no formal date has been set as to when this method of payment will be rolled-out.
Wrap Advertising A wide variety of advertisements can be seen on MRT trains, of which some include Samsung Electronics, Panasonic, and Epson products. Trains bearing wrap advertising are now very common aboard the MRT, although trains that use MRT's house colors are also in service in the network. The revenues generated from the advertising on MRT trains are used to pay off debts incurred by the MRTC during the system's construction.
Recommendations for Proposed Solutions
In the course of the case study, there have been countless searches made to find a model transport system that has flawlessly made the BOT agreement transition from contractual to government ownership. Among the criteria would have to be that the said system might be found within the same geographical context of the Philippines, have undergone the same BOT schemes and agreements, have addressed virtually the same needs and concerns, and with the operation
Page 27 of 33
that both the Philippine government and its society can only dream of. We have found it in Hong Kong.
Transport in Hong Kong Hong Kong has a highly developed and sophisticated transportation network, encompassing both public and private transport. Over 90% of the daily travels are on public transport, making it the highest in the world. Traveling on public transport is facilitated through use of the Octopus card, an "anonymous" stored value smart card which can be purchased at Mass Transit Railway (MTR) and Kowloon Canton Railway (KCR) stations. It can be used to pay fares on most trains, buses, trams, ferries and some minibuses, and is even accepted at parking meters, convenience stores, supermarkets, fast-food restaurants and some vending machines. Mass Transit Railway Hong Kong has an efficient train network. Public transport trains are operated by the MTR Corporation Limited (MTR). The MTR operates the metro network within inner urban Hong Kong, Kowloon Peninsula and northern part of Hong Kong Island with newly developed areas, Tsuen Wan, Tseung Kwan O, Tung Chung, Hong Kong Disneyland, the Hong Kong International Airport, the northeastern and northwestern parts of the New Territories. The Hong Kong Tramways operates a tram service exclusively on northern Hong Kong Island. The Peak Tram connects Central, Hong Kong's CBD, with the Victoria Peak.
There are altogether ten lines in the MTR system, with a total of 82 railway stations and 68 light rail stops. The ten lines are East Rail Line, Kwun Tong Line, Tsuen Wan Line, Island Line, Tung Chung Line, Tseung Kwan O Line, West Rail Line, Ma On Shan Line, the Airport Express and the Disneyland Resort Line. The former eight lines provide ordinary metro services, whereas the Airport Express provides a direct link from the Hong Kong International Airport into the city centre, while the Disneyland Resort Line exclusively takes passengers to Hong Kong Disneyland.
Page 28 of 33
The Light Rail possesses many characteristics of a tramway, including running on streets with other traffics (at grades) on some of its tracks and providing services for the public in New Territories West, including Tuen Mun and Yuen Long.
All trains and most MTR metro stations feature air conditioning which allows the visitor intimidated by Hong Kong's tropical heat to literally shop and work all day without having to experience outside temperatures.
Removal of the Fare Subsidy To those disagreeing to the proposed buy-out and takeover of the MRT, the study in turn may propose an alternative—although not as popular or favorable—solution; a partial removal of the MRT fare subsidy of the government. Buying out the MRT proposes a potential dilemma to the financially-challenged government: the very reason for placing the project under the BOT scheme was lack of funds on the part of the government. Moreover, if such buyout materializes, the financial burden is going to be absorbed by the entire country. This means that even nonusers will have to bear the costs. The fare subsidy removal of the government would, in turn result to probable consequent increase of the MRT fare. A fare rate increase might be able to lessen the shoftfall of the MRT operations, although this will certainly not totally eradicate it.
The general public using the MRT might not react favorably towards the fare increase, especially seeing that for the past 7 years of operation, MRT fares has plateaued on a stable rate of P10-15 a ride—that of which, MRT communters have enjoyed sans the awareness or realization of the adverse consequences the cheap fares have recurringly plagued our government. Seeing that the current break-even fare for MRT operations amount to P72 per person, commuters will defenitely be discouraged from riding the MRT.
Raising Public Awareness Probably only but a handful of people are aware of the situation of the MRT, and the dire straits it finds itself in. Few people really understand how it operates, and also the same few are knowledgeable as to the BOT contract it is currently under. The general public are under the notion that MRT is a government operation, and not a 25-year contract lease the Philippine
Page 29 of 33
government signed with the private sector (MRTC consortium). This is probably one of the reasons why public transport consumers are so adamanat and resistant to the prospect of a MRT fare hike. They do not realize that the MRT is still currently a private venture operation, that of which is being paid annual equity rentals by the government—rental and principal payments on top of O & M costs, interest payments, and the inevitble fare subsidy. The public must be made clear on MRT ownership status, its situation, and the obligations and responsibilities the civil society has towards the MRT.
In hand with public awareness is education of the citizens, alongside primary education of Filipino students. Making them aware oif the process of public administration is key towards achieving a harmonius and functional relationship between the government, civil society, and the private sector. In BOT projects, like the MRT, participation and coordination should not exclusively come from government agencies and private actors. Main contribution should be expected to come from the civil society itself—upholding social responsibility, developing a conscientious sense of citizenship, and exercising one’s capacity to adhere and synchronize with the goals of contemporary national development.
Moreover, public awareness may be spurred on by efforts from the private sector themselves. Seeing that BOT contracts will always involve partnership of the government with private corporations of the country, the private sector must be required to participate in
the
governement’s attempts for engagement of the civil society. The private sector must realize that—taking the example of the MRT—educating the members of civil society (their daily clientele) would, in the long run, benefit both the government and their consortium. The civil society, once aware, would be less obstinate towards the idea of a probable fare hike. They would also harbor less resentment towards the government and the MRT management once realizing that the government is not to be held completely accountable for its operations and maintenance. In fact, they will probably be sympathetic towards the MRT and , in turn, may be relied on for cooperation and adherence to government policies regarding its future state.
Seeing that majority of the demographics of MRT commuters come from the youth age range (13-30 years of age), it will be much easier to engage their participation through awareness-
Page 30 of 33
raising events and programs oriented towards their tastes and culture (i.e. music—concerts, contemporary literature—poetry reading and essay-writing competitions, and food—engaging representatives of the contemporary coffee culture like Starbucks). All sectors of society are represented in the cause which, in turn, would make it more relatable to the said demographic. Malls should also participate in the venture—seeing that they are one of the sectors/industries that directly benefit from the commuter convenience of the MRT (e.g. SM Ayala and Glorietta Malls directly linked to the Ayala MRT stations).
Reduction of Unnecessary Spending It would considerably lessen the financial burden of the MRT management if more ticket machines and electronic vendors are installed at normal operations. This would slice out the need to pay for manual labor (i.e. ticket vendors) in this respect.
Critiques: BOT Agreement in the Philippine Context
There really is not much to say about the planning and the stipulations BOT schemes bring to the Philippines. In fact, it must be reiterated: it is definitely most advantageous to utilize this scheme, especially for countries in their developing stages. As what was stated above, this scheme is the government’s way to make the private sector do what
the government should do. It is the harnessing of the private sector’s desire to earn from investment. Some thinkers consider this as the manifestation of private investment in infrastructure development. The basic consideration is that a project will be allowed under this scheme because the government deems it necessary for development, and not because it is viable to the contractor.
One major discrepancy might be that in the Philippine context, there will be eventual differentiated interests at the end of the day. The Philippine government aims for national
Page 31 of 33
economic alleviation, while their private investors and contractors are only really after it for the profit.
Another critique of the BOT scheme in the Philippines is that it will probably provide for more avenues for the unsupervised misallocation and the unscrupulous distribution of resources among individual and corporate actors all the same.
It is not that BOT agreements are ineffective, or that they are inefficient. It is just the misappropriation and mismanagement by the Philippine government, their agencies, and their subsidiary agencies that should be held accountable for the less-than favorable states of their respective infrastructure projects. To add to that, it seems that the government lacks foresight with respect to long-term financial provisions. The government solely relies on the stillhypothetical success and prosperity of their projects that they become complacent—due to the much premium they hold for the prospect of economic alleviation.
Page 32 of 33
References
Agcaoili, Lawrence. DOF names new chief of privatization. Available online. Retrieved from
http://www.mstonline.com. October 9 2007. Retrieved November 26 2007.
Ager,
Maila.
P72-MRT
fare
hike
mulled.
Available
online.
Retrieved
from
http://www.inquirer.net. January 13 2006. Retrieved November 26 2007.
Contreras, Volt. An invitation: come on board the Pasig ferry. Available online. Retrieved from http://www.inquirer.net. March 25 2007. Retrieved November 26 2007.
Cruz, Neal. MRT-7 may end Metro traffic problems. Available online. Retrieved from http://www.inquirer.net. November 14 2007. Retrieved November 26 2007.
Dela Cruz, Roderick. MRT-7 to create new city. Available online. Retrieved from http://www.mstonline.com. October 8 2007. Retrieved November 26 2007.
Dumlao, Doris. Neri backs government buy-out of MRT-3 BLT contract. Available online. Retrieved from http://www.inquirer.net. June 23 2007. Retrieved November 26 2007.
Lam, William. (2003). Advanced modeling for transit operations and service planning. Elsevier Publishing.
Mottershead, Terri. (2004). Sustainable development in Hong Kong. Hong Kong University.
House of Representatives: Railways and Ro-Ro Systems. Committee looks into the proposed buy-out
of
MRT-3.
Available
online.
Retrieved
from
http://www.congress.gov.ph/committees/commnews/index.php?pg=commnews_det&ne wsid=487. December 7 2006. Retrieved November 26 2007.
Pomfret, Richard. (1997). Development economics. University of Adelaide.
Page 33 of 33 Rimando, Lala. Bad news for 800,000 commuters: MRT-3 in dire financial straits. Available online.
Retrieved from http://www.gmanews.tv. May 24 2007. Retrieved November 26 2007. Todaro, Michael. (1997). Economic development. (6th ed.). New York University.
Wikimedia.
Manila
Metro
Rail
Transit
System.
Available
online.
http://en.wikipedia.org/wiki/Manila_Metro_Rail_Transit_System.
Retrieved
December
5
from 2006
Retrieved November 26 2007.
Wikimedia.
Metro
Rail
Transit
Corporation.
Available
online.
Retrieved
from
http://en.wikipedia.org/wiki/Metro_Rail_Transit_Corporation. December 5 2006 Retrieved November 26 2007.
Wikimedia. MTR. Available online. Retrieved from http://en.wikipedia.org/wiki/MTR. December 5 2006 Retrieved November 26 2007.
Wikimedia.
Transport
in
Hong
Kong.
Available
http://en.wikipedia.org/wiki/Transport_In_Hong_Kong. November 26 2007.
online.
Retrieved
from
December 5 2006 Retrieved
