Grab-e sa Uber ang LTFRB! What should LTFRB do instead.

The woes of commuters continue to pile up as the Land Transportation Franchising and Regulatory Board has started cracking down on unregistered Grab and Uber drivers, while at the same time fining Grab and Uber Php 5 million each for letting drivers operate without permits. Because of the crackdown, it is estimated that it will be close to impossible to book a Grab or Uber by July 25. Commuters will have not much choice then.

Continue reading “Grab-e sa Uber ang LTFRB! What should LTFRB do instead.”

The reasons why the MRT 3 is a mess will boggle your mind

Regular commuters of MRT3 will tell you – it’s a mess. Long queues, broken rails, oven-hot train interiors, stations with non-working elevators and escalators, toilets that stink, constant train breakdowns. The MRT was meant to alleviate traffic and provide commuters another option at convenience. Now, it’s more an inconvenience than a comfort.

What’s wrong with the MRT3?

I

The ownership structure limited the government’s ability to act on the problems of the MRT 3

The MRT 3 was designed as a build-lease-transfer project. The private sector proponent was a convoluted confusing haze of corporate vehicles really, but let us reduce these to two – MRT Corporation (the signatory to the MRT Agreement), which in turn is owned by MRT Holdings. In this Sobrepeña propaganda site, it listed down the owners, but it’s ownership is unclear, so let’s assume it’s MRT Holdings. The BLT agreement calls for the private proponent to design, construct, and turnover the system to government, while the government will operate the system and pay MRTC rental fees.

When two of the major owners of the MRTC – the Agustines and the Sobrepeñas – suffered financial difficulties, they (together with other owners like the Ayalas) created another company, MRT III Funding Corporation (MRTFC). MRTFC basically issued asset-backed bonds (assets meaning the guaranteed rental payments) and sold them to private companies.

Back in 2007, the government was behind in rental payments, and to avoid default it decided to buy these bonds through DBP and LBP. Despite owning these bonds, government did not acquire ownership of MRT3. Remember, these bonds only represent the income from rental payments, not the system itself. MRTC still owns the MRT3.

Do you know why the PPP framework was created? To avoid issuing sovereign guarantees, with government providing financial guarantee to private companies in case the project doesn’t earn as expected. The MRT Agreement provides for such a guarantee. Not only is there a sovereign guarantee, the Agreement also calls for “an after-tax, after-debt-service, after-expense return on their investments of 15 percent per year.”

Not only is the government paying MRTC rental fees, it is also subsidizing passenger fares – Php 5.7 billion back in 2009 alone. The subsidies basically cover the real fare passengers should be paying; since the passengers do not (thanks to former president Estrada’s populist decision to reduce the original MRT3 fare price).

Why is ownership an issue and a reason why the MRT3 is in this mess?

Again, the government, through DOTC (now DoTr) operates the system without owning the system. Government pays MRTC guaranteed monthly rental payments. So the problems with the MRT – maintenance, new trains – are the responsibility of MRTC, not the government. The problems that commuters are facing were already apparent back in 2007. MRT3 has been operating beyond capacity since 2004. It is not clear if MRTC was remiss in its responsibility; it claimed it sent 3 proposals to DOTC since 2006, but DOTC did not act on them, or so MRTC claims. It is also unclear if DOTC did receive such proposals, nor if it decided not to act on them, why. This dispute is something for another day. But this much is clear – the MRT3 is owned by the MRTC, and it has the responsibility for capacity expansion and maintenance, being the owner of the system.  The hands of the government are tied by this little piece of paper called the MRT Agreement.

II

Poor maintenance and problems on maintenance provider and maintenance responsibility

It is quite obvious that maintenance has been poor. Sumitomo had been the maintenance provider since the MRT3 began operation, and in 2010 MRTC abdicated its maintenance responsibility, throwing the problem back to the government. The contract with Sumitomo does not contain provisions for “penalties for malfunctioning elevators and escalators, and setting a minimum requirement of 19 trains running during peak hours between 7 am and 9 am.” The government was paying Sumitomo US$ 1.4 million per month (when MRTC should have been paying them instead). There had been no improvement since the problems became apparent in 2007, and Sumitomo has been accused of cannibalizing parts.

As stated earlier, MRTC abdicated its responsibility regarding maintenance, and government took over the maintenance aspect of the system. This is the reason why the government, and not the MRTC, made decisions regarding selection of maintenance providers.

There had been much controversy and noise on the decision to replace the MRT3’s maintenance provider, even leading to the sacking (or, as he claimed, voluntary resignation) of MRT3 General Manager Al Vitangcol (who is facing charges for extortion). To be clear, he was axed for conflict of interest (his uncle was one of the incorporators of the maintenance provider PH Trams).

The current maintenance provider, Busan Universal Rail (BURI), has managed to restore the MRT3 to its maximum number of operational trains to 22 within a year after it got the maintenance contract. However, at the onset of the 2017 summer season, a series of breakdowns hampered operations and once again reduced the number of maximum operational trains to less than 20. This (and politics, see part III) lead to questions regarding BURI’s contract.

There’s only so much a maintenance provider can do. Not only is the system old, it is also operating beyond its design capacity, reducing the life span of the trains. Sometimes the only solution is to replace the old one with the new.

Operating beyond capacity with previous maintenance providers failing to maintain the system and not being held accountable for such failures, it is no surprise that the MRT 3 is in this confusing mess. It is actually quite surprising that it is still running despite these problems. All this has been worsened through politicking by politicians.

III

Politics and revenge messing things up

The previous administration made two crucial decisions based on MRTC’s inaction: first, to replace Sumitomo with another maintenance provider, and second, to acquire new trains. However, with the change in administration, there seems to be a rather suspicious, concentrated effort by a certain politician and a certain party list (see 1, 2, 3, 4) to discredit such decisions.

For example, PBA party list representative Jericho Nograles claimed the Dalian-manufactured trains are unusable, which led Senator Grace Poe to call for another hearing. In the Senate hearing, it was proven that Nograles was wrong – the only things remaining to be resolved are the feedback signal and response time issue.

And with the recent breakdowns plus Nograles’ rants that the contract is onerous, DoTr threatens to  terminate the maintenance contract with BURI. It remains to be seen if they will replace the maintenance provider. To be fair to BURI, it was handed a system in such terrible shape it is near impossible to fix these numerous problems. It is quite obvious the reason is not due to breakdowns (it happens most during summer, look it up). Folks, politics is rearing its ugly head.

IV

TL;DR

  • The MRT3 is a build-lease-transfer project, owned by MRTC and operated by government through DoTr.
  • MRTC gets guaranteed rental payments with guaranteed annual return of 15%.
  • MRTC has capacity expansion and maintenance responsibility, but it is unclear if it has shirked its responsibility regarding capacity expansion.
  • MRTC turned over the maintenance responsibility to DoTr.
  • DoTr bought new trains despite this not being a responsibility.
  • DoTr wants to replace BURI with Sumitomo as maintenance provider.
  • Current administration and its allies are bent on derailing current solutions to the mess.

Image credit: Exec8, Public Domain

Why hybrid PPP is a confusing mess

The public-private partnership (PPP) is a framework where the private sector can participate in nation-building by providing needed infrastructure, thereby allowing government to use freed up funds for other things, such as social services.

In the previous administration, PPP was the vehicle for infrastructure programs. For most of the PPP projects currently in implementation, the private sector proponent actually paid government a premium to get the project (for example, LRT1), instead of government paying the proponent to implement the project.

The main criticism against PPP was the speed in which projects were conceptualized. Only 4 projects were completed after Benigno Aquino III’s term, 7 currently under construction, and 4 under “pre-construction” phase (as of June 2017).

The regional airports project was supposed to be bidded out last year, but bidding was delayed several times. It also became the first casualty of the mess called “hybrid PPP.”

The regional airports project was the lowest hanging fruit among the PPP projects in the pipeline. These airport projects were bundled to be more attractive to prospective bidders. Taken individually, bidders might not find the scale big enough for them to profit. Moreover, one of the requirements for prospective bidders is they should have at least 3 years experience (for Mactan-Cebu Airport project) in managing an airport. Since most of the local conglomerates have no prior airport management experience, they had to find foreign companies to partner with in order to comply with the requirements. All that being said, all the Duterte administration had to do was to bid out the projects.

But, strangely enough, the projects were unbundled – each airport was to be bid out separately, ostensibly to give smaller companies a chance to bid and win.

Ultimately, the Department of Transportation (DoTr) decided to scrap the projects. DoTr will develop the airports either through overseas development assistance (ODA) or national budget funding, then offer the operations and maintenance (O&M) projects for future auction.

What is hybrid PPP?

According to the Department of Finance, using the hybrid PPP mode, the government will build the infrastructure, then bid out the O&M afterwards. They claim that this mode will be faster than the original PPP. Funding for the project will either come from ODA, loans, or internal funds (aka funded by taxes).

Businessmen are worried, it seems, because this modification shuts down private sector funding.  It could take away much needed funds from education and healthcare agencies, and lead to new or increased taxes (despite the claims of reduced income taxes).

(As a side note, it seems that even people at the National Economic Development Authority are confused. Here’s a confusing quote from NEDA Undersecretary Rolando Tungpalan:

“Even broadly, we have always maintained that the private sector is the engine of growth and thus PPP must not be seen in the narrow sense of the BOT law, but the broader public-private sector engagement in development.”

Why is this mode “suboptimal?”

There are a number of reasons why this hybrid PPP mode is questionable:

  • It is basically a throwback to the time when government used to build substandard infrastructure projects at a very slow pace.  The Laguindingan Airport took 20 years to complete (from conception up to opening). When it first opened, night flights were impossible, as the installation of facilities for night flight operations were started after the airport was inaugurated. The ability of government to complete projects on-time is in doubt.
  • The government will have to fund the design, construction, and right-of-way acquisition. With considerably limited resources, the government has to rely on new taxes, bilateral loans, or ODAs for funding. Loans and ODAs have to be paid, of course, so it will still come from taxes, or from fees by concessionaires when these projects have been bid out.
  • By funding the projects through general appropriations, the government has to reduce funding to other, more crucial programs like education and healthcare.
  • A PPP expert claims this hybrid PPP can lead to investors to “just abandon revenues they are getting and disappear” in case the O&M project does not perform as expected. “It’s important for the O&M operator to have capital at risk” to give the operator the incentive to ensure the project will generate revenue, says Vaugn Montes.
  • ODA funded projects limit contractors to those accredited by the grantor (though these contractors can sub-contract to smaller local companies).

What a mess

And it doesn’t end there. The uncertainties remain unaddressed and the viability of PPP as a framework is in doubt. The government is quick to assure the private sector that PPP is here to stay, but with PPPs getting about 18 percent of the pie, that’s very comforting. We still don’t have an idea what projects are to be bid out, and we wish this regime is transparent with all the loans it is contracting.

It’s a mess.

 Image credit: Courtesy Gov.PH