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The Many Sins and Mysteries of MRT-3

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The Many Sins and Mysteries of MRT-3

By Rene S. Santiago

ONCE AGAIN, an old rickety train system mislabelled as MRT-3 is in the news, threatening our Christmas celebration like Grinch.

Troubles seem to be the twin brother of MRT-3.

Controversial at birth, it continues to be talked about nearly three decades after.

To understand its current predicament and recurring problems, one has to look at its sordid past that is shrouded in mystery and colored by money.

It is a saga that transcended six administrations — Corazon C. Aquino, Fidel V. Ramos, Joseph E. Estrada, Gloria Macapagal-Arroyo, Benigno S. C. Aquino III, and now, Rodrigo R. Duterte.

It began in 1989 as an unsolicited proposal to the Philippine National Railways (PNR), then evolved into a Build-Lease-Transfer Agreement in November 1991. How it became an official contract was a mystery by itself.

The construction of MRT-3 broke ground (in October 1996) during President Ramos’ watch, and only after forcing a change in investors line-up.

After 10 years in labor, the Edsa Rail line made its inaugural run in December 1999 and baptized by Erap as “Magandang Regalo sa Taongbayan.”

During Arroyo’s long reign, its future dimmed and became a victim in the battle between two malls. But its most dramatic, and visible, downhill slide to hell commenced during Aquino’s time.

Will MRT-3’s fortune change in Duterte’s time?

ORIGINAL SIN
Back in 1989, a Manila-based Jewish businessman (who likes to brag he has yet to meet a Filipino he cannot bribe) submitted an unsolicited proposal to PNR.

It was received like the horse given to Troy by the Greeks — the first to ride on the newly-minted Build-Operate-Transfer Law (Republic Act 6957). The proposal snaked its way to the then-Department of Transport and Communications (DoTC), which promptly conducted a tender — where a Hongkong-registered company capitalized at $998 got anointed.

Four challengers with bigger pockets were knocked out, within a month of document submission.

A DoTC insider blew the whistle that got the Senate poring over its mysterious provenance.

Eventually, the issue landed on the court of last resort, which dismissed its legal infirmities on the ground that the same had been cured by a subsequent law (RA 7718 or the amended BOT law).

While MRT-3 proponents managed to hurdle the legal challenges, its shaky finances failed to impress the tight credit markets of the time.

With Palace prodding, a new group of investors “kicked out” the original sinner with a “pabaon” of about $33 million. Out with EDSA LRT Consortium, in with Metro Rail Transit Corporation (MRTC).

The contract underwent at least seven revisions — as some well-meaning bureaucrats tried to remedy the atrocious features of the project (e.g., changing the at-grade crossing on Quezon Avenue, thumbing down on the high-rise property developments on the middle of EDSA, improving the poor accessibility of stations, etc.). The project cost ballooned from $160 million to $675.5 million. The last amended contract was dated August 8, 1997, but I think it was not the last.

UNMASKING THE PPP MODALITY
The Build-Lease-Transfer (BLT) contract shielded MRTC from commercial or market risk. It would make money regardless of ridership, a guaranteed 15 percent return after tax, sweetened with the sovereign guarantee of the Philippine republic.

In the current parlance of Public-Private Partnership (PPP) project practitioners, it was structured as a capacity-fee payment, a more appealing name for “take-or-pay” modality. The capacity is a minimum of 22 trains (three-car/train) per hour in exchange for the fixed lease payments.

To deliver on its commitment, MRTC took responsibilities for maintenance and spare parts via its affiliate. It had the features of a ‘wet lease’ arrangement, except that operations personnel would be hired by the lessee (which was DoTC). More than 600 employees were hired by DoTC on a contractual or casual basis. It is a wonder that after 10 years of employment, more than two-thirds of these personnel remained as “casuals” — the kind of “Endo” arrangement this current administration wants to abolish.

During construction, MRTC officials went to town — boasting about the “first mass transit project” to be build at no cost to the government. Earnings from the lucrative “development rights” would cover losses on the rail side of the business.

By 2003, this no-subsidy myth crumbled, and government had to scramble for the rental payments that were non-existent in DoTC’s budget. This omission became the seed for the third sin. But that will come later.

The MRT-3 project intrigued me as a development researcher, a perennial student, and a transport professional. I had a ringside view of its putative years. In July 1993, I published a paper entitled “Heresies of the BOT Kind: Lessons from Manila’s LRT”, which was presented at the 1st Annual Conference of the Transport Science Society of the Philippines.

Its takeaway: MRT-3 would be a very big problem. Nobody believed me at that time.

I had another opportunity to revisit the project, when the UP National Center for Transportation Studies conducted a short course for senior transport officials in the ASEAN region in 2000 and 2001.

As the resource person on PPP, I used the MRT-3 as my case study.

At that time, private sector participation was quite novel for many of our neighboring countries. The officials returned to their home countries with invaluable lessons on how not to do a PPP. Or perhaps, a subliminal lesson on how to steal legally.

I still remember one participant’s effusive reaction: “If it happened in my country, the deal-makers would have been shot.” There was no need to riposte, that indeed, the Philippines was (and still is) different.

WHERE HAVE ALL THE MONIES GONE?
Revenues from property developments underpinned the no-subsidy myth. These revenue streams evaporated — quicker than David Copperfield could do it.

By 2017, the government share from “development rights” should have amounted to more than P500 million, based on Annex A-2 of the BLT contract.

But where did the money go? No one could tell me.

In the last decade, I recall occasional outbursts from DoTC officials about the missing billions. It is a mystery wrapped in enigma. How could billions disappear without a quizzical note from COA? One could only deduce that another amendment to the 1997 contract transpired between 2002 and 2010 as to cut off or divert the incomes from Trinoma and other station-related commercial developments. This to me is the second mortal sin committed in the name of MRT-3.

From the get-go, MRT-3 started its transit life on a fragmented set up — a business model that guaranteed future headaches. Rail revenues goes to the national treasury, rather than flowed back to the operating entity. Expenses need an annual allowance from Congress, dominated by persons who cannot dissociate a “coupler” from salacity. Maintenance is outsourced to another entity. Non-rail revenues is nowhere to be found.

After construction, MRTC had no more incentive to take care of the assets, except sit back, collect rental payments, and re-channel them to creditors and equity holders. Nobody was left to look after sustaining the economic life of the system.

MULTI-LAYERED DEBTS
The third sin committed in the name of MRT-3 was the securitization of the future lease payments or the equity rental payments (ERP) — with the tacit consent of DoTC. It involved 77.7% of the ERP.

The complex web of debts becoming another form of debts and/or sliced into several tranches, cannot easily be explained in a few paragraphs even by financial experts.

Cast of characters multiply from MRTC to MRT Holdings (MRTH), MRTH II, MRTC Limited (MRTCL), and so on.

A simple analogy might help.

Instead of waiting for your measly retirement checks from Social Security System, you go to your friendly pawn shop who pays you a lump sum amount, and takes your place on the monthly queue.

On the surface, it is nothing more than a textbook case of receivables financing — except done to the second and third order derivatives. The tricky part of the deal was retention of residual rights; like selling your house but still retaining some rights over who gets to occupy the building.

There were payment hiccups on the ERP, caused in part by a government that initially swallowed the no-subsidy myth. This was a breach of material obligation that gave rise to arbitration proceedings in Singapore, and for the ERP bonds to suffer value downgrades.

The financial crisis of 2008 also forced holders of those bonds to hold a fire sale. A large portion of those bonds were in the hands of the vultures of Wall Street.

For purposes of simplicity, they were in possession of a bond with a face value of $100, but could be sold only at $20.

The vulture funds — who, among others, specialized in making money out of the misfortunes of poor countries — saw an opportunity. Losing the case in Singapore could trigger a cross default in other Philippine loans totally unrelated to MRT-3. The government panicked. And the vultures’ $20-worth of paper rose in value, say $40.

Not to be outdone, our local vultures joined the party. After all, they are disciples of Wall Street, if not trained in the USA to do the same financial wizardry. Their dummy firms in the British Virgin Islands became the buyer for $40, with credit provided by Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP). The latter two government financial institutions (GFIs) then purchased the same bonds for $80, in the hope of getting $100 at maturity.

By participating in the financial merry-go-round, the GFIs exceeded the limits of their own charters. An Executive Order had to be issued to provide a legal cover for a transaction that has the appearance of propriety.

MRT

With his Wharton credentials, it was no wonder that then DoTC Secretary Mar Roxas found and push aggressively for the Equity Value Buyout (EVBO) of MRTC. But the Senate smelled something fishy, and threw a monkey wrench that stopped the greasy wheels of EVBO — albeit, temporarily.

Everybody made money — from the vultures of Wall Street and their local versions, to the two GFIs, including some powerful individuals who recouped their losses of hidden wealth parked in some esoteric papers in New York City. The government also managed to evade a bad judgment from an arbitration court, or has it?

The paradox, however, is this.

Why allocate $1 billion in the national budget for EVBO that would give windfall to the GFIs, but not a single cent going into badly-needed improvements of the MRT-3 system? At the current exchange rate, that would be more than enough to rebuild the MRT-3 system from scratch — new railcars, new signaling, new tracks, renovated stations, new power systems, etc. And yet, at the end of the financial exercise, control over MRTC remained elusive.

When the dust cleared, who ended up paying for all these? Everybody made money, except poor Juan dela Cruz.

COMMERCIAL INTEREST OVER PUBLIC AND TRANSIT NEEDS
The depot of MRT-3 got built on the property of the National Housing Authority (NHA). NHA management would be at a loss on how several hectares of land on North Triangle ended with the MRT-3 sinners. But that is another story.

A rail system needs a good maintenance facility. That took a back seat to the demands of Mammon.

Occupying a cramped quarter on the basement of Trinoma, the depot can only support 120 railcars, of the double-articulated tram-car type. Not the kind of rail cars you can see on LRT 1 or LRT-2. It is adequate for its current fleet of 72 railcars. But not for system’s ultimate capacity of 145 railcars and passenger volume of 850,000 thousand per day.

To accommodate future expansion and extension, it would need a second depot. That option has been taken away with the construction of the North Loop and the ‘uncommon’ common station.

To begin with, the 1938-model tramcar of MRT-3 were designed for the cities of the former Soviet republics, where passenger demand is light. They got deployed in a high-demand corridor — like tricycles forced to carry daily loads of jeepney passengers.

To deliver the same volume of passengers, MRT would require more railcars than the other two lines.

With the extension to Malabon foreclosed, and the earlier mistake of grade-elevation on EDSA/Tramo, there is very little elbow room left for MRT-3 expansion. Replacing the old cars with more modern light rail vehicles (LRVs) is out of the question.

HOW DID DOTC DOOM THE FUTURE OF MRT-3?
Sometime in 2004, the DoTC proposed to build an entirely new line from North Avenue to Malabon, at twice the cost of extending MRT-3. An exasperated President, who was also desperate for some accomplishments in rail — decided to transfer the extension project to LRTA.

Thus, the MRT-3 extension to Monumento became the North Loop of LRT-1. This has the unintended effect of truncating the future expansion of MRT-3 depriving it of possible a satellite depot.

Before the construction of the North Loop ended, LRTA issued a variation order — to build a “common” station for MRT-3, LRT-1, and MRT-7 nearer to SM North, rather than at North Avenue closer to Trinoma. SM paid LRTA P200 million for the privilege. Board piles and other civil works got erected on the new station location. But the budget for this enlarged station got caught in the transition from the old to new administration. Thus, begun the protracted “war” between the two malls.

To railway engineers, the common station had technical issues. Inter-station distance should not be less than one kilometer so that trains could gain enough speed before decelerating and could be given enough space for turn backs. Locating it nearer SM would meant a short distance from the Roosevelt Station, a downside for LRT-1 operations. Locating it nearer to Trinoma would constrain operations of MRT-3 (and the forthcoming MRT-7). The battle of the malls stretched for more than seven years.

GAME OF MAINTENANCE CHAIRS
To its credit, MRTC managed to make available 22 trains in service continuously.

By the 10th year of operation, the system needed major rehabilitation and called for a re-pricing of the maintenance contract between MRTC and Sumitomo-TES Philippines. The acolytes of Daang Matuwid saw gold at the darkened shop floors of the depot; so they took out MRTC from the equation and booted out Sumitomo.

When I joined a maintenance review team in 2011, five Japanese engineers of Sumitomo answered all my probing questions — with data. In the case of the other rail lines, I was met by lawyers who blurted out arguments on why they were the chosen people.

What was the DoTC’s excuse for the unilateral abrogation of the maintenance contract?

Since DoTC was paying for the maintenance work as a separate item (rather than bundled into the ERP), it resorted to the golden rule: he who has the gold rules. The overt explanation was that the Sumitomo contract had expired, and something had to be done. Mysteriously, it omitted the fact that the contracts for LRT-1 and LRT-2 were also on extended runs.

With a stroke of the pen, then DOTC Secretary Joseph Emilio A. Abaya launched a game of musical chairs — starting with an interim contractor that had yellow lineage, replaced by another outfit that has the DNA of the first one.

The maintenance responsibilities were sliced into several packages — the better to spread the crumbs on the maintenance table. Then came a third interloper, the progeny of another mysterious negotiation. Busan Universal Railways Inc., emerged with its agricultural credentials hiding behind the facade of a Korean rail operator.

By intervening in the maintenance aspect of MRT-3, DoTC unilaterally changed the Build-Lease-Transfer contract and absolved MRTC of its continuing responsibility to provide 22 trains/hour until termination.

Not only did it upend the capacity-fee modality of the contract, DoTC also handed MRTC a big favor: a valid ground for evading its end-of-contract obligation to turnover full ownership of a rail system in good working conditions. Handing over a carcass in 2025 has become legal.

Given what happened to MRT-3 in the last six years, it is illogical for a new railway maintenance outfit with true credentials to step up on a fixed-price basis. It needs to be omniscient as to discern what had been cannibalized, and make sense of fuzzy maintenance records of the last six years.

In contrast, Sumitomo had a fully functioning computerized system for maintenance management. And since it was the first contractor, its mechanics also got trained on the particulars of the Czech-made railcars and has amassed a detailed history of every item of the system — down to the last screw. Data analytics can then guide the mechanics on the floor on which part to change and when.

Should MRT-3 go back ex-ante, i.e., before the bright boys of Roxas and Abaya ran the system down? Another round of a game of maintenance chairs?

Let’s not forget that maintenance as a business sucks.

To make a profit under a regime of fixed payments, a maintenance contractor can either scrimp on salaries of specialists, or on parts procurement, or both. Both are bad choices. In addition, the client has no full control of his funding — as it is dependent on the caprice of Congress.

Inherently, splitting maintenance from operations is a flawed policy. It precludes the balancing of the conflicting goals of two vital organizational cogs of an efficient urban transit system.

This was the lesson from an operations audit of LRT1 in 1997; it became the basis for my paper “Designing Sustainability into Mass Transit” presented during the 2nd Annual Conference of the Eastern Asia Society for Transportation Studies held in Seoul.

With no rail industry to speak of, the Philippines has a shallow bench to tap. Our railway sector is very small and the technical expertise grew out of the three railway lines — which, unfortunately, had very little parts or system commonalities. Thus, a public tender would be akin to scouring for someone who can repair a Lamborghini in a sea of jeepney mechanics.

MOVING FORWARD
With so many sins committed in the name of MRT-3, the gods must really be very angry. Running after the sinners, however, will be a fool’s errand; the perpetrators are guarded by the best lawyers that money can buy.

Nevertheless, putting one or two of the sinners behind bars will be a better salve than presidential apologies.

It appears that the current administration has not learned from history. It is embarking on the same game of revolving maintenance contractors.

No matter who gets chosen and how transparent the selection process has become, the outcome will be the same. As someone else once said: “Insanity is repeating the same mistakes and expecting different results.”

Privatization of the entire MRT-3 system is the only sensible way forward. This is the path already blazed on LRT-1 and its extension to Bacoor.

However, privatization is not the same as handing over the system back to a collector company. That is akin to rewarding the sinner. It will be the litmus test whether the administration will make good on its hybrid PPP strategy, or make powerpoint presentation as the conclusion.

A new concessionaire can be granted a long-term contract, say 25 years, to rehabilitate the system and double its capacity in two years. It may take around $400 million to do this.

Metro Pacific Investments Corp. (MPIC) has submitted an unsolicited proposal — in September 2011 and in September 2017. That can be a jump off point — for an eventual Swiss Challenge, or a Solicitation Proposal.

The PPP-track will not be a walk in the park. Expect a turbulent ride, more severe than what MRT-3 riders now experience.

Firstly, the bearded landlord could be pesky, as he is wont to do when the smell of money wakes him from stupor. The President could shame him into exile, or throw him into the hands of the millions of parents who saw their dreams for collegiate education of their children vanished. He can checkmated by expropriation. It will not be as bad as the NAIA-3 expropriation, as long as the ERP schedule is honored to re-assure the remaining 22.3% holders of the ERP Bonds.

Secondly, the new PPP contract should avoid the onerous provisions of the 1997 BLT agreement, shield it from future administrative expropriation that the 2015 concession for LRT-1 is vulnerable to, and cut it some slack in setting fares.

A third wrinkle is the Metro Manila Subway.

If it gets completed in 2025, the concessionaire would face a precipitous market share reduction. There are ways to mitigate this.

A journey of a thousand miles begins with the first step. Re-brand MRT-3 into LRT-3, if not the “Yellow Line”, to end the deception.

Besides being more technically honest, it avoids confusing the elevated railway from the forthcoming subway — which is the true MRT.

 

Rene S. Santiago is a Transport Engineer, a Fellow of the Foundation for Economic Freedom, past president of the Transportation Science Society of the Philippines, and the President of Bellwether Advisory Inc.

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