Think-tank proposes government buyout of MRT from private sector partner

MANILA, Philippines - A private think-tank has proposed an innovative rescue package anchored on the government’s buyout of the Manila Metro Rail Transit System (MRT) from its private sector partner, Metro Rail Transport Corp. (MRTC).

Forensic Law and Policy Strategies Inc. (Forensic Solutions), in its first policy paper on government corporations, said the Department of Transportation and Communications (DOTC) could save the financially-strapped MRT by acquiring the equity share or project assets of MRTC along with the unsecured shares of the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP) in the transit system.

The buyout of MRT 3, which comprises 13 stations over a nearly 17-kilometer stretch of EDSA, could finally plug the company’s financial hemorrhage, according to the think-tank headed by former Justice Secretary Alberto Agra, who had also served as head of both the Office of the Solicitor General (OSG) and the Office of the Government Corporate Counsel (OGCC).

The paper pointed out that a government buyout would terminate not just an “onerous” build-lease-transfer (BLT) agreement, which has hamstrung the DOTC from meeting its financial obligations, but also the costly litigation process initiated by the private investors to collect overdue equity rental payments (ERPs) from the DOTC.

 “Otherwise, the only way for government to keep MRT afloat—and running for metrofolk commuters—is to scrap its billion-peso subsidies, either in part or in whole, and impose a long-deferred, steep fare hike that would severely hurt ordinary rail users,” Agra and lawyer Faye Rañola wrote in the report.

As then Solicitor General, Agra shepherded earlier this year the negotiations between the MRTC board, which is controlled by DBP and LBP, and contractor Sumitomo Corp. that led to the Japanese company’s accession to certain technical and financial terms. These include Sumitomo’s reimbursement of excessive maintenance fees paid by DOTC, its payment of wheel retrofilling or replacement of MRT train wheels, and its upgrading of the Taft Ave. station from a three-train pocket track to the required four-train pocket track.

Agra and Rañola said one more option is for the DOTC and MRTC to agree to end the expensive arbitration proceedings abroad and modify the BLT terms. But this approach will not completely free the government from this BLT deal that requires it to cough up ERP or rental fees for MRTC equivalent to a 15 percent profit or return on its equity and to shoulder the pertinent tax payments, both for the duration of the 25-year agreement, they added.

MRT has been neck-deep in red ink because it charges a low fare of P10 to P15 per single trip depending on distance, which means the government has been subsidizing fares that Forensic Solutions estimated at P45 per passenger.

As a result of the 25-year lock-in internal rate of return (IRR) arrangement tucked in the BLT pact in 1997 when the dollar-peso rate was just 26:$1, MRT manager Roberto Lastimoso told Congress in 2005 that the transit company’s monthly financial obligations totaled $3.3 million or roughly P150 million as against gross earnings of only P130 million. 

The DOTC’s failure to settle its ERP payments on time eventually prompted MRT’s private investors to take separate legal actions against the Philippine government before the International Chamber of Commerce (ICC) in Singapore and the International Center for the Settlement of Investment Disputes (ICSID) in Washington, DC.

To mitigate the cost of these arbitration proceedings, former President Arroyo directed the DBP and LBP to purchase shares of stock, notes, and securities representing MRTC equity giving the banks a combined 75 percent controlling stake in MRTC.

The paper pointed out that it was a sound business decision for DBP and LBP to purchase MRT 3 notes back then, because given the financial crisis at that time, any financial instrument like the MRT 3 notes that yielded a guaranteed profit of 15 percent was a “golden opportunity” for investors.

Agra and Rañola stressed that the Aquino administration has to take decisive steps to save MRT because “while the system itself has not been financially viable, the combined social and economic benefits of having such a system in place far outweigh the monetary equivalent of the government subsidies expended to support its operations.”

Of paramount consideration in a save-the-MRT program, they said, are the onerous provisions of the BLT agreement such as the 15 percent IRR guaranteed by the government, the liability for taxes assumed by DOTC, and the obligations and liabilities of a common carrier also assumed by DOTC.

“The contemplated buy-out of MRTC, either through the purchase of all its shares or the acquisition of the project assets of MRTC, should extinguish the BLT agreement and free the government from the onerous provisions therein. Furthermore, the buy-out and transfer of the project to the DOTC should take into account the buy-out mechanism provided in the BLT agreement, the complex securitization structure, and ultimately the take out of the equity interest of DBP and LBP,” the paper said. 

It added that alternatively, the DOTC and MRTC can agree on a settlement of their claims and the closure of the arbitration proceedings.

Agra and Ranola emphasized that unless a buyout is made, an inevitable measure is to raise fares to address the shortfall in the fare box revenues. The government currently subsidizes fares at an average rate of P45 per passenger, which means that if the subsidy were removed, the regular fare would be P60, they said.

The DOTC proposed to more than triple the MRT fare from the P10-P15 range to the P17-P34 band as early as 2000, but Malacañang thumbed down this fare hike plan even if the rail rates were lower than bus fares.irect obligor.