EconomyEditor's PickFare is fair

November 9, 2022

The Metro Rail Transit Line 3, or MRT-3, started full operation in 2000 under a 25-year concession agreement with the government. The line is actually owned by a private consortium, the Metro Rail Transit Corp. (MRTC), and not by the government. But the government — through the Department of Transportation — operates the line, charges and collects fares, and handles line maintenance. In turn, MRTC — actually, its creditors — receive lease payments from the government.

Thus, MRT-3 cannot be “privatized” just yet since it is actually still owned by a private corporation, MRTC, until 2025. After 2025, MRT-3 will officially transfer to government hands as its the Build-Lease-Transfer contract with MRTC ends. It is only then that the government can “privatize” the line. Or, to be precise, opt to return it to private sector hands. By then, it will be the government that will receive lease or rental payments from the winning bidder.

The government bidding out the assets and operations of MRT-3 is not something that can happen until after 2025. Thus, relief from the line’s P9 billion yearly maintenance cost won’t come until maybe three to four years from now. In the meantime, unless the government finds a more practical way to subsidize MRT operating costs, a fare hike is necessary. “Fare is fair” is the only option to date.

Can the government continue to subsidize fares in the next three to four years? I don’t know. With an annual cost of P9 billion against annual revenue collection of less than P2 billion? The line has been operating at a significant loss. At its highest, in 2017, fare revenue was just below P3 billion. Given these numbers, re-privatization is a promising option, not only for operations and maintenance, but also for the assets.

A former party-list lawmaker, Terry Ridon, noted that the “immediate risks of privatizing MRT-3 will be the prospect of higher fares for the commuting public and undervaluation of both the O&M [operation and maintenance] business and the existing assets. Undervaluation is a concern, particularly because this would mean a smaller purchase price paid to government, even if the privatization process is subjected to competitive bidding.”

Luckily for the government, it has a relatively long runway, at least three years, to figure out the best options for MRT-3 after 2025. There will be disputes and questions regarding valuation, for sure. But there is still time to sort these out. The worst that can happen is that the government comes up with an outrageous number that turns off bidders. Or, populist sentiments sway decision-makers to nationalize MRT-3 rather than privatize it.

In 2003, I believe, the MRTC cashed in on the project by issuing asset-backed bonds to be covered by future equity rental payments from the government. The bonds, issued through a special purpose vehicle, were acquired by private investors. Bond proceeds went to MRTC. In 2007, the government almost defaulted on bonds that securitized cashflows from MRT-3, given the failure of the Department of Transportation to make equity rental payments to MRTC creditors, the bond holders.

From the very start, fare revenues have never been enough to cover what is owed to MRTC creditors — to cover the initial investment in building the line — and to properly maintain and operate the line. In this sense, MRT-3 has been a drag on public finances for some time. In 2008, in fact, to mitigate the risk of default, the bonds were bought by the government through the state-run Development Bank of the Philippines and Land Bank of the Philippines. As such, the government ended up owning around 80% of the economic interest in MRTC, but not necessarily the line’s ownership.

In short, the government created a lien on MRT revenues. But ownership remains with MRTC until 2025. This was necessary, as prior to the buyback, the government’s obligations under the MRT-3 lease agreement — the bond payments — carried the full faith and credit of the Republic. Thus, defaulting on the MRT-3 debt papers could have been a sovereign default that could have adversely impacted the country’s stature as a borrower.

I cannot recall when the Philippine government last defaulted on a sovereign loan. It has always been diligent in settling on time either the interest or principal payments on its obligations. In fact, despite several opportunities in the past to repudiate “questionable” obligations such as the loans for the mothballed Bataan Nuclear Power Plant, the government still opted to honor its debts — all for the sake of protecting its reputation as a good creditor.

To save on costs, there were previous attempts to renegotiate the lease agreement with MRTC, with the government attempting to prepay all its obligations to MRTC and thus terminate the need for continued equity rental payments to MRTC financiers — which include two government banks. But there have been disagreements on the valuation of the outstanding and future obligations (discounted to present value). Previously, the government reportedly offered $720 million, but MRTC creditors wanted $1.33 billion.

Funny part is that in 2011, as early as 11 years ago, the Metro Pacific group already offered to take over the operations of MRT-3 by paying the government $1.1 billion. It also offered to limit profits while doubling the rail capacity, and spending another $300 million to make the rail more efficient. But the government declined the offer. One can only imagine how things could have progressed if the Metro Pacific offer was considered 11 years ago.

The crux of the matter is that with present MRT-3 fares, it is unlikely for the government to be up-to-date on equity rental payments to MRTC creditors. Even if the government raises the fare to the “appropriate” level in the next three to four years, it is simply too late for the line to actually make money. In sum, MRT-3 can never ever pay for itself, and the government will continue to put out more money in the next three to four years to pay the contracted obligation to MRTC financiers.

In this sense, re-privatization after 2025 may be the only logical choice. Invariably, even this early, any offer to privatize the MRT should be seriously studied — all with the aim of getting the best deal not only for the government but also for the riding public. There are many issues to tackle, including MRTC’s “ownership” by government banks. And it goes without saying that the transaction is imbued with public interest and should satisfy the strictest levels of accountability and transparency.

Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippine Press Council

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