Proposed Integration and Re-Privatization Model of

ODA-Developed LRT1 & BOT-Developed MRT3

Projects

Rommel C. Gavieta MA (URP), MSc (Eng)

Vice President Metro Rail Transit Development Corporation
Senior Professioral Lecturer, De La Salle University (MBA Program)
Research Associate, York Center for Asian Research, York University

Beijing, China
April 2011
Philippine Macro-economic
and Project Financing Indicators
Fiscal Policy, Public Debt and Lender’s Security Requirements

Benchmark Debt to GDP Ratio (1985-2002)

• Industrial Countries: 75% of GDP
• Emerging Market: 25% of GDP
• Old Doctrine: 60%
• Philippines: 57% in 2010 from 65% in 2001
• Philippine Debt was PhP2.2trillion in 2002 and
now PhP4.5trillion in 2010
• Decline in Debt to GDP ration is more a result of
the peso appreciation since the stock of debt has
increased and not decreased from 2001
Source: Diokno, D.; How Deeply Indebted is Citizen Pinoy; BuinessWorld; June
16, 2010; Philippines
WORLD ECONOMIC OUTLOOK: REBALANCING GROWTH
Fiscal Policy

Lenders will ask for guarantees which 1. In the long run, developing Asia must
include: rebalance its export growth model.
1. Foreign exchange rate guarantee 2. Carefully designed fiscal stimulus can help
2. Tariff rate guarantee restore stability and growth.
3. cost-overrun guarantee: 3. Infrastructure provides the opportunity to
4. completion guarantee: raise employment and growth quickly>
Murphy, Tim, “Financing Challenges For P3 Projects After The
Credit Crisis, u.p. & u.d., Source: Asian Development Bank, “Global Economic
http://www.mcmillan.ca/Files/ARTICLE_Financing_Challenges_%2
Crisis Challenges for developing Asia and ADB’s
0for_P3_%20Projects_0110.pdf
Responses”, April 2009
Equity Effective Rates of Return

http://www.investorsfriend.com/return_versus_gdp.htm
Bosworth, Collin, Chodorow-Riech; Returns On Fdi: Does The U.S. Really Do
Better?; Working Paper 13313
http://www.nber.org/papers/w13313

http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
Debt Market and Project Financing Interest Rates

Total External Debt:

http://data.worldbank.org/indicator/DT.DOD.DECT.CD/countries/PH-TH-MY-ID-4E-
7E?display=graph
Project Financing after 2008 Global Financial Crisis

„ Investment in new PPI projects continues to

recover, but the revival has been selective.
„ Projects reaching financial or contractual
closure face more difficult financial market
conditions.
„ Local state-owned banks as well as
multilateral and bilateral agencies continue to
be key financiers, and infrastructure sponsors
are looking for new sources of funding such
as local financing.
„ Projects continue to be delayed or, to a lesser
extent, canceled.
„ The rate of project closure varies across
sectors, with investment in the third quarter
higher in energy, telecoms, transport and
lower in water.
„ The rate of project closure varies across
developing regions, with investment in the
third quarter higher in South Asia, stable in
Latin America and East Asia and Pacific, and
lower in the other three.
„ Greenfield projects continue to show growth
in investment (and debt raised), while
concessions and divestitures show a decline.

Public Private Infrastructure Advisory Facility-World Bank, PPI data update

note 35, Assessment of the impact of the crisis on new PPI projects – Update
5, “New private infrastructure activity in developing countries recovered
selectively in the third quarter of 2009”, February 2010
Privately and Publicly Project Administration Comparison

• Average public sector project suffered

50% to 70% time overruns and 10% to
20% cost overruns in dollar terms.
(Klien, So, Shin Transaction Costs in
Private Infrastructure Projects—Are They
Too High?, 1996, WB

• Non-PFI project suffered 37% time

overrun and 46% cost overrun. Of
those projects that were delivered late,
two thirds also incurred price increases.
(2008 National Accounting Office Survey
UK).

PFI Project suffered a 31% time

overrun and 45% cost overrun (NAO
2009 PFI Construction performance
Report)
Publicly and Privately Administered LRT Project
Background Information Philippine Experience
Tranvia and LRT Development in the Philippines

Philippine Tram and LRT Historical

Development

„ 1882 La Compañia de tranvias de

Filipinas

„ 1903 Manila Electric Railroad and Light

Company

„ 1984 Light Rail Transit Authority

(Government Owned and Controlled
Corporation) independent of energy links

„ 1998 MRT-3 build as a BT project with

Metro Rail Transit Corporation with Real
Estate Development Rights.

„ 2009 DBP/LBP bought 23% of MRTC

and 99.9% of MRT3 Equity Rental
Payment receivable from DOTC
Infrastructure Requirements of SE Asia and the Philippines
Traffic Corridors of Metro Manila

North
Triangle

Cubao
East Wood

Ayala Ortigas

Fort
Bonifacio

Major traffic corridors in Metro Metro Manila Mass

Manila based on MMUTIS Study Transit System

As of 2010, World Bank recommended
7% of GDP investment in infrastructure
which is greater than the 2% of GDP
investment in infrastructure in the
Philippines
The LRT/MRT systems that were identified after the completion of the
MMUTIS were determined to be market driven projects which are prime
candidates for PPP undertaking with sovereign guarantees for tariff rate,
FX and Inflation.
 LRT1 and MRT3 Technical and Market-Driven Project
Comparison
LRT1
„ 1980: Belgian ODA (PhP300million or US$16million) and
commercial (PhP700.0million or US$ 37.45million) 15 km, 18
stations and 32 LRVs
„ 1996-1999: Japanese ODA Phase 1 ¥11billion (7 4-car LRVs) and
balance of debt payment is approximately US$59million
„ 1999-2009 Japanese ODA Phase2 ¥22billion (12 4-car LRVs and
refurbishment of civil/electro-mechanical systems) and balance of
debt payment is approximately US$253.0million
„ 2004: Belgian ODA €12.3million (Refurbishment of 63 LRVs and
spareparts) and balance of debt payment is approximately
US$17million
„ LRT1 ODA Debts are not tranferrable.

„ Ridership of LRT1 is 350,000 passengers a day

„ Maintenance agreement obligates the maintenance service

provider to ensure availability of maintenance personnel and
generate annual spare part procurement requirement for the
LRTA to procure.

MRT3
„ Phase1: US$675million 16 km, 13 stations and 73 LRVs and
balance of equity rental fees is US$1.9billion
„ Phase2: US$15.0million to refurbish LRT1 North Extension Electro-
Mechanical systems
„ Procure $300million 75 LRVs phase 1 capacity expansion and
additional US$300million 75 LRVs for MRT3 Phase2.
„ Monumento to Caloocan Extension US$80million and US$
US$50million satellite depot.

„ Ridership is 500,000 passengers a day with a potential

ridership of 8880,000 passengers a day

„ Maintenance agreement obligates the maintenance provider to

ensure 80% availability of the MRt3 system.
Asian Development Bank 2010 Key Indicators
MRT3 (PPP) and LRT2 (ODA)
Project Completion Cost (Philippine Experience)

• NPV of PPP developed MRT3 is less than NPV of original ODA developed LRT2 project (with cost overruns.
• NPV of normalized PPP developed MRT3 almost equal to NPV of ODA developed LRT2
• NPV of normalized PPP developed MRT3 is less than NPV of ODA developed LRT2 (using MRT3 project cost) with
cost overruns
LRT1 and MRT3 Revenue and Remaining Debt
Surplus/Deficit Comparison

• The estimated total remaining LRT1 debt obligation of the LRTA is US$671million (NPV US$204 million)
• The estimated total remaining MRT3 obligation of the DOTC is US$2.01billion (NPV US$836million)
MRT3 Additional Ridership Capacities and Projections
(2009 to 2025)

1,600,000.00
Phase 1 ridership

1,400,000.00 Phase 1 potential operating

capacity

Phase1 and 1e ridership

1,200,000.00

Phase 1 and 1e potential

1,000,000.00 operating capacity

Phase1, Phase1e and phase2

ridership
800,000.00
Phase 1, Phase1e and Phase 2
optential Operating Capacity
600,000.00

400,000.00

200,000.00

-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

• Phase 1: 73 LRVs for 400,000 passengers a day capacity at 3-car train 3.5 minute headway
• Phase1 with Capacity Expansion: with 75 additional LRVs for 850,000 passengers a day capacity at 4-car train 2.0
minute headway
• Phase1, Phase with Capacity Expansion and Phase2: with additional 75 LRVs for 1.25 million passengers a day
capacity at 4-car train 2.0 minute headway
14
Ownership of MRT3 System,
MRT3 Bonds and Metro Rail Transit Corporation
DOTC and MRTC MRT3 Relationship Flowchart
Unbundling Private Sector, and Pubic Sector Ownership of
MRTC, Equity Rental Payments (ERP)s and MRT3 Bonds
„ Private sector owns approximately 77% (Metro Pacific Investment Corporation owns 51% and other
private sector partners owns 26%) of MRTC, ERPs and MRT3 System

„ MRTC owns residual rights under the Build, lease & Transfer Agreement which includes MRT3 Phase1
Capacity Expansion, MRT3 Phase2, MRT3 Makati Loop Project and NAIA Airport Connection and MRT3
Phase2 Project.

„ Public sector owns 23% of MRTC and 77% of the ERPs thru Government Financial Institutions
Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP). (This can be validated
by the sale agreement between GFIs and MRT Fund Inc.)

„ DOTC has paid 16% of the US$ 2.4 billion in Equity Rental Payments to MRTC which represents DOTC’s
pro-rated ownership of the MRT3 Phase1 System as of yearend 2010. (This can be validated by DOTC
Comptrollership Service)
Models for Integration and Re-Privatization
of Operation and Maintenance of LRT1 and MRT3
Hong Kong and German Transit Models
Philippine Experience (MRT3 and LRT1 projects)
Hong Kong MTR Model German Transit Model

MTR Hong Kong 25% to 27% from Transit

Revenue and 75% to
73% from Non-Transit
Revenue
Philippines 25% from Transit
Revenue and 75% from
National Government

Most German cities created a public works

consortium combining utilities (gas, water, transit,
etc.). Financial planning and transport planning are
therefore integrated across the full spectrum of public
services.
Chislom, Gwen; International Transit Studies Program
Report of the Spring 2000 Mission Germany’s Track-Sharing Experience:
Mixed Use of Rail Corridors; Transit Cooperative Research
ProgramRESEARCH RESULTS DIGEST March 2002—Number 47

Source: Hong Kong and German Financing Models to Minimize Subsidies for Foreign Exchange and Tariff Rate Risk for Market Driven Transit Systems in
the Philippines Rommel Gavieta; 2008 Metro Rail Conference Rome Terrappinn
London Tube PPP Model and
Swedish International Development Agency Water PPP Model
London Tube PPP Model

Minimum Subsidy Bidding (MSB), potential service

providers compete with each other and the enterprise that
quotes the lowest amount of subsidy requirement becomes
eligible for subsidy payments subject to fulfilment of
specified level of performance (service provision)
obligations.
Government Options for
the Re-privatization of the MRT3
DOTC Options to Reduce its Sovereign Backed
Equity Rental Payment (ERP)s Obligations
MRTC Status Quo on Remaining Equity Rental MRTC Refinances Remaining Equity Rental
Payment Scenario Payment Scenario will save DOTCUS$318million

DOTC’s guarantee for payment of $2.01billion „ DOTC refinances $463million (NPV $192million)
(NPV $836million) ERP will remain until 2025 (as ERPs due to DBP and LBP with $192million
stipulated in DOJ letter to DOF dated May 8, 2007). Leveraged Balance Sheet Arbitrage structure
will save DOTC $211million (NPV $66million)

„ DOTC refinances $1.55billion (NPV $644million)

ERPs due to MRT3 Bonds due to DBP and LBP
with $644million off-balance sheet loan and
save DOTC $768million (NPV $252million)

The proposed concession fee should be used by The proposed concession fee should be used by
DOTC to help defray payments for remaining DOTC to help defray payment of the $836 million
$2.01billion ERP obligation. refinancing of ERP obligation.

The concession fee that will be paid by PPP proponent will be used to pay
obligations of the DOTC which it guaranteed with the full faith and credit of
the Republic following a modified MWSS Privatization Model.
Savings for DOTC as Rationale in Re-Privatizing
the Operation and Maintenance of MRT3 Phase1 System
MRT
Total annual operating and maintenance budget is
US$ 435million or an average of US$ 43.5.0million
from 2011 to 2025. (Maintenance fee includes a
guaranteed 80% availability requirement),
Total amortization for a ten year US$375million loan
with a 5% interest rate for MRT3 Phase1 Capacity
Expansion Project is US$596million (procurement of
75 Trains)
Total amortization for a ten year US$ 400million with a
5% interest rate for MRT3 Phase2 Project is
US$508million. (procurement of 75 trains, retrofit of
5.5 km LRT1 Extension from North to Monumento and
extend MRT3 from Monumento to PNR Caloocan
Station)
TOTAL SAVINGS FOR THE PUBLIC SECTOR IN
PRIVATIZING THE OPERATION AND
MAINTENANCE OF THE MRT3 SYSTEM IS
US$1.431BILLION
LRT1
Total cumulative annual operating and
maintenance budget US$458million or an average
of US$ 45.8million from 2011 to 2025.
Maintenance fee does not include a guaranteed 80%
system availability.
Total amortization for a ten year US$1.53billion loan
with a 5% interest rate for LRT1 South Extension
Project is US$1.2billion (procurement of 50 LRVs
and develop 16km guideway)
Total amortization for a ten year US$174mllion loan
with a 5% interest rate for LRT1 North Extension
Project is US$222million (to develop 5.5km
guideway)
TOTAL SAVINGS FOR DOTC IS US$2.162ILLION IN
OPERATINNG/MAINTENANCE AND NEW
PROJECT EXPENSES
Re-Privatization Strategies for the DOTC of the
Operation and Maintenance of the LRT1 and MRT3 Systems
Proposed Options for Public Private Partnership Modes to Reduce DOTC’s subsidy for Maintenance
and Operating Expenses

Separately, DOTC should refinance the remaining US$ 2.0billion Equity Rental Payments (ERP)s due
to MRTC by triggering the conditions set under the Equity Value Buyout provisions of the Build,
Lease and Transfer Agreement.
Potential Sources of MRT3 Phase1 Concern for the DOTC
Conclusion
Conclusion

Based on the Immediate effect on providing a more efficient public service, the
refinancing of MRTC Equity Rental Fees is the most advantageous to the DOTC
because:

„ The integration and re-privatization of the MRT3 and LRT will save DOTC/LRTA a total of of US$3.5 billion
in additional government guarantee to finance expansion and improvement plans of the LRT1 and MRT3
Systems.

„ Option 1 and 4 strategies for privatizations appears to provide the most advantageous conditions to the
DOTC legally, financially and technically.

„ Regardless of the what options the DOTC takes the refinancing of the ERPs is paramount to reduce
subsidy to the MRT3 Phase System and enable the DOTC gain unencumbered and immediate ownership
of the MRT3 Phase1 System

„ The refinancing of rhe ERPs will save the DOTC at least $250 million in NPV by refinancing the remaining
$1.8billion Equity Rental Payments

„ DOTC can immediately privatize without any legal obstacles the MRT3 Phase1 System

„ DOTC will be able to realize for the public a more efficient and safe public service to the combined 850,000
passengers a day ridership of LRT1 and MRT3.
Thank you