Gov't cautious on MPIC's MRT 3 scheme

By Lenie Lectura, Business Mirror

Posted at Feb 07 2011 01:53 AM | Updated as of Feb 07 2011 11:54 PM

MANILA, Philippines - Pangilinan-led Metro Pacific Investments Corp.’s (MPIC) proposal to rehabilitate the Metro Rail Transit (MRT 3) system can only happen if the build-lease-transfer (BLT) agreement entered into by the government with the Metro Rail Transit Corp. (MRTC) is amended.

In MPIC’s terms, an amendment of the contract means extending it to another 15 years, set to expire in 2040.

Transportation officials, interviewed by the BusinessMirror, said this proposal needs to be carefully studied by the government as it does not want a repeat of another Piatco fiasco, stressing the need for the government to be more prudent this time in sealing deals with private entities.

They were alluding to the government's long-drawn legal battle with the Ninoy Aquino International Airport 3 airport builder.

“Secretary Jose de Jesus is not rejecting the proposal outright. We are at a stage wherein we are comparing various approaches to determine the advantages and disadvantages of any dealings with the government,” said Aristotle Batuhan, Department of Transportation and Communications (DOTC) undersecretary and head of the technical working group formed to handle MRT 3 issues.

The DOTC is consulting local and foreign lawyers to address gray areas involving ownership of the railways system. “We are consulting with government lawyers and with Patricia Tan Openshaw of Paul Hastings,” he said.

Separately, de Jesus said in an interview his office is carefully studying if such a proposal will address government’s intention to buy back the railway system from its current owners, in hopes of providing efficiency and affordability. “Whatever [is deemed] fit for the riding public, we will do it. If any proposal can address that, then we will very seriously [consider that].”

Proposed transaction

There are 6 transactions involved in order for MPIC, the local flagship of First Pacific Co. Ltd., to acquire all of government’s equity interest in MRT 3 held by the Development Bank of the Philippines and Land Bank of the Philippines.

First, MPIC will acquire a 19.9% interest in MRTC through common shares of Metro Rail Transit Holdings Inc. (MRTH-I), which are held by the two banks, and a 2.4% interest in MRTC through common shares of Metro Rail Transit Holdings II Inc. (MRTH-II), which are also held by government financial institutions (GFIs).

MRTC is 100% owned by MRTH-II, which, in turn, is currently owned by MRTH-I (84.9%); Fil-Estate Properties Inc. (8.7%), Fil Estate Corp. (4%), Railway Systems Holdings Co. Inc. (1.4%), Rapid Urban Transit Holdings Inc. (1%) and other smaller shareholders.

It is the understanding of MPIC that both Railway Systems Holdings Co. Inc. and Rapid Urban Transit Holdings Inc. are owned by the DBP and/or LandBank.

MRTH-I, meanwhile, is owned by Fil-Estate Corp. (18.6%), Anglo Phil. Holdings Corp. (18.6%), Railco Investments Inc. (18.6%), Sheridan LRT Holdings Inc. (16%), LandBank (4.8%) and DBH Inc. (4.8%).

“To effect the acquisition of said interests from the GFIs, MPIC will purchase 23.4% of the common shares of MRTH-I, a company that owns 84.9% of MRTH-II, and 2.4% of the common shares of MRTH-II,” MPIC said.

The second transaction is for the Finance department to acquire 75% of the bonds issued by MRT III Funding Corp. Ltd. in relation to the securitization of the shares of certain shareholders of MRTH-I to the equity rental payments (ERP) payable to MRTC.

If the first transaction is successfully carried out, then MPIC will own approximately 70.57% of MRTC and will have voting power over 99.95% of MRTC. MPIC identified this as the third transaction.

Fourth, MPIC then makes MRTC agree to amend the BLT agreement in order to remove or reduce the ERPs, among others.

ERPs make up bulk of the government’s payment to MRTC as stated in the BLT deal. Last year the DOTC paid a total of P7.87 billion. Of this, P5.29 billion represented ERP; P1.18 billion, maintenance cost; P1.15 billion, debt-guaranteed payment; P207 million, insurance expenses; and P34 million, other fees and costs.

“Initially, the ERPs will be reduced by the value associated with the GFIs’ common shares and the ERPs associated with the MRT 3 bonds and preferred shares that will be acquired by the Department of Finance from the GFIs, leaving the ERPs associated with the MRT 3 bonds held by the non-GFI bondholders,” MPIC said in its detailed proposal submitted to the DOTC and the Department of Finance.

For the fifth transaction, MPIC will then offer to buy out the remaining ERPs owned by the non-GFI bondholders. When this happens, the ERPs will be wiped out. However, if some GFIs oppose this, then there will only be a reduction of ERPs. The MRTC will then be made to pay the DOTC concession fees so it could service the remaining bonds held by non-GFIs.

The last transaction involves the $300-million cash infusion of MPIC into MRTC in a bid to expand and rehabilitate the railway which services the high-traffic Edsa highway.

Capacity expansion

The expansion will double the railway’s capacity from 23,600 passengers per hour per direction (PPHPD), or 350,000 passengers per day, to at least 40,000 PPHPD, or 700,000 passengers per day, through an investment in additional light rail vehicles (LRVs), signaling system upgrades, station and depot improvements, among others.

“MPIC commits to investing at least $300 million to acquire 73 LRVs, inclusive of all other associated investments,” it told the agencies.

But in order to implement this, the following should be included in the amended BLT deal: the MRTC shall implement Phase 1 of the capacity expansion project; will manage the entire operations of MRT 3; will pay concession fees to the DOTC which, in turn, will be used to service the outstanding non-GFI MRT III Funding bonds; will commit to integrating MRT 3 with Light Rail Transit (LRT)1; will use the MRT3 with no additional charges until the end of the amended BLT project; and MRTC assumes market risk.

Further, the MPIC proposes to extend the BLT to 15 years in order to limit the required annual rate increases to generate an acceptable regulatory equity return; that the ERPs paid by the DOTC be reduced to an amount necessary to service non-GFI-held MRT 3 bonds; that railway fares go up to at least P30 and for MRTC to adopt a formula for future rate-setting.

Last, MPIC suggests a waiver of the 15% guaranteed internal rate of return and adoption of a 13.5% projected return based on ROE.

“The 10 amendments, all of which are necessary to carry out, and are integral to, the proposed transaction, are legal from the standpoint of Philippine law,” said MPIC. “We believe that the most expeditious and least contentious way of immediately implementing any expansion of the MRT3 is to work within the existing BLT agreement together with relevant amendments.”

Possible hurdles

MPIC cites “potential issues” that could arise from the implementation of its proposal.

There are concerns being raised in relation to possibly amending the BLT agreement without a public bidding.

The government is bidding out the operation and management (O&M) of MRT 3 as part of the administration’s public-private partnership scheme. This means there could be other interested firms wishing to participate in the project, thus giving MPIC tough competition.

“The government’s intention is that it would like to retain ownership of the tracks but auction the O&M. Before it does this, government should buy out the existing owners of the MRT3, which, according to MPIC, will cost us $1.1 billion,” said DOTC Undersecretary Dante Velasco in a separate interview.

Batuhan said this is one approach that the government is looking at. “Others include a do-nothing approach or accepting the proposal of MPIC. We are not discounting any option yet. First, we must determine who the owners of the MRT 3 are. There are many legal issues involved here.”

MPIC seeks to acquire interests in MRTC and to have the O&M of the project transferred to MRTC by amending the BLT agreement into a Build-operate-transfer (BOT) agreement.

“We believe that the BLT agreement may be validly amended without public bidding for four reasons,” said MPIC.

First, it said, public bidding does not apply to negotiated contracts like the BLT agreement. “The BLT agreement may be validly amended into a BOT agreement with a view to transferring the operations of the MRT from the DOTC to MRTC, among others, without public bidding.”

Second, MPIC said the MRTC cannot be compelled to bid out the operations of the MRT project because MRTC owns the entire system until 2025, when the DOTC exercises its right to purchase it from MRTC.

Under the BLT agreement, MRTC allowed the DOTC to use and operate the railway for 25 years. “The grant of leasehold rights to DOTC does not carry with it the right to transfer the same to third parties by bidding out the operations of the system without the consent of the MRTC,” said MPIC.

“Thus, it is only MRTC, by its consent, that can release DOTC from its obligations under the BLT agreement, and DOTC has no legal basis to compel MRTC to surrender its right under the BLT agreement to the government of any third party,” added MPIC.

MPIC has sought the opinion of SyCip Salazar Hernandez & Gatmaitan law office, which opined that the government cannot bid out the O&M without violating the property rights of MRTC as owner of the system. Moreover, an exercise of an equity value buyout must be approved by two-thirds of MRTC’s outstanding shares.

Third, MPIC stressed that the proposed amendments are advantageous to the government. “Where the proposed amendments promise greater benefits to the government than the status quo, there is no reason to set aside such amendment simply because of lack of public bidding,” said MPIC.

Last, MPIC said amendments without public bidding are allowed under the implementing rules and regulations of the BOT.

“In sum, the proposed package of amendments to the BLT agreement will result in a contract that would net more favorable terms to the government by way of economic benefits. Therefore, the law mandating prior public bidding, which is based on amendments that resulted in less favorable terms for the government, is inapplicable to the proposed transaction,” said MPIC.

MRT-LRT integration

The government will also bid out the expansion of the LRT line 1 into Cavite. Whoever wins would also have the right to expand and operate all of the LRT lines and MRT 3. This approach is geared toward achieving an integrated LRT 1/MRT 3 privatization.

MPIC, based on its discussions with the DOTC, is of the impression that the government’s approach to MRT 3 privatization, which includes LRT line 1 expansion project, is “costly and difficult to implement.

“A structure that offers for bidding the expansion of LRT 1 but awards the O&M of LRT 1 and MRT 3 to the winning bidder of such expansion gives little value to the MRT 3 business and potential. This approach is neither beneficial to the government nor to the private shareholders of MRT 3,” according to MPIC.

It said it would be difficult for any new investor to bid for the expansion of LRT 1 should they be made liable for the $1.1-billion MRT 3 equity value buyout (EVB) cost; be made to assume LRTA’s existing debt of over $1.4 billion; and buy out MRTC’s existing expansion rights valued at over $150 million. “These obligations aggregate $2.65 billion before any new investments for rehabilitation and expansion for all three systems are expended,” stressed MPIC.

Should the government insist on this approach, the winning bidder will also be forced to set the initial average fare at no less than P60 per trip for MRT3 alone, said MPIC. “The government assuming the cost of servicing $2.65 billion in existing obligations does not, in our view, constitute a prudent or wise decision,” it added.

MPIC’s letter and detailed proposal were signed by its chairman Manuel V. Pangilinan and its president Jose Lim.

The DOTC could not yet comment on the issues raised by MPIC. Batuhan said the TWG is precisely meant to help fully plan government’s buyout move. “The TWG is an interagency [mechanism]. As I have said there are many options but we must settle for one that will give us the best in tariff and quality of service.”

Win-win solution

In contrast, MPIC claimed its proposal will give the government savings of about $460 million because MPIC will buy the equity interest of the GFIs and MRTC will assume the servicing of the non-GFI bonds.

MPIC said both the government and the riding public will gain enormously, as the proposed transaction effectively wipes out the $130 million to150 million annual subsidy of the government to the MRT 3, as well as ERPs amounting to about $2 billion.

The proposal will also allow the government to earn, after 2025, concession fees amounting to about P350 million per year for a total of P4.2 billion from 2026 to 2040.

Moreover, DBP and LandBank could book investment gains by about $110 million on their MRTH-I and MRTH-II common shares and MRT-III Funding bonds and preferred shares.

“Our proposal provides for reduced regulatory returns to MRTC when compared with the prevailing MRTC ERP guaranteed IRR of 15% per annum. Moreover, we do not require a direct financial guarantee on the returns,” said MPIC.

MPIC stressed that its proposal aims to achieve three objectives which, in its view, is what the government also wants to accomplish. These are to retire the DOTC’s obligation to pay ERPs to MRTC, thereby eliminating DOTC’s annual subsidies; to double MRT 3 capacity; and to seamlessly integrate MRT 3 with LRT lines 1 and 2.

To successfully carry these out, MPIC will need to retire DOTC’s obligations to MRTC; amend the BLT contract; and expand the MRT3 capacity.