On a clear day you can see the MRT Posted by chemrock on January 31, 2016 · 389 Comments

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By Chempo

The MRT-3 is owned by MRTC (a private enterprise registered in Hong Kong) which is also responsible for the maintenance. The govt operates the trains. It started operations in 2000 with 24 trains handling a capacity limit of 350,000 pax per day. Today, the pax load is 600,000. The red line for capacity expansion was sometime in 2010 and there have been some private sector proposals which the govt were not interested in. Mitsubishi was the long-serving maintenance contractor of MRTC whose contract finally ended in October 2012 after several monthly extensions. Inexperienced local maintenance contractors took over under seemingly suspicious circumstances, and thereafter a series of accidents occurred. Lack of spare parts reduced running trains to only 14 as of January 2016 leading to epic gridlock in Manila, kilometre long queues and an incensed public.

Manila is caught up in a swirling acrimonious battle between the govt and MRTC shareholders whilst millions of commuters suffer every day. In the centre of this cauldron is ex-MRTC GM Soriano Vitangcol, the man responsible for highly suspicious way of bringing in 2 succeeding inexperienced maintenance contractors. Vitangcol is currently facing corruption charges.

www.mrt3.com is not the official website of MRTC but one published by the private owners of the train system. They did an excellent job of explaining the whole fiasco and put the blame squarely on the govt. But are they really squeaky clean of blame? And is the Dept of Transportation & Communication (DOTC) really bumbling good-for-nothing civil servants whose heads care for only political gains?



PRE-OPENING

With a country cash-strapped (thanks to the plunder of Ferdinand Marcos) and in need of infrastructure improvements, President Cory Aquino took the view that govt-private partnership was the way to go. The legislative requisite was put in place when Cory signed the Republic Act No. 6957 (BOT Act) on 9 Jul 1990. This is titled “An Act Authorizing the Financing Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes”. It covers only BOT & BT schemes and it came into effect 9 Oct 1990.

In late ‘80s the govt was looking for a mass transit system along EDSA to alleviate the terrible traffic problems. Israeli businessman Elihaju Levin (EL) presented a proposal to DOTC Sec Oscar Orbos on 3 Mar 1990 to construct a light rail transit system on BOT basis. Things moved very fast and within 2 weeks EL was in discussion with DOTC. On 1 Apr 1991, a pre-qualification bidding was held which drew 5 bidders. EL cobbled together a consortium of foreign and local partners (EDSA LRT consortium) for this. EL’s group was the only one to meet the criteria and on 9 May 1991 the pre-bid award committee confirmed the award to them.

On 31 May 1991, new DOTC Sec Pete Prado asked Cory for permission to negotiate with EL’s group and received the green light in July 1991. By now the EL group had set up EDSA LRT Corp Ltd in Hongkong (ELC). In the same month, Prado sent ELC’s BOT contract to Cory for approval. In 19 Mar 1992, new Exe Sec Drilon advised the contract was disapproved for reason that the bidding was not in accordance with BOT Act (no public bidding) and the list of BOT projects had not yet been approved by Congress.

Enter new DOTC Sec Jesus Garcia who held the view DOTC can sign the contract without President’s approval under Executive Order 380 November 27, 1989. He re-negotiated with ELC and executed a “Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA”, and a Supplemental Agreement on 22 Apr 1992. These were approved by new Pres Fidel Ramos (FVR) on 6 May 1993.

On 5 May 1994, FVR signed R.A. No. 7718 (BLT Act), an “Act Amending Certain Sections of Republic Act No. 6957 with an effective date 28 May 1994. The law expressly recognizes the BLT scheme and allows direct negotiation of BLT contracts.

Meanwhile EL incorporated in Philippines as EDSA LRT Holdings Inc (ELH), as shareholders of ELC .

Enter Robert Sobrepena.

In 1995, a new group bought out EL’s group and names were changed – ELC to Metro Rail Transit Corp HK (MRTC) and ELH to MRT Holdings (MRTH – which eventually changed to MRT Holdings I).

On 8 Aug 1997, MRTC and DOTC signed new agreements (the BLT Agreement) to supersede the many agreements, revised agreements, and supplemental agreements previously signed. All terms remain unchanged except the project was split into 2 phases:

Phase I — 16.9 km from Edsa North to Taft (13 stations)

Phase 2 — MRT3-LRT1 Loop from Edsa North to Monumento.

Construction started on 15 Oct 1996 and the line was officially operational by 20 Jul 2000.



BOT/BT/BLT SCHEMES

BOT – Build Operate Transfer – contractor finances and constructs the infrastructure facility, and operates (and maintains) the same for a stated period, then transfers ownership and operation of the project to the government. (Republic Act No. 6957)

BT – Build and Transfer – contractor finances and constructs the infrastructure facility and, after completion, the ownership and operation thereof are turned over to the government. (Republic Act No. 6957)

BLT – Build Lease and Transfer – developer finances and constructs infrastructure facility and upon its completion turns it over to the government on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government. (Republic Act No. 7718)



TATAD Vs GARCIA



The constitutionality of the BLT Agreement was challenged by Senators Francis Tatad, John Osmena and Rodolfo Biazon. In Apr 6, 1995, the SC junked Tatad’s petition.

The petition and the SC decisions in brief :

(1) EDSA LRT Corp is a foreign entity, thus it is unconstitutional for it to own a public utility.

SC decision : EDSA LRT Corp construct and own the assets, thus they are not running a public utility.

(2) The BLT financing scheme is not defined in RA 6957 (BOT Act), thus it is illegal.

SC decision: RA 7718 now recognizes BLT schemes. Thus RA 7718 ratified the BLT contract.

(3) Contract was awarded on negotiated basis, thus violates RA 6957.

SC decision: EDSA LRT was already pre-qualified by PBAC after bidding process.

(4) Award violates the implementation rules and regulations of the BOT Act (no public bidding).

SC decision: (a) There was only one pre-qualified bid, thus public bidding was meaningless. (b) Presidential Decree No. 1594 allows the negotiated award of government projects in exceptional cases.

(5) The award violates Executive order 380 for failure to bear presidential approval.

SC decision: The discretion to award a contract is vested in the government agencies entrusted with that function

(6) The contract is grossly disadvantageous to the govt.

SC decision: The matter of valuation is an esoteric field which is better left to the experts and which the Court is not eager to undertake.

Note:

1. By saying RA 7718 ratified the BLT contract, the SC took a very dangerous stand on ex post facto law. This is a law that has retroactive effect. Many countries do not permit this, notably America. Since the Philippines are heavily influenced by the US, I was curious as to this decision. So I googled, and true enough, the 1987 Constitution of the Philippines categorically prohibits the passing of any ex post facto law. Article III (Bill of Rights), Section 22 specifically states: “No ex post facto law or bill of attainder shall be enacted.” It is left to us to wonder why nobody took issue to this. Retrospective application of legislation creates legal uncertainty.

2. A concurring judge opined that the case ought to be dismissed because the petitioners do not have standing to sue. This underlines the fruitlessness of an activist citizen’s action against the government. Such actions may be allowed only if a party can show that he personally has suffered some actual or threatened injury as a result of the allegedly illegal conduct of the government and the injury is fairly traceable to the challenged action.

3. The SC’s decision forfeited the last chance for Philippines to prevent the ‘original sin’ from prospering.



OWNERSHIP MAZE



Corporate names and shareholdings change all the time, there is nothing wrong in that. But it is difficult trying to understand the MRT deal. The initial Eli Levin consortium in 1990 and the players that finally constructed the MRT 3 were totally different. We can’t even find a simple chart showing the corporate relationship. The chart that I drafted here seems to be the current status, but I am willing to stand corrected on this.



The corporate structure is so hazy that Sen Escudero was prompted in Jan 2011 to initiate a senate hearing to look into this and determine who is who. I think this did not materialize. (This is different from the 2014 hearings into the MRT accidents).

MRT Holdings II (MRTH II)

This is the corporate vehicle to construct MRT-3 Phase 2 (North to Monumento MRT3-LRT1 link). I’m unable to determine the shareholders, but most certainly it will be the same as MRTH I shareholders. Sobrepena runs the show.

MRT Development Corp (MRT Dev)

This is the entity that acquired the development and commercial rights to develop the 16-hectare depot site and in the 13 stations, as well as the right to develop the air space above the 13 stations.

MRT III Funding Corp (MRT3FC)

The special purpose vehicle (SPV) that is used to issue the MRT-3 asset backed bonds. It is registered in Cayman Islands.

Metro Pacific Investments Corp. (MPIC) – Manuel Pangilinan

There have been many reports since 2010 on MPIC buying out Sobrepema’s stake and others in one form or another. It seems there is only some sort of “co-operation agreement” because MPIC is trying to get in on the MRT-3 act and made an unsolicited proposal to DOTC to buyout MRTC. It’s obviously an arrangement that will be conditional on the MRT-3 Phase 2 extension being accepted by the govt. From other reports, it seems MPIC has bought rights to purchase Sobrepena’s equity in MRTC. This undoubtedly creates yet another legal dimension.

Eli Levin:

One thing that is very puzzling is the role of Eli Levin. Every news article where his name turned up simply stated “Mr Eli Levin, an Israeli businessman” and nothing more. Absolutely nothing! EL was involved in the LRT 1 and 2 projects, this MRT3 project, as well as MRT7. He simply fixes the deal, wins the concessionaire, and then he vanishes. In this world of information overload in the internet, he is invisible. The only time he seemed to be actually a real person was in a Manila Standard article March 01, 2013, by Emil Jurado who wrote “ . . . my good friend, Israeli businessman Eli Levin, a long-term resident of the Philippines and at one time married to a Filipina.”

Robert Sobrepena:

He is the front man at the MRTC with whom the govt has to deal with. He was in the center of 3 failed or problematic business dealings – Fil Estate group that ran into serious difficulties and losses from the 1997 financial crisis, the ill-fated College Assurance Plan and the controversial Camp John Hay development. It seemed at Camp John Hay, he collected rentals, paid out Php 900m in dividends in 1989-2000, and never paid lease fees to the govt. He is certainly not the kind of businessman who gives us great confidence in PPP.



BLT AGREEMENT



The system : Phase 1 – 16.95 km for Edsa North to Taft, comprising of 13 stations

$190.0m – Equity (Capital put in by shareholders of MRTC)

$462.5m – Project financing (comprising of 3 components – a Japanese export credit in Yen, a Czech export credit, and a syndicated bank loan)

$ 23.0m – Loans from local bank (2001)

$675.5m – Total

Note: The total of $675.5m has been mentioned as total cost. Is that the total financing or is that actually the project cost? Is that only for Phase1 or does it cover phases 1&2? The additional $23m taken on in 2001 – was this for cost overruns? Is the govt supposed to pay for this? It is not included in the lease rental computation.

MRTC responsibility: Provide capital and arrange project financing Build MRT-3 Phase 1 Responsible for maintenance Responsible for developing the govt land above the depo and provide the govt a share of the revenue.

Govt’s obligation: Operate the system Make a monthly Lease Rental Payment (LRP) Pay MRTC a maintenance fee Guarantee the loans for the project financing.

The Lease Rental Payment : Payable monthly over 25 years. It covers the following: The loan amortization (principal + interest) The Equity amortization (principal only) Guaranteed economic return of 15% on Equity. Some other expenses, such as LGU taxes

Payable monthly over 25 years. It covers the following:

The LRP is not a fixed monthly sum because it has to follow the loan repayment schedule where interest is on reducing balance basis and principal repayment is on a tiered basis. Without internal info, it is not possible for us to compute the quantum of monthly LRP. For example, for the Yen loan component, is it converted to $ for the LRP purposes, if so, how is the exchange derived? For the other expenses, it is based on actual incidence as it occurs so it cannot be quantified. The guaranteed economic return is also quite impossible for outsiders to compute.

The economic return is based on the Internal Rate of Return of 15% on the Equity of $190m put up by shareholders. This is a fairly complicated way of computation so I’ll leave the mathematics out. This return is on after tax basis, and considering corporate tax was 35% before 2009 and 30% thereafter, this guaranteed return makes it an extremely lucrative deal. The question I would ask is : the lease payment includes equity repayment, so is this 15% based on the reducing balance of equity or on $190m for 25 years?

There are many who said that FVR did a great job in reducing the guaranteed returns from 21% during Cory’s time to 15%. It’s really such hogwash because we don’t know if the basis are the same, and more importantly, Cory never approved any deals.

Shortcomings in the BLT Agreement

There is no exit clause for the government after completion of Phase 1. The often touted EVBO (equitable value buy out) is an exit clause for the owners of the MRT-3, not the government.

The O&M responsibility should be held by one sole party. As operator, the govt has no control over maintenance nor the purchase of new trains.

The contracting basis left the govt with no control over all construction cost as well as maintenance cost.

Revenue sharing for income from other areas are not properly spelled out.

Why should the govt guarantee loans favor private sector?

The govt, being the ultimate transferee of the assets, is not adequately protected in respect of the assets (eventually locked up by the bonds).

The govt guarantees the loans, makes monthly lease payments and there is no protection to the govt to ensure the funds are utilized to service the loans.

The assets are to be transferred to the govt by the end of the lease, but there is no protection to the govt to ensure shares in MRTC cannot be encumbered; doing so may complicate asset ownership.

The economic rate of return of 15% on Equity on a net tax basis seems extraordinarily high for a project where the developer takes absolutely no market, currency, and interest rate risks.

The financing arrangement locked in the rates preventing the govt to re-structure the financing in a regime of extremely low rates in the last 2 decades thereby possibly saving millions in interest.

Nothing that got done has been subject to open bidding.

MAINTENANCE MESS AND SCANDAL

MRTC, as the MRT-3 owner, is responsible for maintenance. MRTH, the holding company of which Sobrepena is the CEO, ran the show and from 2000 to October 2012, with the maintenance contracted to Sumitomo Corp.

In 2009, the govt, through Landbank and DBP, bought a massive amount of MRTC bonds and by then held about 80% economic interest in the company, securing for them 11 of the 14 seats in the board. The govt now effectively controls MRTC and runs the show.

October 2012, the Sumitomo Corp contract was not renewed. A new maintenance contractor PH Trams CB&T was engaged. Sobrepena now cries foul and puts the blame for MRT-3 maintenance woes squarely on the govt. His claim seems pretty obvious – all the breakdowns and accidents occurred after October 2012. When the govt took over, there were 20 trains running with 4 back-ups. By 26 Jan 2016, there were only 14 trains running.

Is it true therefore, that it is the govt’s interference, corruption, and mis-management that created the whole mess? The answer is an unequivocal NO.



There is clear indication that decay had already set in long ago. Way back in 1999, MRTC had already mentioned the need for upgrading some parts. Any new maintenance contractor would have to deal with an increasingly deteriorating situation as decay picks up speed. Vitangcol’s nefarious arrangement with a seemingly untrained new team simply rushed the ordeal to the breaking point.

Note: This article does not go into all the contentious issues regarding MRTC General Manager Vitangcol and PH Trams/APT Global. Those are separate matters.



ORDER FOR 48 LIGHT RAIL VEHICLES



The govt moved to acquire 48 new light rail vehicles (or coaches) from CNR Dalian Locomotive and Rolling Stock Company, China, which was frustrated by Sobrepena obtaining TROs. The Court of Appeals in May 2014 ruled in favor of the DOTC and cleared the way for DOTC to proceed with the purchase.

Sobrepena’s position is that he has no objection to new trains, but merely wants to be given the right to go and inspect the trains to make sure they are compatible. They fear Dalian has no record, and also the fact that the new trains may jeopardize the Phase 2 system. DOTC’s view is that Sobrepena’s non-cooperation makes it difficult for the govt to solve the MRT problems.

Arbitration #2

Jan 2014, MRTH II started arbitration in Singapore. This time, the dispute is the purchase of 48 light rail vehicles from Dalian. As part of the MRT-3 capacity expansion, the govt is contractually bound to the BLT agreement. Thus it should be the owners of the MRT responsible for new purchases, not the govt. Note that it was MRTH II and not MRTC that filed for arbitration. They felt MRTH II had concessionaire rights to Phase 2 and thus have the right to petition.

I share the concern for compatibility issues. Empty train shells will be coming from Dalian, and engines coming from somewhere else, running on old Czech technology. Here’s hoping this will not yet turn out to be another turn of events of bumbling govt officials running the show. Meanwhile, first prototype vehicle arrived in Aug 2015. After testing, if all goes well, the balance will arrive in batches starting Jan 2016. Here’s keeping our fingers crossed.



SECURITIZATION MESS



Under the BLT contract, the govt makes monthly Lease Rental Payments (LRP) to MRTC for 25 years (2000-2025). For composition of LRP, see Contract details above.

Sobrepena’s group of companies faced financial difficulties in the aftermath of the 1997 financial crisis. In 2003, a scheme was created to monetize the future cashflows from the LRP. This took the form of Bonds backed by the future LRP cashflows.

The mechanism works like this. A special purpose vehicle MRT III Funding Corp (MRT3FC) was used to issue the Bonds to shareholders who are free to sell them in the capital market for immediate cash. The government pays LRP to MRTC each month. The funds are distributed to each shareholder who in turn course it to MRT3FC’s paying agent (and possibly the securities depository) Bank of New York NY. Out of these funds at the bank, the obligations for coupon payments, bond redemption and ‘pass-through’ funds will be satisfied.

Bonds issued:

Zero-coupon means it carries no interest payment, the bonds are priced on a discount basis.

Pass-through securities are not exactly bonds but let’s just call them all simply as bonds. The LRP payments by the government for years 2015 to 2025 will be coursed through the paying agent to holders of the bonds. The bonds will be priced on a complicated discount basis.

It is apparent only a portion of the quantum of LRPs are monetized.

There is a Yen component, so was this left out, or do they have a basis for forward conversion rates? There is an expenditure component, so it cannot be quantified 18 years forward, furthermore, this is probably in pesos, so how was the conversion made? The economic returns can only be computed post fact, so it is likely equity repayment was also omitted. It also appeared not all shareholders monetized their share of LRP.

The LRP cashflow from the govt is guaranteed under the BLT contract, thus the Bonds take the form of a sovereign risk which enhances its credit rating. This is of course very good for the bond holders.

Bond valuation

Let me explain a bit on this because lack of knowledge has led to lots of mis-information on the MRT bonds. A bond has a face value which is the future cash flow of the LRP. This cash flow (let’s say in 1 years time) is made up of loan repayment ($100,000)+ interest let’s say @ 9%pa.($9,000). So the bond face value is $109,000. Shareholders are selling this away but at what price?

Bond prices are driven by market forces such as interest rates, market sentiment of interest rates, whether it’s a junk bond, or AAA-rated bond, etc. Some bonds are quoted, some are not in which case the parties need to do their computation.

For Tranche 1 it is simple, the price is $109,000 and MRTC need to pay coupons (interest) of 9.5%pa. It is basically like a time deposit. So the price is par for a zero risk bond.

For Tranche 2 & 3, the price is on discount basis – what is the present day value of $109,000 in ‘x’ years time. If it’s for 1 year and the discount rate is say 5%, net present value is $103,810 and the price is 95.24. If it’s a stream of income, like Tranche 3, the calculation gets complicated.

Price for bonds is inversely related to interest rates. If rates go up, bond prices fall, and vice-versa.

What’s in it for the bond holders? In the case of Tranche 1 (with coupons), bond holders earn at the rate specified in the bond. In the case of Tranche 2 & 3, if bond holders hold to maturity, they earn at the discount rate, which can be recomputed to arrive at the yield (the rate of interest per annum on the cost for the number of days to maturity). If they sell before maturity, they make a gain or loss in the buying and selling price differential. Be very clear on this point — the interest on the loan has nothing to do with the bond holders.

What’s in it for MRTC shareholders? For Tranche 1, they got a lot. They received the future LRP now, which earns them interest (but they need to pay coupons to bond holders). For Tranche 2&3, they received much less than the face value of the bonds because present value of money is always less than the future value. And here’s the worrisome part. The LRP comprises of equity and bank loan amortisation. If the bonds allow shareholders to cash out their equity + economic returns, that’s all prim and proper. But the portion of LRP for loan amortisation is not theirs to keep so why did they cash out on that too? That is a big holler

So what does securitizing the LRP mean to the govt?

It means when problems arise, the govt now has to deal with MRTC shareholders and entities with economic interests (bond holders). As the bonds are bearer securities, the holders could be any investor. And, indeed, a situation did occur in 2007/2008 when the govt was 8 months in arrears on the LRP and maintenance payments. It was not a case of the RP gone burst, but rather a matter of delays in the budget process so funds could not be allocated on time. MRTC threatened to bring a case in Singapore courts (Arbitration #1).

In the case of a buy-out scenario, the situation becomes very complicated. That is where we are today. The govt has made a decision to buy out the MRT3.

One serious question that needs to be asked is, why was this securitization allowed in the first place? If the future cashfows from LRPs are monetized, where then is MRTC going to get the funds to service their bank loans?



GOVT BUY-OUT OF SECURITIES

In Dec 2008, delays in payment of LRT forced MRTC to file Arbitration #1 in Singapore which eventually did not proceed. The arbitration was forced by bond holders Goldman Sach and Elliot Partners. These are vulture hedge funds, one does not play punk with them. Their holdings were bought out by the govt, hence the case in Singapore never proceeded.

Arbitration carries great implication as the country’s sovereign risk standing may be negatively impacted making it more expensive for the country to borrow in the capital markets. To pre-empt arbitration filing, the Arroyo govt made a decision to buy out the bonds and MRTC. The Dept of Finance instructed the Land Bank and the Devt Bank of Phils to buy up all the MRT3 bonds.

The numbers I got from a PPP presentation showed that by 2009, the 2 govt financial institutions’ (GFI) holdings of interest in MRTC was :

DBP with $676.25m of the bonds

LP with total of $376.87m (a) unsecuritised equities payment, (b) Preference shares – $54m (c) bonds.

It is not clear how much of the bonds have been redeemed by now. We can only assume the bonds are those from Tranche 3 maturing 2025, and the rest have matured. Mrt3.com website indicates that the GFIs currently hold 78% of outstanding bonds. Tranche 3 bonds have a total face value of $1,197,155,666 so 78% would be $933,781,415 which is fairly consistent with the PPP presentation.

Land Bank’s holdings raised some questions:

There are preference shareholders in MRTC, who are these? Could it be MRTH I are the preference shareholders, and Sobrepena has the ordinary shares, that’s why he is calling the shots? Does it mean the govt already owns 25% of MRTC? Unsecuritized equities payment – that means not all the LRP cashflow was securitized. So the actual payments by the govt for the LRP all the way to 2025 will be much higher than the total bonds issued (as I suspected above).

The 2 GFI’s holdings appear to be in breach of some banking regulations. So arrangement was made for the MRTC preference shares to be parked with the National Devt Corp. The rest of the holdings remain at the GFIs.

So what does this govt acquisition of the bonds mean?

In terms of cashflow, the bonds are a damning exercise for the govt because the right hand had to cough $180m upfront to buy the bonds, and the left hand continues to make the monthly LRP payments to 2025. A major portion of the govt’s monthly LRP money finds its way back to the 2 GFIs as bond holders, some to other bond holders and balance for MRTC. The big holding of the bonds gave the Arroyo govt 11 of the 14 seats in the MRTC board. The govt does not own the MRTC, but it is effectively running the business of the company that owns the MRT-3 by virtue of board control. This is what pisses off Sobrepena and why the Pnoy govt is directing the show – putting appointees in the general manager post, ordering new trains, changing maintenance contractors, etc. There are some who said the buy back of the bonds is a good turn of events because now when the govt remits the LRP, 78% is coursed back to the GFIs, thus recouping substantial portion of the loan interest. Claims of $300m to $400m savings have been mentioned. Not true. The GFIs earn on the yield on bonds (as explained in “Bond valuation” above), the loan interest has nothing to do with them. The bonds were purchased in 2008 when Fed rate was about 3% and since 2009 has been flat at under 1%. So the bond holdings in the GFIs’ books are most likely giving them some book revaluation gains at the moment, but nowhere near to $300m.

Bond acquisition scandal?

The 2014 Senate enquiry brought into the open the circumstances of how the 2 GFIs acquired the bonds. The purchases were done through Global Air Services (GAS). The banks explained that they would be in breach of banking regulations to book the purchases directly, so they had to do it via a $180m loan to a third party to buy the bonds. The facts are – GAS was a $2 company, registered in Virgin Islands, managed by Presidio Capital (a Singapore trust fund management firm) and owned by Robert Ongpin, and fees of US$5 or 6 million were paid for the transaction. It just smells fishy. It tells me of a round trip arrangement for the purpose of camouflaging the actual purchase price. With a $180m transaction, a simple compromise of a few basis points in the price would have allowed millions to be siphoned away. What I’d like to know is, were the bonds purchased by GAS who then sold to the banks? Or did GAS buy on behalf of the GFIs? Either way, what was the price? Was there valuation done — a comparision of purchase cost to the net present value of the securities? Senator Osmena immediately exclaimed “plunder” when the $180m loan was revealed. That’s barking up the wrong tree. No one asked about the pricing. The Senate enquiry did not ask intelligent questions.

Could Senators Escudero and Poe have asked their 2016 election backer Mr Ongpin pertinent questions, and could they be privy to information they didn’t share at the inquiry?.

The bonds are now carried in the GFIs’ books. We do not know of the purchase price nor its valuation then and now. The loan to GAS was $180m so it is possible the cost of the purchase was in that ballpark figure.



PRIVATE SECTOR INITIATIVES

Sobrepena insists that that they expected capacity would be breached by 2002 and they made several requests to buy additional trains which the Arroyo govt refused to approve. There are in fact 3 private sector initiatives for capacity expansion, and MRT Phase 2. All these have been mothballed by the Pnoy govt despite the fact that these plans would have eradicated the current MRT problems. According to Sobrepena, it is the govt’s refusal to entertain private sector initiatives and maintenance failures that dragged the MRT to its current sad state of affairs.

Sobrepena appears to be pushing MPIC’s unsolicited proposal to the govt for obvious reasons – he has made certain tie-ups with Pangilinan . The fact is, most,if not all, MRTC shareholders have cashed out on MRT 3. There is nothing in it for them, except the opportunity for another sweet deal on Phase 2. That’s the reason they have not left town.

It is being bandied about that these private sector initiatives are financially advantageous to the govt, will increase capacity tremendously and new signaling/communication systems will improve safety, will have new trains for free, no more govt subsidies, etc. It’s the developer’s soundbites. The MPIC proposal, for example, will not cost the govt a single peso, the monthly Php 7.2m subsidy (where did that come from?) will not be necessary and the guaranteed equity ROI will be decreased from 15% to 11%. It’s so beautiful . . . so why is the govt not biting? It is impossible to form any opinion on these proposals since the public has no access to details and operational data.

My take on this is both Arroyo and Pnoy govts saw the onerous nature of the BLT Agreement. That, coupled with financial troubles of Sobrepena’s group, led them to believe taking over ownership of the MRT-3 is the best course of action.

More importantly, the Pnoy govt has learned that it needs to be very prudent when dealing with private entities as it does not want a repeat of the PIATCO fiasco. Contrary to Sobrepena’s statement that the govt is not interested in looking at these proposals, it is in fact studying them for a long time and has sought high level international legal assistance. The very fact that Sobrepena criticized the DOTC for the high consultancy fees incurred by Sec Abaya attest to this. The details of the MPIC proposal is so terribly complicated that it will lead the DOTC into many new rabbit holes. For those who have time and like to drill into minute details, you will see I tell no lies if you check out this article: ” Gov’t cautious on MPIC’s MRT 3 scheme“.



GOVT GAME PLAN

Public perception is that the govt is fumbling and DOTC is inept in its handling of the MRT problems. In reality, the govt has a well defined game plan. Aquino’s Executive Order (EO) 126 of 28 Feb 2013 says in no uncertain terms, the govt is buying out the MRT-3. The buy-out is taken under the EVBO term of the BLT Agreement. The DOTC is pursuing the buy-out and system upgrading in parallel. That is why, despite the fact there has been no progress in the buy-out, upgrading work has already started.

Vitangcol’s corrupt machination is a side show that detracts public attention away from the DOTC’s real work. Let’s put Vitangcol aside and let the court deal with him. Let the govt focus on the difficult work on hand and may detractors be damned. Now without a plan, there would be no direction. The DOTC’s website clearly defines what the govt is doing, and it makes a lot of sense. Let me restate briefly :

On the buy-out:

They have Congress approval on the buy-out and Php54b has already been allocated in the 2014 budget for this. The legalities are overwhelming and they are currently working it out, seeking lots of high legal advice. When they have finalized the legal aspects, they will then approach the shareholders. Due to the delicate nature of the situation, DOTC cannot disclose any proceedings for the time being.

On upgrading:

48 new light rail vehicles (LRV) have been purchased. Prototype is being tested. The rest expected to be delivered Q1 2016 in batches, total delivery by December 2016 Current the train configuration is one engine pulling 3 LRV. After upgrade it will be 4 LRV to one engine. Automatic ticketing system has been installed which will cut queue time. Elevators/escalators to be replaced Portions of the rail will be replaced Train engines to be replaced Signalling systems – both hardware and software, will be replaced. Ancillary systems will be added — depo bays, power substations, etc New radio systems will be installed Construct an additional footbridge at North Avenue Overhaul existing 72 trains

Post buy-out

The govt will own the assets, maintain regulatory responsibilities, bid out Operations and Maintenance to private sector. The govt feels operations and maintenance are best left to private sector who can manage this better.

These upgrading works have either been completed in 2015 or are work-in-progress. Overhaul of existing trains will be completed by 2017. Life for commuters will be tolerable within this year. So let’s give DOTC a chance. It will be a sad commentary on Filipino culture if a non-LP candidate wins the 2016 election just in time to take credit for all the work that has been done.



GOVT BUY-OUT

But just what exactly is the govt going to buy out and how did they arrive at the Php54b valuation is not clear. The valuation need to consider the following:

(1) MRTC bonds

The bonds need to bought back so as to extinguish economic interest holders. Whether the govt will buy back the bonds held by Land Bank and Devt Bank of Phils is academic because it’s a case of govt settling with itself. Technically, it would probably need to be done so that the GFIs can clear their books of the 78% holdings of bonds. The balance of the 22% need to be bought back from other bond holders.

How much then would these bonds cost? We are unable to compute due to lack of information.

Critics are quick to point out the Php54b is hardly enough to buy out the roughly $900m bonds held by the GFIs so how is the govt going to buy out shareholders. It should be noted the $900m is only the face value, and we don’t know what is the balance they hold. The valuation of these bonds is based on net present value of the pass through cashflow stream of LRP from the govt. Since we are talking of remaining 10 years stream of monthly cashflow that these bonds represent, the value of these outstanding bonds will be substantially lower than $900m.

Another thing to consider is we don’t know how the two GFIs manage their interest sensitivity ladders. It seems these are not booked under trading a/c, but as being held to maturity. If so, taking such a hugh amount off their books will unwind their asset-liability positions with bottomline impact.

(2) Shareholders of MRTC

The govt needs to buy out all the shareholders of MRTC who put up the $190m capital. Does it mean we need to pay all these shares at par value? Of course not, it needs to be assessed and negotiated.

MRT-3 Phase 2 : Can the govt opt out this part of the BLT Agreement? If so, the shareholders have no economic interest. If the govt has no exit rights, then damages need to be negotiated.

MRT-3 Phase 1: The value to shareholders is basically the future cashflows from the LRP to the extent that it has not been monetized. Sounds complicated, right? To recap, the LRP are future cashflows to pay off: (a) loan amortization, (b) equity + guaranteed ROI, and (c) some expenses. Since (c) can only be quantified post-fact, they are most likely left out of the bonds, that is, not monetized. This non-monetised portion of the LRP is due to shareholders. In addition, as regards the bonds, it seems not all shareholders are alike. There are some who did not participate in the bond issuance, which means their share of a portion of the LRP is not monetized. Furthermore, some shareholders who did not monetize their share of the LRP have already sold the unsecuritized portion of the LRP to Land Bank. Are you beginning to see how difficult it is?

Preferred shares: Some of these have already been purchased by Land Bank. On what basis were these shares valued? I cannot see anywhere at all that Land Bank had a valuation basis when they purchased these lots in 2008/2009. It was really very clumsy work. Did they simply acquire it on par value? These are currently parked with National Devt Corp, so the govt may need to buy them back from NDC, but at what cost? Probably at the same price at which it was transferred to them from Land Bank. We don’t know how much this is.

MRTC shareholders cannot sell their shares because that is one of the bond convenants. That means the govt must first buy in all the bonds.

Some shareholders have already assigned their shares to MPIC, most notably, Sobrepena. Pangilinan is keen to get into the MRT-3 Phase 2 act and has made proposals to the Govt, and made some arrangements with some shareholders. These shareholders would thus be unable to dispose of their shares to the Govt.

Some shareholders may have pledged their shares elsewhere for other purposes. I have read somewhere that substantial MRTC shares are in fact been held as collateral at Penta Capital. These shares are encumbered and cannot be sold.

(3) Project loan amortization – another scandal?

And here is the most troubling part. Under the BLT Agreement, MRTC obtained loans totaling $462.5m (Japanese export credits, Czech export credits and a syndicated loan). These loans are guaranteed by the govt under Dept of Finance Undertaking Letter dated Oct. 17, 1997. The Commission on Audit revealed in 2012 that the govt has paid out a total of $632m (principal and interest) from 2000 to 2010 because creditors have called on the guarantee. In other words, MRTC defaulted on the loans and the govt has been servicing the loans for the project. According to the COA, this sum is recorded in the DOF books under a/c 962 designated as Loss On Guaranty.

Loan servicing is the obligation of MRTC and their source of income to do that is the monthly LRP from the govt. The LRP are lease payments which should be expensed off in the books of DOTC. Is the COA referring to this LRP out of DOTC budget, or an entirely different payment out of DOF budget? If it is the latter, then it is a scandalous double payment. This is possibly the case and it is easy to see why. Shareholders have already monetized their LRP cashflow stream. When the govt remits the LRP to MRTC, the funds flow to bond holders. Where is MRTC going to get funds to service their loans?

If God forbid that I am correct and there has been double payment, the $632m should not be expensed off under a/c 962, but recorded as a receivable due from MRTC. If it is in fact a receivable, then the computation of how much it will cost the govt to buy out MRTC may become ridiculously crazy – shareholders may have to pay the govt to buy them out!

Further logical questions beg to be asked – How did that happen and who was responsible for it? What happened after 2010 – is the govt still servicing the loan?

(4) MRTC balance sheet

The govt needs to do some due diligence on the MRTC balance sheet. Are there any liabilities that will be assumed by incoming shareholders? Since govt appointees are already running the show in MRTC, this should not be a difficult undertaking.

There was another loan from local banks in 2001 of $23m loan. This was not factored into the LRP. Was this a cost over-run and not part of the project cost? What is the status of this loan in the books of MRTC?

(5) MRT Dev Corp

This is the MRTH I subsidiary set up to develop the govt land above the MRT-3 depo, on which Trinoma Mall now sits. I believe under the BLT agreement there is a revenue sharing arrangement with the government.

“Anglo Philippine Holdings Corporation reported that its net income surged 278 percent to P359 million in the first half of 2015 from the 95 million earned in the same period last year due to the sale of assets” Businessworld online December 03, 2014

Anglo is one of the shareholders of MRTH I. The asset sale above refers to some properties on that plot of land. There are reports of lots of activities and money being made on the plot of land above the MRT-3 depo. The land is red hot real estate with the MRT-7 and the LRT1-MRT3 loop in the pipeline. In contrast, there is a dearth of information regarding any revenue flows to the govt. Whatever happened to the govt’s share?





SENATE INQUIRY 2014



The senate convened in Q4 2014 to look into the MRT maintenance problems. The Senate inquiry in 2014 was a good opportunity indeed in aid of legislation for PPP. The Senate missed a great opportunity by focusing instead, on the quarrels between DOTC Sec Abaya and Sobrepena and offered no solution to the ownership problems. The highlight of the inquiry was Senator Chiz Escudero saying “You two should work it out” and that would have solved the MRT problems.

The MRT problems are not technical but legalistic. Maintenance issues can be resolved, especially with the govt now controlling MRTC. It’s a matter of having good and capable people in place. We now have Roman Buenafe, a mechanical engineer, in charge. Gen Manager Vitango’s shenanigan tainted the DOTC and he should be marched to jail and the key thrown away. There is no doubt DOTC fumbled terribly on the maintenance side and the Pnoy admin is paying a high political price for not taking immediate action against Vitangcol. However, it’s the legal matters that cannot be resolved easily. Pres Arroyo could not solve it during her terms and Pnoy has wrestled with the same problem of ownership. Arroyo did right in gaining control of the boardroom. Pnoy is right in issuing executive order 126 to buy out the owners and the LP admin has a concrete plan to resolve the MRT crisis. The Senate provided no additional wisdom in dealing with the matter. Wouldn’t it be great if senators had done their homework when they attend the inquiry and asked all the questions that this article prompts?

CONCLUSION

I should warn that facts and figures here are presented on a best efforts basis. It’s not easy to obtain data. The Land Bank’s holding of the bonds is reflected in their Annual Report 2013 on their website. The Devt Bank showed this in Annual Report 2011 and, thereafter, it’s not highlighted, perhaps they have been transferred out. The DOTC has a website DOTC Metro Rail Transit Line that provides good info including some financial reports. A sample report is MRT3 2014 Financial Report.

Unfortunately, the mrt3 report isn’t very helpful. The govt’s expenditure on the mrt3 can be split into payment for the assets (the lease payments) and on the operations, including maintenance. With operation financials we can assess govt subsidies for running the trains. In the reports mentioned, we can’t see collection figures, so I wonder where the fare revenues go. It is not possible to assess govt subsidy for the operations. The mrt3 report may be good DOTC internal financial accounting, but it is not good management reporting material.

Moving forward, the govt’s plan is the logical way. The hard assets (the tracks, stations, power stations, the land on which the hardware stands, etc) should be owned by the govt. This should not be construed as govt subsidies, but a country’s investment in infrastructure. There should be an independent Regulatory Commission to oversee fair rates, safety and quality service. Private enterprise should operate and maintain the MRT on a commercial basis. This is the model common in many other countries.

Two major ideas I would recommend are :

(a) Instead of bidding out the O&A, the govt could incorporate a company for this purpose. Let it run as a fully independent commercial unit under professional management. Make it profitable then float it on the stock exchange and the govt can retain some shareholdings. If it is bid out, some fat cats will get the pie that comes with heavily socialized infrastructure cost to benefit only them.

(b) To recoup part of the heavy investment on the hard assets required in a MRT project, the govt should be allowed to acquire the land surrounding the stations (say within a radius of 50 meters). That way the govt can recoup investment cost by commercial re-development of these land. It is also a way to maximize the land to its full potential. Unfortunately, the byzantine laws of the Philippines make this impossible.

The govt buy-out of MRTC has to happen. Let the DOTC work out the legalities, after which, as Secretary Abaya indicated, they will approach the shareholders. As this article shows, the bitch is the legalities which are the shareholders’ doing. Commercial disputes are best settled through negotiation. Investors are due their fair profits, but if they have already cashed out long ago, let’s hope concessionaire rights to Phase 2 will not justify greed over national interest.

It is very clear that the core of the problem is the “original sin” which is the anomalous BLT contract signed by FVR. It is also very telling that FVR has been absolutely and conspicuously quiet in all the uproars over the MRT these past few years. I’m just wondering why.