Tuesday, August 30, 2011

Pilipinas Forum 2: Exchanges on MRT

This was posted in inq7.net last February 5, 2001 that I submitted to then EIC Joel Pinaroc. As usual, get your favorite food and drinks while enjoying the debate and exchanges below.
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Exchanges on the MRT

Integration is something they forgot in building the MRT. (Or if they did remember it, they sure have a bad way of implementing it). The Ortigas station is located in the wrong place, away from Ortigas Avenue (where there is a lot of people). There isn't even any station easily serving the gate 5 area. Anyone who has traveled through the area coming from Sta. Mesa and Cainta will tell you that these two areas are where many commuters pass. So this part of the MRT does not integrate well into the flow of people. I've walked all the way from Ortigas-EDSA to the MRT station and it is not a pleasant thing (smoke, heat, lack of walkway).

And then there's the Ayala and Buendia stations, which do not provide any efficient, time-based access to the rest of the Makati area.

For people to use the MRT, especially those with cars, the system must allow them to plan the trip to their destination with a reliable time limit. In the case of the MRT, you can plan up to the Buendia or Ayala station, but when you get there, how long it will take you to get to your ultimate destination within the Ayala-Buendia area is still unsure. There is no "feeder route" which is reliable in the context of the amount of time. It may be difficult to take a taxi (ayaw nila kasi traffic), it may be raining (saan ka sisilong?), the FX may take time to fill up and you don't even know its route, etc. In other words, the transport system does not provide the regularity that a commuter needs.

This is why many people (especially those with cars) are still reluctant to use the MRT--because the system to get you to an Ayala destination is not efficient. The MRT may be, but the system is not. This is a disincentive for a middle-class consumer with his or her own car.

It is in the nature of economics that the system will correct itself in time. Efficient, reliable, predictable, and cost-effective feeder systems may develop. But right now, we the taxpayers are subsidizing the MRT by about P2 billion a year--money that could have been better spent for those who really need it (education, healthcare, environment).

-- Bobby Herrera-Lim

For some reasons, I still think that those who constructed the MRT are ingenious. Inspite of all the flaws that you have mentioned it is still there. It is the only rail system that I've seen intermingling with those flyovers. I have yet to see something like that. Anywhere I went here in the US, maybe even in Hong Kong, the routes of the trains are usually different from the buses or from the main flow of traffic.

The park and ride- they should have big, secure parking spaces allotted for this. They usually have it in strategic points. Not only in one area. The routes of the buses and the railways are always complementary.

-- Genes Marquez

Can I offer an alternative view? The MRT III Project is not a transportation project. It is, above all else, a real estate project.

You will note that the current MRT consortium, the so-called private sector group, is composed of property companies (Fil-Estate, Ayala Land, Anglo-Phil, DBH, Allante, etc.) and firms which have interests in property (Ramcar, Greenfield (Unilab), etc.) None are involved, even somewhat involved, in transportation. The concept is simple - the success of the development of property is dependent on attracting the market or the people traffic. Hence, there was no science to the selection of location of the stations -- the trains will stop at areas where any one of the consortium members' (a) mall; (b) property development; or (c) property owned for future development or sale, are located. The engineers may argue to no avail, that there were too many stations or too-close stations for the trains to run efficiently. The mandate given by the owners of the project was for the technical group to engineer around the selected sites.

Finally, the MRT project is tied-up with such sweeteners as: (a) a grant by the government to the MRT consortium of effective ownership (50+25-year lease) of
the North Triangle, one of the few remaining large and contiguous prime properties in Metro Manila; and (b) the ability to "create" real estate along EDSA through the design of the MRT stations. The rail project is the monster that guards the treasure.

There should be no illusion that the private sector undertook the project with a view of fulfilling its "social responsibility". Right now, that seems to be the accidental result of the prime objective of the project sponsors -- to undertake only projects which yield economic returns and unlock synergies necessary to compete and make money. I say, "right now" and "accidental" because in the future, if things deteriorate and the commercial return expectations of the project sponsors are threatened (they're fully guaranteed by the government, come-hell-or-high-water), then you will see that it can get ugly both for the government and for the commuters and yes, for Juan.

-- Gina



If there was public hearing about this project, for sure, someone could have seen the plan to be defective. Maybe the public could have exerted enough pressure to at least move the stations to where they should be logically located. To benefit the public, and not a handful few.

If our government is entering into a business deal with private groups, it is our government's responsibility to determine what is good for the public. IF these project had extensive public hearings during its planning stage (like broadcaster on TV, so we can watch from the comfort of our homes, even replays lang, after coming from work), the common tao, could have "nudged" the government which way to go to benefit most of us, the common people.

-Jojo Reyes-McAllister

I believe the Philippine government viewed the MRT project (& rest of privatization program, in general) largely as financing initiative. The argument primarily put forward by the government is that BOT replaces need for government funding and in many cases, helps stop huge inefficient subsidies. Very little is usually said about how the transfer to private hands will be "regulated" in terms of ensuring continuous or improved provision of basic services by the private investor.

In the case of MRT project, government should have taken an active role in its design by specifying concrete, measurable targets for the transport project (e.g., number of operating hours, daily passenger volume, etc) and ensuring that private sector operator commit to meeting these parameters. Unfortunately, it did not do so and virtually allowed the private consortia complete freedom to implement the project - for example, I remember the original MRT fares were set by the operators so much higher, never mind if these would lead to lower passenger traffic as they wanted to have a faster payback. Cost-recovery is also the name of the game for other privatization projects such as PAL, MWSS, etc. rather than focus on benefits or value-added to public. No wonder many privatized public services are no better than those directly run by government itself.

-- Ronald Villanueva

I used to be with the Transport Division of NEDA and we evaluated the project when it went through the inter-agency body called the Investment Coordination Committee (ICC) of which the NEDA evaluating staff serves as the secretariat.

It may be wrong to just say that the "MRT III Project is not a transportation project. It is, above all else, a real estate project." The real estate component was necessary to make the project attractive to the private sector. At least in the first place this was the contention. Please recall that when we started the project, it was a BT-BTO, meaning, a build-ransfer arrangement for the superstructure and a build-transfer-operate for the rail and rolling stock. Somewhere along the way of the approval process, the ICC was tasked to strike a win-win solution and amidst NEDA's effort to block it, the arrangement became BLT, meaning, Build-Lease-Transfer.

Of course it is primarily a transport project. The MRT did not come to fruition because it was proposed by John Sobrepena's group. It started as a solicited proposal, solicited by the government. It existed for quite a while in the MTPDP of the country. The MRT consortium is basically a financial group. The technical aspects were done by its main contractor, Sumitomo Corporation, a known Japanese transport developer/contractor.

Many have complained about integration. There are, in some stations. Take Shaw for example. The jeepney stops are right down below; the bus stops are close as well. Again, people just don't wanna walk even for a bit in this side of the world. In some other areas, there are blue prints to do integration, including plans to put up huge parking facilities close to end stations. There are plans to integrate MRT with LRT 1, 2 and 4 in the future. Relax guys, the government as an institution is not perfect, so are its projects. But there are people who work inside who do think and act, even if in most times the act becomes
superceded by political decisions.

Of course MRT is tied. In government we call it a Sweetheart Deal. But, as a solicited proposal, it is allowed by the BOT law to receive guarantees. The bad thing really is when it was transformed to BLT, the government took on the market risk and unilaterally became responsible for ridership. Meaning, if few people ride the MRT, the government will still have to fully pay, by way of rental payments (lease), the loans falling due of MRTC from FCDU, JBIC and Canada(?).

There is always the profit motive, of course. When a businessman comes to you and says that he will do a project for social reasons, he is definitely bullshitting you.

If things deteriorate and the commercial return expectations of the project sponsors are threatened (they're fully guaranteed by the government, come-hell-or-high-water), then you will see that it can get ugly both for the government and for the commuters and yes, for Juan. All the result of the change from BT-BTO to BLT.

-- Ozone Azanza

I agree that allowing some form of real estate development is a viable sweetener to lower the cost of the other component. However, the way the risk was packaged to separate the infrastructure risk (now borne by the public) from the real estate development cost risk (now borne by the developers) was wrong, considering that the project is a package and that it was the developers who decided the location of the station and the facilities.

The location of the stations and their integration into the transport system were not done properly. In a project as expensive as this, every effort has to be exerted to attain the ridership--as in parallel development of feeder routes, etc. The developers had no incentive to do this because they had effectively passed on the infrastructure project risk to government. Again, this is wrong considering that they designed the MRT system.

One of my major complaints--now, short of an engineering marvel or a very expensive reconstruction, you cannot link the rails of the MRT and LRT. Why didn't they build the MRT as the same level as the LRT so that connection may be an option? Now, the only way to use it as a commuter is to walk up and down. Why didn't they build it at the same level? At least there's an option to link it in the future.

Make those who are making the decisions the ones who will bear the loss if their decisions are wrong. In other words, the risk of not meeting the ridership targets should be borne by the consortium because they are the ones who designed the system, and who got the real estate development deals. As of now, they bear none of the infrastructure risk and only the risk of not earning on the malls (which they haven't built anyway.)

So taxpayers are now subsidizing this to the tune of P2 billion this year. We bore the infrastructure risk without knowing it so that the developers would have their real estate projects. We bore the externality of having to deal with 2 years plus of construction along EDSA where countless millions of pesos were lost in idle man-hours and additional fuel due to the traffic.

Have we been taken for a ride by the developers?

-- Bobby Herrera-Lim

It was not purely the developers who decided on the station sites. The sites went through technical evaluation on a per site basis. The sites were scrutinized by ICC itself, not to mention the technical staff of NEDA. But you have a point, in principle, on packaging risks. The main principle for BOT projects is that the risk is borne by the party who can best manage it. I would like to stress that the problem lies in fact that the arrangement was transformed to BLT. Under the BLT, the operator is DOTC/Government hence was made to bear the market risk. As I said before, this change in arrangement was vehemently disagreed by NEDA albeit unsuccessfully.

It may be true that the integration is not perfect. I'll concede that, but in many of the imperfections I hope that you would try to consider that there are engineering issues as well as gridlock considerations in areas close to a road intersection. Transport planners try to space out bus and jeepney stops away from road intersections because the PUVs add up to the gridlock in these areas when they pick up or drop off passengers. Logically, the MRT entrances have to follow the same consideration.

I just hope that one would realize that there are opportunity costs brought about by delays in implementing a project. And at times, spending too much time debating on the perfection of a project costs more than what would have been the losses caused by the imperfection itself.

Technically, the rail gauge of the MRT and the LRT do not match, so there is no plan to physically connect the rail, but rather to simply just integrate them so that people can transfer from one system to the other. There is also a plan to have a single-ticket system for all rail services in Metro Manila to support integration.

Oh, and check out how the Shaw station was developed. It has links to the malls so that the station can be permeable to users. Anecdotal evidence has it that Forbes people now don't drive to Shangrila/Rustan's or Megamall. They take the MRT instead. Is that not good? Having been able to take a significant number of cars off EDSA.

The incentive is there already as it is now. No traffic, quicker way to travel from end to end. Ridership as of December 2000 ballooned to around 300,000 a day. Still short of the projection of 450,000 passengers-trips, but way above the 56,000 it had when it opened in July 1999.

You are right that those who make the decisions should bear the loss if their decisions are wrong. It's one of my misgivings as well. But be assured that we fought MRTC then with regard to this. Records of ICC would show how NEDA got hit left right and center because it would not allow the BLT arrangement.

Taxpayers are now subsidizing the MRT not P2 billion, but more than P4 billion, this year. The wonders of BLT huh?

Have we been taken for a ride by the developers? Not by the developers alone. But with the aid of some government fellas.

I am not one to defend MRTC and the project itself. If integration is the issue, I think we are not at a loss here. We can still do things as planned to maximize ridership. But if the issue is that the MRT deal is onerous to the Filipino people, by all means I agree with you that we got the shortest end of the stick here.

-- Ozone Azanza

Actually, I agree with most of the sites, except that the feeder facilities were not developed on time to reach the desired level of efficiency to entice the car-using public to patronize the MRT. The only site locations where I have complaints are Shaw and Ortigas (too close, why not have SM and Shangri-la share one site in between them, and the present Ortigas site is difficult to reach), and Santolan (maybe I'm looking at this from a Greenhills-bound passenger's point of view. But somewhere nearer gate 5 would have been better, considering that there's one very long gap with the Ortigas station, which is very near Shaw).

Point well taken about not putting the MRT entrances at the actual intersection, but in the case of Ortigas, you have to walk from Ortigas Ave. to the station while being blasted by pollution on a narrow sidewalk under the unforgiving heat of the sun. Doesn't seem like a good way to move the thousands of people who want to use it from Ortigas.

Dealing with the problem of the rail gauge might be solvable. But instead of allowing only one problem, there are now two. You never know, it might one day be cost-effective and technologically possible to change the rail gauge of either track. But know you ALSO have to deal with the problem of the two stations not being on the same level.

In the case of Buendia, where there are no malls, the links have to be in the form of reliable feeder routes. And none have yet been developed. My concept is this: the Ayala/Buendia areas can feed the MRT with a minimum 50,000 a day (including those who still use their cars now). Is there any feeder concept that can move those even half of that amount to the Buendia/Ayala station within an hour of the 5 p.m. end of work, other than walking?

The scheme was intervened? To turn this contract into something disadvantageous to the public to the tune of P4 billion this year.

-- Bob Herrera-Lim

Please consider this equation:

What the project sponsors put in/arranged:
- equity financing [from corporate funds; from capital markets raised by listed
companies]
- debt financing [EGAP/JBIC or formerly, JEXIM/MITI/Commercial/FCDU banks]

What the project sponsors will get in return:
- return of equity capital [guaranteed, in US$]
- equity return [15%, guaranteed, in US$]
- debt repayment [direct assumption by the government, guaranteed, in foreign
currency (US$; Yen)]
- interest and other debt charges [direct assumption by the government,
guaranteed, in foreign currency]
plus: the sweeteners
- effective ownership of the 16-hectare North Triangle
- ability to create real estate along EDSA
- other upside potentials e.g. farebox revenue-sharing (if any); Makati Loop;
MRT III Extension

Comments:
It is a fair revenue-cost match-up before the sweeteners. In fact, sans sweeteners, the MRT III would be like any infrastructure project undertaken by the government under a BOT-type scheme or any private sector infrastructure franchised by the government. Power projects are allowed up to 15% equity return; telecom firms, a return on rate base of 12%; utilities like power distributors e.g. Meralco, tollways, also an RORB of 12%; other BOTs, up to 15% equity return.

Ozone, I am finding it difficult to find a justification that "the real estate component was necessary to make the project attractive to private sector" and that "to recoup private investments without having to resort to higher rates passed on to riders, the real estate component is a logical solution". The real estate component or the economic benefits to be derived therefrom, is an incremental cost to the government, to us, as a result of its bundling into the MRT III Project. As Ozone mentioned, this is the "sweetheart" part of the deal. It is a fact that the incremental benefits from the real estate component has
absolutely no effect on the fare or tariff setting. It only serves to enhance the consortium's return beyond the 15% already guaranteed.

Just as an aside, the MRT consortium was put together, initially to bid for Fort Bonifacio, which bid they lost. Their substitute project was the MRT. It is not a financial group, it is a property group.

Where the government will get funds to pay project sponsors:
- net peso farebox revenue; to be paid by riders [(tariff x traffic) less
(operations and maintenance cost: DOTC/Sumitomo)]
- annual general appropriations; to be paid by all taxpayers

What the government will forego:
- economic benefits from North Triangle and other sweeteners

Comments:

This is where the subsidy comes into the picture. The net peso farebox revenue will never cover the US$ debt and equity rental payments for two reasons: (1) the fare rates/tariff were not commercially set for cost recovery; and (2) to date, the traffic or ridership is below the expected volumes. Additionally, we have the foreign exchange differential to fund. The project, as it stands today, is not capable of self-financing.

You ask, Bob, "why is it that the taxpayers . . . are bearing the brunt of this subsidy this year . . ." Good question. I can only offer this answer: because it should be considered now, a "social infrastructure" project. In project finance, we have a saying, "the most expensive project is the project that does not get done". I do not know if there are any studies done on this at all, but the shadow cost or the cost of not having an MRT along EDSA may provide some consolation. But then again, this is no justification for a rather uneven arrangement.

Per Bob, "Isn't it a fact of infrastructure risk management that the party best able to mitigate the risk be the one to bear the cost of the risk". Please find below the risk profiles:

Risks the project sponsors assumed:
- construction and completion risk (insurable, fully priced in contract)
- credit risk (consortium takes Philippine government or sovereign risk =
risk-free)
- contract frustration (my personal favorite!)

Major risks the government assumed:
- technology risk / design risk
- price risk
- foreign exchange risk
- financing risk
- market risk (ridership or traffic and farebox or tariff)
- operations risk

Comments:
The consortium took a Contractor's stance. The government assumed everything
else. What can I say? That the consortium had better negotiators? That certain
government officials had millions of reasons for approving the contractual
arrangement? Please see Ozone's posting
- he had a ringside view.


Note from the above that the perceived reasons-for-being of the MRT project
structure mentioned by Ronald, i.e. (1) "replaces need for government funding";
and (2) "helps stop huge inefficient subsidies", may have been partially
negated. The need for government funding and subsidy was simply delayed by a few
years.

Finally, Jojo, I did not mean, in my initial posting, to create a dark and
sinister impression of the private sector consortium. They were doing what they
were supposed to do -- maximize what they can get from the project, from the
government and from poor Juan. The defenders of public interest did not put up a
good fight. In the words of one of the proponents - "hindi bawal ang tsamba".

-- Gina

Did you notice that the Taft station of the MRT is at ground level while the LRT located near the same location is at the equivalent of the 3rd or fourth story of a building. This makes it impossible to connect the two rail systems. Now whose brilliant idea was that? I mean at least they could have had the option for the future.

If you will notice, the tracks are at grade level, but entry and exit to the station is one storey up from grade. This would make it possible to have a skywalk rounding the corner of EDSA and Taft, and connecting the MRT and LRT stations. It's still some distance from each other, but it sure beats having to go down to the street and wade through a crowd (and mud in the rainy season). This way, some of the expansion costs associated with increasing ridership can be passed onto the consortium.

-- Reuel Hermoso

Aren't many MRT's built on different levels so it can be extended to more directions? Maybe the system can later be developed so that after getting off from EDSA station (ground level), you choose 2nd level for northbound passengers, 3rd level for southbound passengers, 4th level to NAIA, etc. without ever leaving the system. I've seen stations abroad with 4 to 6 levels underground in every station.

- GiLBerT Cunanan

Precisely. I mean, a multi-grade transport system shouldn't be a problem when the need for expansion and linkage to other lines crops up. Tokyo's main station, for instance, is about 6 storeys up and up to 5 below ground. And I'm glad you mentioned NAIA. It's vital that a city's international terminal be linked with the train lines. You can just have a baggage delivery service pick your stuff up at your door so you don't have to carry them with you when you get on the train. It's a heck of a lot more convenient and saves you time and effort.

-- Reuel Hermoso

On the comment that SM and Shangrila share one station, in the first place, the stations were not there to serve the malls per se. Secondly, if we move the station to that direction, the entrance and exit servicing the other side of Shaw may have to go. People coming from EDSA central, which is a huge jeepney station servicing Pasig, Rosario and even Marikina will lose it's integration effect. We will get more criticisms if we did this.

Changing the rail gauge is capital intensive. When you exit MRT taft now, you are at second level because at first level you will be at the middle of EDSA. So, if you intend to go to LRT given that the planned platform is already in place, then you do not have to go up and down or vice versa. You will be at second level the whole time. Have you tried taking a full stretch ride by the way? It's educational, a good way to see the actual problem and solutions especially if you try getting off and on again per station just to have a look.

-- Ozone Azanza

I have been wondering why the MRT is so designed that it is so inconvenient for commuters that even if it is cheaper for me to take the MRT rather than the bus, I'd still take the bus. Having to walk a hundred paces through smoke and dirt and then having to go up a hundred steps or so will make me smell like traffic when I get into my office. Not only the smell, but I would be so tired, it would take me time to get my breath and start my work day. So, it is designed primarily as a real state project, no wonder. And the private sector has no incentive to make the system pay by itself and hence, we, the poor middle class who pays tax regularly have to pay again. Let us do something about this.

-- Nina Halos

"MRT real estate project" is an apt description of the Philippine infrastructure state of affairs. The MRT while primarily designed to transport thousands of harassed commuters, eventually evolved into a real estate venture hatched by an overly entrepreneurial cabal close to then President Ramos. Golden opportunities were ripe for the picking and almost every Juan, Kulas & Kulasa with access to MalacaƱang wanted a piece of the action.

With many cooks spoiling the broth, the construction consortium facing dwindling funds from escalating costs & kickbacks, right of way problems and DPWH foot-dragging, mediocrity set in. Several revised blueprints later and into Erap's term, Voila!, the Most Ridiculous Transport (MRT) was inaugurated under Erap's term.

You have concrete stairs mirroring Mt. Everest, relocation of the Connecticut-Greenhills Station to Crame, the blocking of EDSA-Tramo in lieu of a flyover, stratospheric overpasses reserved for mountaineers, the ubiquitous tiangges masquerading as boutiques and many more band-aid prescriptions instead of what was originally planned.

For all its myriad imperfections, the MRT gets you from point A to B in record time. Proof of its efficiency is the reduction of buses plying the EDSA route. A dear friend who owns a bus consortium of 30 buses has pulled out of EDSA and transferred to a more lucrative provincial route, reducing fuel emissions in EDSA and reducing their high maintenance costs attributed to city driving and debilitating under-the-table costs.

-- Sam Aherrera

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