More train systems, more public debts?

By Karen Tiongson-Mayrina, GMA News Research Photos by Jes Aznar (Second of two parts) Part I: Train systems' subsidies drain government Despite huge revenue losses in the mass railway systems, the government has prioritized rail transport sector projects. The plans for the expansion of the LRT and MRT lines have been laid out. The government is also currently entertaining proposals for an MRT 4 from Manila to Novaliches and MRT 7 from Commonwealth Avenue to North Avenue. Most of these are unsolicited proposals from private developers. "The benefits that you derive here are the economic benefits that you get -(by cutting) your losses on manpower hours wasted on traffic, and (by addressing) the environmental issue and energy waste because of traffic," said LRT Administrator Mel Robles. However, experts taking note of the MRT 3 experience said the government should now be more cautious in dealing with the private sector. The national government has been subsidizing MRT 3 operations in billions of pesos annually because of guarantees in contracts cushioning risks to investors and creditors. University of the Philippines economics professor Renato Reside said the government failed to anticipate the losses when it allowed the private sector to undertake MRT 3. It was, after all, the country's first foray into an urban mass transit rail project with the help of the private sector, he noted. Reside wrote a paper on the perils of infrastructure investment with private sector participation, as applied to MRT 3, and submitted it to the International Institute of Public Finance Congress in 2002. The economics professor said the government agreed to subsidize commuter fares but did not consider insufficient passenger load when the MRT 3 started operations in 1999. MRT trains ran almost empty in that year, forcing then President Joseph Estrada to reduce the fares. Reside said the government should not have agreed to take care of the commercial risk and the demand risk or passenger load, which was "overestimated" during the contracting stage. "Mababa ang (bilang ng pasahero) that time kaya binabaan ang pamasahe," he said. (Low passenger load at that time resulted in reduced fares.) The project was also delayed. Reside said operations have not even started when the private developer faced debt problems and, invoking the sovereign guarantee in the contract, began asking for funds from the finance department (DOF). Government guarantee has been used to encourage private sector participation in public infrastructure projects. It is an instrument used to minimize, and in some cases, eliminate the risks that discourage private sector participation in financing, building, maintaining and operating public infrastructure projects. "Dahil hindi pa kumikita yung project naubusan sila ng pambayad sa contractor, so tumakbo yung private developer sa DOF. Sinasabi nila kailangan na namin ng pangpondo sa contractor pero hindi pa nag-o-operate yung project dahil maraming delays," Reside said. There were other factors such as peso devaluation brought about by the Asian financial crisis, Reside said. In both the MRT and LRT, the government pays its obligations in dollars. A former LRTA official noted that when LRT 1 was built in 1983, the exchange rate was just P8 to a dollar. Reside added that the government may have also failed to factor in during negotiations on the MRT 3 the high interest rates of private loans. He said loans made by the developer are base on market or bank rate, which is not subsidized because it is private sector loan. Freedom from Debt Coalition's Ma. Theresa Diokno-Pascual said this means the government is actually paying for the debts of the private sector, which is in effect paid for by the public through taxes. "Rule of thumb yan sa pagpapautang, mas malaki yung interest na babayaran ng pribadong sector kesa sa gobyerno. Kaya nakakasira ng ulo yung utang ng MRT kase utang ng private sector, utang ng isang kumpanya na gobyerno ang nagbabayad. Kung gobyerno yung umutang baka mas mababa yung interest," Diokno said. (As a rule of thumb, the private sector gets higher interest rate on loans compared to what government is charged. It makes one crazy to think that government is paying for private sector debt. If it is the government that took out the loan, then the interest rate would be lower.) But Pascual said the MRT fiasco is not unexpected, taking into account previous government contracts with the private sector. "Government's track record is very bad in terms of dealing with the private sector and often to the detriment of the public interest," she noted. Private sector participation in public projects started in the '90s, when the government recognized the significant role the private sector can play in the provision, financing and implementation of infrastructure projects. The government turned to the private sector to fill the huge gap in infrastructure services that it could not address owing to fiscal deficit. Measures were adopted to encourage private sector participation in infrastructure, notably the passage of Republic Act 6957 or the 1990 Build-Operate-Transfer Law. Anomalies were later discovered in the BOT contracts entered into by the government under President Fidel Ramos with independent power producers. Investigation made by the Philippine Center for Investigative Journalism showed that the former president personally pushed for the speedy approval of some of the most expensive power deals that contained onerous provisions. The government's contract with Philippine International Air Terminals Company for the construction of the NAIA terminal 3 was nullified by the Supreme Court for violating the BOT law. Some provisions of the contract constitute a direct government guarantee expressly prohibited by the law and its implementing rules and regulations. The government is now seeking to avoid the MRT 3 mistake in the planned MRT 7, a $1.2-billion, 22-kilometer elevated track running from Tala in Novaliches to North Avenue corner EDSA, and would traverse Lagro, Fairview, Commonwealth Avenue before joining MRT Line 3 in North Avenue. The National Economic Development Authority (NEDA) said the project should be "deficit-neutral," meaning there should be no financial exposure on the part of government. But Reside noted that the deemed deficit-neutrality of the MRT 7 project is overshadowed by the fact that train systems all over the world do not gain profits. Unsolicited proposals such as MRTs 3 and 7 are particularly risky. Most of the projects falling under private-public partnership are unsolicited or proposed by the private sector. Reside explained the private sector, so concerned with profits, is expected to push for support or guarantees from the government. It is preferable, he says, if government itself develops a project, although he admitted that this would require not only more than adequate funds but expertise. Most of the projects now are unsolicited because the government and its implementing agencies such as the departments of transportation and communication and public works have no capacity to undertake such projects on their own. Reside said the government should be aware at the outset of the productivity of every peso spent-how much profit and losses the project would incur and the cost and benefits of providing subsidy. In the MRT case, it appears that the government was "surprised" when the private sector began asking for money. The government should also enlist the services of good lawyers who would do the "bargaining" and ensure that the subsidy and risk of the government is not too big. Pascual called for transparency in the whole process, noting that most of these anomalous contracts were approved without public scrutiny. She said the public should be included in the decision-making, be informed of the obligations of the government under the contract and be allowed to object to the questionable provisions. She added that the public was informed only of the expenses the company passes to the government. The financial support private companies were receiving go unreported. The companies are also not required to disclose their profits. "If the process was transparent, we can voice our objections. Pero nalalaman na lang natin pag nadesisyunan na, meron ng nakapirma na obligasyon tapos sasabihin sa atin we must honor all our debts, we must honor all our contracts. Hindi naman tayo isinama sa pagdedesisyon ng mga kontrata't obligasyon na yon pero pinapabayad pa rin sa atin. That's the injustice of all of that," Pascual said. (We only get to know of the obligations after the contracts have been signed and we would be told that government must honor all debts. We were not part of the decision-making but are also asked to pay these obligations.) The government honours the provisions of the contract "99.9 percent of the time," Reside said. "Put in a tight situation, the government may resort to additional foreign debt to pay its obligations," he added. (With Richelle Joyce Figueroa) GMANews.TV