MANILA Oct 15 Images of a portion of the
Philippines' oldest light rail transit line ablaze in the middle
of the night were exactly what private sector bidders for a $1.4
billion rehabilitation of the country's rail system had feared.
The fire last week, caused by a short circuit that ignited
power cables lining the tracks, was the second on Manila's
elevated rail system in two months and one of many mishaps in
its 29-year life - telltale signs that Southeast Asia's first
light rail transit (LRT) network is in dire need of an upgrade.
The reliability of the decrepit rail system, without a
government warranty on its performance and potential stiff
penalties for operational delays, is one of the reasons for last
month's failed tender for LRT 1's expansion and upgrade, the
biggest in a series of public-private partnership (PPP) deals
worth at least $4 billion Manila is offering to investors to
further boost growth in one of Asia's fastest-growing economies.
Of the four groups prequalifed to bid, three backed out at
the last minute: DMCI Holdings Inc with Japanese
partner Marubeni Corp, SMC Infrastructure of San Miguel
Corp, and Malaysian-Korean MTD-Samsung C&T consortium
That left Metro Pacific Investments Corp as the
lone bidder submitting a conditional bid without partner Ayala
"There is no record at all of extensive rehabilitation,
maintenance, or infrastructure testing in its years of
operation. That is a significant risk," said a senior official
at one of the conglomerates who asked for anonymity because of
the sensitivity of the issue.
"(If) a segment of that old system falls apart and the
accident leads to a catastrophic result, it will be the
concessionaire who will be blamed," he said, adding there were
steep financial risks via penalties and unrealised profits for
each day the rail system is not operational.
The country's top conglomerates and some of the region's big
capitalists had initially jumped at the opportunity to fix what
the latest Global Competitiveness Report of the World Economic
Forum says is the top problem in doing business in the
Philippines - inadequate infrastructure.
But delays and problems with PPP projects three years after
the programme was launched are clouding prospects of an
infrastructure boost to sustain economic growth at 7 percent or
higher and bring down the country's jobless rate, which at 7.3
percent is the highest in Southeast Asia.
Underinvestment, including in infrastructure, along with the
government's failure to transform protectionist policies and
liberalise more sectors, have contributed to the country's high
unemployment and underemployment rate, the World Bank said in a
report on jobs in the Philippines last month.
The government has said it needs to raise infrastructure
spending from around 3 percent of GDP now to 5-7 pct of GDP, or
by about 300 billion to 500 billion pesos ($6.95 billion to
$11.59 billion) annually, to keep pace with its regional
neighbours and sustain its growth momentum.
Officials from some of the bidders said they knew as early
as a year ago the LRT 1 project was not going to fly because the
government wanted to pass on what bidders called "excessive"
technical, economic and even political risks to the private
sector with inadequate returns.
They conveyed their concerns to the government repeatedly,
during some of the four one-on-one meetings, around 10 small
group gatherings and more than 100 emails prior to the bid, but
to no avail, the companies say.
Transportation Secretary Joseph Emilio Abaya said the
government listened to the companies and changed some of the
terms to address concerns.
"We have always kept our ears close to the ground. That's
why we spent days, weeks on one-on-ones and answered more than a
thousand questions. There were no alarm bells and red lights
that came to me days before the bid date," he said in a mobile
phone text reply to questions from Reuters.
"We are learning and we want the PPP projects to push
The bidders objected to paying real property tax on the
rail's expanded 29 km (18 mile) line, since Manila has not paid
the tax in the 29 years it has operated LRT 1. The official from
the first conglomerate said their calculations showed those tax
payments alone would reach 64 billion pesos over the 35-year
life of the contract, higher than the project cost.
But their biggest concern was the low tariff setting, which
bidders say makes the project unbankable. For LRT 1, Manila is
not offering a fixed level of return, unlike in earlier deals.
Using the latest approved fare structure as a basis for the
bid, the average fare being set by the government was just a
fourth of that in Bangkok, even though rail development costs
were similar except for cheaper labour in the Philippines, the
official from the first conglomerate said.
Bidders also lament that Manila could not guarantee tariff
hikes, a politically charged issue in a city of about 12 million
people where the daily minimum wage is under $12. Manila has not
imposed a fare hike in more than a decade on any of its three
light rail lines due to stiff public opposition, a track record
which bidders say could lead to a cash flow squeeze.
"Government should understand they should eliminate risk -
risk of income tax, risk of real estate tax, regulatory risk,
there are so many risks," said Isidro Consunji, president of
DMCI, one of the firms which dropped out of the bidding.
WAR AGAINST GRAFT
For the government of President Benigno Aquino, whose
campaign battle cry in 2010 was to end corruption especially in
state contracts, the PPP programme was a chance to show the
investment community it meant business in its war against graft.
"We want to make sure that the contracts are not onerous and
can stand scrutiny beyond this administration," said Cosette
Canilao, head of the state agency tasked to oversee the
country's PPP drive. "We're making sure that tariffs are not too
high and that the level of service is being met."
But the drive to ensure less risk exposure to the government
is holding up PPP projects, bidders say, with only two out of a
wish list of 35 projects getting off the ground.
State officials are afraid contracts they have signed will
haunt them after Aquino's term ends in 2016, just like what is
happening to several cabinet and top officials of the previous
government of President Gloria Macapagal Arroyo, herself under
detention for a year now on plunder charges.
Private sector sources say they are encouraged by the
government's shift in tone after the LRT 1's failed tender.
Officials are considering a subsidy and dropping payment of real
property taxes ahead of the rebidding of LRT 1 early next year.
Manila is also putting up a 30 billion pesos contingent
liability fund in the 2014 budget to finance possible breaches
in tariff setting, and considering a 5 percent increase in the
tariff upon completion of the 12 km line extension.
Some of these revisions, however, need the approval of an
inter-agency board headed by Aquino, who is sidetracked by some
major security and political concerns.
With only about 2-1/2 years left before the country's most
popular president steps down from office, the private sector
hopes big PPP projects will at least be awarded during his term.
"We have already reached a point where time is running out
on the implementation of these projects," said Ramon del Rosario
Jr, chairman of the influential business lobby group Makati
Business Club. "But I am still hopeful that the government will
get its act together."
$1 = 43.155 pesos
(Additional reporting by Karen Lema and Niluksi Koswanage in
Kuala Lumpur; Editing by Emily Kaiser and Mark Bendeich; Editing
by Emily Kaiser)