ASSET MANAGEMENT RISK IN FIRST BOT TRANSPORTATION PROJECT IN THE PHILIPPINES

Rommel C. Gavieta MA (URP) MSc (Eng) Asia Rail 2006 international Congress Shangri-la Hotel Kowloon, Hong Kong

Part 1

Infrastructure Development Indicators

Sustainability of Asset Management of Infrastructure Projects and Millennium Development Goal

Demand Driven Urban Infrastructure in the Philippines

Private Sector Returns in S.E Asia and Public Sector Investment

Comparative Initially Private Sector Developed LRT projects in South East Asia

Index of Traffic Stress on Network

Capacity

Actual Ridership

Concess ion Type

Status of Lenders

Status of Private Sector Investors Nationalized Nationalized Nationalized GOCC GOCC

Restructuring under negotiation Restructuring under negotiation Restructuring under negotiation

Cost (US$ (million) per Kilometer 36.00 53.00 33.00 40.00 57.00 40.00

Cost per Kilometer Benchmark (World Bank) 30-75 33-75 30-75 27-66 33-75 27-66

Malaysia

1.6

Monorail Putra Star

200,000 500,000 600,000 350,000 450,000 450,000

60,000 170,000 140,000 350,000 200,000 450,000

BOT BOT BOO GOCC GOCC BLT

Updated payment Updated payment Updated payment Updated payment Updated payment Updated payment Lenders were discounted by as much as 40% Lenders were discounted by as much as 40%

Philippines

13.11

LRT-1 LRT-2 MRT-3 BTSC (Sky Train) BMCL (Blue Line)

Thailand

4.45

600,000

400,000

BOT

155.00

60-180

600,000

250,000

BOT

59.00

30-75

Source: Best Practices For Private Sector Investment In Railways, TERA Internatonal Group, INC. (TERA). Asian Development Bank and the World Bank Group, March 2006

Part 2

Lesson in Public Sector Provided LRT Projects

Lessons in Public Sector driven Projects focused on Development Risks in S.E. Asia and not on Asset Management Risks

Advantages of public rail developer approach: as a single entity with consistent organizational objectives and fewer conflicts of interest allows cross-subsidizing rail construction; possible to plan and implement, in a concerted fashion, a variety of development projects that will increase transit ridership; and with no profit motive and more concern for improving public welfare, upfront investment well ahead of the project implementation can be justified for achieving the smooth undertaking of a project. Disadvantages of public rail developer approach: World Bank studies have shown that public sector infrastructure projects had a minimum average of 30% cost overrun and a minimum average of 40% time overrun.
(STUDY FOR DEVELOPMENT OF URBAN TRANSPORT STRATEGIES: Interim Report, PADECO Co. Ltd. International Bank for Reconstruction and Development, April 2000)

State of Asset Management in Rail Projects in Asia

CONTRACT NO. 7133241: BEST PRACTICES FOR PRIVATE SECTOR INVESTMENT IN RAILWAYS FINAL REPORT; Prepared By: TERA INTERNATIONAL GROUP, INC. (TERA) 107 E. HOLLY AVENUE, SUITE 12 STERLING, VIRGINIA 20164, U.S.A. TELEPHONE: ++1-703-406-4400 FACSIMILE: ++1-703-406-1550 March 28, 2006 ASIAN DEVELOPMENT BANK AND THE WORLD BANK GROUP

Tariff Rate Setting Risks and Farebox Recovery Ratio for Asset Management in Transit Projects in the Philippines

LRT-1 started with PhP 1.00 flat fare and only piggy backed on the zonal fare structure of MRT-3 where the average fare rate is now PhP 12.50. LRT-1 increased its fare 4 times only and the average increase from 1986 to 2005 is 2% per annum. Learning from the tariff rate setting risks of LRT-1, the private and public sector partners in MRT-3 adopted a parametric formula that would annually adjust fare based on inflation and foreign exchange movements MRT-3 average fare rate is fifty percent cheaper than the same air-conditioned public bus average fare rate Farebox recovery ratio for Equity Repayment, Operating expenses, Maintenance Fees and others expenses is 32% at average fare rate of 12.50, 420,000 passengers a day and exchange rate of PhP 55.00 to US$ 1.00. (excludes debt repayments by another government agency)

Congressional Appropriation Risks in Public Sector Asset Management in the Philippines

View of Asset Management by the annual government appropriation Asset management sustains efficient operation of existing assets for economic growth and to build up investor confidence. However, the less than 1% of GNP prescribed allocation for rail asset management is a result of:

Public Sector Salary and LGU budget that allocation crowds out allocation for Asset Management or O&M. In the Philippines, budgetary allocation for asset management used to be as high as 5-6 percent of GNP. Less than 2% of GNP budgetary allocation and tariff rate setting constraint will lead to a cycle of deterioration of assets starting lack of budget, to poor service, to a weak revenue base and to finally poor asset management.

Asset Management from the Point of View of South Asian LRT Passengers

STAR and Putra LRT Operation Passengers Perspective: Putra breakdown FIRST-CLASS infrastructure, Third-World mentality. High-tech driverless Putra LRT, bottom-rung maintenance.
(http://thestar.com.my/news/story.asp?file=/2006/10/7/focus/15659509&sec=focus)

MetroStar Express (MRT-3) Operation Passengers Perspective: Breakdowns are seen as precursors to fare rate increases of the Metro Manila Transit System.

BTSC and BMCL Operation Passengers Perspective: Major problem has been in the integration of the lines with the existing transportation or highway system.

Part 3

Light Rail Transit Projects in the Philippines

History of Mass Transit Systems in the Philippines

Transit development in the Philippines has had a 70 year tradition:

In 1878, Leon Monssour of the Spanish Department of Public Works in Manila submitted a proposal to Madrid for a streetcar system. In 1888, Jocobo Zobel de Zangroniz (businessman), Luciano M. Bremon (engineer) and Adolfo Bayo (banker) formed La Compaia de Tranvias de Filipinas to operate the 5 Line concession horse drawn tranvia system. In 1903, Charles M. Swift formed the MERALCO to establish a 12 twelve line electric street car system. In 1984, President Ferdinand Marcos presided the opening of the first elevated LRT system in SE Asia In 1988, President Corazon Aquino solicited bids, in 1998, Fidel Ramos presided in approval of the concession and in 2000 President Joseph Estrada presided in the opening of the first BOT LRT project in SE Asia.

Mass Transit System of Metro Manila 1984 to the present

Asset management is critical to ensure a critical public service to 1,000,000 passengers a day along the

45 kilometer transit network.

MRT-3 line carries 450,00 passengers a day along the 2 million commuters a day in the heaviest traffic corridor of Metro Manila LRT-1 line carries 350,000 passengers a day along the second heaviest traffic corridor of Metro Manila LRT-2 line carries 200,000 passengers a day along the fourth heaviest traffic corridor of Metro Manila

LRT-1 Project Development (ODA Financing) First LRT Project in S.E. Asia

Centralized and top down approach to project development in the Philippines ODA financing does not seek to ensure the viability of farebox revenue collection because the source of repayment of the ODA loan is the republic.

In 1986, LRT-1 started operations with a 5 minute interval between trains and capacity of 350,000 passengers a day.
By 1990, LRT-1 operations deteriorated to a 15 to 30 minute interval between trains due to premature wear & tear, cannibalization to manitain residual service and speed restrictions to avoid damaging the support beams in the Central Station. By 2000, residual service led to a massive refurbishing and structural capacity expansion program which is still being implemented today.

LRT-1 and LRT-2 Asset Management Model (ODA Financing)

Between 1984 to 2000 asset management budget requirement was subject to tariff rate setting risk and government appropriation risk Lack of budgetary appropriation and a militant public sector labour union resulted to frequent system breakdown and strike lockouts of the LRT-1 System. By 2000, LRTA took over maintenance of the 64 Belgian LRVs and the LRT-1 system. In 2001, LRTA secured an ODA loan for the rehabilitation of Belgian LRVs and secured two ODA loans to acquire additional 28 Adtranz LRVs and 48 LRVs from Kinki Sharyo After 2005 and the lessons learned pre-2000 asset management practice, LRTA implemented in LRT1 and LRT-2 the outsourcing of rail maintenance services and retained in-house the procurement of spareparts and consumable.

Current Experience: 1. Payment to the rail maintenance services of subjected to government appropriation risks
1.

Procurement of spare parts and consumables has a 15 month backlog due to government appropriation risks and lengthy government procurement process.

LRT-3 Project Development (Project Financing)

Maintenance Fee for asset management was fixed at a lump sum monthly base fee of US$ 1.2 million inclusive of materials, labour and mid-life major repairs of the system and trams by the end of the 10th year. Maintenance Fee non-payment is ground for declaration of an event of default by the Project Lenders.. Maintenance Fee payment of Sumitomo Corporation is subject to penalty clause if the daily availability of the LRT-3 System less than 80%.

Sumitomo Corporation is the Single Point Responsibility contractor for the Civil/Electro-MechanicaI and LRV Works

15% Internal Rate of Return of the private sector proponent, Metro Rail Transit Corporation (MRTC) is linked to 80% availability of the LRT-3 System.

Metro Rail Transit Corporation (MRTC) invested US$ 190.0 million and guaranteed to the DOTC project cost of US$ 679.0 million and project period of 2 years.

Lessons for Asset Management and Private Sector IRR Link

Lesson Learned from LRT-1 for Asset Management Select electro-mechanical vendors which has minimal market merger/acquisition risks like Adtranz for signalling systems and corporate bankruptcy risk like Tatra for for the 73 CKD trams.

Payment of maintenance fees was subjected to Congressional Appropriation Risks and Tariff Rate Setting Risks and event of default was not triggered by Project Lenders in consideration of fiscal constraint and timely payment of debt obligations.

Lessons for the next LRT projects Acquisition the main components of a transit project from a company that will not close down.

Maintenance fee payment is subject to tariff setting and government appropriation risks. In the future, it will be proposed that government setup a revolving letter of credit to ensure payment for asset management of a critical transportation system. .

The End
Thank you for your time and patience Rommel C. Gavieta MA (URP), MSc (Eng)
Vice President, Metro Rail Transit Corporation Professor, Graduate Business School De La Salle University Research Associate, York Center for Asian Research