2011 April Private Public Partnership Model in Integrating ODA Developed LRT1and BOT Developed MRT3 Projects China Final2

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Pro ropo posed sed Int Inte egr gra ati tion on and Re-Pri rivatiza vatizati tion on Mode Mod el of ODA-De OD A-Devel velop oped ed LRT L RT1 1 & BOTBOT-De Dev v elo eloped ped MR MRT3 T3 Projects

Rommel C. Ga Gavieta vieta MA (URP (URP), ), MS MSc c (E (Eng) ng) Vice Presid President ent Metro Metro Ra Railil Tra Transi nsitt Developm Developm ent Corpor ation Senio Se nio r Professior al Lecturer, De De La Salle Salle Universi Universi ty (MBA (MBA Program) Research Resea rch Asso ciate, York York Ce Center nter f or Asian Research, Research, York Universi ty Beijing, China  Ap r i l 2011


Phil hilipp ippine ine Ma Macro cro--econ conomi omic c and Proj roje ect Financing Indi ndicators cators


Fisc isca al Poli olicy, cy, Publ Public ic Debt and Lende Lender’s r’s Secur curity ity Requi quireme rements nts

Benchm Benc hmark ark Debt to GDP Ratio (19 (198585-200 2002) 2)

Indu In dust stri rial al Co Coun untr trie ies: s: 75 75% % of of GDP GDP

Eme merrgi gin ng Mar Mark ket et:: 25% 25% of GD GDP P

Old Do Doctrine: 60 60%

Phililip Ph ippi pine nes: s: 57 57% % in in 201 2010 0 fro from m 65% 65% in 20 2001 01

Philip Phil ippi pine ne Deb Debtt was was PhP2 PhP2.2 .2tr trilillilion on in in 2002 2002 and and now PhP4.5trillion in 2010

Declin Decl ine e in Deb Debtt to GDP GDP ra rati tion on is is more more a res resul ultt of the peso appreciation since the stock of debt has increased and not decreased from 2001

Source: Diokno, D.; How Deeply Indebted is Citizen Pinoy; BuinessWorld; June 16, 2010; Philippines


Public Se Sector ctor Gua Guarantee rantee sho uld be b e limited to 1. Ex Extr trem eme e Fore Foreig ign n exch exchan ange ge rat rate e guar guaran ante tee e 2. Extreme Inflation rate 3. Tariff rate setting

Fiscal Policy 1. In th the e lon long g run run,, dev devel elop opin ing g Asi Asia a mus mustt

2. 3.

rebalance its export growth model. Care Ca refu fulllly y de desi sign gned ed fis fisca call sti stimu mulu lus s can can he help lp restore stability and growth. Infr In fras astr truc uctu ture re pro provi vide des s the the opp oppor ortu tuni nity ty to rai raise se employment and growth quickly.

Source: Asian Bank, Crisis Challenges forDevelopment developing Asia developing and“Global ADB’s Economic ADB’s Responses”, Response s”, April 2009


quit ity y Effective Effecti ve Rate Rates s of o f Retu Return rn Equ




Debt Mark rke et and Pro roject ject Fin ina anc ncin ing g Int nte erest Rates Rates

Total External Debt: http://data.worldbank.org/indicator/DT.DOD.DECT.CD/countries/PH-TH-MY-ID-4E7E?display=graph


Publ ublicl icly y and Privately Privately Adm Admini inistere stered d LR L RT Proj Proje ect Background Backgro und Info Information rmation Phil Philipp ippine ine Experience


Tranvia and LRT Development in the th e Phil hilipp ippines ines Philip pine Philippin e Tra Tram m and LRT Histor Historical ical Development 

1882 La 1882 La Com Compañ pañia ia de tra tranvi nvias as de Filipinas

1903 Manila Electric Railroad and Light Company

1984 Light Rail Transit Authority (Government Owned and Controlled Corporation) independent of energy links

1998 MRT-3 build as a BT project with Metro Rail Transit Corporation with Real Estate Development Rights.

2009 DBP/LBP bought 23% of MRTC and 99.9% of MRT3 Equity Rental Payment receivable from DOTC


Infr nfra astr struct ucture ure Re Requi quireme rements nts of SE Asia and and the Phil Philipp ippines ines Traffic Corridor Corri dors s of o f Metro Metro Manil nila a

North Triangle Cubao East Wood  Ayala  Ay ala


Fort Bonifacio

Major traffic corridors in Metro Manila based on MMUTIS Study

Metro Manila Mass Transit System

 As of 2010, World Bank Bank recommended

The LRT/MRT systems systems that were identified after the completion completion of the

7% of GDP investment in infrastructure which is greater than the 2% of GDP investment in infrastructure in the Philippines

MMUTIS were determined to be market driven projects which are prime candidates for PPP undertaking with sovereign guarantees for tariff rate, FX and Inflation.


LRT LRT1 1 and and MR MRT T3 Techn Technic ical al and Market-D arket-Dri riven ven Project Pro ject Comparison LRT1

1980: Belgian ODA (PhP300million or US$16million) and commercial (PhP700.0million (PhP700.0million or US$ 37.45million 37.45million)) 15 km, 18 stations and 32 LRVs 1996-1999: Japanese ODA Phase 1 ¥11billion (7 4-car LRVs) and balance of debt payment is approximately US$59million 1999-2009 Japanese Japanese ODA Phase2 ¥22billion ¥22billion (12 4-car LRVs and refurbishment of civil/electro-mechanical civil/electro-mechanical systems) and balance of debt payment is approximately US$253.0million US$253.0million 2004: Belgian ODA ODA €12.3million €12.3million (Refurbishment of 63 LRVs LRVs and spareparts) and balance of debt payment is approximately US$17million LRT1 ODA Debts are not tranferrable. t ranferrable.

Ridership of LRT1 is 350,0 350,000 00 passengers passengers a day

Maintenance agreement Maintenance agreement oblig ates the m aintenance service provi der to ensure availability availability of maintenance personnel and generate genera te annual spare part part p rocur eme ement nt requi rement for the LRTA LRT A to pro cure.

MRT3  Phase1: US$675million US$675million 16 km, 13 stations stations and 73 LRVs and balance of equity rental fees is US$1.9billion  Phase2: US$15.0million US$15.0million to refurbish LRT1 North Extension ElectroMechanical systems  Procure $300million $300million 75 LRVs phase 1 capacity expansion expansion and additional US$300millio US$300million n 75 LRVs for MRT3 Phase2. Phase2.  Monumento to Caloocan Extension US$80milli US$80million on and US$ US$50million satellite depot. 

Ridership is 500,0 500,000 00 passenge passengers rs a day with a potential ridership of 88 8880 80,0 ,000 00 passengers passengers a day

Maintenance agreement Maintenance agreement ob ligates th e maintenance provider to ensure 80% ava availability ilability of the MRt3 system.  Asian Development Development Bank 2010 2010 Key Indicators Indicators


LRT1 and MRT3 MRT3 Re Reven venu u e and Remaini Remain i n g Debt Surp urplus lus//Defic ficit it Comparison Compariso n

Original Origin al 25-y 25-year ear (20 (2000 00 to 202 2025) 5) bac backe kende nded d Equ Equity ity Rep Repaym ayment ent Pr Profi ofile le isn isntt ide ideal al bas based ed re reven venue ue and exp expens ense e matching and will result in a negative US$ 469million cashflow

Tradition Tradit ional al 10-ye 10-year ar (200 (2000 0 to 2010 2010)) Equit Equity y Repay Repaymen mentt Profi Profile le is the ide ideal al and will will resu result lt in pos positi itive ve US$366million cashflow.


Mod ode els fo forr Integration Integratio n and ReRe-Pri rivatiza vatizati tion on of Ope Operati ration on and Main Maintenanc tenance e of LRT LRT1 1 and MRT MRT3


Hon ong g Kong Ko ng and Germ Germa an Trans Transit it Models Phi hililipp ppin ine e Exp Experience erience (M (MRT3 and and LRT LRT1 1 projects pro jects)) Hong Kon g MT MTR R Model

German Ge rman Transit Model

MTR Hong Kong

25% to 27% from Transit Revenue and 75% to 73% from Non-Transit Revenue


25% from Transit Revenue and 75% from National Government

Most German cities created a public works consortium combining utilities (gas, water, transit, etc.). Financial planning and transport planning are therefore integrated across the full spectrum of public services. Chislom, Gwen; International Transit Studies Program Report of the Spring 2000 Mission Germany’s Track-Sharing Experience: Mixed Use of Rail Corridors; Transit Cooperative Research ProgramRESEARCH RESULTS DIGEST March 2002—Number 47

Source: Hong Kong and German Financing Models to Minimize Subsidies Subsidies for Foreign Exchange and and Tariff Rate Risk for Market Driven Driven Transit Systems in the Philippines Rommel Gavieta; 2008 Metro Rail Conference Rome Terrappinn


Lo Lond ndon on Tub ube e PP PPP Mod ode el and Swedis wedish h Int nte ern rna ati tion ona al Deve evelo lopm pme ent Ag Age enc ncy y Water PPP PPP Mod Mode el Lon don Tube PPP PPP Model

Minimum Subsidy B idding (M (MSB) SB), potential service providers compete with each other and the enterprise that quotes the lowest amount of subsidy requirement becomes eligible for subsidy payments subject to fulfilment of specified level of performance (service provision) obligations.


Owners hip Ownershi p of o f MRT3 MRT3 Sys ystem, tem, MRT3 Bo Bond nds s and Metr Metro o Rail Rail Transi ransitt Corpor Corp ora ati tion on


DOT TC and MR MRT TC MRT MRT3 3 Relatio Relations nshi hip p Flow Flowch chart art DO


Typ ype es of o f MRT MRT3 Related Ass A sse ets Own wne ed by b y the t he Pri Private vate Sect ctor or,, and Pub ubic ic Sect ctor  or  

MRTC the corporation MRT corpor ation where the Private Private sector sector owns approximately 77 77% % (Metro Pacific Investment Corporation owns 51% and other private sector partners owns 26%) and its residual rights that includes the right to extend existing line, buy more trains and develop other lines.

Government Financial Financial Instit Institution ution owns o wns 23% 23% of MRT MRTC C and 77% 77% of the ERP RPs s thru Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP).

DOTC has paid 16% of the US$ 2.4 billion in Equity Rental Payments to MRTC which represents DO DOTC TC’s ’s pro pro-ra -rated ted ownershi own ership p of the MRT3 MRT3 Pha Phase1 se1 Syst System em as of yearend yearend 2010 2010. (This can be validated by DOTC Comptrollership Service)


G overnment O Opti ptions ons f or the th e Re Re-pri -privati vatiz zatio ation n of o ffor t he MRT the MRT3 3


DOTC Opt ptio ions ns to Redu duce ce its Sov ove ereign Backed Equi quity ty Rental Payment (ERP)s Obli bligations gations MR MRTC TC Status Quo on o n Remaini Remaini ng Equit Equ ity y Rental Rental Payment Scenario

MRTC Re MRTC Refin fin ances Remaini Remaini ng Equit Equ ity y Rental Payment Pa yment Scenario w ililll save s ave DOT DOTCU CUS$ S$31 318mill 8millio ion n

DOTC’s DOTC ’s guarantee for payment of $2.0 $2.01billi 1billion on (NPV (NP V $83 $836mill 6millio ion) n) ERP ERP will wil l remain unt il 2025 (as stipulated in DOJ letter to DOF dated May 8, 2007).

DOTC refinances $463million (NPV $192million) ERPs due to DBP and and LBP with $192million Leveraged Levera ged Balance Sheet Sheet Arbi trage structur stru ctur e willll save DOT wi DOTC C $21 $211mill 1mill io ion n (NPV (NPV $66 $66mil mil lilion) on)

DOTC refinances $1.55billion (NPV $644million) ERPs due to MRT3 Bonds Bonds due to DBP DBP and LBP wit h $644millio $644millio n of f-bala f-balance nce sheet loan and save DOTC DOTC $768mill $768mill io ion n (N (NPV PV $252 $252mil mil lilion) on)

TheTC proposed fee should be used by DO DOTC to help h elp concession defray payments fo r remaining $2.0 $2 .01billi 1billion on ER ERP P obligation obl igation .

TheTC proposed fee should be36 used byn DO DOTC to h elp concession defray payment of the $836 $8 millio mil lio refinancing of ERP obligation.

The concession fee that will be paid by PPP proponent will be used to pay obligations of the DOTC which it guaranteed with the full faith and credit of the Republic following a modified MWSS Privatization Model.


Savi ving ngs s for f or DO DOT TC as Ratio Rationale nale in Re-P Re-Pri rivati vatiz zin ing g Sa the th e Operati Operation on and Main Maintenanc tenance e of MRT3 MRT3 Phase1 Phase1 Sys System tem MRT


Total annual annual op era erating ting and maintenance budget is US$ US $ 435mill 435mill io ion n or an average average of US$ 43. 43.5. 5.0mil 0millilion on fr om 201 2011 1 to 2025. (Maintenance fee includes a

Total cumulative cumulativ e annual annual opera op eratin tin g and maintenance budget US$458million or an average of US US$ $ 45.8 45.8mil mil lilion on fro m 2011 2011 to 2025. 2025.

guaranteed 80% availability requirement),

Total amortization for a ten year US$375million loan with a 5% interest rate for MRT MRT3 3 Phase1 Capaci Capacity ty Expansion Project is US US$5 $596 96mil million lion (procurement of 75 Trains)

Maintenance fee does not include a guaranteed 80% system availability. Total amortization for a ten year US$1.53billion loan with a 5% interest rate for LRT LRT1 1 South Extension Project i s US US$1 $1.2 .2bill bill ion (procurement of 50 LRVs

Total amortization for a ten year US$ 400million with a 5% interest rate for MR MRT3 T3 Phase2 Phase2 Project is

and develop 16km guideway)

US$508million. (procurement of 75 trains, retrofit of

Total amortization for a ten year US$174mllion loan with a 5% interest rate for LRT LRT1 1 North Extensio n Project is i s US US$2 $222 22mill mill ion (to develop 5.5km

5.5 km LRT1 LRT1 Extension from North to Monumento and extend exten d MRT3 from Monumento Monumento to PNR Caloocan Caloocan Station)





Re Re--Priv Privatiza atizati tion on Strategi Strategies es for th the e DO DOT TC of th the e Operati peration on and Main Maintenanc tenance e of the t he LRT1 LRT1 and and MR MRT T3 Sys Systems tems Proposed Options for Public Private Private Partnership Modes to Reduce DOTC’s DOTC’s subsidy for Maintenance and Operating Expenses

Separately, DO DOTC TC sho should uld r efinance the remaining US$ 2. 2.0billi 0billion on Equit y Rental Rental Pa Payments yments (ERP) (ERP)s s due to MRTC MRTC by trigg ering the conditions set under the Equity Va Value Buyout provisi ons of the Build, Lease and Transfer Agreement.

Lease and Transfer Agreement.  



Conclusion Based on the Immediate effect on providing a more efficient public service, the refinancing of MRTC Equity Rental Fees is the most advantageous to the DOTC because: 

The integrati integration on and re-priv re-privatiza atization tion of the MRT3 MRT3 and LRT LRT will save save DOTC/LRTA DOTC/LRTA a total total of of US$3. US$3.5 5 billion in additional government guarantee to finance expansion and improvement plans of the LRT1 and MRT3 Systems.

Option 1 and 4 strategies for privatizations appears to provide the most advantageous conditions to the DOTC legally, financially and technically.

Regardless of the what options the DOTC DOTC takes the refinancing of the ERPs is paramount to reduce subsidy to thePhase1 MRT3 Phase System and enable the DOTC gain unencumbered and immediate ownership of the MRT3 System

The refinancing of rhe ERPs will save the DOTC at least least $250 million in NPV NPV by refinancing refinancing the remaining remaining $1.8billion Equity Rental Payments

DOTC can immediately privatize without any legal obstacles the MRT3 Phase1 System

DOTC will be able to realize for the public a more efficient and safe public service to the combined 850,000 passengers a day ridership of LRT1 and and MRT3.


Thank you


Pro roject ject Financing Financi ng after 2008 2008 Glo lobal bal Financia Financi al Crisis Cris is

Investment in n ew PPI Investment PPI proj ects conti nues to recover, but th e revival has been selective. selective. Projects reachin reachin g financial or con tractual closu re face face more diff icul t financial market conditions. Local st ate ate-owned -owned banks as well as mult ilatera ilaterall and bil ate ateral ral agencies agencies conti nue to be key key financiers, and and inf rastructu re sponsors are looking for new sources of funding such as local financin g . Projects cont inu e to be delayed delayed or, to a lesser lesser extent, canceled. canceled . The rate of project c losur e varies varies across sectors, with investment in the third qu arte arterr hig her in energy, telecoms, telecoms, transport and lower in w ate ater. r. The rate of project c losur e varies varies across developing deve loping regions, with i nvestme nvestment nt i n t he thir d quarter higher in South Asi a, stable in Latin A merica and East East A sia and Pacifi Pacifi c, and lower in the other thr ee ee.. Gree reenfield nfield projects conti nue to show growth in i nvestment (and (and d ebt raised), raised), while concessio ns and divestitures show a decline decline..

Public Private Infrastructure Advisory Facility-World Bank, PPI data update note 35, Assessment of the the impact of the crisis on new PPI projects – Update 5, “New private infrastructure activity in developing countries recovered selectively in the third quarter of 2009” 2009”,, February 2010


riva ately and and Publ Publicl icly y Proj Proje ect Admini Adm inistr stra atio tion n Comp Compa aris rison on Priv •  Av er erage age p u bl i c s ec ecto to r pr o jec t s uf f er ered ed 50% 50 % to 70 70% % time overrun ov errun s and 10% to 20% 20 % cost o verruns i n dollar dol lar terms. (Klien, So, Shin Transaction Costs in Private Infrastructure Projects—Are They Too High?, 1996, WB •

Non-PFI project suffered 37% time overrun and 46 46% % cos costt overrun . Of those projects that were delivered late, two thirds also incurred price increases.

(2008 Accounting Office Survey Survey UK). National Accounting PFII Pro PF Project ject s uff ered a 31% 31% ti time me overrun and 45% 45% cost overrun (NAO 2009 PFI Construction performance Report)


MRT3 3 (PPP) (PPP) and L RT2 (ODA) (ODA) MRT Proj roje ect Comp ompletion letion Cost (Phil hilipp ippine ine Experience) Experience)

NPV of PPP PPP developed developed MRT3 is less than NPV of original original ODA developed LRT2 project (with cost overr overruns. uns.

NPV of norma normalize lized d PPP PPP develop developed ed MRT3 MRT3 almos almostt equal equal to NPV of ODA ODA devel developed oped LRT LRT2 2

NPV of of normalized normalized PPP developed developed MRT3 is is less than NPV NPV of ODA develope developed d LRT2 (using MRT3 project cost) with

cost overruns  

Additi onal Ridershi Ridership p Capa pacities cities and Projection Projections s MRT3 Additional (2009 (20 09 to 202 2025) 5) 1,600,000.00 Phase 1 ridership


Phase 1 potential operating capacity


Phase1 and 1e ridership


Phase 1 and 1e potential operating capacity Phase1, Phase1e and phase2 ridership

800,000.00 Phase 1, Phase1e and Phase 2 optential Operating Capacity





















Phase Pha se 1: 1: 73 LRV LRVs s for 400 400,00 ,000 0 pass passeng engers ers a day day capac capacity ity at 3-c 3-car ar trai train n 3.5 3.5 minut minute e headw headway ay

Phase1 with Phase1 with Capac Capacity ity Expa Expansi nsion: on: with with 75 add additi itiona onall LRVs LRVs for 850, 850,000 000 pass passeng engers ers a day day capa capacit city y at 4-car 4-car trai train n 2.0 minute headway

Phase1,, Phase Phase1 Phase with with Capac Capacity ity Expa Expansi nsion on and and Phase Phase2: 2: with with additi additiona onall 75 LRVs LRVs for 1.25 1.25 mill million ion pass passeng engers ers a day day capacity at 4-car train 2.0 minute headway


Equ quit ity y Effective Effecti ve Rate Rates s of o f Retu Return rn

http://www.investorsfriend.com/return_versus_gdp.htm Bosworth, Collin, Chodorow-Riech; Returns On Fdi: Does The U.S. Really Do Better?; Working Paper 13313 http://www.nber.org/papers/w13313



Potential Sources of MRT3 Phase1 Concern for the DOTC

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