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Insight: Philippines infrastructure: taking the slow train to nowhere

A train operator on Southeast Asia's first light rail transit (LRT) network, which is 29-years-old, signals to a colleague in another train
A train operator on Southeast Asia's first light rail transit (LRT) network, which is 29-years-old, signals to a colleague in another train

By Rosemarie Francisco

MANILA (Reuters) - 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 Corp.

"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 unrealized 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 program 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 liberalize 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 neighbors and sustain its growth momentum.

NOT VIABLE

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 through."

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."

(Additional reporting by Karen Lema and Niluksi Koswanage in Kuala Lumpur; Editing by Emily Kaiser and Mark Bendeich; Editing by Emily Kaiser)

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