Public to bear costs of state-guaranteed profits in LRT privatization

The regulatory risk guarantee was designed precisely to protect the commercial interests of the private business undertaking PPP projects from such outside intervention. Economic managers behind the regulatory risk guarantee have cited the case of the South Luzon Tollway Corp. (SLTC), the private operator of the South Luzon Expressway (Slex), which the SC stopped in August 2010 from implementing a more than 250% toll hike already approved by the Toll Regulatory Board (TRB). Bayan Muna party-list congressman Teddy Casiño also filed a House resolution seeking for a suspension of the toll increase pending a legislative inquiry.

In reality, while the DOTC officials are trying to differentiate the LRT 1 privatization’s top-up subsidy from the controversial guaranteed ROI of earlier PPP projects, they are giving an even more favorable setup (and more disadvantageous to the public) to the private concessionaire.

The 250-percent Slex toll hike arose from the guaranteed 17-percent ROI for SLTC as written in its 2006 Supplemental Toll Operation Agreement (STOA) with the TRB. But the guaranteed ROI was rendered meaningless after the SC issued its TRO (although it was eventually lifted more than two months later). The top-up subsidy eliminates risk of reduced profits due to an SC TRO or any outside intervention.

More profits through commercial development

On top of expected profits from fares and guaranteed periodic fare hikes, the winning LRT 1 bidder is set to enjoy additional cash flows from project land and commercial development based on the draft agreement’s Section 11.4. In Section 20.7.a on Commercial Revenue, the deal says “The Concessionaire shall be entitled to make arrangements for and charge for and collect the Commercial Revenue generated from the Project subject to Relevant Rules and Procedures.”

Developing and leasing commercial spaces on LRT 1 stations and depot, plus advertising, are potential sources of income for government that critics have long suggested could be maximized, instead of resorting to steep fare hikes and/or privatization. The country’s LRT and MRT system has very low non-rail revenues which include earnings from commercial development and advertising.

A 2007 study by the Japan Bank for International Cooperation (JBIC), cited by Senator Francis Escudero, said that LRT’s non-rail revenues is equivalent to a paltry 2.6% of its total revenues while neighboring countries earn more than a fifth of its revenues from advertising and commercial leases. There is thus room to generate more revenues from commercial development for government if the government retains the LRT 1. Such potential source of income will also be transferred to a private business under privatization.

No need for privatization

The Philippines is among the first Third World countries to implement massive privatization of infrastructure development and operation. Early efforts were prodded by conditionalities attached to loans from the World Bank, International Monetary Fund (IMF) and the Asian Development Bank (ADB) in the 1980s and 1990s. Some of the big-ticket items already privatized are Napocor assets, the Metropolitan Waterworks and Sewerage System (MWSS), the MRT, super highways like SLEx, etc.

Through the years, the people were made to pay the soaring and exorbitant user fees charged by the private concessionaires. Meanwhile, government debt and deficit still continued to balloon. Ironically, it went on ballooning due also to the privatization deals that in the first place were implemented supposedly to ease the fiscal pressure on public coffers.

Unfortunately, despite this sorry record of privatization, the Aquino administration’s PPP program is just continuing this discredited policy as in its effort now to privatize LRT 1. So far, Aquino has not yet offered a compelling reason for privatizing LRT 1.

Unlike with the heavily indebted Napocor and MWSS, the LRTA – the government operator of the LRT system – is earning enough revenues to finance its operation and maintenance (O&M). In 2012, the LRT 1’s gross revenues even increased by almost 10-percent while its farebox ratio – the proportion of fare revenues to total O&M expenses – improved from 1.10 in 2011 to 1.31 in 2012.

A farebox ratio of 1.0 means that fare revenues can cover all of O&M costs. Improving, modernizing and extending the system to Bacoor, Cavite would certainly require additional investments but this is where the national government could pitch in.

Aquino could not argue now that the government cannot finance such investment. If it is willing to incur more debts to guarantee the profits of whoever will win the LRT 1 project, why can’t it make the necessary investments such as through bilateral loans under concessional terms?

When Malacañang insists on increasing the fares for LRT and MRT, it argues that the government could no longer subsidize the system. Yet, it is willing to subsidize the profits of the prospective LRT 1 operator?

As a mode of mass transportation LRT 1 is a public investment imbued with public interest. It was never designed nor intended to squeeze profits from commuters but to provide a reliable, efficient and affordable system of transportation for workers and employees, students, the self-employed, the riding public. Its true measure of viability is the social gains it creates for the people and the economy, not the private profits for say, the Ayalas or Pangilinans, Angs or Cojuangcos, and their respective foreign partners. As consumers have been telling the government, “there’s no need to privatize the LRT.”