Nationalize?

A group representing the harried commuters of the MRT-3 asks government to nationalize the rail service. The proposal is very likely inspired by exasperation over the legal complications impeding purchases and maintenance of the utility.

Recall that, a few months back, the MRTC (the corporation that has legal ownership of the rail line under a horribly-designed BOT contract) went to court to prevent the DOTC from purchasing new wagons from a Chinese supplier. Under the terms of the BOT contract, they claimed, MRTC retains the right to make capital investments in the rail line.

Although government technically does not own the MRT, the rail service is managed by an agency under the DOTC. The general manager is Al Vitangcol, now under investigation for allegedly attempting to extort money from the Czech company Inekon in exchange for a contract to purchase new wagons.

Inekon is the supplier of the original wagons plying the line. A third of those wagons are said to be out of commission, being in disrepair. Those constantly overloaded wagons still in service will not last very long.

The new wagons were ordered from the Dalian company in China. Some experts doubt this company’s ability to fabricate wagons good enough to handle the MRT’s load. A prototype will be delivered towards the end of this year and there are no guarantees it will be good enough to service the line. If the prototype proves inferior, the MRT-3 will be half-serviceable for many years and commuters will spend more time lining up for a place on the train.

Inekon, by the way, was probably the wrong supplier to begin with. The company is a tram maker and the MRT is a light rail system. This might explain why the first generation wagons are yielding, one after the other, under the strenuous load. Soon, as we wait for the delayed deliveries from Dalian, we might have even less trains well enough to service the line.

A new unified ticketing system for all the light rail lines was awarded recently and promises to make things easier for commuters. That, however, might be negated by the antiquated signaling system that has made riding the MRT a perilous proposition.

Now we know that the electrical system that runs the MRT can only support a small number of trains. If we want to reduce turnaround time and increase the frequency of trips plying this line to accommodate the burgeoning passenger load, an entirely new electrical system will have to be installed.

At the moment, as in the case of the purchase of new wagons, we do not know if the additional investment ought to be made by MRTC or by government. It is an urgent investment to be done, given the rising ridership of the line. No one knows, really. 

The BOT contract covering the MRT is seriously flawed.

That contract allowed the original investors to funnel “aerial” income (inflows from selling advertising rights and renting out property on the line) to a separate corporation, the MRT Development Corporation. Everywhere else, this sort of income is used to offset the costs of operating the system to make fares more affordable for the commuters.

Even if, distant as this possibility might be, government decides to nationalize the MRT, the “aerial” revenues will flow to the original group of investors. Those investors, by the way, financed the construction of the line using loans covered by sovereign guarantees. It was as if government itself undertook the borrowing. That being the case, government ought to have made the investment and owned the facility to begin with.

This takes the cake: embedded in the contract is a provision where the Republic guarantees MRTC a 15% annual return on investments made (those “investments”, to underscore, funded by loans covered by sovereign guarantees).

A 15% return might have been normal during the nineties. In today’s low interest rate regime, that is an extremely profitable economic return.

The guaranteed return encouraged two unhappy outcomes. First, it removed any business incentive for the “investors” to improve the quality of service on this line and add investments to increase ridership. Second, it made it attractive to “securitize” the economic returns and cash in on the investments.

  Both unhappy outcomes happened. The rail service was hardly improved and the system-design was cruel to commuters. The “investors” did indeed “securitize” the income flows, cashed in on their investments and took the money to other profitable ventures.

The hefty 15% annual economic return forced government to heavily subsidize MRT operations. A rider paying a fare of P14 enjoys a subsidy of P45 each time he boards the train.

That hefty return was enjoyed for many years by the giant international investment banks that bought the bonds the MRTC issued. Those bonds expire on the same day that the contract ends (about a decade from now), eradicating any value in the common stock of the MRTC.

For government to nationalize this rail facility, it will have to buy back the shares and the bonds attached to them. After which, government must make the investments required to bring this line up to capacity. That will require a huge amount of money government might not be able to afford at this time.

Into the foreseeable future, it seems, we will have to endure the worst of all possible worlds as far as the MRT is concerned: a badly engineered rail line run by an inept public agency while the original investors have long ago laughed their way to the bank.