MRT 7 proposal going back to NEDA for re-evaluation

The proposed Metro Rail Transit Line 7 will have to go all the way back to the National Economic and Development Authority (NEDA) for a decision on whether or not to increase the profit ceiling for the project proponent.

Universal LRT Corp. (ULC), the consortium planning to take on the MRT 7 line, is asking for a higher rate of return than the 11.9 percent set by the NEDA Investment Coordinating Committee (ICC).

The Department of Finance (DOF) pointed out, however, that a higher rate of return would require a re-appraisal of the entire project and this would have to be taken up by the ICC.

Finance undersecretary Jay Singson said ULC’s proposal could not be decided on just by the Privatization Management Office (PMO) or the Department of Public Works and Highways (DPWH) since the fundamental financial assumptions would be affected by the adjustment.

"The proponent may not find that ceiling feasible but the government might not find that acceptable either," Singson said. "We have to go back to the ICC for something as fundamental as this."

According to ULC, a maximum rate of return of 11.9 percent to the MRT-7 investors is "very restrictive considering the risks that the investors are required to assume."

The proposed MRT 7 was approved by the NEDA-ICC last year under the build-operate-transfer (BOT) scheme. The project was initially estimated to cost $1.4 billion.

When completed, MRT 7 would run along Commonwealth Ave. in Quezon City up to Tala in Caloocan City, and the adjoining municipality of San Jose del Monte in Bulacan.

MRT 7 would likewise involve the construction of a bus-rail transfer hub to be located at the Tala Caloocan-North, connecting the line to the North Luzon Expressway by a private highway. It would also connect to Light Railway Transit Line 1 and 2 through the MRT 7’s elevated railway transit system.

"So far, the rate of return is the only contentious issue," Singson said. "There is no disagreement about the ridership or any other aspects of the project."

According to Singson, the NEDA-ICC will have to re-evaluate the financial details of the project and it would have to be approved by all the agencies sitting in the ICC including the DOF.

Singson said the government’s original position is likely to remain the same, primarily that the project should have no impact on the government’s deficit reduction program and that its contingent liabilities be reduced to the absolute minimum.

Sources said the DBCC is being careful to avoid the pitfalls of the MRT Line 1 project which was undertaken under the government’s build-lease-transfer (BLT) scheme. The government, in effect, pays both debt rental and equity rental.

Government’s debt rental payments are covered by automatic appropriations in the national budget. The equity rental payment was more problematic and has caused conflict between the government and the Fil Estate-led company.

Under the controversial BLT contract for MRT 1, government agreed to guarantee MRTC a 15 percent return on equity, a provision that has been harshly criticized for removing the pressure on MRTC to increase the usage of MRT Line 1 since its return was guaranteed by the government anyway.

The DBCC directive means MRT 7 will not be able to count on huge sovereign guarantees from the government when it goes to the market to raise funds for the project.

ULC said earlier that 75 percent of the project cost would have to be financed with loans and the remaining 25 percent would come from shareholders’ equity. Funding would commence within the next 12 months and the proponents planned to start construction within the next two years.