NorthRail gets new life from Japan

NorthRail was China’s flagship project here that got killed in the flurry of corruption charges during the last years of the Arroyo administration. Last week, Japan granted a loan amounting to 241.991 billion yen (approximately P93.457 billion or about $2 billion) to do the Tutuban to Malolos segment of the NorthRail line that is supposed to go all the way to Clark.

I am told the specifications of the project to be funded by Japan are different from the Chinese version. No details were immediately available on how the two versions differ. The only thing clear now is Japan’s agreement to finance the project.

Of course, we are happy that the stalled North- Rail project may get restarted. But is the Japanese offer cost effective? Are the terms of the loan agreement better than the usual JICA packages we get? It should be.

After Japan lost a high speed rail project in Indonesia to China, there was this report by Reuters that Japan will ease development loan conditions for infrastructure projects in Asia. I hope we are the first beneficiary of this policy change.

Reuters reported sources told them Prime Minister Shinzo Abe would unveil the new policy. Japan, according to Reuters, would facilitate yen loans to cash-strapped developing countries by making flexible application of the rule that currently requires a 100-percent loan guarantee from a borrower’s government. This is something Japan learned from its experience with Indonesia.

Reuters quoted Gatot Trihargo, deputy assistant for the state-owned enterprises ministry, that Indonesia picked China over Japan for the rail project because “the government of China has courage not to ask for guarantees from Indonesia.”

The Reuters story also reported “President Joko Widodo’s administration preferred, China’s proposal because it was less burdensome and promised a larger share of technology transfer than Japan.”

The Indonesia source told Reuters “other countries like Japan and Germany request government guarantees, we cannot afford this because our budget is limited.”

The Reuters story saw “the high-profile contract is a victory for Chinese President Xi Jinping’s ‘One Belt One Road’ initiative to build a network of ports, trains and expressways to help expand trade, investment and influence in the region.”    

China Railway International Co. Ltd. and a consortium of Indonesian state companies will build the 150-km Jakarta to Bandung rail line. China will hold 40 percent of the venture, which will use as much Indonesian material, machinery and workers as possible, according to Xie Feng, China’s ambassador to Indonesia.

I realize the Indonesian project is different enough from our NorthRail to be easily compared. Since we know so little about the terms of the Japanese deal, we can only compare what details are publicly available.

The Japanese loan offer for the NorthRail project at $2 billion divided by 34-kilometers comes up to roughly $60 million/km of rail line. The Chinese project for Indonesia at $5 billion divided by 145 kilometers comes to around $35 million/km.

And because China is providing the loan without requiring any “sovereign guarantee” unlike in our current rail projects whether ODA or PPP, the Indonesian government may have more leeway in terms of fare rates and profit levels.

NEDA will go through the motions of final approval, at the behest of DOTC. But it is doubtful the project will move at DOTC given the Aquino administration has just seven months to go.

I asked the Japanese embassy for more details and the economic section responded “JICA will conduct a detailed design funded by a Japanese grant starting in January 2016. It will take a little over one year to finish the study.”

Japanese funding of a long needed project should be easily seen as good news. But our experience with similar ODA funded projects hasn’t been all that good. Now, we have the Chinese deal with Indonesia to compare it with.

First of all, the project loan is denominated in yen at the equivalent amount of close to P100 billion. The forex risk we face with a yen loan is a big concern. The concessional interest rate may be overshadowed by an upward movement of the yen, as had happened to us in the past.

I remember one of the first priorities of Ping de Jesus at NLEX was to repay initial yen denominated loans as soon as he could, precisely to remove the yen revaluation risk. Ping was able to get local banks to come up with a peso denominated financing package which suited the peso income NLEX generated.

There has to be a way to mitigate the forex risk. Maybe Japan can provide us an acceptable form of foreign exchange risk cover.

Then there is the more basic question: Why are we borrowing abroad when we have so much liquidity here? Can Japan do something radically different like buying a special peso denominated bond issue and use the peso proceeds to finance the rail project?

That protects us from forex risk and helps use excess local liquidity. It may sound absurd because it has never been done before and favors the beneficiary country more than the donor. It can only happen as a very special concession from Japan. Should we ask? Or should Japan offer?

Then there is the cost of the project at P93 billion for such a short line. The P93.4 billion JICA loan is just for the 34 km Tutuban to Malolos rail line. That translates to roughly P3 billion per kilometer. Isn’t there a less expensive option? We likely do not need all the bells and whistles the Japanese consultants want.

What kind of train service do we really want? As a friend of mine who worked with NorthRail pointed out, “do you want to achieve: commuter service to spur development of all those Bulacan and Pampanga towns, or high speed to open up Clark and a second international airport to development (as well as logistics connectivity to the Subic port down the road)? Looks like both objectives are mutually exclusive.”

As with almost all ODA, there will be a bias for Japanese contractors to provide services and the trains. If Japan really wants to help us, they can let us manufacture and fabricate all coach bodies including all interiors as well as rails in the Philippines. This will also transfer manufacturing technology. China is supposed to be ready to do this for Indonesia.

It would be best if we could see this rail project outside of our current problems with China. The territorial dispute and the sad experience with the NorthRail forced us to shut out China and for good reasons too.

China bullied us not just in the West Philippine Sea, but also in forcing us to pay for the NorthRail project that produced almost nothing. We had to pay all loans dispensed for the aborted project, most of which were suspected payoffs to some Filipino politicians.

According to a story in the South China Morning Post Feb. 1, 2013, “the Philippine government and China’s Export-Import Bank quietly signed an agreement last year for Manila to repay a concessional loan for the now-scuttled North Rail project…

“National Treasurer Lea de Leon yesterday confirmed to the South China Morning Post that Export-Import Bank of China (Eximbank) and Manila have agreed on the repayment of the loan amount disbursed, which amounted to $180.8 million, plus interest of three percent due yearly.

“’Instead of payment in one lump sum, this would be paid in four equal tranches starting 2012 to 2014,’ De Leon said. ‘We have already paid about $46.1 million last September.’

“Even as Manila is repaying the loan, the Philippine government has confirmed the row between state-owned North Luzon Railways Corp. (NorthRail) and its contractor Sinomach over the controversial railway project has been submitted before the Hong Kong International Arbitration Center.”

An independent survey valued the work completed by the Chinese contractor at just $100 million, but claimed by Sinomach at about $200 million. The contract had been terminated, and arbitration is now almost two years and still not concluded. The Chinese company wants to recover another $100 million in the arbitration process.

On the other hand, there is now so much goodwill with Japan, specially with their offer to provide us with essential national defense assets. The Japanese Emperor is also set to make an unprecedented state visit here early next year.

Or maybe, it would be better to just do a PPP with a local conglomerate using more reasonable specifications. We probably do not need ODA for this project.

Hopefully we are not accepting a less advantageous deal with Japan because we no longer want to deal with China, or because DOTC hates unsolicited offers of private Filipino conglomerates. Expensive projects like these should be vetted purely on the merits.

Boo Chanco’s e-mail address [email protected]. Follow him on Twitter @boochanco