LRT 1: A showcase of PPP’s flaws

October 28, 2014

by superadmin

The LRT example shows how the government actively uses public resources to subsidize big corporate profit-seeking

IBON Features– The single most expensive Public-Private Partnership (PPP) project so far under the Aquino administration, the Light Rail Transit (LRT) 1 Cavite Extension rail project, was awarded last week to the Ayala-Pangilinan consortium, the Light Rail Manila.

The example of the LRT 1 extension project usefully illustrates how PPP deals are primarily designed to guarantee corporate profits rather than ensure affordable and accessible public services. It also shows how pricing is mainly according to what will ensure revenues and profits for the corporate partner.

The concession agreement agreed to by the government provides for immediate increases in the rail fare of some 20-100%, depending on the distance travelled, with further large hikes in the coming years. Aside from the immediate hike in the ‘notional’ fare charged upon implementation of the agreement, there are additional increases: 1) another 5% hike upon completion of construction of the extension; 2) a programmed periodic adjustment of some 10% every two years; 3) inflation rebasing every four years; and 4) pass-on of power cost fluctuations up to 5% of the notional fare.

The LRT-1 example shows how the government actively guarantees corporate profits at the expense of public funds. The concession agreement commits the government to pay the Light Rail Manila Consortium any difference between the higher fare the consortium wants and the fare that is actually approved and charged to commuters. This is the regulatory risk guarantee that Pres. Aquino promised corporations in his inaugural state of the nation address in 2010 and made law through amendments to the BOT Law in 2012.

The example also shows how the government uses public resources to subsidize big corporate profit-seeking. On the face of it, it appears that Light Rail Manila Consortium will be spending Php39.4 billion – consisting of its Php30.0 billion expense on civil works for the project and its Php9.4 billion premium payment (or negative bid) – and billions more in operating and maintenance expenses.

However the government will actually be paying some Php34.9 billion or more than half of the total project cost of Php64.9 billion. This means that Light Rail Manila Consortium’s rail business in effect benefits from the lower borrowing costs of government including from official development assistance (ODA). There is also an additional Php5.0 billion subsidy of ‘viability gap funding’.

More perks

The Aquino government has also committed to paying the estimated Php64.0 billion for the project’s real property tax, which is in effect a substantial tax exemption for the consortium. The consortium even has multiple gains from any commercial operations such as shops or malls on the project’s locations – these will benefit from the effectively government-subsidized construction of locations, will not have to share any revenues with the government, and do not pay real property tax.

The government has also committed to maintain a Php500 million annual standby fund dedicated to the project and effectively controlled by the consortium to assure the consortium that there will be at least that amount available for any payments owed it by the government.

Favored business allies?

The LRT-1 example finally also shows how a few big business conglomerates dominate vital economic sectors and raise suspicions of exploiting close ties with government to get as profitable deals as possible. The lone and winning bidder Light Rail Manila Consortium is led by the Pangilinan/Salim group’s Metro Pacific Investments Corp. (MPIC) and Ayala’s AC Infrastructure Holdings Corp. They are both from the just around 12 big business families and oligarchs that are competing for the largest and most profitable projects of the government’s PPP program.

With so few participating it is inevitable that they would be involved in more than one project under Aquino’s PPP program – the Pangilinan group is also involved in the NLEX-SLEX Connector and Automatic Fare Collection System projects while the Ayala groups is also involved in the Daang Hari-SLEX Link and Automatic Fare Collection System. The LRT 1 project however overshadows and is bigger in value than all the other seven solicited projects combined. Both conglomerates also have major interests in other privatized water, power and road projects from before the Aquino PPP program.

These are all important indications that the regressive character of PPPs has not changed under the Aquino administration. As it is various accommodations have already been extended to favor corporate project partners. These include a sovereign guarantee for San Miguel Corporation (SMC) in the MRT 7 project, allowing Ayala Corporation to alter the design of the Daang Hari SLEX Link Road, giving the AF Consortium the Automated Ticketing System project despite a conflict of interest and an apparently better rival bid, allowing SMC-Citra Consortium and MPIC to construct respective tollways instead of the original single road project, and others.

PPP’s main flaw

The main problem with the PPP scheme is that the supply and pricing of the public service becomes determined not primarily by the need of consumers (i.e. the public good) but by what will ensure a profit for the private provider (i.e. private profit). This set-up is hardened by onerous contracts – agreed to by the government – and by how these are interpreted amid a corporate investor-biased legal system which enshrines private property and profit over the social good.

The burden is placed on the consumer to claim and assert their right to vital services rather on the government, which has the responsibility to provide these services. The consumers are also ultimately burdened with unaffordable and poor social services, as the undesirable outcomes of previous PPP have shown. Unfortunately, these will only recur in the respective contexts of the new PPPs being entered into, such as the LRT-1 extension project. IBON Features