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Rescuing Manila's light rail network

13 January 2014 Chris Lo




The recent failed tender to overhaul and extend Manila's LRT1 light rail line has cast doubt on the entire project. With the Philippine Government revising its contract terms to attract new bidders, will this vital scheme ever get on the right track? And at what cost?


manila light rail

The fire that hit Manila's Light Rail Transit Line 1 (LRT1) one night in October could have been much worse. The blaze was caused by a cable catching alight on the track between United Nations and Pedro Gil stations. It was extinguished shortly after firefighters reached the scene, and a limited service on the line was resumed by morning.

Although the fire's consequences may have been limited, the incident is one of many worrying issues to hit Manila's LRT system, especially Line 1, which is approaching its 30th year of operation after being opened in 1984. The fire in October 2013 seemingly fitted with the pattern of safety-threatening malfunctions that have caused Filipino civil engineer and transport planning specialist Rene Santiago to blast the 'sorry state' of the outdated LRT and its counterpart the MRT (Metro Rail Transit). A high proportion of operating systems, rolling stock and other technologies have been rendered obsolete, without any updates or replacements.

"The project will extend the line by a further 11.7km, passing through eight new stations."

The Philippines Government has recognised Manila's light rail problems, as well as a wider trend of sub-standard infrastructure that poses a significant risk for the country's continued economic growth.

As a result, Philippines President Benigno Aquino's administration is attempting to push through a raft of infrastructure upgrade projects, making liberal use of the public-private partnership (PPP) model. The government aims to increase infrastructure spending from the current PHP300bn ($6.95bn) to PHP500bn ($11.59bn) to maintain growth and keep in-step with neighbouring economies.

Among these PPP schemes is the PHP64.9bn ($1.47bn) LRT1 extension project, which will bring the light rail line to Metro Manila's outlying cities of Parañaque and Las Piñas, and to the province of Cavite beyond. Under the scheme, the chosen industry consortium would be responsible for the operation and maintenance of the existing LRT1 line, as well as the total design, construction, engineering, operation and maintenance of the integrated Cavite extension. The Philippine Department of Transportation and Communications (DOTC) and Manila's Light Rail Transit Authority (LRTA), meanwhile, will procure 30 new four-car trains to run on the line and develop the region's rail depot infrastructure.

The project will extend the 20.7km line by a further 11.7km, passing through eight new stations on its way to Cavite. If completed, the scheme would increase the line's daily passenger numbers from 500,000 to 700,000 and bring a faster commuting option to the four million people living in Parañaque, Las Piñas and Cavite province.

Risky business: the Cavite extensions failed first tender

Unfortunately, the risks presented by assuming operation and maintenance duties for the rickety LRT1, as well as the government's insistence that the project's industry partner should shoulder the majority of that risk, has thrown a spanner in the works before they have even began.

The government's first tender for the project failed spectacularly earlier this year, when three of the four prequalified bidders dropped out at the last minute. Their departures left Metro Pacific Investments Corp (MPIC), having already been abandoned by its partner Ayala Corp, as the sole remaining bidder for the project before the tender was ignominiously cancelled for a rethink. The botched tender raised the prospect of the LRT extension, along with a number of other infrastructure improvement schemes, failing to get off the ground by the end of Aquino's term in 2016.

"For the bidders involved, there was too much risk for an inadequate return."

One of the central issues in the failed tender was the crumbling condition of the system that the winning bidder would inherit. As an anonymous official of one of the consortia that dropped out of the bidding told Reuters in October, the financial risk of technical problems and penalties for shutdowns was too great.

"There is no record at all of extensive rehabilitation, maintenance, or infrastructure testing in its years of operation," the source said. "That is a significant risk... [If] a segment of that old system falls apart and the accident leads to a catastrophic result, it will be the concessionaire who will be blamed."

The bidders were also put off by what they saw as an unreasonable expectation to pay real-estate tax, which Manila never paid when it operated the system and, according to Reuters' anonymous source, would amount to PHP64bn over the 35-year contract period, virtually the same cost as that of the project itself. These problems, as well as other issues such as low fares making the line unprofitable, created a formula that, for the companies involved, introduced too much risk for too little return.

"The government should understand they should eliminate risk," DMCI Holdings president Isidro Consunji, who withdrew his company from bidding, told Reuters. "Risk of income tax, risk of real estate tax, regulatory risk; there are so many risks."

One more round: Manila seeks LRT bidders again

Since the bidding no-show, the Philippine Government appears to have learned its lessons and has made significant moves to re-shape the LRT extension PPP contract in response to the industry's complaints. At the end of November, the Philippines National Economic Development Authority (NEDA) approved a revised form of the contract with new economic terms that are designed to make the project more attractive to prospective bidders.

The revised contract terms address virtually all of the issues of the earlier bidding round. Under the new terms, the government has agreed to bear the cost of real estate taxes, as well as offering subsidised power if price rates should spike. To reduce financial and operating risk due to LRT1's current condition, the government will guarantee the line's existing structure for two years, so if there are any incidents or faults on the line within that period then the cost will fall on the public budget rather than private coffers.

"The revised contract terms address virtually all the issues of the earlier bidding round."

The government is also now accepting negative bids to mitigate the project's risk, although transport secretary Joseph Emilio Abaya emphasised that positive bids will be preferred if any are offered. Perhaps most importantly to the bidders' long-term profit margins, DOTC's new contract would allow the winning bidder to impose a 5% fare increase upon completion of the extension, although it's not yet known how this will be received by Manila's commuters, who have proactively opposed even small fare hikes in the past.

In fact, it could be argued that in its desperation to get the ball rolling on the LRT extension project, the Philippine Government itself may have transferred too much risk from the private sector to itself. If the project should run into unexpected difficulties, taxpayers would be more heavily exposed to the financial fallout.

Enticing new (and old) bidders

Nevertheless, Abaya and the DOTC are confident that the new terms will reverse the project's fortunes and provide some much needed momentum. "We hope that [the] same players would still be interested and hopefully there would be new players," said Abaya.

To entice the original bidders back into the game, any bidder that has already prequalified for the contract will be able to buy bid documents for half the usual fee. The bidding process has also been condensed into a faster, single-stage process in which bidders can simultaneously submit their prequalification documents along with their technical and financial proposals to meet a bid submission deadline of 28 April 2014.

Recent developments seem to suggest that the government's overtures to industry are paying off. With bid documents only available since the beginning of December, two companies, DMCI Holdings and San Miguel Corp, have already purchased bid documents, and two new bidders, Megawide Corporation and Globalvia, have done the same. Manuel V Pangilinan, chairman of MPIC, the last bidder standing in the last round, has also indicated to local news site InterAksyon that the company 'will quite likely bid'.

So after several years of false starts, Manila's ailing LRT finally looks set to get the attention it needs to remedy its problems, especially in conjunction with separate contracts for LRT1 track replacement and a smart ticketing system for both the LRT and MRT, which are moving forward. If everything goes to plan, the overhaul of Metro Manila's light rail system will undoubtedly benefit Filipinos and help drive the national economy for decades to come. But with the country's public finances now shouldering the lion's share of risk for the project, one can only hope that the government's extensive concessions to get to this point won't come back to haunt it if the plan goes awry.

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Manila's LRT Line 1 is almost 30 years old, and in dire need of modernisation.
The LRT1 extension would take the line south to Parañaque, Las Piñas and Cavite province.
Philippines President Benigno Aquino III has made infrastructure improvement a key pillar of his administration.
LRT1 carries 500,000 passengers a day, which would increase to 700,000 after the extension.