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MASS TRANSIT SYSTEMS IN METRO MANILA:

Market, Financing, and Currency Risks


Based on Paper Entitled: Market Oriented Planning for Mass Transit Systems: Private Sector Role in Metro Manila, Summer 2002, Journal of Structured and Project Finance

Rommel C. Gavieta MA (URP), MSc (Eng), UAP, PIEP 12th International Rail Finance Conference Organised by Euromoney October 28 and 29 2002 London, UK

Metro Manila Mass Transit Systems (MTS) Market Development Drivers

Types of MTS Development Drivers

Market-Driven Supply (MDS) Development


an approach that avoids costly supply investment by matching existing demand and supply through the market-oriented planning.

Non-MDS Development
a traditional approach to urban infrastructure development that embodies a tendency to predict and provide services.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Socio-economic Characteristics in Metro Manila

In Developed Countries Public Sector investment in infrastructure development is at least 4% of GDP as compared to the Philippines which is 2% of GDP Metro Manila has a population of 9.54 million over a 636 sq.km. area or Greater Manila Region will have a population of 25 million over a 41,500 sq.km. Metro Manila contributes 30% to the total GDP. Metro Manila has 13% of the total national population on an area that is less than 1% of the total national land area. Metro Manila earn $ 2,650.00 per capita while the national average is over $ 1,000 per capita. Young and educated workforce and relatively big domestic market have in fact allowed the country to grow despite its low savings rate of barely 22% compared to East Asias average rate of 40%.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Urban Pattern of Metro Manila

Urban pattern followed the crescent shape of Manila Bay with 6 circumferential roads and 6 radial roads Public Transportation use in Metro Manila is relatively high as compared to Bangkok and Jakarta Proposed infrastructure pattern is incomplete and currently under development Delays are attributed to lack of Funds and ROW acquisition problems.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Metro Manila Spatial Characteristics


The changing spatial characteristics of Metro Manila along with its suburb, the Greater Manila Region are as follows:

Increased suburbanisation and sustained density of inner areas with the stepping in of commercial activities. Mass transit system in the inner core has not improved and the environment has deteriorated.
Continued nodal development of Commercial Business Districts (CBD) as well as squatter/slum communities, both of which exert strong but contrasting influences on transportation. Increased spatial separation between residences and CBD and educational centers. Unabated development of suburban areas is characterized by market corridor. Unprepared and undeveloped infrastructure of the suburban area for the influx of the people into the Greater Manila Area.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Mass Transit System (MTS) Development Plan

Metro Manila Transportation Demand Pattern

MTS projects categorised as Metro Lines were found to be MDS capable. MTS projects categorised as Suburban Lines were found to be non-MDS capable Public Transportation has a modal share of 78% which like Tokyo is high when compared to Bangkoks 49% and Jakartas 55%

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Metro Manila MTS Development Plan


Based on the Transportation Study funded by JBIC the following are the MTS projects recommended for development: Metro Lines LRT-1: completed in 1984 LRT-2: under construction MRT-3: Phase I completed & Phase II to be built LRT-4: under negotiation Suburban Lines LRT-1 Extension: under negotiation South Rail: under negotiation North Rail: under negotiation

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

MTS Project Description


Project
MDS AND METRO PROJECTS LRT-1 LRT-2 MRT-3 Phase I MRT-3 Phase II LRT-4 NON-MDS AND SUBURBAN PROJECTS LRT-1 Extension South Rail North Rail US$ 842.5 mn (est.) PhP 14.2 bn (est) PhP 42.1 bn (est.) 27 km with 13 stations 132 LRVs 50 km Phase I: 42.7, Phase II: 4.9 km, Phase III: 11.6 km and Phase IV: 37.5 km PhP 3.4 bn (1984) PhP 31.4 bn (est.) US$ 675.5 mn (2000) US$ 214.0 mn (2005) US$ 958.0 mn (est.) 15 km with 18 stations 13.8 km with 11 stations 104 Light Rail Vehicles (LRV) 16.9 km with 13 stations 73 LRVs 5.1 km with 3 stations 48 LRVs 22.6 km with 11 stations 124 LRVs

Project Cost

Description

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

PUBLIC SECTOR PROJECT FINANCING AND CURRENCY RISK PERSPECTIVE

Public Sector Economic and Financial Evaluation Parameters of Public-Private Partnerships


Based on the Transportation Study funded by JBIC:

Concerns

Projects with highest Economic IRR are metro-expressways (25% and above) and MTS projects (15% to 20%).
Financial IRR for metro-expressways is not high ranging between 4% to 12% while MTS is moderate ranging from 5% to 16%. Private sector provides the capital for pump-priming the urban economy with the development of MTS.

Public Sectors lack of appreciation of maturity mismatches between maturity of obligations and MTS asset lifespan
Public Sectors should link sovereign enhancements to economic income from the development of MTS projects Public sectors evaluation of project focuses on project cost evaluation and transparency of bidding process

Public sector will benefit from the development of down stream economic linkages and the incremental increase in tax base as a result of the urban mass transit system project.
Rommel C. Gavieta Euromoney 12the International Rail Finance Conference
THE METRO RAIL GROUP

October 2002

Public Sector Concerns over Deficits due to Sovereign Enhancements


Phase I & II Financial, Economic and Health & Welfare Benefit Cash Flow
US$ 000s
9 0 0 ,0 0 0 H e a lt h & W e lfa r e B e n e fit E c o n o m ic B e n e fit P h a s e I & II R e v e n u e s P h a s e I & II D e b t + E q u it y In s t a llm e n t P a y m e n t s

Growing fiscal deficits as a result of mismatches between public revenues and public expenditures. Fiscal deficits blurring Public Sectors appreciation of MTS Project Economic and Financial Returns. Growing awareness about currency mismatches between source of funds and project revenues. Public Sector debt in local currency doubled from the date of signing of the loan and concession agreement to the first date of debt and equity payments.

8 0 0 ,0 0 0

7 0 0 ,0 0 0

6 0 0 ,0 0 0

5 0 0 ,0 0 0

4 0 0 ,0 0 0

3 0 0 ,0 0 0

2 0 0 ,0 0 0

1 0 0 ,0 0 0

2 0 0 6 2 0 0 9 2 0 1 2 2 0 1 5 2 0 1 8 2 0 2 1 2 0 2 4 2 0 2 7

Year

Assumptions:

Ridership figures are based on DOTC projections Average Ph1 fare: PhP12.50 increasing at 3% p.a. Average Ph1 & Ph2 fare: PhP 19.00 from 2004 and increasing at 3% p.a. Average distance: Ph1 and Ph2 (11 km), Ph1 (8 km) PhP51.00/US$ @ 2001 Assumes 48 LRVs for Ph2 through ODA Financing

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Currency Risk and its effect on Public Sectors Fiscal Position


Phase I & II @ PhP40/$
450 400 350 300 250 200 150
100 200

Phase I & II @ PhP50/$


350 Cost + lease rentals (Ph2) Cost + lease rentals (Ph1) Revenues(Ph1+Ph2)(PhP50/$) Revenues (Ph1 + Ph2)(PPP) Revenues (Ph1)

Cost + lease rentals (Ph2) Cost + lease rentals (Ph1) Revenues (Ph1+Ph2)(PhP40/$) Revenues (Ph1 + Ph2)(PPP) Revenues (Ph1)

300

250

150

100
50

50 0 2000 2003 2006 2009 2012 2015 2018 2021 2024


0 2000 2003 2006 2009 2012 2015 2018 2021 2024

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Public Sector Fiscal Position


Philippine Debt

Public Debt is classified into two: Direct and Indirect Obligations of the Republic. Direct Obligations is automatically appropriated annually while indirect obligations are subject to appropriations risk. Public Sector must understand that it is like an ordinary borrower where it lacks the resources needed to finance high net present value or MDS projects. Public Sector debt is 61% of GDP in 2001. Obligation at present does not include obligations as a result of indirect sovereign enhancement for MTS projects.

18.5

Public Sector Debt

`
34.9

Private Sector Debt

Philippine Debt Maturity Profile


10% Short Term Loans Medium and Long Term Loans

90%

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

PRIVATE SECTOR PROJECT FINANCING

MTS Project Financing Schemes


Project MDS AND METRO PROJECTS LRT-1 Government Project Belgian and Swiss ODA with Commercial Loan from Lloyds Japanese ODA and Government Equity Japanese and Czech ECA, Commercial Loans and Private Equity Japanese ECA, NEXI & Commercial Loan and Private Equity French ECA and Commercial Loans Project Cost Description

LRT-2 MRT-3 Phase I MRT-3 Phase II LRT-4 NON-MDS AND SUBURBAN PROJECTS LRT-1 Extension

Government Project Build Lease Transfer Build Transfer Build Transfer and Build Own and Operate

Joint Venture Agreement between Private Company and Government Corporation Government Project Government Corporation Project

Canadian ECA, Commercial Loans and Private Equity Korean ODA and Government Equity Japanese ODA and Government Corporation Equity

South Rail North Rail

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Unbundled Internal Rate of Return (IRR) for the MRT-3 Phase II Project

DOF Offered Equity Investment Premium 10.44% or 1,044 basis points (bp) p.a.

Philippine Debt Paper with a 25-year tenor and at an interest rate of 10.44%

Equity Liquidity Risk Premium 1.5% or 150 bp p.a. Financial Closure Risk (1.5% or 150 basis points (bp) Premium

US$ 30 million or 14% of the US$ 214 million proposed Total Project Cost (TPC) for potential advances for design, construction mobilisation and construction if financial closure is not achieved six months from effectiveness of the Build Transfer (BT) Supplemental Agreement

Construction Completion Risk (1.5% or 150 bp Premium)

US$ 13 million or 6% of the TPC for additional interest During Construction costs in the event the project is not completed on time due to MRTCs fault and the US$ 10.9 million or 5% of the TPC for claims from government for the first debt re-payment in the event the project is not completed on time due to MRTCs fault.

Cost Overrun Risk (1.5% or 150 bp Premium)

US$ 14.6 million or 6.8% of TPC claim from EPC Contractor for escalation of the EPC Cost from 1997 and US$ 4.0 million or 1.9% of TPC claim from the EPC Contractor for Foreign Exchange losses due to the pegging of the exchange rate at JPY 121.50 to US$ 1.00 in 1997.

Light Rail Transit Project investment Risk (1.0% or 100 bp Premium)

At present, the capital market is wary of the Light Rail Projects in Southeast Asia in light of the recent debt restructuring talks for the LRT projects in Bangkok and Kuala Lumpur. This has increased the investment premiums for any appetite, if any, for future LRT projects in Southeast Asia.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Comparative Yields
MRT-3 Project Yield: 15%
(Assumes completion and other risks)

Average Yields from 8-12-1992 to 08-12-2002


Dow Jones Industrial Average: 10.16 (USA) NASDAQ Composite Index: 8.62% (USA) S&P 500 Index: 8.08% (USA) S&P Railroad Index: 7.30% (USA) Hang Seng Index: 5.32% (HK) STI Index: 2.02% (Singapore) Kuala Lumpur Composite Index: -2.20% (Malaysia) Philippine Composite Index: -9.71% (Philippines) Jakarta Composite Index: -9.71% (Indonesia) Thailand Stock Exchange Index: -11.61% (Thailand)

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Build Lease Transfer (BLT) Security Structure


Lenders Equity Investors

Fare box Revenue Collection

Letter of Credit

Fare box Revenue Collection

Letter of Credit

DOTC Appropriation

Liquidity Risk Mitigant

DOTC Appropriation

Liquidity Risk Mitigant

DEBT repayment with Appropriation risk

DEBT repayment with Appropriation risk

Performance Undertaking Department of Finance

Performance Undertaking Department of Finance

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Financing Structure of EDSA MRT-3 Phase I Project


Phase I
Equity Debt US$ 485.5 M US$ 190.0 M Government PhP 2.0 B
Contingent obligation subject to GAA

Phase II
Debt US$ 175 to 185 M Advances US$ 40 to 60 M

Build Lease Transfer Agreement

Direct Appropriation

EDSA MRT-3 Project Completion Phase I

Contingent obligation subject to GAA

Asset Transfer to DOTC)

Supplemental BT with ROP Security-Advances Swap Option

Debt direct obligation of ROP

ROP Security- Equity Swap

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Build Transfer (BT) Security Structure


Lenders Metro Rail Group Advances 20% of Total Project cost

Fare box Revenue Collection

Fare box Revenue Collection

Asset Asset
Republic of the Philippines Republic of the Philippines

Performance Undertaking Department of Finance

Performance Undertaking Department of Finance

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Private Sector Incentives from the Public Sector


1. Indirect sovereign enhancement for repayment of US$ 500.0 million debt:

Lessons Learned

Low front-end fees and premia for ECA guarantee/insurance


Low interest rate spreads from foreign and domestic commercial banks Access to ECA loans Extended tenor offered by the Philippine Foreign Currency Deposit Unit (FCDU) banks with back-ended repayment profile No requirement for cashflow to cover debt service by more than one time No requirement for debt service reserve accounts.

Indirect sovereign enhancement classified debt repayment as a contingent liability of the public sector that makes debt repayment subject to appropriation risks.
Debt repayment is a continuing management concern of the private sector to ensure smooth transmittal of debt payment every time it is due.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Private Sector Incentives from the Public Sector


2. Guaranteed Internal Rate of Return for an investment of US$ 210.0 million:

Lessons Learned

The allocation of project and market risks away from lenders allows extremely attractive financing terms and conditions Extended tenor for domestic and foreign investors with a back-ended repayment profile.

Equity repayment is subject to Farebox revenue and government appropriation Government appropriation is subject to appropriation risks. Farebox revenue is subject to currency mismatch between source of equity and source of revenue. Domestic and Foreign investor unable to liquefy its receivables due to an undeveloped domestic debt security market Due to the tenor and equity rental repayment profile domestic investors are seeking funds from the insurance sector.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Private Sector Incentives from the Public Sector


3. Market and Fare Setting Risk

Lessons learned

The allocation of market risk and fare setting risk away from the Lenders allowed for competitive financing terms and conditions.
Fare setting is a politically sensitive concern that affects revenue but enhances economic benefits. Fare setting makes revenue an elastic that affects market share.

Lack of appreciation that domestic political constraints usually starts biting before any technical capacity constraints is reached.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Securitisation and Convertible Bonds


Build Lease and Transfer (BLT)
Government Guarantees

Build and Transfer (BT)


Government Guarantees

Lenders US$ 485.5 M

Private Sector US$ 190 M

Project Completion

Lenders US$ 181.5 M


(Loan Guarantee)

Private Sector US$ 16.2 M


(paid in US$ government bonds)

Convertible Bond Peso equivalent of US$ 16.2 M

Government Guarantee 15% IRR over 25 years

Private Sector Securitises Equity Cash Flow

Project Completion

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

FUTURE PARADIGM FOR PRIVATE AND PUBLIC SECTOR PARTNERSHIP IN THE DEVELOPMENT MTS PROJECTS

Recommendations to Improve Governments Absorptive Capacity in the Implementation of BOT Projects

BOT law was enacted to address government financial constraint and facilitate private sector investment into infrastructure/transportation sector. It would be ideal for the processing of project proposals to focus on to economic benefits and prioritization of BOT projects. Technical and financial viability be measured on the basis of compliance to performance standards and not on detailed specifications. Government to recognise that its participation in the financial road-show will result in lower interest spreads and ultimately reduce project cost. Strict implementation of the RA regarding the acquisition of property for government sponsored projects by government and acquisition cost for ROW should be made part of project cost. NEDA to endeavor to obtain ODA funds from donor countries approximately 5% of the total ODA loans for project identification, feasibility studies, master planning at local and regional levels, and monitoring and evaluation.
THE METRO RAIL GROUP

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

Private Sector View of the Public Sector in MTS Development


Public Sectors constancy in incorporating into the annual budget the contingent liability for paying obligations due to MTS projects. Public Sector should enact legislation that will promote the development of a domestic debt security market.

Public Sectors constancy in the interpretation of contractual obligations by the Public Sector.
Private Sectors understanding that sovereign enhancement is a finite resource of the Public Sector

Private Sectors earlier lack of understanding of indirect sovereign enhancements

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

ODA and ECA-Commercial Loan Comparison


Same Project Cost Comparison

US$ million

ECA & Commercial Loan 181.5 57.8 239.4

ODA Loan

Principal Interest Total Debt PhP million Principal Interest Total Debt
NPV of total Debt installment repayment

157.5

US$ to PhP exchange rate was assumed to be 3% per annum which may not reflect reality as experienced during the Asian Crisis and political upheavals. ECA and Commercial loans would have already been repaid From an NPV perspective, ODA financing is better because of the backended repayment schedule

88.3 245.8

11,520.0 3,497.0 15,016.0 11,812.0

19,037.0 7,821.0 26,858.0 8,882.0

However, MTS Projects funded by ODA and administered by Government is generally at least 50% over budget and completed at least 100% over the original project schedule. In this regard, the full benefits of ODA financing is not fully realised.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Light Rail Vehicle Financing Option


Metro Rail Group Performance Undertaking (DOF)
Advance 15% ROP counterpart fund

ODA Financing
85% project cost financing

Republic of the Philippines (ROP)

Light Rail Vehicle Supplier

MRT - 3 Phase II
Rommel C. Gavieta Euromoney 12the International Rail Finance Conference
THE METRO RAIL GROUP

October 2002

Current and Future Development


1.

Segregation of Onshore Cost from Offshore Cost

1.

Public Sector is pushing for domestic loans or equity investment for onshore cost to reduce currency risks.

2.

Matching of loan maturity with corresponding asset development

2.a.
2.b. 3.a.

Public Sector to promote long term ODA loans for civil and system works.
Public sector to promote ECA and Commercial loans for LRV acquisition. Private sector to advance for government the 15% counterpart funds and project management for Public Sector. Secure request from ODA facility for funds for ROW acquisition and utility relocation.

3.

ODA financing for MDS-based MTS Projects

3.b. 4. Develop domestic debt security market

4.

Private Sector raises capital and debt from domestic debt security market to develop domestic savings at the grass roots. (bonds, commercial papers and others)
THE METRO RAIL GROUP

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

The End

ODA Project Implementation Issues


Major Factors Contributing to Implementation Delays
Public Sectors fiscal deficits is affecting absorption capacity for approved ODA

facilities
Right-of-way Acquisition/Resettlement Problems - difficulty in resolving

problems is a result of the lack of coordination among government and property owners.
Transport Sector has 32% share of approved ODA Financing facilities.
ODA projects are PhP 30.0 billion over budget as of 2002. In the case of DOTC,

seven (7) projects are PhP 11.7 billion over budget (BW p 13 Yap, Cecile)
Public Sector use of ODA financing for MDS potential projects when ODA

financing can be be channeled for civil works components of MDS projects or Non-MDS projects.

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP

Project Development Concerns


Market and Financing Closure Risk

Project Development Closure Risk

Foreign Exchange Rate Risk Perceived higher political risk due to September 11 event and domestic events. None performing assets and shallow domestic debt market Initial limited demographic and ridership data for market and feasibility studies Regulatory risk related to implementation tariff rates imposition

Long gestation for project development Long learning curve for private and public partnership to reach fruition.

Project Completion Risk

Delivery of Right of Way along the guide-way and the station entrance footprints Coordinating Design and Construction activities with other flagship projects.

THE METRO RAIL GROUP

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

Risk Allocation Matrix


BOT Risk Project Development Financial Closure Completion ROW Market Currency Operations and Maintenance Proponent BLT/BT Government Proponent ODA Government Government

October 2002

Rommel C. Gavieta Euromoney 12the International Rail Finance Conference

THE METRO RAIL GROUP