2002 mass transit systems in metro manila market, financing, and currency risks euromoney london...

8/12/2019 2002 Mass Transit Systems in Metro Manila Market, Financing, And Currency Risks Euromoney London Financing Mass Transit Systems (New Version)

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MASS TRANSIT SYSTEMSIN METRO MANILA:

Market, Financing, and Currency RisksBased 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

12thInternational Rail Finance Conference

Organised by Euromoney

October 28 and 29 2002

London, UK


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Metro Manila Mass Transit Systems (MTS)

Market Development Drivers


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THEMETRO R ILGROUPOctober 2002

Rommel C. GavietaEuromoney12the International Rail Finance Conference

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.


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Socio-economic Characteristics inMetro Manila

In Developed Countries Public Sector investment in infrastructuredevelopment is at least 4% of GDP as compared to the Philippineswhich is 2% of GDP

Metro Manila has a population of 9.54 million over a 636 sq.km. area orGreater Manila Region will have a population of 25 million over a 41,500sq.km.

Metro Manila contributes 30% to the total GDP.

Metro Manila has 13% of the total national population on an area that isless than 1% of the total national land area.

Metro Manila earn $ 2,650.00 per capita while the national average isover $ 1,000 per capita.

Young and educated workforce and relatively big domestic market havein fact allowed the country to grow despite its low savings rate of barely

22% compared to East Asias average rate of 40%.


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Urban Pattern of Metro Manila

Urban pattern followed the crescentshape of Manila Bay with 6circumferential roads and 6 radialroads

Public Transportation use in MetroManila is relatively high as compared

to Bangkok and Jakarta

Proposed infrastructure pattern isincomplete and currently underdevelopment

Delays are attributed to lack ofFunds and ROW acquisitionproblems.


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Metro Manila Spatial Characteristics

The changing spatial characteristics of MetroManila along with its suburb, the Greater ManilaRegion are as follows:

Increased suburbanisation and sustained densityof inner areas with the stepping in of commercialactivities. Mass transit system in the inner corehas not improved and the environment hasdeteriorated.

Continued nodal development of Commercial

Business Districts (CBD) as well as squatter/slumcommunities, both of which exert strong butcontrasting influences on transportation.

Increased spatial separation between residencesand CBD and educational centers.

Unabated development of suburban areas ischaracterized by market corridor.

Unprepared and undeveloped infrastructure ofthe suburban area for the influx of the peopleinto the Greater Manila Area.


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Mass Transit System (MTS) Development Plan


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Metro Manila TransportationDemand Pattern

MTS projects categorised asMetro Lines were found to beMDS capable.

MTS projects categorised asSuburban Lines were found to

be non-MDS capable

Public Transportation has amodal share of 78% which likeTokyo is high when compared toBangkoks 49% and Jakartas

55%


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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: com pleted in 1984

LRT-2: under construct ion MRT-3: Phase I completed & Phase II

to be bui l t

LRT-4: und er negotiat ion

Suburban Lines

LRT-1 Extension: und er negotiat ion

South Rail: und er negotiat ion

North Rail: und er negotiat ion


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MTS Project Description

Project Project Cost DescriptionMDS AND METRO PROJECTS

LRT-1 PhP 3.4 bn (1984) 15 km with 18 stations

LRT-2 PhP 31.4 bn (est.) 13.8 km with 11 stations

104 Light Rail Vehicles (LRV)

MRT-3 Phase I US$ 675.5 mn (2000) 16.9 km with 13 stations

73 LRVs

MRT-3 Phase II US$ 214.0 mn (2005) 5.1 km with 3 stations

48 LRVs

LRT-4 US$ 958.0 mn (est.) 22.6 km with 11 stations124 LRVs

NON-MDS AND SUBURBANPROJECTS

LRT-1 Extension US$ 842.5 mn (est.) 27 km with 13 stations

132 LRVs

South Rail PhP 14.2 bn (est) 50 km

North Rail PhP 42.1 bn (est.) Phase I: 42.7, Phase II: 4.9 km, PhaseIII: 11.6 km and Phase IV: 37.5 km


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PUBLIC SECTORPROJECT FINANCING AND CURRENCY RISK

PERSPECTIVE


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Public Sector Economic and Financial EvaluationParameters of Public-Private Partnerships

Based on the Transportation Study funded

by JBIC:

Projects with highest Economic IRRare metro-expressways (25% andabove) and MTS projects (15% to 20%).

Financial IRR for metro-expressways isnot high ranging between 4% to 12%

while MTS is moderate ranging from5% to 16%.

Private sector provides the capital forpump-priming the urban economy withthe development of MTS.

Public sector will benefit from the

development of down streameconomic linkages and the incrementalincrease in tax base as a result of theurban mass transit system project.

Concerns

Public Sectors lack of appreciation ofmaturity mismatches between maturityof obligations and MTS asset lifespan

Public Sectors should link sovereignenhancements to economic income

from the development of MTS projects

Public sectors evaluation of projectfocuses on project cost evaluation andtransparency of bidding process


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Public Sector Concerns overDeficits due to Sovereign Enhancements

Growing fiscal deficits as a result of

mismatches between public revenuesand public expenditures.

Fiscal deficits blurring Public Sectors

appreciation of MTS Project Economicand Financial Returns.

Growing awareness about currencymismatches between source of funds andproject revenues.

Public Sector debt in local currencydoubled from the date of signing of theloan and concession agreement to thefirst date of debt and equity payments.

Phase I & II Financial, Economic and Health & Welfare Benefit Cash

Flow

Assumptions: Ridership figures are based on DOTC projectionsAverage 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

-

1 0 0 , 0 0 0

2 0 0 , 0 0 0

3 0 0 , 0 0 0

4 0 0 , 0 0 0

5 0 0 , 0 0 0

6 0 0 , 0 0 0

7 0 0 , 0 0 0

8 0 0 , 0 0 0

9 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

H e a l t h & W e l fa r e B e n e f i t

E c o n o m i c B e n e f i t

P h a s e I & I I R e v e n u e s

P h a s e I & I I D e b t + E q u i t y I n s t a l lm e n t P a y m e n t s

US$ 000s

Year


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Currency Risk and its effect onPublic Sectors Fiscal Position

0

50

100

150

200

250

300

350

400

450

2000 2003 2006 2009 2012 2015 2018 2021 2024

Cost + lease rentals (Ph2)


Revenues (Ph1+Ph2)(PhP40/$)Revenues (Ph1 + Ph2)(PPP)

Revenues (Ph1)

0

50

100

150

200

250

300

350

2000 2003 2006 2009 2012 2015 2018 2021 2024



Revenues(Ph1+Ph2)(PhP50/$)

Revenues (Ph1 + Ph2)(PPP)

Revenues (Ph1)

Phase I & II @ PhP40/$ Phase I & II @ PhP50/$


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Public Sector Fiscal Position

Public Debt is classified into two: Directand Indirect Obligations of the Republic.Direct Obligations is automaticallyappropriated annually while indirectobligations are subject to appropriationsrisk.

Public Sector must understand that it islike an ordinary borrower where it lacksthe 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 includeobligations as a result of indirectsovereign enhancement for MTS projects.

Philippine Debt

18.5

34.9

Public Sector Debt

Private Sector Debt`

10%

90%

Short Term

Loans

Medium and

Long Term

Loans

Philippine Debt Maturity Profile


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PRIVATE SECTOR PROJECT FINANCING


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MTS Project Financing Schemes

Project Project Cost Description

MDS AND METROPROJECTS

LRT-1 Government Project Belgian and Swiss ODA with Commercial Loan fromLloyds

LRT-2 Government Project Japanese ODA and Government Equity

MRT-3 Phase I Build Lease Transfer Japanese and Czech ECA, Commercial Loans andPrivate Equity

MRT-3 Phase II Build Transfer Japanese ECA, NEXI & Commercial Loan and PrivateEquity

LRT-4 Build Transfer and Build Own andOperate

French ECA and Commercial Loans

NON-MDS ANDSUBURBAN PROJECTS

LRT-1 Extension Joint Venture Agreement betweenPrivate Company and GovernmentCorporation

Canadian ECA, Commercial Loans and PrivateEquity

South Rail Government Project Korean ODA and Government Equity

North Rail Government Corporation Project Japanese ODA and Government Corporation Equity


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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 fromeffectiveness 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 theUS$ 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 thepegging 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 debtrestructuring talks for the LRT projects in Bangkok and Kuala Lumpur. This has increased the investmentpremiums for any appetite, if any, for future LRT projects in Southeast Asia.


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Comparative YieldsMRT-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)


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Financing Structure of EDSA MRT-3


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Financing Structure of EDSA MRT-3Phase I Project

Asset Transfer to DOTC)

Phase I

Debt US$485.5 M

EquityUS$ 190.0 M

Contingent obligation subject to GAA

Build Lease Transfer Agreement

EDSA MRT-3

Project Completion Phase I

Debt direct

obligation of ROPROPSecurity- Equity Swap

Phase II

Government

PhP 2.0 B

Debt

US$ 175 to

185 M

Advances

US$ 40 to 60 M

Direct Appropriation

Supplemental BT with ROPSecurity-Advances Swap Option

Contingent obligationsubject to GAA


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Build Transfer (BT) Security StructureLenders

Fare boxRevenue

Collection

Asset

Republic of the Philippines

Performance Undertaking

Department of Finance

Metro Rail Group

Advances 20% of Total Project cost

Asset


Performance UndertakingDepartment of Finance

Fare boxRevenue

Collection


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Private Sector Incentives from the Public Sector

1. Indirect sovereign enhancementfor repayment of US$ 500.0

million debt:

Low front-end fees and premia for ECAguarantee/insurance

Low interest rate spreads from foreignand domestic commercial banks

Access to ECA loans

Extended tenor offered by the PhilippineForeign Currency Deposit Unit (FCDU)banks with back-ended repayment profile

No requirement for cashflow to coverdebt service by more than one time

No requirement for debt service reserveaccounts.

Lessons Learned

Indirect sovereign enhancementclassified debt repayment as a contingentliability of the public sector that makesdebt repayment subject to appropriationrisks.

Debt repayment is a continuingmanagement concern of the privatesector to ensure smooth transmittal ofdebt payment every time it is due.


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

The allocation of project and market risksaway from lenders allows extremelyattractive financing terms and conditions

Extended tenor for domestic and foreigninvestors with a back-ended repaymentprofile.

Lessons Learned

Equity repayment is subject to Fareboxrevenue and government appropriation

Government appropriation is subject toappropriation risks.

Farebox revenue is subject to currencymismatch between source of equity andsource of revenue.

Domestic and Foreign investor unable toliquefy its receivables due to anundeveloped domestic debt security market

Due to the tenor and equity rental repaymentprofile domestic investors are seeking funds

from the insurance sector.


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3. Market and Fare Setting Risk

The allocation of market risk and faresetting risk away from the Lendersallowed for competitive financing termsand conditions.

Fare setting is a politically sensitive

concern that affects revenue butenhances economic benefits.

Fare setting makes revenue an elasticthat affects market share.

Lessons learned

Lack of appreciation that domesticpolitical constraints usually starts bitingbefore any technical capacity constraintsis reached.

Securitisation and Convertible Bonds


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Securitisation and Convertible BondsBuild Lease and Transfer (BLT) Build and Transfer (BT)

Government Guarantees

Lenders

US$ 485.5 M

Private Sector

US$ 190 M

ProjectCompletion

Government Guarantee 15%IRR over 25 years

Private Sector SecuritisesEquity Cash Flow

Government Guarantees

Project Completion

LendersUS$ 181.5 M(Loan Guarantee)

Private SectorUS$ 16.2 M

(paid in US$government bonds)

Convertible Bond

Peso equivalentof US$ 16.2 M


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FUTURE PARADIGM FOR PRIVATE ANDPUBLIC SECTOR PARTNERSHIP IN THE

DEVELOPMENT MTS PROJECTS

Recommendations to Improve


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Recommendations to ImproveGovernments Absorptive Capacity in

the Implementation of BOT Projects

BOT law was enacted to address government financial constraint and facilitate privatesector investment into infrastructure/transportation sector. It would be ideal for theprocessing of project proposals to focus on to economic benefits and prioritization of BOTprojects.

Technical and financial viability be measured on the basis of compliance to performancestandards and not on detailed specifications.

Government to recognise that its participation in the financial road-show will result in lowerinterest spreads and ultimately reduce project cost.

Strict implementation of the RA regarding the acquisition of property for governmentsponsored projects by government and acquisition cost for ROW should be made part ofproject cost.

NEDA to endeavor to obtain ODA funds from donor countries approximately 5% of the totalODA loans for project identification, feasibility studies, master planning at local and regionallevels, and monitoring and evaluation.

Private Sector View of the


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Private Sector View of thePublic Sector in MTS Development

Public Sectors constancy in incorporating into the annual budget thecontingent liability for paying obligations due to MTS projects.

Public Sector should enact legislation that will promote the development of adomestic debt security market.

Public Sectors constancy in the interpretation of contractual obligations by thePublic Sector.

Private Sectors understanding that sovereign enhancement is a finite resourceof the Public Sector

Private Sectors earlier lack of understanding of indirect sovereign

enhancements


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ODA and ECA-Commercial Loan Comparison

US$ million ECA &

CommercialLoan

ODA Loan

Principal 181.5 157.5

Interest 57.8 88.3

Total Debt 239.4 245.8

PhP million

Principal 11,520.0 19,037.0

Interest 3,497.0 7,821.0

Total Debt 15,016.0 26,858.0

NPV of totalDebt installmentrepayment

11,812.0 8,882.0

Same Project Cost Comparison

US$ to PhP exchange rate was assumed to

be 3% per annum which may not reflectreality as experienced during the Asian Crisisand political upheavals.

ECA and Commercial loans would havealready been repaid

From an NPV perspective, ODA financing isbetter because of the backended repaymentschedule

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.

Light Rail Vehicle Financing Option


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Light Rail Vehicle Financing Option

Performance Undertaking (DOF)

ODA Financing

85% project cost financing

Metro Rail GroupAdvance 15% ROP

counterpart fund


(ROP)

Light Rail VehicleSupplier

MRT - 3 Phase II


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Current and Future Development

1. Segregation of Onshore Cost fromOffshore Cost

2. Matching of loan maturity withcorresponding asset development

3. ODA financing for MDS-based MTS

Projects

4. Develop domestic debt security market

1. Public Sector is pushing for domesticloans or equity investment for onshorecost to reduce currency risks.

2.a. Public Sector to promote long term ODAloans for civil and system works.

2.b. Public sector to promote ECA andCommercial loans for LRV acquisition.

3.a. Private sector to advance for

government the 15% counterpart fundsand project management for PublicSector.

3.b. Secure request from ODA facility forfunds for ROW acquisition and utilityrelocation.

4. Private Sector raises capital and debtfrom domestic debt security market todevelop domestic savings at the grassroots. (bonds, commercial papers andothers)


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The End

ODA P j t I l t ti I


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ODA Project Implementation Issues

Major Factors Contributing to Implementation Delays

Public Sectors fiscal deficits is affecting absorption capacity for approved ODAfacilities

Right-of-way Acquisition/Resettlement Problems - difficulty in resolvingproblems is a result of the lack of coordination among government and propertyowners.

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 ODAfinancing can be be channeled for civil works components of MDS projects or

Non-MDS projects.

Project Development Concerns


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Project Development Concerns

Foreign Exchange Rate Risk

Perceived higher political riskdue to September 11 eventand domestic events.

None performing assets andshallow domestic debt market

Initial limited demographicand ridership data for marketand feasibility studies

Regulatory risk related toimplementation tariff ratesimposition

Market and Financing Closure Risk

Long gestation for projectdevelopment

Long learning curve for privateand public partnership to reachfruition.

Project Development Closure Risk

Project Completion Risk

Delivery of Right of Way alongthe guide-way and the stationentrance footprints

Coordinating Design andConstruction activities with otherflagship projects.


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Risk Allocation Matrix

BOT BLT/BT ODA

Risk Proponent Government Proponent Government Government

ProjectDevelopment

FinancialClosure

Completion

ROW

Market

Currency

Operations

andMaintenance

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