Bayan’s position paper on the MRT/LRT fare hike

Posted: February 4, 2011 in Economy, Socio-Political
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(The paper below was formally submitted to the LRTA public consultation on Feb. 4, 2011. We encourage groups to use it as a reference in raising awareness on the fare hike issue)


Position paper of BAYAN submitted to the public consultation on the LRT/MRT fare hike

February 4 and 5, 2011

The Bagong Alyansang Makabayan (Bayan) is participating in this consultation to state for public record its opposition to the fare hike approved by the LRTA for the light rail transit (LRT) and metro rail transit (MRT) systems. We participate to exhaust all available venues to stop the impending increases and help protect the interest of the commuters and Filipino people.

Our opposition rests on economic and legal grounds.

The debt burden of the MRT/LRT should not be passed on to the commuters

The LRTA and the Department of Transportation and Communications (DOTC) have so far failed to present valid and urgent reasons to implement the fare hike. We have carefully studied the Executive Report, dated 27 October 2010, conducted by the LRTA-DOTC Study Team. Without giving a detailed account, the LRTA/DOTC claimed that the full cost fare for LRT/MRT ranges from P 35.77 to P 60.75, which is way above the average actual fare of P 12.30 to P 14.20. Based on this unsubstantiated comparison, the LRTA/DOTC calculated that government “subsidies” for the LRT/MRT reached P 13.85 billion last year. Without adjusting the fares, it further estimated that subsidies could grow to P 17.06 billion in 2011. This, for the LRTA/DOTC, is the single biggest justification to increase the LRT/MRT fares.

The fare increase is arbitrary. The DOTC and LRTA study outlined threeproposals for a restructured MRT/LRT fare, and chose the proposal which would yield the biggest revenues, without stating any other basis why this, and not the two other proposals, was approved. Not only did the study fail to establish the basis of the P35.75 and P60.75 full cost fare, it also failed to establish why the P11.00-plus-P1.00-for-every-kilometer fare structure was the best option.

In the absence of a meticulous breakdown of the full cost fare, we assume that a huge portion of the P35.77 to P60.75 is actually made up of the debt service burden of the LRTA and DOTC for the light rail infrastructure. In one of our informal dialogues with DOTC officials, we learned that the rule of thumb for large infrastructure projects like the LRT and MRT is that 85 percent of the cost is made up of servicing principal and interest payments. By way of example, this means that debt servicing comprises almost P 51.64 of the alleged P 60.75 full cost fare of the MRT. This also means that the actual cost, or the amount needed to finance the operating and maintenance (O&M) expenses per MRT passenger, is only P9.11. In other words, each MRT commuter already pays between P 0.89 to P 5.89 more than the actual O&M costs.  A similar situation can be observed in the case of LRT 1 and LRT 2.

Such assumption is also supported by available data on the financial operation of LRT 1 and LRT 2 as posted on the website of the LRTA. Looking at the farebox ratios or the proportion of the fare revenues to the total O&M expenses of the LRT 1 and LRT 2, we confirmed our assumption that passengers already pay for the actual cost of a train ride and even contribute to debt servicing. A farebox ratio of 1.0 means that fare revenues cover 100 percent of O&M. From 2007 to 2010 (as of November), LRT 1 has averaged an annual farebox ratio of 1.39. LRT 2’s farebox ratio averaged 1.01 during the same period.

For Bayan, the issue of debt is important because of two things – (1) the debt burden has been made onerous because of questionable and disadvantageous BOT contracts such as in the MRT and (2) it is the obligation of government to service these debts through the people’s taxes and not through user fees. It is government’s duty to lessen, not increase, this burden of the people.

In the case of the MRT, the original proponents were private local and Japanese corporations which formed the consortium Metro Rail Transit Corp. (MRTC). These investors made a killing on the MRT because government guaranteed payments to the banks that financed the project including the Export-Import Bank of Japan, Sumitomo Bank, and other Japanese and Czech banks as well some local financial institutions like the Bank of the Philippine Islands (BPI).

Furthermore, the deal was made more financially onerous because the owners of these banks that provided a loan of $462.5 million in 1998 and the private firms that constructed the MRT have the same investors. MRTC included the Ayala Land Inc., owned by the Ayala family which also controls the BPI. MRTC also entered into an Engineering, Construction, and Procurement (EPC) Contract with the Sumitomo Corporation, owned by the same Japanese investors that control Sumitomo Bank. On top of the guaranteed debt payments, government also guaranteed that the MRTC will get 15 percent return on investment (ROI) per annum.

In fact, this deal was so burdensome that the previous administration in 2009 had to buyout 76 percent of MRTC for $800 million lump-sum payment in order to terminate the guaranteed ROI.

This is clearly a case of bad policy. Taxpayers should not be made to shoulder the burdened for this onerous transaction. Increasing user fees to pay for such debt is an additional injustice.

Subsidy reduction is patently anti-commuter

It is not unusual for state agencies managing public infrastructure like the LRTA to be in the red because their performance is measured not in narrow financial terms but through the net social and economic benefits they bring. The new capability that results from public infrastructure such as improved mobility of the economy’s workforce, for instance, far outweighs what government deems as its “losses”. These losses are actually not losses in the business sense but public investment that go into achieving economic efficiency and improving the overall living condition of the people.

Government should not consider as losses the subsidies it provides to LRT and MRT users. Instead, these must be deemed as public investment that will provide the economy and its human resources new or additional capacity. By drastically reducing state subsidy for commuters, it’s as if the government is saying that public funds are wasted on the students, workers and employees, many of whom are low-income earners, who are the recipients of such subsidy.

Fare hike proponents peddle the fallacy that it is unfair for Mindanao taxpayers to subsidize the LRT and MRT users in Metro Manila.  The entire Filipino people are already paying for the debts of the LRT and MRT in the same way that they are paying for the debts incurred to build infrastructure in Mindanao and elsewhere in the country.

The fare hike issue can be more appreciated if one will scrutinize the socioeconomic profile of regular LRT and MRT commuters. In the 2007 Mega Manila Public Transport Study conducted by the Japan Bank for International Cooperation (JBIC), it was disclosed that 68.1 percent of LRT/MRT users during weekdays earn below P 10,000 per month and a significant 15.3 percent earn nothing at all. The same study also said that 48.8 percent of LRT/MRT commuters (weekdays) are ordinary employees and workers while 31.5 percent are students.

We note that the LRTA-DOTC, in its study on the fare hike, recognized the social and economic role of the LRT and MRT although they are not profitable, to wit: “Most urban railway systems in the world are not financially viable, but are implemented for their socio-economic benefits. Our Manila Light Rail Transit (LRT) systems promote the use of high-occupancy vehicles, thereby reducing traffic congestion on the corridors served, local air pollution and greenhouse gases emissions. Besides the substantial savings in travel time cost of LRT riders, the LRT systems reduce infrastructure investment in Metro Manila road expansion”. (emphasis added)

We thus wonder why these socioeconomic benefits were not factored in by the DOTC study in determining the need for a fare hike. For instance, the savings of government from less air pollution and GHG emissions (i.e. public health budget) and less pressure for road expansion (i.e. public infrastructure budget) should have been computed to get the net losses or even gains from operating the LRT and MRT. The economic value accruing from reduced traffic congestion and considerable savings in travel time cost should have also been calculated to know additional potential benefits for government such as increased tax revenues.

The fare hike seeks to further marginalize low-income earners and student commuters

Aside from minimum wage earners, the study said that the fare hike will also heavily affect “students who are not granted fare discounts on LRT lines”. It claimed, however, that such impact “could be eased by the grant of 15-20% fare discounts”. As for MRT users, the LRTA-DOTC said that while they face the steepest fare hike, “they are expected to afford the increase in fare with their average personal monthly income of P 13,560 or 1.5 times the minimum wage in Metro Manila”. But still, fare discounts and the relative capacity of commuters to afford the higher fares do not legitimize the unwarranted fare increase.

It appears to us that the LRT and MRT fare hike has the intended result of marginalizing the minimum wage earners and students from maximizing the benefits of a relatively affordable and efficient mode of mass transportation. In its study, the LRTA-DOTC mentioned that one of the expected gains from the fare hike is “Optimized ridership and revenue leading to the reduction in wear-and-tear of LRT/MRT systems/facilities and postponing the required capacity expansion (additional trains)”. Optimized ridership, to our mind, is a euphemism for reducing the number of passengers from low-income workers and poor students who make up the bulk of LRT and MRT commuters.  The above portion of the report also belies the claims of government that services will be improved. Quite the opposite, government seeks to defer the expansion of capacity (additional trains) of the MRT/LRT.

We object to the government’s seeming indifference to the plight of the commuters. For instance, the LRTA-DOTC study simply assumed that Minimum wage earners will likely shift to cheaper alternative modes such as jeepneys and regular buses”. Under the new fare structure, regular and aircon bus fares will be lower than LRT/MRT fares. This was actually used as one of the justifications for the fare hike. The LRTA-DOTC however failed to mention that the fare in road-based public transport modes have been increasing too due to unabated oil price hikes.

Furthermore, government seems to think that it is wrong for LRT/MRT, which is a more efficient mode of mass transportation, to have cheaper fares than public buses and jeepneys. Does this mean that every time private jeepney and bus operators increase their fares, the LRTA-DOTC will also have to automatically raise LRT and MRT fares?

The fare hike will be an unbearable burden. We have already pointed out that the ridership of the LRT and MRT is characterized by a high concentration of low-income, marginalized, and vulnerable social sectors. Worse, since late last year, the prices of basic consumer goods and services including rice, bread, sugar, petroleum products, electricity, water, and jeepney fares have all gone up. The current minimum wage in the National Capital Region (NCR) is not even half of the estimated daily cost of living of around P 1,000 per family. Unemployment in NCR is the highest among all regions at 12.6 percent as of October 2010 based on official data.

The fare hike will ultimately benefit big business and not the riding public

The fare hike in LRT and MRT is a policy decision that President Benigno Aquino III first articulated in his State of the Nation Address (SONA) last year. According to the LRTA-DOTC study, the objective of the fare hike is to “Send clear signal to private sector investors that regulatory risks will be minimized in future public-private partnership projects”, the apparent centerpiece economic program of the Aquino administration. The extension of LRT 1 (which will cost P 70 billion) and LRT 2 (P 11.3 billion) are also the two biggest projects identified by government in its priority list of PPP ventures. DOTC officials, meanwhile, have indicated that the whole light rail system will be eventually turned over to the private sector through the PPP.

The ultimate beneficiaries of this fare hike are the big business investors government is trying to attract for the country’s rail system. Even now, Metro Pacific Investments Corporation of Manny Pangilinan is seeking to buy the entire MRT line to a tune of $1.1 billion. Private control over the MRT will of course make it truly profit-oriented to allow the buyer a “reasonable” return on investment.

The LRTA is not a regulatory body and thus cannot approve the fare increase

LRTA’s power is limited to construction, operation, maintenance and leasing of light rail transit system. It has no regulatory powers. One of the powers of its Board of Directors is to fix the rate of fares, a power possessed by any board of directors of any private transport companies. The rate fixed by the Board of Directors, in the case of private entities, is subject to approval by the proper regulatory bodies. Since regulation is not one of the powers vested on LRTA, the rate fixed by its Board of Directors should be likewise subject to approval of proper regulatory bodies.

All other utilities and services such as toll fees, jeep and bus fares, power rates, water rates and the like, are subject to government regulation. In the case of the MRT/LRT fare hike, the proponent is also the approving authority. The commuters are at the onset placed at a gross disadvantage.

It cannot be denied that it is the DOTC which was granted the authority to regulate all kinds of “land transportation utilities”. Under the circumstances, it is only the DOTC which can determine and fix the fare rate to be imposed by the operators of land transportation utilities, including those operating light rail transports. The proposed fare adjustment should also go through the formal process of hearings, not just a mere public consultation aimed at informing the commuters.

Admittedly, the LRTA is an attached agency of the DOTC. However, it must be reiterated that the LRTA, being a government corporation, is not a line agency of the government, and is in fact governed by its Board of Directors. Under this peculiar situation, the act of the Board of Directors of the LRTA relative to the issue of determining and fixing fare rate is subject to the regulatory powers of the DOTC.

Our demands

We demand that the LRTA-DOTC not implement the so-called “provisional” increase in fares of LRT and MRT starting March 1.

The LRTA does not have the mandate to approve the fare hike. On the question of debt, government must negotiate with creditors to find ways on how to lessen the debt burden, instead of passing these on to commuters. Government must seriously look into the many projects funded by onerous debts and were bloated by corruption. It can start with the MRT loans that have been characterized by onerous terms.

Further, creative ways to improve the non-rail revenues of the LRT and MRT should be pursued and maximized.  The LRTA-DOTC admitted that “Compared with urban railway lines in neighboring countries, our LRT lines are not generating substantial revenues from commercial development and advertisement”. But the LRTA-DOTC did not further explore the option of raising collections from tenants and commercial establishments and advertisers that use the railway infrastructure.

For example, the DOTC has yet to collect from the MRT DevCo an outstanding debt of P1 billion in unsettled Development Rights Payments. The questionable operation of  the MRT DevCo, which holds the concession to develop open spaces in the MRT, has apparently placed the government at a disadvantageous position since MRT Dev Co has not paid up.

A study by the Japan Bank for International Cooperation (JBIC) disclosed that LRT’s non-rail revenues comprise a paltry 2.6 percent of total revenues. In neighboring countries, non-rail revenues account for 20 percent. Non-rail revenues must be raised to at least approximate this regional benchmark instead of placing additional burden on commuters through a fare hike.

Finally and most importantly, we demand the LRTA-DOTC and the Aquino administration to junk the PPP/privatization scheme to develop the country’s infrastructure. The MRT case should have taught government of the pitfalls of PPP. The experience of power and water privatization, in the Philippines and elsewhere, clearly show that privatization does not alleviate government’s fiscal woes and create unnecessary burden for consumers due to skyrocketing and increasingly prohibitive user fees. (end)


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