mrt3 blt contract

PUBLIC-PRIVATE PARTNERSHIP CENTER


THE MRT 3 CONTRACT

Atty. Helena C. Tolentino1 June 2012


Contracts in General

What is a contract?• A contract is a meeting of minds between two persons

whereby one binds himself, with respect to the other, to give something or to render some service. (Art. 1305, Civil Code)

• The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

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Contracts in General

• Parties- two or more• Understanding- Covenant • To do (or not to do)• Cause (why?)• Object (what?)


The MRT Contract

Background:• Parties : DOTC (Sec. Enrile) awarded contract to

MRTC Hong Kong (Sobrepena)• Agreement : Build, lease and transfer • What : MRT System• Why : 23,000 passengers per hour per direction

in EDSA


Contract Undertakings

• Legal Basis : BOT Law• Major Consideration:–MRTC did not have a franchise to operate the

system• DOTC to hold the franchise to operate• MRTC to own the system; DOTC to lease the system • Relevance: Constitutional requirement on franchises

on public utilities


Main Covenants

MRTC • build system• maintain and guarantee availability of trains • procure spare partsDOTC• operate system• collect fares • pays MRTC monthly lease fees for number of years


Financing of MRT

Equity : US$ 190 million Financing : US$ 465 million• Japan Export Import Bank (JExIm)• Bank of Tokyo-Mitsubishi• Postal Bank of the Czech Republic• Czech Export Credit Agency• Other Commercial Banks


The MRT Route


Rental Payments

Rental Payments Cover:• Loan Amortization

JExIm; Czech; Commercial• Equity payment • Fixed and guaranteed Economic Return (15%)• ALL EXPENSES RELATED TO THE CONSTRUCTION, MAINTENANCE

AND OPERATION OF THE SYSTEM• Sovereign guaranteeAppropriately increased or decreased to preserve Metro Rail’s Net

Economic Return


JExIm Bank


Czech Facility


Commercial Loans


Equity


Net Economic Return

“Net Economic Return” means the return to be realized by Metro Rail over the life of this Agreement of the amount of its equity investments into LRTS Phase I together with 15% per annum thereon, such return to computed using standard “internal rate of return” methodology and the same assumptions as were utilized in determining the Rental Fees set forth in table 2 of Annex A-1 on the date hereof x x .

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This might merit a separate slide containing:DefintionSampleOther metodologies


Internal Rate of Return

• IRR :discount rate that would make a project's NPV equal zero. Ceteris Paribus, given two projects, the project with a higher IRR would be preferred over the other.

• Expected equity IRR expected return of an investor when he/she invested in the project.


Why the 15%?

• A premium over equity IRR is given when the latter is below market rate such that without the premium, no investor will invest in the project.

NC Ricky Lozari (thought bubble)• Not sure where 15% came from but it may have come

from the economic rate of return of 15% required by NEDA to all of its projects ... the logic may have been, that society is willing to pay the investors 15% on top of the equity IRR, just so the project will push through.


Rental Fees

Under any and all circumstances Rental Fees are:• UNCONDITIONAL• IRREVOCABLE• Shall in NO WAY be released, discharged or otherwise

affected for ANY REASON


Summary: Payments due to MRTC

• Rental Fee (9.1) to cover:Loans to lenders: JExIm; Czech Republic EGI, ECA FACILITY; Commercial FCDU (Table 1)

• For equity (Table 2)• Commitment fees, Taxes• Claims • Premiums for risk insurance• Any other amount owing under the Financing Agreements• Adjustments


Summary: Payments due to MRTC (2)

• Maintenance Fees (Maintenance Agreement)• MRTC Administration costs • Reimburse Corporate Income Tax (9.3)• Reimburse withholding taxes, business taxes, real estate

taxes (9.3)


Fares and Revenue

1997• 9.2. DOTC agrees that it shall at all times set

passenger fares on LRTS Phase I such that the average fare paid by each passenger shall be at least 15 pesos per ride, x x x


Fare Increases

• Makati City, Dec. 6, 1999 The Metro Rail Transit (MRT) 3 has come up with a distance-related fare, which is competitive with other commuter vehicles plying the EDSA route.The Metro Star Express fares start at P17 for the shortest trips and P34 for the maximum distance, between North Avenue in Quezon City and Buendia Avenue in Makati.

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And as a consequence thereof ...


No Fare Increase

• Then President Joseph Estrada ordered a rollback of a 5 peso increase in MRT fares and there has not been any increase since then causing the MRT system to be heavily subsidized by the NG


The MRT Bonds

• The 1997 Asian Financial Crisis caused the Sobrepena corporations in real estate and preneed to cash in on the equity rental payments (ERPs) of MRT 3.

In 2003 the corporate owners of the MRT issued asset-backed bonds for its future ERPs. This was done through a new SPV, MRT III Funding Corporation, Ltd.


The MRT Bonds

• US$66,000,000 9.50% Tranche 1 due 2007• US$30,972,000 zero-coupon Tranche 2-A due 2008• US$30,972,000 zero-coupon Tranche 2-B due 2009• US$33,885,000 zero-coupon Tranche 2-C due 2010• US$81,464,000 zero-coupon Tranche 2-D due 2011• US$99,913,000 zero-coupon Tranche 2-E due 2012• US$100,884,000 zero-coupon Tranche 2-F due 2013• US$100,884,000 zero-coupon Tranche 2-G due 2014• US$1,197,155,660 Pass-through Tranche 3 due 2025


The MRT Bonds (Notes)

Described by the Issuers as:• backed by future dividends from MRTC, arising from

equity rental payments (ERPs) • The ERPs described as direct obligation of the DOTC• The ERPs are direct, unconditional, and general

obligations of the government• DOTC’s obligations under the project agreement carry the

full faith and credit of the ROP.


Government Situation

• At this point, the NG was beginning to fall behind in its lease and maintenance payments.

• 2004 : DOTC signs Restructuring, Repayment and Forbearance Agreement (RRFA) with Sumitomo Corporation for maintenance fees

• 2005: Interagency committee was formed to study the government’s options for MRT III.

• 2005: Ayala Group sells equity to Goldman Sachs


Government Assumption of Loans

The NG began paying the loans of MRTC in 2006 Payments made

in Millions PHP

2010 1216.46

2009 1966.80

2008 3948.21

2007 2007.87

2006 1398.00 Total 10537.34


COA Report

• However, total figures per COA show PHP 32.08 Billion (USD 632million) for debt servicing on the basis of the Build-Lease-Transfer Agreement and the DOF Letter of Undertaking.


Land Bank

November 2008: Land Bank approved the purchase of MRTC interests in the form of:

• Unsecuretized Equity Rental Payments• Preference Shares• NotesAs of December 31, 2009: LBP interest in MRTC was

USD376.87 million.


DBP

• DBP’s outstanding investments in MRTC bonds on the other hand have a face value of US$676.25 million.


Executive Order 855

January 2010: President Arroyo ordered the National Development Corporation on its own or in partnership with other entities to acquire economic interest in MRTC in the form of shares

The NDC has not been able to complete the purchase of the bonds from LBP and MBP and the government has received offers from MPIC for MRT 3.


Original Investors of MRTC ORIGINAL INVESTORS OF MRT:

MRT EDSA Line

MRTC

MRT Holdings II

MRT Holdings 1 - 84.9

Ayala 23; FEL 18.6; Anglo 18.6; Rail Co. 18.6; Sheridan LRT 16; DBH Realty 5;

Fil Estate Management 12.65

Others 2.5


Economic Interests in MRTC THE MRT BONDS

MRTC

MRT Holdings II


Ayala 23; FEL 18.6; Anglo 18.6; Rail Co. 18.6; Sheridan LRT 16; DBH Realty 5;

Fil Estate Management 12.65

Others 2.5

MRT Holdings III DIVIDENDS FOR 25 YEARS Goldman Sachs

Elliot Holdings

DBP/ LandBank


The entry of MPICWith the Entry of MPIC


LBP/DBP 19.9 ; (FEL) MPIC 18.6; Anglo (MPIC) 18.6 ; Rail Co. 18.6; Sheridan LRT 16; LBP/DBP 4.8 (MPIC/DBH? 5)

FEL Prop (MPIC) - 8.7

FELI (MPIC) - 4

Rail Systems, Inc. 1.4

Rapid Urban 1

MRTC

MRT Holdings II

MRT Holdings III DIVIDENDS FOR 25 YEARS Goldman Sachs

Elliot Holdings

DBP/ LandBank


Operations Subsidies by NG

For the year 2012 : DBM has allotted the amountPhP 4.289 Billion To cover :Deficiency between the projected revenues P2,814,625,000

and obligations under the BLT agreement for MRT 3 P7,104,490,000


Moving forward….


AFCS

Legal Considerations :• MRTC owns the current AFCS facilities. BLT contract

provisions to be studiedFinancial Considerations:• ERPs remain despite enhancement


AFCS Options

Financial:• Force MRTC to replace the AFCS with working onesLegal:• Judicial determination on the state of the facilities

(leased? owned?)• Consider maintenance contract between Sumitomo and

DOTC (not MRTC)• The future maintenance contract to be bid out by DOTC

(not MRTC)


THANK YOU!!!

mrt3 blt contract

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