The government will provide a guarantee to ensure the profitability of the company that will eventually win the contract to operate and manage the Light Rail Transit (LRT) line 1 system.
At a pre-bid conference last Thursday, the Department of Transportation and Communications (DOTC) said the concession contract for the private sector’s half of the P60-billion project would include a “top-up” provision. This will represent the difference between pre-approved fares in the concession contract and the actual fares that the government will be able to implement when the time for adjustments comes. The difference in fares will be paid by the government to the operator.
The provision, the DOTC said, would ensure the long-term viability of the project from a “finance perspective.” This also eliminates the so-called regulatory risk on the part of the private sector contractor, which ideally should focus its efforts on improving efficiency of operations and driving up traffic.
“If we can’t implement what’s stated in the concession, then we will cover the difference,” Transportation Undersecretary Jose Perpetuo Lotilla said.
Lotilla likewise made the distinction between the LRT extension’s top-up subsidies and the take-or-pay provision in the existing 25-year concession for the Metro Rail Transit (MRT) held by a private consortium led by Metro Pacific Investments Corp. (MPIC).
The take-or-pay provision in the MRT contract, Lotilla said, ensured that the private investor received a 15-percent return on its investment. In the MRT contract, Lotilla said commercial risks were borne by the government, removing the incentive for the private sector to improve operations.
Last year, the government allotted P4.28 billion in subsidies for the MRT line to cover the deficiency between the projected fare revenue of P2.81 billion and obligations under the concession agreement of P7.1 billion.
In past pronouncements, Transportation Secretary Joseph Emilio Abaya said the government would take the same “top-up” approach in toll road projects to make up for the state’s inability to approve toll increases due to economic, political or legal issues.
The government hopes to award the P30-billion contract to extend LRT line 1 from Baclaran to Cavite in the first half of the year. The amount will cover the cost of construction and installation of electromechanical signaling systems. The winning bidder will be given the rights over fare collections at the train line for 35 years.
For its part, the government will borrow P30 billion from the Japan International Cooperation Agency to fund the acquisition of new train cars.