Shrunk cost

TO SOLVE the hellish traffic in Metro Manila, the call recently got louder for the next Congress to give the next President, i.e. the motorcycle riding Duterte Harley, emergency powers.

That seemed to be, at first glance, some desperation move in the business sector. Even the Makati crowd was suspiciously overly vocal in its favor. There seemed to be a sustained campaign to push for the emergency powers.

That would mean the next President could do anything at all in whatever that had anything to do with traffic, such as giving away railway contracts left and right, and he could do it all legally.

Everybody, of course, would love to see the government doing something, finally, about the lengthening commute time in the metropolis, now said to take between two and four hours—one way.

But do we really know what we need to do to solve the traffic problem?

Think tanks in urban planning always applied the “four E’s” of traffic management— namely, enforcement, education, engineering and economics—and in all these four areas, Metro Manila seemed to be a miserable failure.

Question: In what area in traffic management would the next President, already said to possess immense power more than any other chief executive of democratic governments in the whole world, really need some fearsome emergency powers?

Based on the noise in the business sector, he would need them to hurry up the “engineering” part of the solution–i.e. infrastructure.

In other words, it would mean, “no questions asked” on multibillion-peso contracts between the government and the private sector on infrastructure projects.

The last time that our government used the “no questions asked” approach to enter into some huge fat contracts with private companies was more than 20 years ago during the power crisis of the 1990s,

At that time, the government entered into “take or pay” contracts with so-called IPPs, those lecherous independent power producers, guaranteeing that the government would pay the IPPs for their plant capacities, whether or not we used them.

Thanks to the “no questions asked” method of awarding contracts, we, the tax-saddled public simply got fried, toasted, and grilled in the past 25 years.

Moreover, because the government incurred mountains of debts due to those contracts, experts said we would still pay for them many years from today.

For, when it came to private sector involvement in utilities—whether in power or telecom or mass transport—in other progressive countries, they would always look out for this scourge called “regulatory capture.”

Let us just say that it is something that utility companies will kill for.

Anyway, some 30 years ago during the time of Tita Cory, we already decided that Metro Manila would need a wide web of urban railways to solve the traffic problem, and the DOTC at that time even announced plans for seven LRT lines, initially.

By the way, history showed us that, by its nature, the urban railway business never made money, and so for the longest time, governments in other countries would have to undertake the projects themselves.

With our government perpetually short of cash, nothing much happened with those LRT plans of the administration of Tita Cory.

Subsequently the next administrations were somehow able to convince everybody that private companies should do those LRT lines, thereby establishing an irreversible trend that we would see up to now.

The private sector nevertheless must make money in any business, even in the railway business that, by itself, without the other profitable collateral businesses like real estate, would always be a losing proposition.

Let me correct myself: The private sector would always want to make quite a lot of money. All right then, they would always want to make a fortune.

How could they do it in the money-losing railway business if not through “regulatory capture?”

Yet, in the “engineering” aspect of the four E’s of traffic management, railway would be the one sure way to solve the monstrous traffic jams along the major streets of Metro Manila.

Guess what—we did not even think of forming a regulatory body for railways, which for instance could decide on the legality of the feature called “automatic” fare increase in one recent railway contract between the government and a private group.

That happened to be the one involving the 11-kilometer LRT-1 extension from Baclaran to Bacoor (Cavite), awarded by the DOTC under our leader Benigno Simeon, aka BS, to Light Rail Manila Corp., or LRMC.

It was apparently not a coincidence that LRMC had as major investors the Ayala group, the MVP group and foreign firm Macquarie.

LRMC was the lone bidder for the LRT-1 extension project costing some P64 billion. After the DOTC declared it “winner” in the supposed bidding that only had one bidder, it proceeded to take over the drafting of the contract.

Word got out that the incoming administration of Duterte Harley had named a new DOTC undersecretary for rail, a guy named Noel Eli Kintanar, who according to Bloomberg, was an executive in the Ayala group since 2007.

Another listing put Kintanar as COO of the AC Infrastructure Holdings, which belonged to the Ayala group, with the “AC” in the name standing for “Ayala Corp.”

Immediately, word also went around that Kintanar, in fact, was one of those who drafted the controversial contract between the government and LRMC on the “privatization” of the LRT-1, together with the representative of the World Bank financing arm IFC.

And this would be the guy in charge of rail projects under the administration of Duterte Harley?

Anyway, the DOTC kept the contract with LRMC a top state secret for the longest time, with even Congress failing to get a copy of it during the budget hearings of the DOTC for 2016.

From the little of what was leaked to the public, the contract seemed to obligate the government to cover half of the cost of the LRT-1 extension.

Thus, the administration of Duterte Harley would have to cough off some P32 billion for the LRMC venture—in cash—on top of putting the entire existing LRT-1 infrastructure into the venture for free.

In the contract, supposedly dictated by LRMC upon DOTC under our leader, BS, the existing LRT-1 was deemed a “sunk cost.”

The concept of “sunk cost” is a popular tool in business when guys like Kintanar try to make a management decision. It is pure fiction. It means the cost is already beyond recovery, such as the “capital” sunk in a project that is being abandoned. The money that the company already spent on the project is the sunk cost.

In other words, the “sunk cost” would be something that could no longer be recovered, the asset having no resale value whatsoever.

And the DOTC under our leader, BS, accepted the entire 20 km of the existing LRT-1 as an irrelevant “sunk cost?” Even with its revenue of P9 million a day, netting an operating income of P6 million a day, or operating income of more than P2 billion a year—it had no value and no longer relevant? Did they have their brains shrunk by some shrink?

Various groups—which called themselves “progressive,” although media tagged them as “left leaning”—already filed cases in court seeking to nullify the contract that they called “lopsided against the government.”

Or maybe the new President, Duterte Harley, can use emergency powers to cancel it.