• The fare hike controversy

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    Govt justifications for higher rail fares slammed by critics on economic, legal grounds

    Second of three parts

    IN comments following a public event in Romblon last week, President B.S. Aquino 3rd castigated critics of the sudden increase in light rail fares for being “full of complaints but not solutions” to the controversy, a challenge to which the critics responded by filing four petitions to stop the fare increase before the Supreme Court.

    While the four complaints differ in individual details, they all essentially question the government’s move on two grounds: First, that the decision-making process and authority of the Department of Transportation and Communications (DOTC) to raise fares was not legal; and second, that the increase in fares is not justified by economic necessity.

    A close examination of the confusing financial arrangements of Metro Manila’s two commuter rail systems – the Metro Rail Transit Corporation (MRTC) which operates the MRT-3 line plying Edsa, and the Light Rail Transit Authority (LRTA) which operates the oldest and newest lines, the LRT-1 and LRT-2 – shows that the critics may in fact be right to reject the government’s “economic necessity” argument.

    Although the level of government support for the light rail systems may be a matter of contractual commitment, serious questions arise as to whether or not that support is actually needed for cost-effective operations.

    Fare hike a windfall for operators
    According to DOTC Secretary Joseph Emilio Abaya and Malacañang’s chorus of presidential spokespersons, the reduction of government subsidies that resulted in fare increases of between P4 and P8 for most commuters will save P2 billion of the P12 billion spent annually. Citing the “unfairness” that citizens in other parts of the country are obliged to subsidize fares for commuters in Metro Manila, Secretary Abaya said in an interview shortly after the fare hike was announced, “I’m referring to the vast majority of Filipinos outside of Metro Manila – those in other parts of Luzon, in the Visayas, and in Mindanao, most especially those whose lives have been severely affected by typhoons and calamities. They will be the real beneficiaries of a more equitable distribution of these savings.”

    This justification is in fact made official by DOTC Department Order 2014-014, which reads in part, “It is envisioned that this fare scheme will result in an equitable distribution of government funds currently dedicated to subsidizing the operations of the above rail lines in Metro Manila to much-needed development projects and relief operations in other parts of Luzon, the Visayas, and Mindanao.”

    Whether or not the savings will be put to productive use – and follow-up statements from Abaya have suggested that at least part of it won’t be – the clear beneficiaries from the subsidy reduction are, ironically, the operators of the light rail system.

    Depending on the source, the “real” maximum fare on any of the three light rail lines is given as either P55 or P60; government spokespeople have generally referred to the higher figure. Thus, government has been subsidizing between P40 and P45 of the fare, or an average of about 72 percent of all fares.

    Based on total ridership and total revenue figures extracted from data provided by the MRTC, the average fare paid by the estimated 188 million passengers of the MRT-3 in 2013 was P12.32, making the average unsubsidized fare P44.01. Ridership figures for the two LRTA lines for 2013 were 171.8 million for LRT-1 and 71.45 million for LRT-2, resulting in average “user paid” fares of P14.71 and P13.29, respectively, and respective average unsubsidized fares of P52.54 and P47.46. (Note: “passengers” in this usage refers to individual trips, not individual people; the actual number of people using the light rail system daily is estimated to be about 1.3 million.) Across the entire system, the average fare subsidy works out to P34.56 per passenger.

    At that rate, P12 billion in total government subsidies would cover the fares for 347.2 million passengers annually; reduced to P10 billion, the subsidies would cover 345.6 million passengers.

    The three lines combined, however, carried approximately 431.3 million passengers in 2013. At first glance, that tends to support the contention made by presidential spokesman Edwin Lacierda on January 5, the day the fare increase took effect, that the fare hike was “not even enough” to cover the government subsidy or fund improvements to the system.

    There are some problems with that notion, however. The first and most glaring is that the removal of P2 billion in subsidies and corresponding increase in passenger fares will result in a revenue increase of about P618 million for the LRTA and MRTC; the average fare increase of P6.07 will, at current ridership levels, result in P2.618 billion in additional farebox revenues, more than compensating for the reduced subsidies.

    Operationally profitable
    One troublesome indicator that has been reported several times since the fare hike controversy erupted just before Christmas is what is called the “farebox ratio.” The farebox ratio is the difference between fares collected from passengers and operating and maintenance costs; if the ratio is 1.0 or higher, it indicates that fare revenue is enough to cover those costs.

    The MRT-3 reportedly has a farebox ratio of 1.17, based on 2012 figures; more current information is not yet available from the MRTC. (Officials from both the MRTC and LRTA declined to answer questions pertaining to the fare hike issue, citing the pending petitions before the Supreme Court). For the LRT-1, the farebox ratio for 2014 averaged 1.19 through October; for the LRT-2, the average for the same period was 0.99. In 2013, the farebox ratios for the LRT-1 and LRT-2 were 1.26 and 0.91, respectively.

    In other words, from a purely operational standpoint, the MRT-3 generates a profit of about 17 percent; for the two LRTA-managed lines, the return is about 9 percent.

    That being the case, fare subsidies would not be necessary for the basic operations and maintenance of the light rail lines; although the margins are not large, they are still positive. That the two rail operators still require subsidies from the government can likely be accounted for by other expenses: Debt service, various administrative costs, and the guaranteed rates-of-return in the two concession agreements (about 15 percent in both cases).

    When a subsidy is not a subsidy
    Part of the apparent discrepancy between what the government claims is paid as subsidies and its apparent lack of results in terms of the reliability and safety of the light rail system might be explained by how those subsidies are recorded.

    According to the financial statement for the MRT-3 for 2013, the total subsidy income from the national government was P6.95 billion. Of that amount, however, only P4.83 billion was accounted for by actual Notice of Cash Allocations (NCAs) from the government; the balance of P2.1 billion was in the form of various credits for taxes, duties, and licenses, with an additional small part of the total, about P5 million, being in the form of gains on foreign exchange transactions through the year.

    For comparison, in 2012 the total subsidy for the MRT-3 from NCAs was reported as P6.77 billion, with other credits amounting to P2.06 billion. In 2012, the MRT-3 reported a surplus (income over expenses) of P531 million; in 2013, this had swung to a deficit of P1.38 billion.

    What this means is that of the P12 billion subsidy amount being cited by government officials in statements about the fare hike issue, only about 70 percent, or about P8.4 billion, is in the form of actual cash outlays; the rest is in the form of various credits, foregone revenue rather than actual spending on the government’s part.

    In interviews shortly after the fare hike took effect, DOTC Secretary Abaya may have given a clue as to how the government intends to reduce the subsidy when he admitted that roughly half of the P2 billion in “savings” would be redirected to escrow accounts to cover equity lease payments to the two system operators under the terms of the build-lease-transfer contracts. The remaining P1 billion could presumably simply be realized through adjusting government tax and other miscellaneous income assumptions upward.

    All this forms part of the basis for the general argument of the Supreme Court petitions against the fare hike that the subsidies are not essential to providing the public service of the light rail system, and that the fare hike is unjustifiable as a result. In the final installment of this special report on Friday, some of the other allegations made in the Supreme Court filings will be examined, in particular serious questions as to the legality of the way the fare was implemented by the DOTC.

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