Questions and an answer on San Miguel’s LRT-1 move

The biggest business group in the Philippines snubbed the bidding for the biggest infrastructure project of the government. Why is this raising eyebrows?

This is the LRT-1 project extending the current rail system to vote-rich Cavite. The consortium of conglomerates Ayala and Metro Pacific was the lone bidder last May 28, 2014 for the P65 billion deal. Map courtesy of PPP Center

This is the LRT-1 project extending the current rail system in Manila to vote-rich Cavite. The consortium of conglomerates Ayala and Metro Pacific was the lone bidder last May 28, 2014 for the P65 billion deal. Map courtesy of PPP Center.

Not viable. That’s the reason San Miguel Corp, the Philippines’ biggest business group, gave on why it backed out of the LRT-1 rail project up for grabs. The P65 billion (about US$1.5 billion) deal is the biggest infrastructure project under the Public-Private Partnership (PPP) program that’s President Aquino’ flagship strategy for infrastructure.

Why is San Miguel’s answer raising eyebrows? Let me count the ways:

One: Financial viability was a key reason the conglomerate has cited whenever it adds a deal or two to its diversifying portfolio. Of course. It’s what its stockholders, investors, creditors, analysts, rating agencies, and other watchdogs want to hear. It’s a basic answer to those who need NAV, ROE, ROI, ROA, EBITDA, cash flow, and other numbers to plug or compute in their spreadsheets. Their verdict — whether the deal is profitable and sustainable — has an impact on one of the country’s biggest supply chain stakeholders and employers. Whatever happens to San Miguel affects us all.

But San Miguel’s plunge into industries outside of its legacy food and drinks business has proven to involve bumps and losses along the way. Take the case of Philippine Airlines. Losses have been staggering since San Miguel acquired it in 2012, but executives’ out-of-the-box style and luck on areas they don’t control, like the lifting of bans by the EU and US aviation bodies, have kept many hoping there’s a brilliant financial and brand future ahead. It’s faith like no other.

That’s not the case with their telecommunications ventures. San Miguel has three (almost) franchises under their belt yet it has only the failed wi-Tribe broadband experiment to bet against the breadth and depth of influence giants PLDT and Globe Telecom have over every onshore and overseas Filipinos. We want more choices to keep our mobile phone and data access costs cheap and innovative, a promise San Miguel’s top honchos have made not too long ago.

Let’s not stray too far since it’s PPP we’re talking about. Remember that winning bid San Miguel made for the NAIA Expressway that will link the current Manila airport to other tollroads and the upcoming grand casino complex off Manila Bay? San Miguel bet a massive P11 billion to win it against its only rival’s P305 million. And San Miguel proudly paid the amount upfront and in cash!

We were scratching our heads. Is Ramon Ang seeing something in the future that we’re not? What will be making that short tollroad financially VIABLE sometime soon? We were given traffic, toll fees and other projections as reasons. Many were not convinced. But hey, they have a crystal ball. We don’t. Faith?

Note that 20 years to recoup an investment in LRT-1 rail project was something they found too long. We can only assume it probably won’t take NAIA Expressway that long to make money on. I still don’t know how. Offhand, the NAIA Expressway does not have financial incentives from the government. LRT-1 has tons of sweeteners. Beats me.

Two: This project has the superlatives in business and politics, so the knee jerk reaction of longtime PPP watchers, and the corporates, lawyers, finance people, those in the media, other skeptics, the jaded ones, etc. is to read between the lines. This is a country with a relatively small market that has been cited as a case study for political economy at work.

Then why snub a “statement” project of a national government that influences many aspects of San Miguel’s business? There are logical reasons, for sure, but I can’t shake off managing political risks and cultivating goodwill from the powers-that-be as reasons not too far behind.

The agency involved in the LRT-1 project is the Transportation Department, which is headed by Jun Abaya — a politician from Cavite province. His constituents are the main beneficiaries of the rail extension project since it will make commuting to and from imperial Manila faster and more comfortable.

Cavite is also vote-rich with a population of over a million. In the run up to the 2013 elections, President Aquino campaigned in Cavite at least 3 times, with Abaya as part of his entourage. The upcoming LRT-1 project that will extend the current line by 11 kilometers more was a consistent promise to the voters. I may be stretching it, but hey, just thinking out this question: Why not help Abaya and Aquino fulfill their promise?

One more: Diversifying San Miguel will still be dealing with Abaya and the Transportation Department in the Aquino government’s remaining two years. It has a US$10 billion unsolicited proposal for an airport that aims to replace NAIA, the “world’s worst.”

And it has an airport near tourist haven Boracay and an airline, both regulated by Abaya’s department. PAL’s growth potential is dependent on government for  policies and regulations friendly to airlines, and air talks with the governments of target destinations abroad.

So pray tell: Is project viability an acceptable answer for not joining the bidding? We’ll know for sure in 20 years. Sit back and watch.

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