Betting on Bankability: Picking up the pace of Manila’s Light Rail Transit system

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Photo credit: joyfull/

When the Manila Light Rail Transit (LRT) extension project reached financial close in March 2016 it was a landmark event for the Philippines and for Southeast Asia. It is an achievement for an enormous project worth some US$1.1 billion to go ahead in a region with not much of a track record of large-scale transport Public-Private Partnerships (PPPs). The project’s winning formula is a combination of at-times difficult ingredients: government responsiveness, a balanced risk profile, and project bankability.

Government Responsiveness

The Manila LRT is a challenging project. As well as taking over and upgrading the existing line – Southeast Asia’s oldest surviving metro rail system and the world’s busiest light rail network – the project required an extension to the 20.7 kilometer corridor, which saw an average of 400,000 passengers daily.
But the Philippines’ infrastructure gap, exacerbated by continuous budget constraints, threatened to pose bigger challenges, potentially impeding prospects of higher growth. Manila’s Light Rail Transit system was particularly impacted by a decade of insufficient government spending, leading to poor maintenance, frequent shut downs, ineffective operating and emergency systems, and inadequate security. Over a third of the 130 light rail vehicles didn’t run or failed international safety standards.   
In response the government took decisive action to enable private sector investment. In 2010, a Presidential Executive Order enabled the government to establish the Philippines Public-Private Partnership Center and to reshape the institutional and regulatory environment for PPP implementation. The transport sector would be prioritized, and the Manila Light Rail project would be a key focus of this new and ambitious PPP program .
With a pipeline of over 20 projects with indicative costs of some US$27 billion, the scale of the PPP program was indeed ambitious. And the private sector was eager to see some results.

Project Bankability and a Balanced Risk Profile

The start of the Manila LRT project was not promising. The first tender in 2012 failed, with three of the four shortlisted bidders declining to submit a bid. Only the Light Rail Manila Corporation, or LRMC, submitted a conditional bid below the asking price. The shortlisted firms then provided feedback to the Light Rail Transit Authority (Grantors) about the ‘deal-breakers’ and the tender was reissued in September 2013 with a more commercially viable structure. After multiple bid extensions and further negotiations, the LRMC was formally awarded the 32-year concession in June 2014.
The ‘deal-breakers’, unsurprisingly, referred to a disproportionate allocation of risks, including delivery of rights-of-way. Risks impede a project’s bankability, as ideally there must be optimum risk transfer between the public and private sector.
Examples of some of the risks that were restructured include:
  • Delivery of the rights-of-way, which was a key risk for the LRT project, as is often the case with metropolitan light rail projects. As the party best positioned to manage this risk, the Grantor bore the rights-of-way risk under the revised concession agreement, with delays in delivery leading to time and cost relief. A continuing failure to deliver the rights-of-way provides the LRMC with a right to terminate the concession, as well as a payment for the termination. To address the risks around delivery rights-of-way, financing was split into two tranches. The first tranche was specific to the rehabilitation of the existing railway system. The second tranche was staggered and made flexible, depending on rights-of-way delivery. This allows project risks to fall away as rights-of-ways are delivered, with technical solutions ensuring that the extension system can operate unimpeded by delays.
  • Agreement from the Grantor to bear certain costs of remedial works that would bring the existing system in line with current operating requirements, and, subject to a cap, the costs incurred by the LRMC to address structural defects in the existing system – a key concern for the LRMC. 
  • Adoption of an Operations and Maintenance strategy by the LRMC that is self-operating, supported by a long-term technical services agreement with an internationally experienced transportation operator. With ready access to expertise, the LRMC can quickly develop in-house capability for oversight and management. 
  • To address the risks of revenue uncertainty, compensation for the LRMC when approved fares would be lower than an agreed ‘notional’ fare
  • Although the LRT had robust ridership and revenue, the concession provided for sufficient compensation mechanisms to ensure the LRMC could return capital to lenders. The LRMC is also allowed to develop ancillary commercial businesses, in order to boost cash-flow and supplement revenue.
  • A bankable termination regime under the concession agreement that provides sufficient coverage to lenders with respect to the outstanding debt amount, financing, and other related costs under various events of default. In other PPP agreements in the Philippines, lenders face incurring discounts to their outstanding funds.
It should be noted that the concession agreement required sponsors to be exposed to full traffic and demand risk. Given current overcapacity issues, lenders were comfortable with this risk.
Ultimately, it was the spirit of communication, good will and partnership that ensured a balanced risk profile and led to a successful PPP financial close.
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.


Bill McCormack

Joint Asia Managing Partner, Shearman & Sterling LLP

Anna Chung

Counsel, Shearman & Sterling LLP

Chad Passlow

Associate, Shearman & Sterling LLP

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