The arithmetic behind and beyond the proposed Manila Subway

Though my present occupation is that of an innkeeper in Cebu, in a past incarnation I was an investment officer at World Bank-IFC on the Latin American desk. My specialty was running the numbers on private-sector projects, from small ones like a US$ 200 thousand sugar-mill rehabilitation in Haiti, to larger ones like a US$ 1 Billion copper mine expansion in Mexico.

“Running the numbers” includes:

determining that the cost estimates are reasonable and comprehensive;

forecasting the financial and economic returns, and

evaluating whether a project has an appropriate scope and economy of scale

In all investment analysis, a healthy scepticism is useful. On one occasion I was assigned to recommend ways to improve profitability in an investment company headquartered in Midtown Manhattan, supposedly worth US$ 1 Billion. It was owned by the world’s then top companies in banking and industry (Citibank, GE, Morgan, IBM, Deutsche, etc. – and that was the problem: with so many illustrious parents, no one felt responsible for watching its numbers). After visiting most of its branches around Latin America and evaluating its asset portfolio, I realized it wasn’t even worth US$100 Million. I recommended shutting it down. Suddenly, a lot of big-name banks and companies were telling me my numbers must be wrong. But they weren’t. The company was liquidated.

The proposed 36-km Manila Subway Phase One also has many illustrious parents or backers in both government and industry. And, as with the case described above, no one has looked closely at the numbers.

First, let’s look at project cost. Even in ideal circumstances (no corruption, highly competent execution, favorable market prices), the cost of most projects is a skyward-moving target. Four years ago when it was first put on the table, the Manila Subway was estimated to cost US$4.5 Billion. Now the cost is estimated at US$ 8 Billion.

Let’s pick this 8 Billion number apart. It amounts to US$ 220 million per kilometer of track. The current estimate for subway construction around the world is US$ 250 million per kilometer. Some subway systems have come in at US$ 350 million per kilometer. Given our country’s record of pervasive corruption and widespread incompetence, the idea that the Manila Subway will cost less than the world average is unrealistic.

No doubt, some people will be able to produce conclusive “proof” that US$ 8 Billion is the upper-limit project cost. Believe them at your own risk. The final cost of this “phase one” subway will be considerably more than US$ 8 Billion. Count on it.

Second, let’s talk about future operating viability. Almost all subway systems in the world are loss-making. The New York subway system, for example, costs the taxpayers US$8 Billion in annual subsidies; that’s with a US$2.75 ticket. The London Underground runs an annual deficit of almost US$2 Billion, with a typical per-ride price of US$3-4. Even the efficient Singaporeans, possibly the world’s most careful investors, lose US$200 Million a year on their subway, despite an enormous rental return on food and retail concessions. Though the Santiago (Chile) Subway’s operating results aren’t publicly available, there is little doubt that it is in deficit; when the government tried to trim the deficit just a little bit by raising ticket prices from US$1 to US$1.05, rioting ensued.

What does this mean? It means that after costing billions of dollars to build, the Manila Subway will not yield a positive future profit, but instead will continue to generate yet more losses. This is exactly comparable to depositing money in the bank, but instead of earning interest, you have to pay the bank every year for the pleasure of keeping your money there.

(To be continued)