Northrail contractor gets bigger fee for less work

December 07, 2010

MANILA, Philippines—Amendments in the supply contract for the North Luzon Railway (Northrail), former President Gloria Arroyo’s biggest planned infrastructure project, have increased to $1.8 billion the cost to complete the 80-kilometer rail link between Manila and Central Luzon, potentially making it the most expensive government project since the mothballed $6 billion nuclear power plant in Bataan.

In a new book, The Seven Deadly Deals: Can Aquino Fix Arroyo’s Legacy of Costly and Messy Projects?, Newsbreak reveals that the new figure is half a billion US dollars more than the $1.3 billion cost announced by government officials last year when they approved an increase in cost of the project.

Apart from Northrail, the book also looks at the Ninoy Aquino International Airport Terminal 3, the Metro Rail Transit 3, the Subic-Clark-Tarlac Expressway, the collapse of the Quedan and Rural Credit Guarantee Corp., the troubled tender for Mt. Diwalwal gold-rush area, and the problems besetting the Department of National Defense procurement of military equipment.
In the Northrail case, Newsbreak reveals that the scope of work of China National Machinery and Engineering Group (CNMEG), the supply contractor for the project, was reduced even as the contract price was increased from $1.18 billion to $1.3 billion. The additional $500 million will cover items that will no longer be delivered by CNMEG but by future private sector partners and Northrail itself.

For example, the number of train stations that CNMEG will build between Caloocan City and Pampanga has been cut to from 11 to only six. The remaining five stations are expected to be built by private companies, most probably shopping mall operators. Similarly, most of the rolling stock will no longer be provided by CNMEG but by the future operations and maintenance (O&M) contractor and Northrail.

The increase in the cost to complete Northrail is one major reason why President Aquino has ordered a comprehensive technical audit of the project in preparation for moves to renegotiate the deal.

Another is that the changes in the supply contract between Northrail Corp and CNMEG lack the proper forward budget cover, potentially making the new contract null and void.

The book quotes the new budget secretary, Florencio Abad, as saying that Northrail has not formally secured a legally binding forward budgetary cover from the Department of Budget and Management for the amended Northrail-CNMEG contract. While Arroyo and her Cabinet had decided to fund the additional costs from the budget in December 2008, that is not enough, said Abad.

Embarrasing project

Launched in 2004 as a great milestone in China-Philippine relations, Northrail has since become an embarrassing millstone in the necks of the two countries. Six years after it began, the project is only 15 percent complete as of end-2009 and is not likely to be finished until around 2013 at the earliest.

Lack of technical and financial preparations as well as legal challenges dogged the project, which was awarded without the benefit of a public bidding. The Senate’s attempts to investigate the project in 2005 were stalled after Arroyo issued Executive Order 464, which required department secretaries to first seek the president’s permission before appearing in legislative inquiries.

In February 2008, the project suffered its biggest setback when CNMEG unilaterally suspended construction work on the project. The Chinese firm agreed to resume work later that year only after Northrail had agreed to its demand for an increase in the contract price. The negotiations led to an amended supply contract that was approved by Arroyo and her Cabinet in late 2008 and early 2009. When the government decision was announced in March 2009, officials said the project cost merely went up from $1.18 billion to $1.3 billion.

But recent research by Newsbreak, which benefited from easier access to official documents following the change in administration in July, shows that the cost to complete the Northrail project could be as high as $1.8 billion and not just $1.3 billion because of the reduction in CNMEG’s scope of work.

Bulk of the extra costs will cover train cars and engines. Instead of delivering 62 four-car diesel multiple units (DMUs), CNMEG will just cover the purchase of an initial set of 4 eight-car DMUs while the future private operator will be bear the responsibility to acquire 30 eight-car DMUs. Northrail will also purchase 23 eight-car DMUS on the ninth year of operation.

Despite these problems, the Aquino administration is not about to scrap the amended Northrail-CNMEG contract but is instead working to renegotiate it to improve the terms, according to Jose de Jesus, the transport and communications secretary.

He said the new administration is still keen on completing the rail project which is a necessary component of plans to boost transport links between Metro Manila and Central Luzon. Diplomatic relations with China, the country’s fourth biggest source of official development assistance, is also another factor to consider, he said.


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