BMA sorely needs financial advisers
published : 22 Sep 2022 at 04:00
newspaper section: Oped
On Sept 7, 2022, the Central Administrative Court ordered the Bangkok Metropolitan Authority (BMA) and its wholly owned subsidiary Krungthep Thanakom (KT) to pay Bangkok Mass Transit System Public Company (BTS) back overdue Operating and Maintenance (O&M) fees on extensions 1 and 2 of the Green Line (Sky Train) in the amount of 11.75 billion baht within 180 days.
Obviously, neither the BMA nor KT have the ability to pay such an amount and are buying time by planning to appeal the case to Supreme Administrative Court. In my view, there is almost no chance of the BMA and KT winning the appeal.
The 12-billion-baht debt is the tip of a gigantic iceberg. The 12-billion-baht overdue fee only covers one year of services. According to the contracts, the BMA and KT agreed to pay the BTS approximately one billion baht per month for O&M services until the end of the contracts in 2042. The total agreed fees in the contracts add up to 351 billion baht. And that's not all. The BMA and KT owe the BTS another 20 billion baht for the Mechanical and Electrical (M&E) services of the two extensions. As present, the BMA is more than 40 billion baht in debt to the BTS. And worse, the debt is increasing by one billion baht per month for the BTS's continuation of the O&M services. Finally, the BMA also owes the Mass Rapid Transit Authority of Thailand (MRTA) 65 billion baht for the construction costs of the two extensions, with interest.
In total, the final cost of these two extensions is 418 billion baht. Given an annual budget of 79 billion baht, the BMA has no possible means to pay that. What will be the future of the BMA if these financial problems are not solved? Bankruptcy seems to be the logical answer. Or the BMA could bring financial adviser(s) to the rescue. May I give free financial advice on the matter?
My first bit of advice is not to extend the BTS's concession on the main Green Line which ends in 2029. It is not worth it. The new concessional fee would cover only a small fraction of the 418 billion baht of financial needs. I will give a mathematical illustration. If the concessional period is extended by 13 years to 2042 to coincide with the ending of the BTS's O&M contracts and the agreed concessional fee is 5 billion baht a year, the BMA would receive only 65 billion baht, or 15.6% of the required amount. How would the BMA come up with remaining 353 billion baht? Last year, the BTS made 6 billion baht in pre-tax profit on the main Green Line. To agree to 5 billion baht of annual concessional fees is already very generous of the company.
To put it another way, the BMA gets 5 billion baht a year from the BTS for main line's concessional fees (if lucky) and pays 12 billion baht a year to the BTS for O&M services on the extensions (legally bound by existing contracts). How will the BMA come up with 7 billion baht to fill the gap, not to mention 40 billion baht of the already incurred debt to the BTS?
Governor Chadchart Sittipunt might like this idea as he campaigned against awarding the BTS an extension of the Skytrain concession. He preferred a competitive bid, not a negotiated deal. If the governor yields to financial pressures, particularly from via court orders, and okays an extension of the concessional period to the BTS, he would likely receive some harsh criticism and be thought of as an untrustworthy governor.
I never perceived the BTS as a villain; it is a business entity, listed on the stock market. It has to work to the best benefits of its shareholders. During bad times, the BTS made big losses and had to go through a debt-restructuring process. The company once told me that without a substantial debt haircut, the company would unlikely see profits.
Let's re-examine the Green Line's financial burdens to the BMA. There are three key points. First, the outstanding debt of 40 billion baht to the BTS. Second, the annual 12-billion-baht O&M fees. Third, the construction (and interest) debt of 65 billion baht to MRTA. The third one is easy to manage since it is debt to the government. The Thai government should consider it as a public service obligation and a gift to the people of Bangkok. In short, no payment.
The 12-billion-baht annual O&M fee can be paid from ticket sales. To mathematically cover that amount, there must be ridership of about one million per day, 365 days a year, paying an average fare of 30 baht each on the two extensions. In reality, the BMA would be extremely lucky to collect half of that amount in ticket sales, which means that it would have to find an additional funding source of 6 billion baht per year to pay the BTS.
The remaining issue is the 40 billion outstanding debt to the BTS. Some 12 billion baht of that already has the court's order and the clock of 180 days is ticking. An easy solution is to give a concessional extension to the BTS in lieu of debt payments. At this point, the BMA's hands are tied, and it apparently has little bargaining power. Apart from the court's order, BTS also has O&M contracts on the extensions until 2042, which makes it an important obstacle for anyone else to compete. How many more years of concessional extension must the BMA give to satisfy this outstanding debt? If the negotiations fail, then governor Chadchart and Bangkok's citizens are doomed.
My suggestion is to have an international bidding for the concession of the main Green Line. The key point is that bidders must show "other income" plans, particularly from real estate developments both inside and outside stations. It is expected that other income will be half of the total income, like the case of the Hong Kong MTR which posted 44 billion baht in profit last year as opposed to BTS's profit of 6 billion baht (pre-tax). The building of feeder lines, such as the Gold Line linking the BTS and Krung Thonburi with Iconsiam is much encouraged to enhance real estate development income.
Time is running out. Even with an appeal, the BMA can postpone debt payments for only a few more months. It must get financial adviser(s) involved to come up with a bidding plan for the to-be-expired Green Line concession as soon as possible. Of course, the BTS and its real estate development partners are welcome to join the bidding.
Chartchai Parasuk, PhD, is a freelance economist.