Northrail contract 'ambiguous’, review ongoing
Lala Rimando, Newsbreak, abs-cbnNEWS.com | 08/13/2008 12:37 PM
Printer-friendly version | 
Send to friend | 
Share your views
An ongoing review of the North Luzon Railway (Northrail) contract with the Chinese contractor by a due diligence team shows that there are ambiguities in how to handle cost overruns and foreign exchange differences. These have partly resulted in the delay in the construction of the 32-kilometer railway that was supposed to be easing traffic between Metro Manila and Bulacan by February 2010.
Gary Olivar, a senior adviser on the financial and economic issues to the newly appointed group of Northrail president Eduardo Pamintuan, told abs-cbnnews.com/Newsbreak that the ongoing negotiations to settle the $299 million that the designated project contractor, Chinese National Machinery & Equipment Group (CNMEG), demanded to add to the current $421-million agreed upon and signed construction cost are due to the ambiguous contract.
Olivar noted that the contract, which stipulated a three-year construction period starting February 2007, was silent on two things: the procedure for handling cost reimbursement claims due to work variations and delay, and on high inflation rates and foreign exchange valuation. Although the contract was in US dollars, it does not specify that the project cost is pegged on that currency even if there are fluctuations in the exchange rates.
Of the additional $299 million that CNMEG was demanding, almost two-thirds, or
$211 million, was mainly due to foreign exchange losses ($106 million), inflation ($71 million), and costs of the delay in construction. The remaining $88.63 million was due to variations in the original scope of work, such as the need to build viaducts instead of embankments in several areas.
In February 2008, CNMEG unilaterally suspended work on the Northrail project after these issues were not resolved.
‘Sincere and friendly’ talks
When President Gloria Arroyo visited China recently to attend the opening of the Beijing Olympics, the group of Pamintuan, trade Secretary Peter Favila and others met with officials of the Chinese Ministry of Commerce and senior executives of CNMEG where there were "sincere and friendly" discussions to affirm each other's commitment to finish the Northrail project.
Olivar said there were several efforts before the Beijing trip to show "good faith" on the Philippine side. These efforts include the hiring of six survey teams to assess the requirements of the families to be relocated since their properties are along the new and existing right-of-way areas. A few days before the trip, excavation work and diversion of utilities, like phone lines and electricity wires, started in Balagtas and Guiguinto towns in Bulacan.
Likewise, Mike Defensor who previously oversaw the opening of the long mothballed Terminal 3 in Manila airport, was also tasked to join the Northrail team. His main role will be to coordinate with the local governments along the entire 32-kilometer stretch and rally their support in the relocation and clearing works.
Previously, CNMEG blamed Northrail for the construction delays because of its inability to clear obstacles within the right-of-way areas and to complete the squatter relocations.
From diesel to electric
With less than two years before the Arroyo government steps down in 2010, Northrail officials are pushing for CNMEG to resume work within the year. That way, there would at least be "substantial completion" of the first 32-kilometer section of the 80-kilometer rail connection between Manila and Clark, which has an international airport and export processing zone.
But while the Northrail officials continue to negotiate with CNMEG for the $299-million additional project cost, the due diligence team, led by Olivar, is also taking advantage of the time to review the project's assumptions and costs.
Olivar said one of the "items on the table" is the possible change from diesel-run trains to electricity-powered ones.
Critics of the project previously noted that diesel-run trains are not environmentally friendly and limits the capacity of the trains.
Olivar said the rising cost of fuel prices, including diesel, and the potential need to have flexibility in traffic capacity, have made the due diligence team consider an alternative.
"It all depends on the economics of it," said Olivar. "Electricity-run trains, in principle, may mean more upfront costs. But it will also depend on the net present value of the project."
"We'll revalidate everything and see if we can change some of the premises as we move forward," Olivar said.
