Taiwan taxpayers taken for a high speed ride?

By Michael Taylor, Asia Times, 25 January 2003

TAIPEI—In the words of the woman who knows better than anyone else, it was always an extremely over-ambitious project. Nita Ing, heir to a Taiwanese construction empire, calls the shots at the Taiwan High Speed Rail Co (THSRC), the primary contractor for the construction of a modern rail lineo linking Taipei with the port city of Kaohsiung in southern Taiwan. More than 10 years in the planning, a project of this scope will not recur in Taiwan for many decades to come. With final costs forecast at about US$14 billion, this 345-kilometer rail link is currently the largest build-operate-transfer (BOT) project in the world.

Or so its builders would like us to believe. The reality is far more interesting.

What is at issue here is not the project’s size or complexity. Although it will not rank among the world’s longest high-speed rail lines when completed, it will span the length of the island and link together its most populous areas—a total of perhaps 18 million people, or more than 90 percent of the current population. With the immense amount of planning, rezoning and coordinating among all of the various and competing levels of government (both central and local), thousands of subcontractors, and of course, the media, no sane person would submit that Ing’s job is easy. And this reporter will not pretend to have the expertise to judge the job that the THSRC head has done so far. There are legitimate questions, however, over whether or not this project is really BOT at all.

The problem touches at the heart of the BOT development model, which theoretically is a mechanism for private capital to fund public infrastructure projects. Each BOT case is of course subject to many variables, but generally the idea is to get private interests to fork out the money to build public facilities; for example, a bridge. In return for this largesse, the builder then gets to play toll-booth keeper for a set amount of time, long enough (the developer hopes) to generate a fat return on investment. Regardless, the developer must transfer the facility to the government at the end of the pre-set period. The system is commonly used to build highways and toll bridges in the United States and Britain.

Depending on your viewpoint, BOT in Western countries is an efficient and cheap way for a government to develop national infrastructure, or else it’s an efficient and fast way for corporate interests to bilk the public while maintaining a veneer of public-mindedness. Both outlooks are probably justified, but in any case, the theory is likewise gaining adherents in halls of power throughout much of Asia ex-Japan, where increasingly democracy-minded masses are beginning to demand social-welfare spending just as export-led economies have been hit by a slow US economy.

This dynamic is putting a squeeze on national budgets and fueling, in Taiwan at least, a burgeoning deficit and potentially worrisome national debt. In this context, the private sector is seen as the rescue squad—and with Taiwan now in dire economic straits, the government is increasingly looking to attract white knights with foreign names and crests (such as the ever-popular US$) to help build up the national infrastructure of which the rail link, scheduled for completion in 2005, is supposed to be the backbone.

But based on the history of Taiwan’s first official BOT case—believe it or not, this massive railroad project—both foreign and domestic caballeros are likely to stay high in their towers while keeping their drawbridges snugly closed. Ing and her confederates won the contract from the Taiwan government in September 1997, mainly on a low-bid offer and a pledge to raise and provide private-sector capital to build the project. But even at the project’s commencement, the government also promised to pony up US$3 billion to buy rail-related property, build supporting road and mass transit systems, and to hand over a 15km underground rail line into Taipei as well as platforms at Taipei Main Train Station. The project was never BOT in the first place, says People First Party legislator Norman Yin.

Perhaps not, but these government concessions were demanded by the THSRC when it drew up its contract proposal—and, says Ing, were necessary for the deal to make business sense to her and her partners. When speaking with planning agencies, potential investors likewise say that they will only be interested in BOT in Taiwan if the central government backs them firmly, including tax breaks and other deal sweeteners. That’s public money—although few in either government or industry characterize it as such. But given its second-class (and decaying) infrastructure, Taiwan might not have any choice.

The rail project bears this assertion out. After promising to raise all of its equity from among the THSRC consortium members, banks or capital markets, the contractor ran into financial trouble, which forced the government to fund the project directly. Today, the original investors together hold about 40 percent of outstanding shares of the THSRC—but the single largest investor is the Taiwan government. State-owned Taiwan Sugar Corp owns a 10 percent stake, and the Executive Yuan’s Development Fund, which has been used in the past to fund companies such as Taiwan Semiconductor Manufacturing Corp, last year purchased a further 6 percent of THSRC shares.

That 16 percent stake has the potential to get much higher. The THSRC was unable to secure sufficient backing on its own, so the government agreed to guarantee another (roughly) US$9 billion in loans from a syndicate of 25 domestic banks. In other words, the government now must take over the entire project, assuming full financial responsibility, if the THSRC fails either during construction or at any time during the following two decades of operations before the scheduled transfer. The opposition-dominated legislature made a show of putting the brakes on public responsibility in June 2001, but it was already a done deal.

Having a high-speed railway could be a tremendous boon to densely populated Taiwan. The train, it is hoped, will allow people to move out of cramped urban areas, integrating the island’s core western corridor into a modern megalopolis. There is no real evidence that the THSRC will fail to deliver the final product or to operate it well and profitably. But the company is hardly a model of transparency either, refusing to entertain questions it believes might foster controversies—as if a US$9 billion commitment of public funds needed the help of media exaggeration to become controversial.

Judging by the raised eyebrows among business people at a recent investment conference when the company made its private funding claim, it does seem likely that the big secret about the government’s guarantee is out.

In establishing the high-speed railroad, Taiwan has stumblingly followed a Japanese development model couched in American BOT terminology. In the end, it might not turn out to have been such a bad thing, but BOT clearly has not worked in this vital case. The railroad project, which has at least another three years before completion, will be carried out. It is extremely unlikely that the THSRC will be allowed to go bust—but taxpayers will continue to fund the project one way or the other.