The planned construction of a high-speed railway linking Taipei in the north with Kaohsiung in the south is Taiwan's first major infrastructure project to be carried out on a Build-Operate-Transfer (BOT) basis. Does it have a future?
On July 1, 1998, numerous ranking government officials and local celebrities were invited to witness the signing of a contract for Taiwan's first major infrastructure project to be done on a Build-Operate-Transfer (BOT) basis. It was an appropriately lavish occasion, with mouthwatering food, champagne aplenty, and even an ice sculpture in the shape of a railway locomotive. But as the deadline approached, with still no sign of the principal signatories, the ice locomotive began to melt. Somehow it seemed like an ill omen. Eventually Lin Fong-cheng (林豐正), the minister of transportation and communications, and Yin Chi (殷琪), chair of the Taiwan High-Speed Rail Corporation (THSRC; see box, page 20), appeared to announce that the signing ceremony would have to be postponed on account of several "unresolved issues."
"The THSRC is demanding much more than we had previously imagined," Lin said. Yin countered that by saying that her consortium merely wanted a government commitment to complete its share of the work. Both parties then departed, leaving behind a stunned gathering of guests and journalists from Taiwan and overseas. Taiwan's biggest infrastructure project, worth several billion US dollars, seemed to have run into the buffers before leaving the station. In the following weeks, the sorry tale of bungling and mutual misunderstanding was rarely out of the headlines.
It was a mystifying story. Why would the THSRC risk forfeiting about NT$1.2 billion (US$21.4 million)--the cost of preparatory work and providing a performance bond--by its last-minute refusal to sign the contract? It soon became clear, however, that the parties were seriously at odds about the terms of the agreement they were supposed to sign.
On June 15 this year, the THSRC in effect presented the central government with an ultimatum: Make a commitment to resolving any and all difficulties arising from land acquisition, station development, and other technical issues, or pay the THSRC compensation and allow it to back out of the contract. The Ministry of Transportation and Communications (MOTC) refused to go all the way with that, insisting on provisions that would exempt the government from liability in certain circumstances. The THSRC refused to accept those restrictions, and the project was effectively derailed.
What led up to this impasse? "We found that the government hadn't completed the work it was supposed to do before we signed," says Edward T.S. Lin (林天送), the corporation's spokesperson. In particular, not enough had been done to rezone potential station sites at Taoyuan, Hsinchu, Taichung, Chiayi, and Tainan, although according to the THSRC they had lodged the proper applications and that process should have been finalized before June this year. What's more, the government had not expropriated all the land that would be necessary to complete the project.
"The government is arguing that more than 99 percent of the necessary land has been acquired, but even that missing 1 percent could result in unpredictable delays," Lin says. "And a single day's delay means losing at least NT$100 million [US$2.9 million]. Lack of government commitment is likely to be our main problem when we're trying to plan our subcontracting, finance, and budgets."
"It's easy to understand why the THSRC wants a written government guarantee--the five domestic shareholders are basically devoting the rest of their lives to this project," says Liao Ching-lung (廖慶隆), director-general of the government's Bureau of Taiwan High-Speed Rail (BOTHSR). "A successful BOT project is just like a marriage--it requires mutual trust."
Liao may be guilty of slight exaggeration there--the contractor will have the right to operate the high-speed railway system (HSR) for just thirty years after completion--but there is no doubt in anyone's mind about the size of this project and the need to take objections seriously. After several weeks of intense negotiations, however, the disagreements appeared to be resolved.
The turning point came with an initiative from ROC Premier Vincent Siew, who ruled that any disputes between the private and public sectors were to be submitted to commercial arbitration. The contract and two supplementary memoranda of agreement were finally inked on July 23. One memorandum listed about twenty issues related to the government's responsibility to acquire all necessary land, and various other matters, all of which had to be resolved within one year. If they were not in fact resolved, or if the required financing could not be raised within the same period, the THSRC was given the right to terminate the contract.
At the signing ceremony, both sides appeared upbeat. Yin Chi announced that financing would be in place within six months to a year, enabling construction to commence in the first quarter of 1999. Premier Siew said that the HSR would save travel time, reduce congestion on the island's roads, and cut air pollution. He stressed that the project would also involve transferring much cutting-edge technology and know-how from advanced nations in a way that was bound to help upgrade Taiwan's industrial and scientific standards. Moreover, the resulting investment opportunities would do much to put the local economy back on track and help it rise above the region's economic woes.
Despite the rosy picture painted at the press conference, there is no doubt that completion of this BOT project will not be easy. "It's the first time such a big infrastructure project has been undertaken on a BOT basis," Yin Chi says. "It's inevitable that there will be difficulties and challenges." And the first challenge is also the most difficult: Where is the money to come from?
Many critics have questioned the corporation's financing plan, which depends on the willingness of Taiwan's domestic banks to stump up no less than NT$280 billion (US$8 billion) at a time when the Asian economic crisis is forcing all institutions to adopt more conservative lending policies. In the words of Chang Ming-chung (張明宗), director of the Graduate Institute of Industrial Economics at National Central University: "If the government doesn't interfere and just lets the banks do their own feasibility studies, I doubt whether the THSRC will be able to raise the money from them. If that happens, the contract will probably be terminated."
Wang Wen-yeu (王文宇), an associate professor of law at National Taiwan University (NTU), thinks that the problems do not stop there. He is prepared to assume that the THSRC will be able to raise the money, but queries what will happen then. "There are only so many banks in Taiwan, and several of the newer ones are capitalized at only about NT$10 billion [US$288 million]," he points out. "Given the size of the sums involved, virtually all the local banks will have to participate. The project is far too big for just two or three of them to handle. Now, what happens if the THSRC can't generate enough profits to support repayment of the loan? An economic crisis is just around the corner."
Another fundamental challenge facing the central government is how to get local governments to cooperate. One senior engineer working for a foreign construction consultation company goes so far as to say that the most serious obstacle to constructing any infrastructure project in Taiwan is disagreements among various levels of government. "I've found some local governments very hard to deal with," he says. "They seem to have different priorities from the central government. Perhaps they're also under pressure from various local forces. Bayer was a good example." (He is referring to a recent cause célèbre, in which a large German company won from the central government the right to set up a chemical refinery in central Taiwan, but was unable to complete the project thanks to rowdy and often violent opposition orchestrated by a grassroots politician who was subsequently elected head of the Taichung county government.) THSRC spokesperson Edward T.S. Lin feels the same way. "The fate of the HSR depends on the central government," he says. "If it can exert its authority in such a way as to avoid political interference, the project has a future. If not, not."
So how do the omens look? Critics have been quick to draw comparisons with a famous case concerning the construction of an ocean park in Hualien County, eastern Taiwan. The construction company's application has been traveling back and forth between local and central government departments for seven years, collecting more than eight hundred official seals in the process. Small wonder, then, that the domestic media is openly expressing skepticism about the government's ability to see the HSR project through.
A review of successful BOT projects the world over reveals that the role of government is extremely important. NTU's Wang Wen-yeu thinks that central government must meet three requirements if a given BOT project is to get off the ground.
First, it must demonstrate good organizational skills, and not everyone is happy about the prospects of that happening. James J. Ouyang (歐陽正), who is an advisor to the China Development Corp., the unsuccessful bidder for the HSR contract, points to the history of the project. "Originally, this project was supposed to be undertaken by the government, and the HSR should have been under construction by now," he says. "Then it was decided to use BOT. From our discussions with the BOTHSR people during the bidding process, I know that they worked really hard, but they didn't strike us as well-prepared. I don't think they allowed enough time for all the necessary preliminary work."
Wang Wen-yeu accepts the fact that using BOT for infrastructure projects is the way to go, but he insists on the need for thorough organization and preparation before the first shovelful of soil is turned. "I agree that the HSR should be a BOT project, because it's much better to use the efficient private sector than bureaucratic state-run enterprises," he says. "But since this project is so vital to the country's future, the government has a responsibility to plan properly and set a reasonable timetable, instead of rushing into it. That just adds to the risk."
The second requirement, according to Wang, is that the government must be a good supervisor. Once construction actually starts, that will become of crucial importance. The government will somehow have to find a way to supervise the quality of construction and yet not get under the contractor's feet.
Third, and most important, the government must pass a clear, comprehensive BOT law as soon as possible. True, the Statute for the Encouragement of Private Participation in Transportation Infrastructure Projects already provides the HSR project with a basic legal framework, but according to Wang it is far from perfect. In particular, it ducks the opportunity to set out a standard operating procedure for evaluating private-sector applications. Furthermore, Wang points out that the existing provisions are obscure and far from transparent.
James Ouyang agrees with this view. "Applicants had to submit plans for an electromechanical system capable of operating at speeds of at least 250 kilometers per hour, and demonstrate two years of operational experience abroad," he says. "The THSRC at first proposed using the German ICE system, but later decided to use French TGV carriages and German ICE locomotives, a combination that has never been operated elsewhere. Yet its revised proposal was accepted. The government argued that its original specification only required applicants to submit a system for reference purposes, not that they should actually adopt it. That's really weird. It's also unfair."
Ouyang also questions the sincerity of the government's claim that it thoroughly evaluated both competing bids. "We submitted 105 large boxes of documents," he says. "Yet the government claims to have evaluated them in less than a month." He is convinced that the authorities determined the outcome solely by reference to cost, without taking any other considerations into account.
Wang Wen-yeu also feels that establishment of a clear, comprehensive legal framework for all future BOT projects is an urgent priority. Premier Vincent Siew has now instructed officials to formulate a comprehensive set of BOT regulations. But it is still unclear to what extent the letter of the law alone can help facilitate the island's BOT future if the government cannot muster the necessary political will and authority to see the project through to completion.
In an interesting historical irony, construction of Taiwan's first major commercial railway at the end of the nineteenth century began on a basis that was actually very similar to today's BOT model. But two years after the work started, the project had to be taken over by the government when key personnel in charge of arranging the financing resigned. In the end, the line was never completed.
Will this be the fate of the HSR project? In any case, scarcely anyone seriously contends that the line will be finished and in operation by the target date of 2003. "The chances of completing this project by 2003 are negligible," Wang Wen-yeu says flatly. And James Ouyang agrees: "On the basis of our research, we think that completion by 2003 is quite impossible. If they do somehow manage to complete it, I'm afraid the quality of the work will be highly questionable."