As everyone knows, THSRC is the largest build-operate-transfer project in the history of Taiwan. According to the initial agreement, the winning bidder would have a 50-year concession period, after which it would unconditionally turn its operations over to the government. But plans cannot stand up to reality. THSRC met many setbacks in the building stage, barely reaching completion.
Now less than three years into the operation stage, it has already lost two thirds of its paid-in capital. Judging that the railway’s financial prospects are dim, the five major shareholders have refused to increase their investments, forcing the government to mobilize state-controlled private companies—the China Steel Corp., Taiwan Sugar Corp. and China Aviation Development Foundation—to keep investing. The government has also had to repeatedly help THSRC get loans from a banking syndicate, and guarantee those loans.
As operational debts have not improved, if the current operating team decides to walk out, or if it announces unilateral termination of the contract, the government would not only have to take over the huge debt, but might also become embroiled in legal disputes, bringing the high-speed rail’s services to a halt. To avoid such a no-win situation, for THSRC to shorten the concession period and transfer operations to the government early will probably be the best move.
With future operations moving from the private to the public sector, the myth of BOT has been busted. The government agencies taking over not only have to ensure railway service is not interrupted, but most immediately must improve the high-speed rail’s financial structure, so that it can continue operating over the long term.
Shoring up the company’s financial structure includes dealing with the NT$400 billion-plus debt, and raising sufficient capital for day-to-day operations. The most straightforward method would be to decrease or increase capital, or have the state-run businesses recognize the equity investment losses from their holdings in the rail company.
This approach, however, would no doubt be criticized as spending public money to pay off the private shareholders’ debts, and in the current political climate would be unacceptable. For this reason Transportation Minister Mao Chi-kuo explicitly stated that in the government’s handling of the high-speed rail, it would “not buy the corporation out, increase its own investment or exchange its preferred shares.”
In this way, THSRC’s pressing financial crisis can be resolved, with the government as guarantor, negotiating a new loan agreement with the bank syndicate at the current lower interest rates, so that the railway can borrow to pay off old debts and reduce its interest payments. Another method is to lengthen the depreciation and amortization period.
These two approaches, in fact, are exactly what THSRC has been working toward over the last year. It could not achieve these goals, however, due to the banking consortium’s lack of faith in the future of the privately-run railway and its unwillingness to lower loan interest rates and thus take a cut in its own earnings.
With regard to extending the depreciation and amortization schedule, the original plan was based on the concession period, and so the government could not easily agree to a longer period. But now if THSRC actually becomes a publicly-run entity, the banking syndicate, led by state-run banks, is much more likely to go along with MOTC policy and approve refinancing and an extension of the depreciation and amortization period, thereby lessening the railway’s financial load.
After THSRC becomes a “quasi-state-run company” it can expect to receive the aforementioned two conveniences. But to thoroughly resolve its gigantic debt, and even to go from the red into the black, it still must put special effort into increasing revenue and decreasing expenditures.
Although since its inception the corporation’s financial forecast has been troubled, in the eyes of the ordinary citizen the salaries of its high-ranking executives have been at the “fat cat” level. Adjusting personnel expenses is something the new operating team cannot ignore.
With regard to broadening sources of revenue, boosting passenger loads so as to improve profits is obviously a better approach than increasing ticket prices. Conditions are more favorable for the new company to strengthen domestic passenger riding habits, and even more to mine the tourist and business passenger sources that have opened up with direct cross-strait transportation, trade and postal service links. The new operating team will have to actively develop these passenger bases, with the precondition of no drop in the quality of service.
Another potential source of revenue is the commercial development of the high-speed rail station areas. The original forecast for station area development now looks a bit too optimistic, and future success will depend in large part on the vagaries of Taiwan’s economy. However, land ownership needs to be clarified, and the new team will have to be capable of managing rail operations and land development simultaneously.
The myth that the government would not have to make any investments in the high-speed rail BOT project has gone up in smoke, but for the government to intervene before the situation is beyond repair is commendable. How the new THSRC, under joint state and private management, will emerge from its troubles is a formidable challenge to contemplate. (THN)
(This editorial originally appeared Sept. 23, 2009 in the “Commercial Times.”)
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