Taiwan Today

Most of Taiwan's major infrastructure development projects are plagued by cost overruns, poor-quality construction, and lengthy delays. Construction firms are coming under heavy fire for corruption, mismanagement, and incompetence, while the government is being urged to improve industry regulation and eliminate more of the barriers to foreign and private-sector investment in the market. Public opinion and international free trade forces hold that a more open and competitive market will not only save taxpayers' money and improve overall construction quality, it will also speed the solutions to problems associated with the island's economic transformation and quality of life.

Taiwan’s construction industry has reached a turning point in its development. For years, local and regional media have carried frequent stories about substandard work, lengthy construction delays, and waste and mismanagement of taxpayer money in the island's public engineering projects. Moreover, many infrastructure projects deemed essential to improving the quality of life have been put on hold or substan­tially delayed by continuing problems. These projects include waste management systems, power generation facilities, and a broad range of ground, air, and sea trans­portation facilities considered crucial for upgrading Taiwan's international eco­nomic competitiveness. In short, problems in the construction industry are helping keep the island from becoming an Asia­ Pacific regional operations center, as en­visioned by the government's APROC plan

Inadequate regulations, as well as re­sistance to reforms by special interest groups, are often cited as more sources of construction industry ills. But, as Taiwan prepares to join the World Trade Organi­zation (WTO), pressure for change is clearly building from the public and from interna­tional free trade forces.

Even a brief assessment of recent in­frastructure development projects is enough to convince people that there must be a better way to get things done. Taipei's mass rapid transit system (MRT) is the most dramatic illustration of problems associ­ated with many such projects. When plan­ning began in the mid-1980s, the budget for the MRT, initial 88-kilometer network was approximately US$8 billion. To date, only a fraction of the network has been completed, the quality of its construction is being questioned, and the budget has almost doubled to nearly US$16 billion, making it the world's costliest mass rapid transit project—more than US$185 mil­lion per kilometer.

Other examples: The budget for a sec­ond freeway in northern Taiwan has swelled from its original US$5 billion to US$6.3 billion, and the island's north-south high­ speed rail project and its fourth nuclear power plant have remained on the drawing board for many years due to problems in the planning and tendering processes, which frequently fail to take full measure of land, material, and construction costs.

What causes these problems? “The planning process has been largely to blame,” says Arthur Chen(陳豫), chair­man of the Public Construction Commis­sion (PCC), an organization established by the Executive Yuan in July 1995 and charged with the task of consolidating control over all government projects and regulating a heretofore unregulated construction industry (see interview on page 44). “Projects coming down from the top are approved first, and the cost esti­mates are inflated to make sure that enough money is budgeted,” Chen says. “And with projects coming up from the bottom, costs are understated to give the projects a bet­ter chance of being approved. Later on, the costs go up—the people involved say that they ‘forgot this, forgot that.’”

There are many other ploys to take advantage of the process. For instance, firms submit artificially low bids to secure contracts, then turn potential losses into profits by using substandard materials to complete the job. Consulting firms respon­sible for the design of public projects set detailed specifications for engineering work in ways that allow predetermined construction firms to monopolize the biding. Or the bidding itself is brokered by individuals with substantial political influ­ence. “The democratic process has actu­ally aggravated the situation,” Chen says. “Elected officials who have been helped into their positions by groups with vested interests oppose measures to regulate and open the market, claiming to speak on be­ half of their constituencies.”

The involvement of criminal groups in the construction business has added to the problems. This is one topic covered in a 1996 report, entitled A View of the Con­struction Industry in Taiwan, by the Inter­national Construction Group (ICG), an association open to all construction indus­try-related firms operating locally. “The role of organized crime in the construction industry in Taiwan is [a problem] recog­nized by the government and must be con­sidered an element standing in the path of reform,” the report states.

This assessment is supported in a gov­ernment report, published by the PCC in April 1992, which identifies areas in the in­dustry affected by corruption and organ­ized crime. According to the report, the most pervasive forms are illegal bidding in the form of collusion between a govern­ment employee and a contractor to ensure that the latter is awarded the contract; con­trolled sales of building materials; and solicitation of protection fees through extortion. The PCC report further states that such practices waste public funds, damage the competitive environment, slow the development of the construction industry, endanger public safety, and have negative impact on the overall quality of public works.

Many government officials, however, maintain that the high cost of public engi­neering works is primarily the result of land prices, which often account for the lion's share of expenses, and the soaring prices of labor and materials. Chen agrees with the view that any planning process can be blind-sided. “There are often geo­logical and weather problems, for instance, that can affect schedules and increase costs,” he explains.“These things cannot always be foreseen. But if they do arise, and have not been anticipated, then people call the planning authority incompetent.”

Nevertheless, there is no denying that mismanagement has played a major role in the huge cost overruns for Taipei’s MRT. In 1993, twelve people involved with various aspects of the project were tried on charges of embezzlement and corruption, and were sentenced to jail terms ranging from fifteen months to more than nine years. And in 1994, two former Department of Rapid Transportation directors were impeached for dereliction of duty; one was also sen­tenced to seven years in prison. All the defendants are appealing their sentences.

Foreign companies have seen the con­struction market's profit potential and are eager to get involved. But to date, despite their efforts, few overseas firms have been able to establish much more than a toehold in Taiwan's construction industry. Thus far, most major infrastructure projects have been publicly funded, overseen by government agencies, and dominated by local construction groups. Foreign con­tractors and investors, many with techni­cal and project-management expertise badly needed locally, have been largely excluded from serious involvement in such significant projects. The frustration experienced by foreign firms is captured in another extract from the 1996 ICG report: “The business environment in the Repub­lie of China seriously discourages major foreign contractors, and ancillary foreign businesses, from investing in or seeking to undertake projects in Taiwan.”

“You have to be careful about judging what happens here by standards else­where,” says Don Birch, chairman of both the Swire Group Taiwan and the European Council of Commerce and Trade (ECCT). “The construction industry uses a system that has grown up locally. When I look at the way projects are put together, I've of­ten thought that it doesn't seem to make a lot of sense by Western standards, because it's done, as you would expect in Chinese society, on a relationship basis. You have a good relationship with somebody, and he looks after you.”

At present, international firms en­counter a maze of government regulations on company registration, investment, licensing, procurement, and project-bid­ding and tender rules. Other formal and informal business practices freeze them out of the market. Why? In part, the rules are protective. “There is opposition from some groups to foreign participation in the market,” says Birch. “Our counter argument is not just that foreign companies can do better—it's that competition can do better. If you believe that, then the question is, how do you introduce competition? Part of the answer is to allow foreign compa­nies or foreign joint ventures to participate [more freely in the market].”

This view is echoed by the ICG report, which emphasizes the benefits that foreign involvement might bring to the local in­dustry. These include transfer of advanced technology and construction techniques that would allow local companies to oper­ate more efficiently. Moreover, joint ven­tures could also open the door to allowing Taiwan investors greater participation in regional markets, as well as boost the island's progress in becoming a regional operations center for the finance, manufac­turing, media, telecommunications, shipping, and air transportation industries.

While there is ample incentive for in­dustry reform, the foreign construction community says that substantive action is still necessary. “Thus far, it doesn't seem that the government and other involved parties have been able to change their present method of getting things done,” Birch says. “When people talk about im­provements, they tend to focus on the what [equipment], rather than the how [systems and management]. Equipment alone is not going to solve the problem. You need to implement systems for pricing, adminis­tration, operations, and training. The peo­ple involved must also be educated in the hows and whys of the system. Those are the real skills. They're not something you can buy off the shelf. You need to enlist the aid of someone who's done this before.”

Efforts have been made to clean up the construction industry, as well as make it more attractive to foreign investors and overseas construction firms. The PCC is generally recognized as leading the way by its research and recommendations for solving problems in areas such as quality control, clarity in procurement and tender processes, and project management. “I think most people now have a fair under­standing of what's required,” says Birch. “The collapse of the whole process comes not just in a project's physical attributes, but in its planning, focus, and implemen­tation. There is growing awareness of that.

A number of ministries recognize that if foreign companies are not involved, then the high level of expertise needed will not be there.”

The goals of stricter budget and qual­ity control and more efficient public project management are reflected in the Statute for Encouraging Private Participa­tion in Transportation Construction, passed by the Legislative Yuan in Novem­ber 1994. Significantly, the statute pro­vides government assistance and tax incentives for private investment in eight transportation facilities: railways, high­ ways, mass rapid transit systems, airport terminals, harbors and related facilities, parking lots, major tourist and recreational facilities, and bridges and tunnels. Investment would be allowed in three forms:

• Construction and operation, in part or in whole, of transportation facilities planned by the government;
• Operation, in part or in whole, of transportation facilities built by the gov­ernment; and,
• Construction and operation offacili­ties planned by the investors themselves.

The first two of these are called Build-Operate-Transfer (BOT) contracts. The third is called Build-Operate-Own (BOO). Under a BOT contract, for example, a private sector construction firm could build an urban waste management system, then manage the operation (and collect fees) for a set period of time. Eventually, it would turn over the fully operational system to the city government. To attract such investment, the statute stipulates that:

• The government will help private investors solve land acquisition problems, thereby removing the main barrier to pri­vate investment in transportation facilities;
• Investors will be helped to obtain long-term soft loans from local financial institutions;
• The government will subsidize the interest on bank loans, or put up part of the investment capital, to cover the proportion of an investment that cannot be recovered from operation of the resulting facilities;
• With approval from the authorities, private investors will be able to issue cor­porate bonds after the facilities have begun operation;
• Private investors undertaking projects under the new statute will be able to offset 5 to 20 percent of their investment against their business income tax, and will be granted a tax holiday for five years be­ginning on the date when the project starts to generate profits; and
• Foreign equipment imported for projects will either be exempt from tariffs or afforded the privilege of deferred tariff payment.

On paper, such measures look good. But have they had any impact? Not accord­ing to the ICG, as Nick Carvel, the chainnan of the group, explains. “Legislation is only a statement of intention,” he says. “The main problem with the announced reforms lies in their implementation. The Ministry of the Interior, the Council of Economic Planning and Development, the PCC, and others all announce incentives that are wel­comed by the international construction industry insofar as they open the market to international competition. Howevet, following the announcement of many of these initiatives, nothing seems to happen. It's difficult to make an accurate assessment of where a particular measure lies.”

Among the concerns expressed by ICG members are the resistance to reform from the large middle-level strata of official bu­reaucracy. Many people are intent on re­sisting changes in the status quo, and are supported by elected officials who are shareholders in, or strongly influenced by, local construction groups. According to the 1996 ICG report, “One of the impedi­ments to open competition, and to the timely and cost-effective completion of projects, is the proliferation of different power bases in Taiwan, each of which may have influence over any particular project. These can block access by foreign compa­nies to projects, and slow the implementa­tion of projects that foreign companies have won.”

Several industry professionals point our that, as long as reforms fail to take deep root, discussing the potential benefits of BOT/BOO methods may be premature. Arthur Chen, for example, feels that the industry is not ready for concepts such as BOT. “We have enough to do just to bring the industry up to internationally accepted standards,” he says.

Nick Carvel of the ICG, on the other hand, believes that the implementation of BOT/BOO projects should facilitate matura­tion of the industry. “But legislation for such projects has so far been limited to mass transit systems,” he says. And where this means of funding is being considered by clients, such as government agencies, there is a naive belief that 100 percent of the risk can be passed to the private sector. But some risks can only be taken by the government, such as with issues of poli­tics, land, environment, and legislation. In Taiwan, bureaucrats seem to think that BOT and BOO are means whereby they can avoid taking any responsibility for the project.”

Carvel's explanation echoes prob­lems reportedly faced by companies en­gaged in BOT work elsewhere in Asia, such as Hopewell Holding's highway projects in Thailand, and Enron's power generation project in Maharashtra, India. In those cases, governments set rates of return that were incompatible with project risks, and therefore proved unacceptable to contrac­tors and investors. “For BOT to work, things will have to change,” Don Birch says. “People are looking at contracts and saying, ‘That company is being allowed to make too much money.’ And the authori­ties are responding by reducing rates of return to ridiculously low levels. But it's far more important to obtain the outcome you're looking for—facilities and systems that are flexible, reliable, and cost-effec­tive. If you tie contractors and investors down, they won't have the flexibility needed to do the job properly. As long as you get what you want from the project, it shouldn't matter that the companies re­ceive a large reward for their successful management of the risk.” .”

The ICG has also been critical of the government's desire to limit foreign par­ticipation to the provision of consultancy services and technology transfers. This level of involvement, according to the ICG, is insufficient because foreign contractors expect their profit to be derived from the total turnover of the project, not just from the mere supply of expensive senior per­sonnel.

But Arthur Chen thinks the point is overstated, because foreign firms must ac­cept that there will be some limitations on their involvement in the industry. “If we are going to join the WTO, we have to open our market,” he says. “Yet, we don't have to open every project to foreign participa­tion. We need to open only the high-value projects suitable for international tender. For most other projects, we have the do­mestic capacity to handle the work. But where we don't have the capacity, or where we lack the necessary expertise, such as with high-speed rail or nuclear power, we rely on foreign firms

The capacity of the local industry, or lack of it, to handle major infrastructure projects for Taiwan's Six-Year National Development Plan (begun in 1991), along with the government's announcement that it welcomed foreign participation in those projects, were exactly what drew the inter­national construction industry to Taiwan in the first place. A 1991 study prepared by the Morrison Knudsen Corporation and consulting firm KPMG Peat Marwick, deter­mined that Taiwan's local construction industry had the capacity to build only one­-third of the projects outlined by the Six­-Year Plan. But according to the ICG, very few projects have gone to international tender, and those that have, like the high­ speed rail and fourth nuclear power plant, have been continually delayed or postponed. “You don't see a common recog­nition about what we're talking about across government ministries,” Birch ex­plains. “Each one has a very different idea of competition, and how much should be embraced. There's no common picture of what needs to be done. Direction needs to come from the top level of government.”

Meanwhile, international businesses continue to knock at the door of Taiwan's construction market, holding meetings with ministers and ministries to promote the benefits of competition. “The ICG rec­ognizes that some progress is being made, but it's a painfully slow process, and un­fortunately one that Taiwan cannot afford if it wishes to become a regional opera­tions center,” Nick Carvel says. “World class construction companies are conspicuous by their absence in Taiwan, and the few who have ventured here do not have happy tales to tell. And it is doubt­ful that any will choose to remain much longer without significant reforms being made to the manner in which the industry presently operates.” No one seems to be sure when, if ever, that will happen. “I hear a lot of people talking about it,” says Don Birch. “You live in hope, don't you, that the government will soon be serious about encouraging a contribution from the foreign community?"