Sunday, July 30, 2006

Taiwan and BOT

On the Beautiful Isle the name of the infrastructure game is Build-Operate-Transfer, or BOT. BOT is in theory a system for getting private financing to pay for infrastructure projects. An Asia Times piece on the High Speed Rail describes the issue:

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.

A US Dept. of Commerce report discusses the high speed rail project, the world's largest BOT project when announced, which has showered a rain of pork barrel money around the island:

The Taiwan High Speed Railway (THSR) project, initiated in early 1990, eventually resulted in a signed BOT contract between the THSR Corporation and the Taiwan authorities in 1998. Engineering companies and construction companies from all over the world have participated in this US$ 15 billion project. With a total length of 345 kilometers, connected by long-span viaduct bridges and 48 tunnels (the longest of which is 7.5 kilometers long), the THSR project has contributed to a substantial upgrade of the technical skills of Taiwan’s engineering and construction industry firms. Among those involved, Continental Engineering Corporation (CEC) and Fu Tsu Construction Company became Taiwan's two largest privately owned contractors after successfully completing their portions of the THSR project.

BOT become popular in Taiwan in the 1990s as the KMT's grip on the economy receded, the economy began to slow down, public debt began to mount, and new ways had to be found to continue the flow of funds out to the construction-industrial complex that underpins the Taiwan economy. Recently public debt constraints have also forced the State to reconsider the whole BOT concept:

During the period 2004-2008, the BOT approach will be re-examined for its feasibility for large-scale infrastructure projects in Taiwan. The authorities, already financially constrained by a public debt ratio set by law (48% of the average GNP for the preceding three years), has allocated a NT$ 500 billion (US$ 15.6 billion) budget to support Taiwan’s infrastructure projects through 2008. Viable projects proposed by state-owned companies like TPC and CPC will be supported by Taiwan’s banking system. The central authorities are also considering tax increases in order to provide continuous support for Taiwan’s infrastructure development.

The support of Taiwan's banking system in BOT projects was demonstrated today as the government announced another US$1.8 billion in financing for the High Speed Rail:

Taiwan High Speed Rail Corp (THSRC) confirmed yesterday that it has secured a loan of NT$60 billion (US$1.875 billion) from three banks to further fund the construction and the operation of Taiwan's first bullet train system, a build-operate-transfer (BOT) project that has cost the nation NT$480 billion.

The loan will help cover the costs accrued due to the company's decision last year to postpone the launch of the bullet train as well as the expenditure on the construction.

It will be jointly provided by the Bank of Taiwan, the Chiao Tung Bank and the International Commercial Bank of China. The company has yet to sign the loan contract with any of the institutions.

This is actually simply another instance of a government bailout, for the problem with the High Speed Rail project is that it has quietly become just another government project that a few privileged private investors are going to make a killing on. The Asia Times piece above notes:

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.

In addition to the government firms noted above, government-owned China Airlines took at stake in the project as well. Another well-known BOT project was Taipei 101. The BOT was coordinated by China Development Financial Holding Corporation, and was originally tendered for a 66 story building.

Massive infrastructure projects aside, Taiwan also uses BOT for the everyday stuff. At the moment the city of Kaohsiung is trying to make progress on Taiwan's awful rate of sewer linkage:

The Kaohsiung city government is planning to construct a sewage system on build-operate-transfer (BOT) basis in Nantzu District of Kaohsiung City. The project stems from the central government's six-year national development plan -- Challenge 2008 - focusing on economic growth and environmental protection. One of the objectives of Challenge 2008 is to boost the coverage rate of the island-wide sewage systems from current 8% to 24% by 2008. The Ministry of the Interior has identified two sewage system projects in Taipei County and Kaohsiung City as the priority for the promotion of private participation in infrastructure projects.

The city, other local governments, the military, and investors are all participating:

Kaohsiung City Government and the military will collaborate with the investor of the BOT project for the construction of the sewer network. Total expenditure for the investor is estimated at US$161.24 million. Commercial operation is expected to commence within three years after the contract is sealed.

It's not as glamorous as a high speed rail, but good sewer systems will do a lot more for the island than bullet trains. Another less glamorous use of BOTs is for resorts. Wild at Heart blogged a while back on a BOT project that threatened beaches in the Penghu:

At the public hearing held on 9 March 2006, the NPB admitted to having made an administrative error by failing to challenge Mr. Chen’s use of the land, but claimed to have responded to the 1998 ruling by pursuing rent in arrears for the illegally occupied area, and denied responsibility for managing the demolition of unlicensed buildings. This met with a series of challenges from the convener of the Forum, Li Gen-jheng, who questioned the NPB's decision to continue the lease, while pursuing an amount of money (a mere NT$1000 per hectare per year) vastly disproportionate to the profits made by the resort, allowing the proprietors to go completely unpunished. Indeed, as argued by the Forum’s chairman, Legislator Tian Ciou-jin, rather than the proprietors being penalized for breaking the law, they were instead being rewarded with a 50-year BOT project on the disputed land and NT$38 million in subsidies, all courtesy of the PNSAA.

According to the PNSAA's bidding manual, the BOT project aims to turn Jibei Island into a major harbour and holiday center, promoting tourism and stimulating local employment and prosperity. Yet there is no mention of local participation in the design and implementation of the development. Bidding companies are merely required to be a corporate person legally established in Taiwan with experience in running facilities of a similar budget size or floor space, and there is no limit on the proportion of foreign shareholders.

Taipei's CyberCity project is also a BOT:

The second stage of implementation, the "Taipei City Wireless Broadband Network Implementation Plan", was put out to tender as a BOT (Build, Operate and Transfer) project in 2004. Public resources all over the city were made available for hot spot installation, including 130,000 street lights, over 8,000 bus shelters, MRTS (Mass Rapid Transit System) stations, elevated expressways, the roofs of public buildings, existing underground conduits and more. The tender was awarded to Q-Ware in August 2004; the company received an exclusive license to provide WLAN service for nine years. Q-Ware is planning to invest over NT$3 billion to build up a wireless broadband environment in Taipei City and will be providing WLAN Internet access and value-added services. Subscribers will be able to choose between either a flat-rate fee or usage-based pricing. Q-Ware will pay between 1% and 3% of its operating revenue to Taipei City. The potential business opportunities are estimated around NT$5 billion.

BOTs have also been used to build schools, dorms at NCKU in Tainan, sewage systems in Taipei, an incinerator in Miaoli, and for administration of the Sun Moon Lake Scenic Area. Given the parlous state of the island's public finances, the relatively low ratio of tax revenues collected by the government, the incestuous links between the government big business, and the necessity of a constant flow of public construction to oil the political and economic machinery of the island, look forward to the continued dominance of the BOT model in public infrastructure in Taiwan.


BigEll said...

Nice Post! Wasn't the electronic toll system another BOT project?

Anonymous said...

do you know where i can get an ENGLISH copy of the BOT law of Taiwan? please email me at