Tuesday, September 22, 2009

Gov't to take over HSR

Big news this week has been the government's move to take over the Taiwan High Speed Rail corporation. Reuters reported today....
Current Chief Executive Ou Chin-der would take over immediately from Nita Ing as chairman, the company said, giving the government control over the popular 345-km (214-mile) north-south railway system, which opened in early 2007 as one of two bullet train routes in Asia after Japan's.

"The most important thing is to make sure the high-speed rail remains in operation," Taiwan Premier Wu Den-yih told reporters ahead of Ou's appointment.

The government would ultimately take over management of the company but had no plan to inject money or buy company, local media quoted Transport Minister Mao Chi-kuo as saying.
According to Reuters, the HSR Corp wants to turn a profit so it can list on the stock exchange. It has a combined debt of NT$380 billion in bank loans and European convertible bonds, and lost NT$25 billion last year, or $770 million in inflated US dollars.

Those are Reuters' facts. Now lets look at AFP's facts, which are sourced entirely from (where else?) The China Times. AFP says:
The company was 70.2 billion Taiwan dollars (2.14 billion US) in debt as of the end of June, compared with a capitalisation of 105.3 billion, the Times said.
AFP also notes the political aspect:
If confirmed, it would signal the failure of Taiwan's biggest build-operate-transfer project, under which the firm agreed to build the rail line and run it for 35 years before transferring ownership to the government.
The Taipei Times says:
The company has a paid-up capital of NT$105.3 billion (US$3.2 billion), but was reportedly NT$11 billion in the red last year, while its accumulated debts amount to NT$70.2 billion.
Taiwan News has the debt at a more precise NT$461 billion.

The China Post also has its facts in a pretty good piece detailing the ownership of the HSR:
As of the end of June this year, the THSRC had recorded total operating loss of NT$70.2 billion, equivalent to two-thirds of its paid-in capital of around NT$100 billion. The firm's outstanding debts have run up to over NT$450 billion, informed sources said.

The company is likely to be forced to go bankrupt within two years if the annual loss of around NT$25 billion lingers and if no additional fund is injected into the firm. But almost all the major shareholders declined to comment on the likely changeover of the firm's chairmanship and on whether to put fresh funding into the company.
According to the China Post, the project is owned by Continental Engineering (400 million shares), Fubon Financial Holding Co. (5.53%), Evergreen (4.05%), China Steel (5%+), and Taiwan Sugar (4%). All are apparently reluctant to dump more money into the project. Over 50,000 people are smaller shareholders, according to other articles.

The Post says that the HSR is supported by two syndicated loans, NT$279 billion from one banking consortium headed by the Mega Commercial Bank, and NT$65.5 billion from another consortium led by Taipei Fubon Commercial Bank, the banking arm of the Fubon Financial Holdings.

The trouble became more acute when the major shareholders refused to dump more money into the project, in turn triggering the banks to refuse to extend it any more credit. The CNA said, citing Premier Wu:
Wu said THSRC's monthly revenues exceed its operating costs, so it runs a small operating profit.

"But the surplus has been more than offset by its heavy burden of interest payments, depreciation and amortization, " Wu said, adding that high interest payments and amorization have been the main cause of the company's heavy indebtedness.
It is easy to see where this is heading: the government's "supervisory role" will enable it to force banks to keep the credit taps open, as Wu said, taxpayer funds thus guaranteeing private wealth. The government says it merely plans to have a majority on the board, not to actively take over the company. Reuters said in another report, citing the China Times, that
the HSR could get a loan of about NT$390 billion ($12 billion) as early as November after the government moves to keep it afloat. If the government can force interest rates down, the project can probably run on life support, servicing its debt and keeping up maintenance, without ever repaying its capital costs.

No administration can afford to have the HSR fail on its watch (nor would an HSR failure here be good for HSRs elsewhere in the world), and it is interesting that the company was handed over to current CEP Ou Chin-der, a Ma Ying-jeou intimate. The CNA report also said that the banks which had refused to extend more credit to the HSR when the shareholders failed to pump in more cash, would be more forthcoming if Ou became head of the company.

The HSR was in its day the largest BOT project in the world, built to run 35 years by private interests, and then turned over to the government. The turnover has just occurred 33 years early, is all. It was a massive pork barrel in its day, a $15 billion project that had a total length of 345 kilometers, connected by long-span viaduct bridges and 48 tunnels (the longest of which is 7.5 kilometers long). Continental Engineering Corporation (CEC) and Fu Tsu Construction Company became Taiwan's two largest privately owned contractors after completing their portions of the HSR project. Having splattered money all over the west coast of Taiwan, it has done its real work. Forbes noted a couple of years ago:
An official quoted estimates from the Council of Economic Planning and Development that construction of the high-speed rail network has created 480,000 jobs and may contribute 1 percentage point to economic growth.
Why doesn't it make money? The original plan, first proposed way back in 1987, when Taiwan's economy was quite different, called for the stations to be located far from the cities (BBC talks about this). At that time the population flow was all to urban areas, so the HSR was looked at as a way to develop more desolate places outside cities, and erect something akin to the English New Town. The land around the stations was going to be rented and developed, enabling the project to generate revenues from restaurants, hotels, and so on. A quarter million passengers a day were projected (Taipei Times says 300K a day in 2000). Then, after it opened, 150,000 a day were hoped for (total capacity is about 300,000 a day). It now carries about 90,000 passengers a day, according to Taiwan Today in 2008 (and Reuters).

The project went ahead under these plans, but then the economy changed. It switched technology in mid-project, from European to Japanese systems, adding to the costs. Now, as every passenger knows, the stations are forlorn in remote areas, massive buildings sitting on empty lots. The system also has other costs, dealing a heavy blow to the island's ailing airlines, and putting dents in its intercity bus and train services as well -- services whose financial health is important to small towns all around the island.

REFERENCE: HSR project in a post on BOT in Taiwan from 2006, project timeline and introductory article
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Anonymous said...


Excellent analysis! Hoping that THSRC will hire you as a consultant!

Hope you'll have another in-depth analysis on TPE 101 next!

More Power!

Readin said...

Sounds a bit like how the U.S. Auto companies were used by the government to pay off people who help the president get elected.

Is Ma copying from the Obama playbook?

Dwayne Elizondo said...

Perhaps one of the reasons the KMT is so anxious to sign the secret ECFA is because they need Chinese investment capital to bailout* these types of big debt projects. (THSR and perhaps Taipei101?).

By the same token, the PRC probably would like to use/dump their US$ before the US defaults on its debts so they are putting pressure on their bitches at the KMT to get the doc signed asap.

In a year or two, if people can still afford to take the THSR, there will be a Bank of China ATM at every station. In addition, to reduce operating costs, all employees will be from the PRC and work for 1/4 the wages if the PBOC gets ownership.

Of course the THSR will have to be renamed the TSAR-HSR. (Taiwan Special Administrative Region High Speed Railway).

*I know Taiwan has US$385B in FX and some 425Tons of gold, so they do not really need PRC $ for bailouts. But, if TSHTF (US default), that $ will be worth less and burned through quickly.

David said...

I wonder if there is a political motive behind all this. The HSR has been crippled with debt for a while so why is the government suddenly making noises about it? Most of the directors and senior staff would have been appointed by the DPP. Is the KMT moving to purge directors sympathetic to the DPP and install its own people instead?

Anonymous said...

"It was a massive pork barrel in its day, a $15 billion project that had a total length of 345 km...........Having splattered money all over the west coast of Taiwan, it has done its real work."

Why isn't Vincent Siew being held accountable for this mess?

de said...

p.s. the bank of china, employment and rename comments are meant to be humorous.

add: Twn also has $77B in Treasuries.

Michael Turton said...

I don't think it is political in the overt sense. It seems like some milestone in the credit cycle came due, and no money was forthcoming, triggering these events.

janice said...

How does this story in today's Taipei Times fit into these latest developments?

Official questions DPP role in high speed rail ‘scandal’

"A Control Yuan member yesterday described the construction of the Taiwan High Speed Rail as a “scandal” and vowed to probe the responsibility of government officials under the former Democratic Progressive Party (DPP) administration.

"'The construction of the high speed rail system is not only a failed BOT [build-operate-transfer] case, it was fraud from the very beginning,' Control Yuan member Yeh Yao-peng (葉耀鵬) told reporters.

"Yeh said the Control Yuan would focus on why the Taiwan High Speed Rail Corp’s original shareholders were able to undertake a project whose cost exceeds the amount they had invested."

Atoq said...

as usual a very fair, apolitical , non-biased piece by prof. turton. no wonder you're judged the best blogger here!

Anonymous said...

i still think its a great system and i'm glad it was built. it should have been a government funded and owned project to begin with. many such rail systems in other countries were built and run by the government. its still a relative new system and i think it will only get better if they continue developing the stations and those areas become more dense with settlement.

Richard said...

I can certainly agree with the complaints about the stations being in the middle of nowhere- especially the Taichung station. For the couple years it's been open, I've never used it once. For one thing, I don't head down to the southern part of Taiwan that often, and when I do, the price still scares me away. I guess if I was in a hurry, the 1000+NT ticket to Zuoying might be worth it, but it doesn't even get you to Kaohsiung?! My most frequent trip from Taipei to Fengyuan isn't any easier with the HSR also. By the time you get to Taichung HSR, then get a ride to Taichung Train Station, and then catch the train from there to Fengyuan or bus from there, it'll barely be faster than just going with a bus from Taipei for 80NT. All that, and you forget about the price being 6-8 times as much.

I guess the one good thing I've noticed this past year is the commercials for Taiwan HSR is not that bad. But I guess it still didn't get me to ride one, so obviously not that good.

Dwayne Elizondo said...

Follow-up on Richard's comment:

The effort & cost it takes to get to the stations make the HSR not so convenient especially when you can take a very clean and well run bus for NT$100 to Taichung and NT$400 Tainan.

On the other hand, if some financial event happens and oil delivery cost skyrocket, the HSR may turn out to be the best choice since it is run on (nuke) electric.

Anonymous said...

On the different stations:

The Taipei and Kaohsiung stations are fine. Kaohsiung has subway at Zuoying, so it's not bad. There will be a new station at Kaohsiung Main Station, making it really awesome. Also, and this is REALLY nice is the KRT connects directly to Kaohsiung International Airport!

Tainan is horrible, in way south Tainan County actually serving parts of Kaohsiung county too! 30-40 minutes to the city. They should build a new station at Sinshi (New City), which is a little north of Tainan city, but where they have a Taiwan rail station for transfers into the city, and it's right next to Tainan Science park too.

Jiayi Station is crazy. It takes you 40-50 minutes by car to get to Jiayi City! Way out there in the middle of nowhere... possibly the worst station.

Taichung could be better since it's all the way at the southern limits of the city, but at least it's in the city, and Taichung was supposed to have built a subway line connecting by now...

Hsinchu is out of the way, but that area really is being developed. But it's enough out of the way that it's not worth it when you're going north to Taoyuan or Taipei. Sad. Taoyuan is also a fast growing place, but what's messed up is that it doesn't connect to Taoyuan Airport.

My estimation: Tainan could be fixed with a new station in Sinshi. Taichung station can be fixed with better Taiwan Rail connections into Taichung (some kind of commuter train maybe?), and the subway being built. Both would get huge amounts of ridership.

I don't think Jiayi is salvageable unless they extend the line. I don't think Taoyuan/Hsinchu could be improved easily either, but they are so far north that it'd still be worth driving to station and taking it south if you're going to Tainan/Kaohsiung.

Anonymous said...

Were the locations decided by the private investors?

In which case let TSR go bankrupt, and another company could take it over, minus the shareholder value and possibly even the bondholders...

David said...

To Anonymous 4:09am

There are several rail lines under construction that will connect HSR stations to nearby city centres. The Hsinchu MRT line is a spur of the Neiwan line. The Taoyuan MRT will connect the HSR station to the Taoyuan Airport and Zhongli. The Shalun line will connect to the TRA line and Tainan City. All these lines are under construction and should open within a few years.

Maybe Micheal can give an update on the status of the Taichung MRT.