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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