Taiwan Business: Infrastructure and the Private Sector
While current market conditions in Taiwan are ripe for increased private participation in infrastructure development, a number of hurdles continue to constrain the proliferation of such projects.
Reprinted from Asia Law & Practice, where it appeared in the May 2004 issue under the title "Will PPPs Take Hold in Taiwan?," with permission of the publisher, Euromoney Publications (Jersey) Ltd.
Take a country experiencing solid economic growth, add a long-running government budget deficit and a pressing need for new social infrastructure schemes and the result is a market with a clear demand for private-sector participation in public infrastructure (PPI). Sadly for Taiwan, although it has all of the above ingredients, considerable obstacles still stand in the way of the development of its PPI industry, including government inexperience and insufficient guidance on risk sharing between the public and private sectors.
In spite of the deficiencies, Taiwan's PPI market has had growth in recent years. Official government figures suggest the market was worth about NT$65 billion (US$1.91 billion) last year. Most commentators expect the market to expand in 2004, although the level of growth will depend on the speed at which upcoming projects are to be processed. According to Angela Wu, a lawyer at Yangming Partners in Taipei, six projects have been signed up to March 17, totaling NT$6.7 billion, and there are 17 more projects under negotiation, worth NT$30 billion. Five further projects, collectively valued at NT$20 billion, are close to being brought to tender.
Small beginnings
With the inclusion of these projects and others, the government predicts the PPI market will increase to NT$106 billion (US$3.09 billion) this year. But, according to Kuh Hsien-chien, chairman of the privately funded National Council for Promotion of Private Participation in Infrastructure (NCPPP), this figure is overly optimistic. "I expect the market to grow, but modestly, perhaps to about US$2.1 billion," he says.
Although the market has expanded relatively quickly in simple dollar terms, industry development has been much slower when measured by the sophistication and variety of PPI approaches used. "Taiwan's PPP market has not evolved much beyond the BOT [build-operate-transfer] model," says Wu.
That's not to say that other PPI approaches aren't permissible in Taiwan. Legally, almost any form of PPI that can be dreamed up is allowed, given the right government approvals. "The February 2000 Law for Promotion of Private Participation in Infrastructure Projects may be known as the BOT Law, but Article 8 of the law allows a whole range of variations, including BOT, build-transfer-operate, renovate-operate-transfer, operate-transfer, and build-own-operate," says Kuh. While BOT schemes account for most PPI mandates signed to date, Kuh adds that operate-transfer (OT) projects have been increasingly commonplace in recent years. OT or build-transfer-operate (BTO) seem to be the preferred models for incinerator PPIs, while build-own-operate (BOO) is a favorite for tourism-related PPIs.
This market growth is somewhat surprising, considering that Taiwan is far from developing a centralized PPI scheme similar to the Private Finance Initiative (PFI) in the UK and that numerous obstacles stand in the way of development of a mature PPI market.
Breaking the old molds
A key problem, according to many commentators, is that civil servants are too used to traditional procurement approaches, where the government retains control of almost every aspect of the project. "Most government officials are not proficient in implementing public-private partnership initiatives. They often lack the necessary business sense and a partnership mentality," says Kuh. Joyce Fan, a lawyer at Lee and Li, agrees. "Often the result is a tender which is simply not attractive enough to the private sector," she says.
Several high-profile failures have highlighted government inexperience and, in some cases, a lack of genuine commitment to projects it originally championed. One well-known example is the Taipei to CKS International Airport high-speed rail link. The project (mandated on a BOT basis in 1997) was scrapped last year. The government was not the only party to blame for the failure of the project; the original sponsor ran into financial difficulties and was unable to provide a performance bond to guarantee the project. But the deficiencies in the pre-tender planning process were highlighted when the original runner-up for the mandate subsequently refused to take up the baton, suggesting that the government had not conducted enough research on the environmental impact and financial feasibility of the project.
More recently, in September 2003, Veolia Water (formerly Vivendi) was forced to cancel its plan of developing a sewerage and waste-water treatment project in Kaohsiung on a BOT basis. Kuh says the water project was the first major project using a non-solicited approach under the BOT law. It is understood that Veolia walked away from the project because the tender package put forward was not sufficiently attractive. "Too many risks were placed on the private sector's shoulders," says one source. Even more telling, when the government sought to re-launch the project in February on an open-tender basis, it did not receive a single bid from the private sector.
Commentators suggest that the failure of this project has had a serious impact on private-sector interest (and in particular, foreign interest) in PPI schemes. "Foreign-sponsor interest in the market is actually diminishing, largely because of experiences similar to that of Veolia," says Kuh. Specific cases of project failure exacerbate general concerns about the PPI market among foreign companies. Members of the European Chamber of Commerce in Taiwan have, for example, expressed concerns about non-compliance with international standards in BOT tenders. According to one source, "Specific problems cited include onerous contract terms and conditions, exclusion of foreign suppliers, and requirements for counter-trade offsets."
Not something for nothing
Kuh is highly critical of the government's overall approach to PPI. "The government looks at PPI as an easy way to get money," says Kuh. "They try to get the private sector involved in almost anything, feasible or not, in order to avoid using public funds." Kuh gives the example of recreation projects, which have accounted for almost one in three of the projects earmarked for PPI treatment in the recent past. "The success rate for this type of project has been very low -- less than 10%," he says.
The NCPPP has, at least, launched a program to educate and train officials in PPI approaches. "We began with public officials in Taoyuan County and are now providing training for officials in other parts of Taiwan," says Kuh. He notes that Taoyuan County is now the most active county in the PPI market. A second key problem, suggests Wu, is the absence of clear risk-sharing guidelines. "The BOT law simply states that the risk-sharing arrangement should be set out in the concession document and that's it," she says.
In the BOT projects that have been negotiated, market sources report wide variations in the level or risk borne by the private sector. Derek Marsh, director general of the British Trade and Cultural Office in Taipei (the office recently hosted a seminar on UK PFI for public and private organizations in Taiwan) says that, in some cases, Taiwanese authorities are asking the private sector to resolve issues, such as land reclamation, that are more appropriately dealt with by the public sector. In December 2003, the Executive Yuan, Taiwan's Cabinet, reiterated that a risk-sharing framework should be included in concession documents, but did not provide further guidance.
Kuh, however, argues that a one-size-fits-all risk-sharing template is not the way forward. "The BOT Law leaves the responsibility for drawing up the risk-reward split to the government officials and consultants devising the PPI tender, which allows more flexibility. Again, the central issue is one of training. If government officials and consultants aren't competent, then the project could easily fail," says the NCPPP chairman.
Fan notes that one government agency, the Public Construction Commission (PCC), has already commissioned a series of projects to provide more guidance to other parts of the government on risk sharing, through reference materials and guidance documents. "The problem is that authorities are inclined to be overly conservative and push too much risk onto the private sector," says the lawyer.
Wu suggests a central coordinating agency is necessary to encourage PPI market growth in Taiwan. "The PCC does perform some vital functions, including formulating laws and regulations for procurement and BOT projects. It also provides interpretation of relevant laws and regulations and a channel for dispute resolution," notes Wu. However, she adds that it has no discretionary power to step in and provide consultation services and no jurisdiction over other parts of the government on PPI matters.
Money matters
At the county and municipal government level, a further major hurdle is a lack of financial resources. Regional authorities lack sufficient budgets to hire lawyers and consultants who have the experience to advise on PPI tenders. So acute is this problem of funding in the pre-tender and tender process, Fan says, that some consultants have refused to act for the government because of the low fees paid. In the case of projects where the government hopes to attract foreign sponsors, budget constraints often prevent the translation of tender documents into English, causing added difficulties for international investors.
Wu says this funding obstacle may eventually be alleviated thanks to a set of regulations that were enacted by the central government in early 2004, allowing the central government to subsidize the pre-tender and tender costs incurred by city and local governments pursuing PPI projects.
Further legislative steps have been undertaken to encourage Taiwan's PPI market. "In 2003, the government legislated to encourage further private investment in public sector projects by allowing a public subsidy of up to 10% of total construction costs for qualifying projects," says a source at law firm Winkler Partners. Taipei's city government, one of the most progressive local authorities in terms of attitude toward PPI schemes, similarly implemented regulations in 2003 which allow incentives for private companies involved in BOT schemes, including, most notably, exemptions from land and housing taxes.
Marsh notes that the PCC has introduced other legal measures to reduce the number of approvals needed before a BOT project can be launched. "The system no longer requires prior approvals for land reclamation or environmental impact study approvals, provided there is no need for the government to provide any financial support," he says.
Another legal development that augurs well for the PPI industry is the Statute for Investment in Infrastructure Upgrading Projects, currently being drafted in the Executive Yuan. "The statute is designed to push forward several major infrastructure projects which have yet to really get going," says Wu. The statute would allow NT$500 billion of public money to be spent on these projects, which could also be built with private participation. The statute is likely to be passed this year.
Moving forward
A wide range of legal enhancements has therefore been made. However, some believe more could and should be done. Wu suggests that Taiwan's banking and company laws be revised to allow foreign bidders in BOT schemes to establish a local presence more easily and to raise funds on the domestic bond market.
One important and unanswered question is whether the government will attempt to introduce an overarching and more coordinated PPI program similar to PFI in the UK. Prompted by the high failure rate for PPI projects, the Council for Economic Planning and Development commissioned a study last year into the UK's Private Finance Initiative and Partnerships UK. Taiwanese law form Lee and Li undertook the study. Although the full results have not been published, Fan says, "We concluded that introducing PFI would be a considerable legal challenge. The entire government budgeting process would have to be overhauled before a UK-style PFI approach could be introduced into Taiwan."
If that is the case, will economic recovery discourage any attempt to launch a Taiwanese version of PFI or even further PPI projects? Most observers think not. "Although the economy is experiencing a strong recovery, the government's budget deficit is not going to move back into the black any time soon. The PPP market will be here for the foreseeable future," suggests Kuh.
"We sounded out the opinions of a large number of government agencies and detected a high degree of consensus on the view that PFI is still the right way forward," adds Fan. The source at Winkler Partners agrees and reveals that the government set up a committee in 2002 to promote PPI, known as the Coordination Committee for the Promotion of Private Participation in Infrastructure Projects. "The Committee has been upgraded to Cabinet-level status, an indication of the priority that the government now places on PPI." The source says the committee is charged with mapping out overall BOT policies, identifying key sectors for development, and coordinating with various agencies to facilitate the implementation of projects.
Promoting PPI is an AmCham Priority
Means of encouraging greater private-sector involvement in Taiwan's infrastructure development have been a frequent topic of discussion at meetings of AmCham's construction committee. The Chamber position has been that PPI can benefit Taiwan by helping to increase the quality of the infrastructure, lower the burden on the public budget, and speed up the planning and construction process.
But most multinational companies that have explored BOT projects have found the experience to be frustrating. "The basic problem is that government officials here don't sufficiently understand the commercial realities," says Ron McGhie, co-chair of the committee. "They don't seem to understand that the private sector will be willing to come in only if it's convinced that the project is a feasible investment and that it will be able to manage the risk. Also, too often the government wants the private sector to provide the funding but still it wants to maintain complete control [over the project]."
Paul Lee, the other committee co-chair, notes that the financial arrangements are often a stumbling block for the multinationals. "Quite a few projects have gone to local companies that use a very, very highly leveraged type of financial arrangement that would be hard for a multinational."
McGhie suggests that officials try to present more complete information to would-be investors to help make projects more attractive. "Anything that's unknown is a risk," he explains, "so whatever the government can do to eliminate uncertainties, especially those over which the government has control, will help. The goal should be to let the developer feel he's coming in knowing exactly what he's getting into."
"Eventually [PPI in Taiwan] should be a good opportunity if we all work together to try to change the rules and the underlying mentality," says Lee. He believes the situation may improve if government officials have the chance to travel abroad more frequently. "If they see what's going on in other areas, it ought to stimulate their thinking."
