AmCham arrow Publications arrow Topics Archive arrow Topics Archive 2006 arrow Vol.36- No.10 arrow Industry Focus - A Survey of the Transportation Sector
Industry Focus - A Survey of the Transportation Sector PDF Print E-mail

Trains, Planes, and Automobiles

Is the High Speed Rail Nearly Here?

Taiwan's new transportation system is expected to finally open soon. What will the economic and social ramifications be?

BY JANE RICKARDS

 

Once one of the grittiest of Taipei suburbs, Banciao now appears to be hurtling towards yuppiedom. In some areas, property prices have tripled in response to Banciao's new status as one of the eight stops on the about-to-open high-speed railway. "Real-estate prices for residential housing have gone up and are now close to the standard of Taipei city," says Tony Chao, managing director at Jones Lang LaSalle Taiwan, the general property consultants for the government's Bureau of High Speed Rail. Although developers of office buildings and department stores have been slower to respond, Chao notes that "seeing is believing" and that "after the train is running, there will be more development interest."

The rise in Banciao's property prices reflect the sweeping social, economic, and environmental changes that are widely expected to be triggered by the high-speed railway. The 345-kilometer-long system, which has run up total construction costs of nearly NT$495 billion (US$15 billion), will operate trains at a top speed of 300 kilometers-per-hour to reduce travel time between Taipei and Kaohsiung to less than 90 minutes. Each 304-meter-long train, based on the design of Japan's 700-series Shinkansen, will consist of 12 carriages and carry a maximum of 989 passengers. But while convenient, the new bullet train has also raised some serious questions: Will the economic and social benefits meet government predictions - and will they be worth the expense? Will the system be safe? And after numerous delays, when will it actually be able to begin operating?

The project, first planned by the government as far back as 1987, has been beset with controversy over the years. When the Taiwan High Speed Rail Corp. (THSRC) chaired by Nita Ing - the president of Continental Engineering Corp., one of the consortium's main shareholders - beat out rival contenders in the late 1990s for the Build-Operate-Transfer (BOT) contract, it pledged that the government would not have to spend a single dollar on the project. In reality, the government - knowing it would have to take on the full financial burden if the project failed - has wound up making a major financial commitment.

Hu Sheng-cheng, chairman of the Council for Economic Planning and Development (CEPD), recently noted to an AmCham luncheon audience that this was a hugely ambitious venture for Taiwan to undertake as its first major BOT project. "When we didn't have any experience [in that area], we decided to do the world's largest BOT project," he said. "Before we could even stand, we tried to run." But some observers have also defended the contractor for completing the work in six years, whereas it took South Korea twice as long to finish a comparable system as a public project.

The first controversy over the project erupted in 2000 when the THSRC suddenly ditched its agreement with a Eurotrain consortium led by Germany's Siemens and France's Alsthom to sign a US$3 billion contract with a Japanese consortium led by Mitsubishi and Toshiba. Eurotrain took its case to an international arbitration court in Singapore, which in November 2004 ordered the THSRC to pay US$65 million in compensation.

The original target of starting operations in 2003 was moved back to October 31, 2005 - and then as that date approached, postponed again to the end of this month. As of this writing, final testing is going on, but it now appears that the October 31 deaddline will again be missed.

Over the years, opposition politicians have consistently attacked the project for "violating the BOT spirit" by relying on financial help from the government. THSRC, which also includes Fubon Financial Holding and the Evergreen Group among its major shareholders, in 2000 obtained a syndicated loan of around NT$323 billion (about US$10 billion) from 25 banks. Five years later, the THSRC was still searching for further investment.

In September last year, two government-backed foundations - the China Technical Consultants Inc. Foundation and the China Aviation Development Foundation - helped out by investing NT$3 billion and NT$4.5 billion respectively, igniting further criticism from the opposition and provoking a lawsuit. Also last year, the China Steel Corp., in which the government is the largest shareholder, bought nearly NT$3.2 billion in preferred shares. Daniel Hsiao, associate director of Corporate and Fund Ratings at Taiwan Ratings Corp., an affiliate of Standard and Poors, notes that the past year's delay in starting operations was responsible for additional fixed expenses of around NT$2.4 billion. The THSRC has already expended close to NT$11 billion (US$330 million) in sunk costs.

In recent months, the THSRC has borrowed a further NT$40.7 billion from seven domestic banks. Deutsche Bank, one of the THSRC's financial planners, is issuing US$200 to $300 million worth of Euro convertible bonds to be put on the international market later this year. Once the THSRC's shares are publicly-listed, bondholders can convert the bonds to shares at a preset lower price in anticipation of a share-price appreciation. If the project doesn't go well, they can wait until the bond matures and get their money back from the corporation.

Is it safe?

Local media and opposition politicians have also alleged from time to time that the railway's construction is faulty, making it unsafe. Minister of Transportation and Communications Tsai Duei flatly denies this. He said in an interview with Taiwan Business TOPICS in late September that safety checks and systems testing were going well and that if no new problems arose, the high-speed rail would partially open by the end of October, running initially between Banciao and Zuoying in Kaohsiung County. Tsai says the railway system is being technically evaluated by both his ministry and independent verification and validation agencies, including Britain's Lloyds Register (which like many other foreign companies involved in the project declined to be interviewed, citing confidentiality agreements). "So far we have not encountered any problems," Tsai says. He said if current tests continue to go smoothly, the evaluation agencies would present the THSRC with a certificate around October 20 confirming the railway system's safety to start operations on October 31. (The October 20 certification date was not met.)

Under the THSRC's contract with the government, it is required to run at least 60 one-way trips daily after the railway has been operational for six months. At the start, the frequency is expected to be 19 trips in each direction. Tsai says the railway will operate at full speed from the beginning and that a full one-way trip is likely to cost roughly NT$1,400.

Since the high-speed rail line from Banciao to Taipei goes through an existing railway tunnel that needed to be widened to accommodate high-speed rail carriages, Tsai says, that section will open later. Trains are expected to be able to enter the Taipei Railway Station on test runs by mid-October, and the Taipei service will formally begin "well before Chinese New Year," according to the minister.

He dismisses allegations that the railway might be unsafe, including some recent claims from opposition politicians that cave-ins near the tracks in Yunlin and Miaoli Counties could cause the high-speed train to behave like a roller-coaster. "The THSRC discovered these problems three years ago," says Tsai. "They have all been resolved." He is equally dismissive of talk of dangers resulting from integrating the European and Japanese systems, noting that little of the original European system remains. Regardless, it is common practice internationally to integrate equipment from different sources, he notes.

But even if the THSRC's poor image derives partially from irresponsible reporting in the local media - some say the attacks on the high-speed rail have been largely because of Ing's strong pan-green identification - the damage might already have been done. When asked when the THSRC might break even or make a profit, Hsiao of Taiwan Ratings says this is a tough question. "I think most [prospective passengers] will wait for a while to see if it is reliable," he says. "In that case, patronage [at the outset] will be low."

Hsiao says the THSRC's internal models project that it can break even or even make a profit in the first year, but the reality is "it all depends on the confidence of passengers and pricing concerns." Winning over passengers from Taiwan's airlines will be not enough, he notes. "Airline passengers account for less than 10% of all [north-south] traffic; they will probably have to gain over 50% of all traffic to make money." Reaching that kind of volume will be possible only if the public is fully confident of the system's reliability.

The idea of building a high-speed railway was first conceived in Taiwan's glory days before China was the major economic power it is today. Planners believed that the high-speed rail would be important in linking corporations' headquarters in Taipei with branches and factories across the island. Now with so much manufacturing having moved offshore, some say the rationale for the project has weakened. "Volume might not be as good as expected earlier because the whole political and economic environment is different from ten years ago," Hsiao says.

Minister Tsai disagrees that the high-speed rail has become any less relevant to Taiwan's needs, arguing that it will boost the tourism industry by encouraging more foreign visitors to travel to the south. In addition, although Taiwan's manufacturing industries are declining, "the high-speed rail can provide functions that meet the needs of the service industry," he maintains. Still, experts say, the success of the high-speed rail will hinge on the island's economic performance as a whole. Tsai Jyh-fa, chair of the economics department at Taipei's Soochow University, says the implications of production and employees having moved offshore are "very serious" since "the high-speed rail will benefit the Taiwan economy in the long run (only) if the whole economy" is doing well." To many business leaders, the key to ensuring that it does well is to further open business and economic ties with the fast-growing China market.

Energy and pollution

From an environmental perspective, the high-speed rail will undoubtedly be beneficial. Minister Tsai points out that Taiwan's two north-south freeways will soon be saturated but that space is too limited to build a third. "Once the high-speed rail is running, we estimate that one-quarter of all long-distance commuters (including airline passengers) will transfer to it, reducing the number of cars on the freeways," Tsai says. The high-speed rail also uses energy more efficiently than motor vehicles or airplanes, with less air pollution.

As to whether the high-speed railway will serve the purpose of fostering more balanced regional economic development, opinion is divided. Some experts believe that conversely it will promote greater centralization, making even larger metropolises out of Taipei, Kaohsiung and possibly Taichung while leaving the in-between areas as sleepy towns. Both scenarios have implications for foreign investment.

The MOTC's Tsai regards decentralization as the more likely outcome, even if it takes a decade or so, with the area around each station eventually developing its own niche industries. The CEPD has long-range plans for commercial and manufacturing parks around the stations. The government will sell or lease land by tender or solicit private investors - international companies - for development, offering them preferential lines of credit.

But Stone Shih, a Soochow University sociologist who has researched the impact of the high-speed rail, says the government's thinking is erroneous. In most Western countries, he notes, rural and urban cultures are more clearly differentiated than in Asia, with farmers centering their lives around their agricultural communities and only occasionally venturing into the cities. That creates a likely scenario for decentralization. But in Asia, where the urban-rural divisions are less rigid, Shih says the high-speed rail will induce many rural residents to migrate to the big urban centers, attracted by all the action. "In the long run, one third or one half the population will live near one of the three extended metropolitan regions," he says. "There is much better infrastructure, better facilities, more leisure activities, and more jobs." The result could be a hollowing out of poorer counties such as Yunlin and Nantou. (For the long term, the THSRC has plans to add four more stations in Yunlin, Miaoli, Changhua, and Nangang, but the timing of that development is still uncertain.)

KMT Legislator Tsao Shou-min sees the high-speed rail as spurring greater competition among cities. With the travel time between Taoyuan and Taipei cut to only around 20 minutes, for example, stores in the two cities could find themselves competing for customers. "If shoppers prefer to come to Taipei, some Taoyuan shops could go under," he says.

For the first stage, the government is focusing its development plans on the areas around the Taoyuan and Taichung stations. The Taoyuan project involves development of a 30-hectare site at a cost of up to NT$50 billion; envisioned are hotels to accommodate an influx of Chinese tourists, plus shopping centers with at least 500 stores. The Taichung project is not as far along. The government is working with foreign architects on the design so as to make it "a window to the city - better than the Xinyi District [in Taipei]," Chao says. Most analysts expect property prices around each station to rise by at least 20% to 30%, which means that property owners in Banciao and elsewhere will continue to smile.
 
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