This record is a partial extract of the original cable. The full text of the original cable is not available.

040110Z Feb 05

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 000490 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 02/03/2015 
TAGS: ELTN ECON TW
SUBJECT: HIGH SPEED RAIL - EXPOSING PITFALLS OF BOT FINANCE 
 
REF: 04 TAIPEI 2466 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.5 d 
 
Summary 
------- 
 
¶1. (SBU) Despite cost overruns and technical problems, Taiwan 
High-Speed Rail Corporation (THSRC) insists that Taiwan's 
first high-speed railway, which will run the length of 
Taiwan's west coast, will open on schedule in October 2005. 
However, financial problems continue to plague THSRC forcing 
it to seek an eleventh revision of its credit contract with a 
consortium of banks and to seek capital from Formosa Plastics 
Group.  The success or failure of the TSHRC is increasingly a 
political issue, and the project has exposed some of the 
hazards of the build-operate-transfer method Taiwan is using 
to finance public works projects. (End summary) 
 
Minor Delays, Significant Cost Overruns 
---------------------------------------- 
 
¶2. (SBU) Taiwan's high-speed rail is still on track to open 
more or less on time, but has experienced cost overruns that 
have caused serious financial problems for THSRC. 
Construction costs have exceeded estimates by at least NT$ 20 
billion (over USD 600 million), more than 5 percent of total 
costs.  Technical problems have increased expenses.  Lee 
Sheau-jin, THSRC's Chief Financial Officer, told AIT/T that 
major construction and laying tracks have not encountered 
major problems and are running close to schedule.  However, 
the "core systems," which include power supply, signals and 
communications systems, have caused difficulties. 
 
¶3. (C) Lee said that many of the problems are due to the fact 
that THSRC originally developed its bid with European 
contractors.  However, in the end, THSRC wound up with 
Japanese firm Shinkansen as the primary contractor. 
Shinkansen's experience with the older Japanese high-speed 
rail has made it difficult for them to meet some of the 
European-based standards in the contract.  For example, 
special provisions had to be made to ensure that the train 
seats were fire-resistant, a feature that Shinkansen had not 
provided before.  Other modifications were required to 
address average temperatures higher in Taiwan than Japan. 
According to Lee, these problems were compounded by the fact 
that as the Japanese systems evolved over time, there was 
inadequate documentation of their standards and 
specifications. 
 
¶4. (SBU) TSHRC conducted the first test runs of the train 
January 27 on a limited portion of track.  The tests were 
months behind the original schedule, and in a mid-January 
interview with the press, THSRC chairwoman Nita Ing implied 
that the train would not be ready to begin operations by the 
October 2005 target.  However, subsequent statements from 
THSRC officials have walked back Ing's statement and 
confirmed that the train will start running on time.  THSRC's 
Lee told us that THSRC will open October 31. 
 
Struggling for Capital 
---------------------- 
 
¶5. (C) THSRC's financial problems are more troubling than the 
technical ones.  As recently as early August 2004, the THSRC 
was seeking to raise more than NT$ 27 billion in capital by 
the end of the year (reported reftel).  In September, THSRC 
reached a new agreement with the syndicated banks that have 
supplied loans for the project.  On September 30, 2004, they 
signed the tenth revision of the syndicated credit contract, 
which set the goal that the THSRC would raise NT$ 7.5 billion 
by the end of 2004.  THSRC was only able to raise NT$ 1.5 
billion resulting in technical default.  Under the terms of 
the contract, THSRC has six months to correct the situation 
or revise the contract.  Otherwise the government has the 
right to terminate the contract.  According to THSRC's Lee, 
the firm is now working on an eleventh revision. 
 
¶6. (SBU) In the meantime, the syndicated banks stopped 
providing additional credit to THSRC.  Chiao Tong Bank is the 
lead bank in the syndicate.  It's chairman Cheng Shen-chi, 
told the press that the bank consortium would meet soon to 
consider whether or not to resume credit.  TSHRC CFO Lee told 
us that the THSRC shareholders would meet March 4 to discuss 
the situation. 
¶7. (SBU) The five original shareholders of THSRC, Continental 
Engineering, Evergreen Group, Fubon Group, Teco Group, and 
Pacific Electric Wire and Cable, all appear reluctant to 
invest more funds in the project.  Some media reports 
indicated that the five had failed to maintain 25 percent 
equity in THSRC as required by the original agreement with 
the Taiwan government.  CFO Lee denied these reports and 
confirmed that the five firms had fulfilled their 
obligations.  Nevertheless, according to press reports, no 
representatives from Evergreen, Fubon or Teco attended the 
ceremony that marked the first test run. 
 
¶8. (U) Although THSRC refuses to confirm it, Wang Yung-ching, 
chairman of Taiwan's largest industrial conglomerate Formosa 
Plastics Group, told the media that THSRC's Ing had 
approached him about investing in the project.  According to 
the reports, Wang also said that Taiwan President Chen 
Shui-bian had suggested that he should help THSRC solve its 
financial problems.  Wang indicated that he would explore the 
possibilities. 
 
Comment - Political Football, BOT Pitfalls 
------------------------------------------ 
 
¶9. (C) As President Chen's apparent involvement indicates, 
the THSRC is increasingly a political issue.  Some Pan-Blue 
politicians have been very vocal in their criticism of the 
handling of the project.  CFO Lee blamed hostile press and 
politicians for many of THSRC's problems.  The source of much 
of the controversy lies in the structure of the 
build-operate-transfer (BOT) agreement with the Taiwan 
government.  The government in effect guarantees the entire 
project.  If for any reason, THSRC fails to complete 
construction the government must buy back the THSRC for up to 
NT$ 325.9 billion.  Although the agreement was signed with 
the KMT government in 1997, the perceived success or failure 
of the project will fall on the current DPP administration. 
In addition, some observers accuse THSRC of unfair practices 
for assigning an unduly large share of the subcontracts to 
the major shareholders or firms connected to the 
shareholders.  Continental Engineering, in particular, has 
been singled out for criticism.  The current situation 
exposes some of the pitfalls of Taiwan's BOT model.  If 
Taiwan wants to use BOT contacts for major projects in the 
future, it must learn from the lessons of the THSRC.  (End 
comment) 
PAAL