VZCZCXRO3841
RR RUEHCN RUEHGH RUEHVC
DE RUEHIN #2860/01 2300236
ZNR UUUUU ZZH
R 180236Z AUG 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 1704
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 TAIPEI 002860 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/TC 
 
E.O. 12958: N/A 
TAGS: ELTN ECON PGOV TW
SUBJECT: ETC FIASCO BRINGS DOWN MOTC MINISTER 
 
REF: A. TAIPEI 729 
 
     ¶B. TAIPEI 2816 
 
¶1. (SBU) Summary: An August 3 ruling from Taiwan's Supreme 
Administrative Court ensured that the Ministry of 
Transportation and Communications (MOTC) would have to 
either hold a second bid process for the troubled 
electronic highway toll collection (ETC) system or take 
over the system itself from the Far Eastern Toll Collection 
Company (FETC).  The future of the project was further 
complicated when Far Eastern Group, FETC's largest 
shareholder, offered to donate its 56.5 percent stake in 
FETC to the Taiwan authorities.  MOTC Minister Kuo Yao-chi 
resigned over differences with Premier Su Tseng-chang on 
how to handle the project.  The ETC system and other build- 
operate-transfer (BOT) projects will continue to cause 
problems for her successor Tsai Duei.  End summary. 
 
Troubled from the Start 
----------------------- 
 
¶2. (U) In February 2004, Taiwan awarded the ETC contact, 
which has been valued at up to NT$10 billion (about US$310 
million), to FETC, a member of Douglas Hsu's Far Eastern 
Group, which includes major textile interests and cell 
phone provider Far Eastone.  FETC beat out two other 
bidders in the final round.  Under the BOT contract, FETC 
sells and installs on-board units (OBUs) with prepaid toll 
cards so that vehicles can use automatic toll collection 
lanes on Taiwan's freeways.  The system went into operation 
on two of Taiwan's busiest freeways February 10, 2006. 
Initially, FETC was widely criticized for charging too much 
for the OBUs.  Drivers have been reluctant to adopt the new 
system, leading to complaints that ETC-dedicated traffic 
lanes were empty while traffic on other lanes worsened. 
(ref A) 
 
¶3. (U) MOTC's ETC problems worsened on February 24, 2006, 
when the Taiwan High Administrative Court ruled that its 
decision to award the contract to FETC was unfair and 
against public interest.  Yu-Tung Information Technology 
Co., the firm that came in second in bidding for the 
project, had filed the suit that led to the ruling.  To 
comply, MOTC would have to take the BOT project away from 
FETC and either reopen the contract for bidding or take 
over the toll collection system itself.  MOTC's Taiwan Area 
National Expressway Bureau in cooperation with FETC filed 
an appeal with the Supreme Administrative Court on March 24. 
In the meantime, uncertainty about the system's future 
increased driver reluctance to adopt the new system. 
 
Court Ruling - Back to Square One 
--------------------------------- 
 
¶4. (U) On August 3, the Supreme Administrative Court denied 
the appeal.  The ruling confirmed that MOTC must take over 
the project itself or rebid it, even though FETC has 
already built much of the infrastructure.  After the ruling, 
MOTC began consultations with FETC, Yu-Tung, and Acer 
(another bidder on the project) to develop a plan on how to 
proceed.  It subsequently formed a new committee to draw up 
terms to rebid the project, hoping to finalize the terms by 
the Lunar New Year holiday in February 2007.  In the 
meantime, FETC has continued to operate the system to 
protect the interests of the 220,000 motorists who had 
already purchase OBUs. 
 
Far Eastern Throws a Curve 
-------------------------- 
 
¶5. (U) A surprising move by Far Eastern Group has further 
complicated MOTC's efforts to deal with the troubled 
project.  On August 11, Far Eastern Group announced that it 
would donate its holding in FETC to the Taiwan government 
and not seek any compensation.  A Far Eastern Group 
spokesman said that the donation was intended to restore 
the company's reputation and end concerns that public funds 
would be used to buy the system from FETC.  The company may 
have also been trying to improve FETC's chances of winning 
the next bid and continuing to manage of the system.  With 
Far Eastern's 56.5 percent stake worth NT$1.4 billion, the 
government would become FETC's largest shareholder.  (Note: 
The other shareholders are TECO Group, Mitac Inc., and 
Systex Corp., all Taiwan firms with equal shares of 14.5 
percent of FETC equity.  End note.) 
 
 
TAIPEI 00002860  002 OF 002 
 
 
¶6. (U) MOTC continues to evaluate the implications of 
accepting Far Eastern's donation.  It is not clear whether 
FETC will be able to participate in the next bid process if 
the donation is accepted.  Of the other two bidders from 
the last round, Yu-Tung has indicated that it will compete 
again, but Acer will not.  If FETC is excluded, Yu-Tung is 
likely to be the only qualified bidder. 
 
Kuo Calls It Quits 
------------------ 
 
¶7. (U) Disagreement over how to handle the ETC case caused 
MOTC Minister Kuo Yao-chi to resign.  She had stated on 
August 4, the day after the ruling, that the authorities 
would take over the ETC and assign state-owned Chung Hwa 
Telecom to run the system.  However, Premier Su 
subsequently announced that the authorities would not take 
over the ETC system but would consult with the original 
bidders on how to proceed.  Kuo tendered her resignation to 
Su on August 7.  Su initially indicated he would try to 
convince Kuo to stay on, but eventually accepted her 
resignation.  On August 15, Su appointed Vice Minister Tsai 
Duei, an MOTC technocrat, to replace Kuo (ref B). 
 
Comment - BOT Blues Play On 
--------------------------- 
 
¶8. (SBU) Kuo's 195-day tenure as MOTC Minister was not the 
first to be troubled by BOT projects.  Her predecessor Lin 
Ling-san was forced out of office at least in part because 
of problems with the ETC as well as the high-speed rail and 
Kaohsiung Mass Rapid Transit System BOT projects.  These 
problems will persist.  The ETC mess will take MOTC months 
to sort out.  It will likely result in serious financial 
losses for the Taiwan authorities, FETC shareholders or 
both as well as continued inconvenience for motorists 
before the system is finally salvaged.  The high-speed rail 
is slated to begin operations in October after a one-year 
delay, but there have been reports that it may not be ready 
to offer full service by that time.  Some observers have 
speculated in the press that Premier Su actually wants to 
appoint Lin Hsi-yao or Wu Tze-cheng, both currently 
Ministers without Portfolio, to be MOTC Minister and that 
he appointed Tsai Duei to take the fall for future problems 
with the ETC and high-speed rail.  Regardless of the 
accuracy of such speculation, anyone who serves as Taiwan's 
Minister of Transportation and Communications will have to 
deal with cleaning up BOT-related messes for many months to 
come. 
YOUNG