Identifier
Created
Classification
Origin
05TAIPEI3779
2005-09-13 01:51:00
CONFIDENTIAL
American Institute Taiwan, Taipei
Cable title:  

TAIWAN,S HIGH-SPEED RAIL DELAYED ONE YEAR

Tags:  ELTN ECON TW 
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This record is a partial extract of the original cable. The full text of the original cable is not available.

130151Z Sep 05
C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003779 

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 09/12/2015
TAGS: ELTN ECON TW
SUBJECT: TAIWAN,S HIGH-SPEED RAIL DELAYED ONE YEAR

REF: TAIPEI 490

Classified By: AIT Acting Director David J. Keegan, Reason 1.5 d

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003779

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 09/12/2015
TAGS: ELTN ECON TW
SUBJECT: TAIWAN,S HIGH-SPEED RAIL DELAYED ONE YEAR

REF: TAIPEI 490

Classified By: AIT Acting Director David J. Keegan, Reason 1.5 d

Summary
--------------


1. (C) Taiwan High-Speed Rail Corporation (THSRC)
announced September 8 that the inauguration of
the high-speed rail will be delayed exactly one
year to October 31, 2006. Reports indicated that
delays in construction of the signal and
communications components of the core electrical
machinery (EM) systems were to blame. THSRC
estimated the additional cost imposed by the
delay to total NTD 19.3 billion (about USD 590
million),which will only exacerbate the firm,s
continuing financial problems. Premier Frank
Hsieh reiterated the government,s unwillingness
to buy back the project as required if THSRC
fails to complete construction, but the latest
news suggests that a more active government role
may be required. End summary.

THSRC Postpones Inauguration by One Year
--------------


2. (U) THSRC Chairperson Nita Ing announced
September 8 that the inauguration of Taiwan,s
high-speed train that will connect Taipei and
Kaohsiung along the island,s west coast will be
delayed one year. Originally scheduled to begin
service on October 31, 2005, Ing indicated that
the train will not begin operations until October
31, 2006.


3. (U) Media reports blamed the delay on slow
construction of the core electrical machinery
(EM) system. As of late August 2005, THSRC
reports that work on civil engineering components
(noise barriers, tunnels, etc.) and on the track
itself is nearing final completion. Construction
of the passenger stations is not far behind,
estimated at 92 percent complete. However, only
60.4 percent of the EM system is complete at this
time.


4. (U) A consortium of Japanese firms, Taiwan
Shinkansen Corporation (TSC),is the contractor
for the EM system. TSC includes Mitsui Corp.,
Mitsubishi Heavy Industries, Mitsubishi Corp.,
Marubeni Corp., Sumitomo Corp., Kawasaki Heavy
Industries and Toshiba Electric. Some reports
have blamed Mitsubishi Heavy Industry for the
delay to the EM systems due to difficulties
meeting quality specifications for the signal and
communication systems.


5. (C) A contact associated with one of the TSC

consortium member firms told AIT econoff that the
major problems lay mostly in the signal systems.
He indicated that Mitsubishi Heavy Industry had
reorganized the section working on those systems
as a result of the delays. He speculated that
even the revised schedule may be difficult to
meet and that although the high-speed rail might
be able to offer limited service by the new
deadline, full service may not be up and running
until as late as mid-2007.


6. (U) According to media reports, TSC proposed a
new schedule to THSRC with new conditions,
including higher compensation, no penalty for
construction delay, new payment conditions and a
three-month grace period for completion of
construction. TSC Chairman Sato Kazuo told the
press that the two parties have different
interpretations of their obligations under the
contract. So far, the two parties have only
agreed on the new inauguration date. THSRC Vice
President Chian Chin-shan told the press that two
sides would discuss compensation issues after
construction is completed and the systems are
turned over to THSRC. In her statement, THSRC,s
Ing emphasized the partnership between THSRC and
TSC and priority placed on finishing the project.

SIPDIS

Costs Rise, More Scrambling for Financing
--------------


7. (U) THSRC President George Liu told reporters
that that the delay would increase construction
costs by NTD 19.3 billion (about USD 590
million). This includes additional interest
charges of NTD 13.8 billion and operational
expenses of NTD 5.5 billion. The total cost of
the project will rise from NTD 460.7 billion to
NTD 480 billion (nearly USD 15 billion). More
importantly, the one year delay significantly
reduces the earnings potential of the 35-year
build-operate-transfer project by cutting THSRC,s
time to operate the railway. Media reports have
estimated the lost revenue to be as high as NT$
50 billion (about USD 1.5 billion).


8. (U) The delay and associated costs will
further exacerbate THSRC,s difficulty in
financing the project. THSRC has revised its
financing arrangements with its creditors more
than a dozen times since the project began. It
has renegotiated the financing three times since
March. Most recently, THSRC failed to meet its
target of raising NT$ 5.5 billion (about USD 170
million) by July 29. As a result, Chiao Tung
Bank, the lead bank of the consortium providing
loans to THSRC, has imposed a contract violation
penalty of an additional 0.005 percent interest
on the firm,s debt. THSRC and the banking
consortium have yet to agree on a new financing
plan.

Will Government Pick Up the Pieces?
--------------


9. (U) According to media reports, THSRC,s Ing
met with Taiwan Premier Frank Hsieh before the
announcement to seek the government,s support for
the decision to delay. Hsieh reluctantly
accepted THSRC,s new timetable but indicated that
the schedule could only be changed once. He
promised Ing that the government would continue
to coordinate with private entities, such as
potential creditors and investors, in support of
rail project. Hsieh also reiterated the
government,s unwillingness to buy back the
project as required by the BOT contract if THSRC
fails to complete construction.


10. (U) THSRC also informed the Ministry of
Transportation and Communications (MOTC) of the
new project timetable. MOTC Minister Lin lin-san
confirmed to the press that THSRC,s time to
operate the high-speed rail under the BOT
contract would not be extended. He emphasized
MOTC,s primary concern is the quality of
construction, and ensured that MOTC would take
action to guarantee the level of quality if
necessary.

Comment - More Bad News for THSRC Likely
--------------


11. (C) Rumors that the high-speed rail would not
open on time have circulated for months. THSRC
executives have repeatedly denied them, but the
announced delay comes as no surprise. Further
delays are not out of the question. In addition,
the inauguration postponement will only ensure
continuing financial problems. News that THSRC
has failed to meet it latest finance targets has
become routine. The need for more drastic
measures to assist the project seems more and
more likely. The Taiwan government may still be
able to avoid buying back the project or
investing its own resources, but it will probably
have to take an active role in arranging for some
other white knight to save the high-speed rail.

12. (C) This news could hardly come at a worse
time for the Taiwan government. Whether the
government should have, or even could have,
exerted more control over the project is a topic
of fierce debate, dividing along predictably
partisan lines. However, coming less than three
months before island-wide elections and in the
wake of labor and safety problems with the
construction of the Kaohsiung subway and
prolonged water shortages following recent
typhoons, the Pan-Blue will seize this
announcement as further proof of the DPP,s
inability to govern.
KEEGAN