Identifier
Created
Classification
Origin
05TAIPEI4125
2005-10-07 23:56:00
CONFIDENTIAL
American Institute Taiwan, Taipei
Cable title:  

TAIWAN GOVERNMENT BAILS OUT HIGH-SPEED RAIL AGAIN

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.

072356Z Oct 05
C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 004125 

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 10/06/2015
TAGS: ELTN ECON TW
SUBJECT: TAIWAN GOVERNMENT BAILS OUT HIGH-SPEED RAIL AGAIN

REF: TAIPEI 3779

Classified By: AIT Director Douglas H. Paal, Reason 1.4 d

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 004125

SIPDIS

DEPT FOR EAP/TC
DEPT PASS AIT/W

E.O. 12958: DECL: 10/06/2015
TAGS: ELTN ECON TW
SUBJECT: TAIWAN GOVERNMENT BAILS OUT HIGH-SPEED RAIL AGAIN

REF: TAIPEI 3779

Classified By: AIT Director Douglas H. Paal, Reason 1.4 d


1. (SBU) Summary. Taiwan has leaned on
government entities to bail out the financially
strapped Taiwan High-Speed Rail Corporation
(THSRC). The China Aviation Development
Foundation (CADF),the major shareholder of
China Airlines, and the CTCI Foundation, both
Taiwan government entities, will purchase a
total of NTD 7.5 billion (about USD 225
million) worth of preferred stock in THSRC.
The bail-out spawned criticism and even a suit
by aviation labor associations against CADF.
The Executive Yuan (EY) formed a task force on
October 3 to monitor the project. The
government has also obtained a seat on the
board of directors. The Taiwan government has
avoided having to buy back the high-speed rail
project, but THSRC still faces financial
challenges. End summary.

THSRC Appeals to EY
--------------


2. (U) Shortly after announcing a one-year delay
in completion of Taiwan's high-speed rail
project on September 8, 2005 (reftel),Nita Ing,
THSRC's chairman, went to Taiwan Premier Frank
Hsieh on September 26 to seek financial
assistance from the government. THSRC has had
persistent difficulty raising funds from
investors. It has been forced to revise the
financing agreement with its consortium of
creditors more than a dozen times.


3. (U) The government has already provided NT$
12.5 billion (about USD 375 million) to THSRC
through state-owned Taiwan Sugar Corp., the Bank
of Taiwan, and the Land Bank of Taiwan. More
recently, China Steel Corp. invested an
additional NT$ 3.2 billion (about USD 95
million) in THSRC in April 2005. In 2002, the
Legislative Yuan passed a resolution limiting
total state-owned enterprise investment in the
project to 12 percent of THSRC's paid-in
capital. However, on September 28, the press
reported that a government official had
indicated that the resolution was nonbinding and
the EY would direct state-owned enterprises to
further invest in THSRC.

Unlikely Suspects Provide the Funds
--------------


4. (U) On September 29, KMT Legislator Lai Shyh-
bao revealed in a Legislative Budget Committee
meeting that the Taiwan government's Civil

Aviation Development Fund (CADF),which owns
over 65 percent of the shares in China Airlines
(CAL),would invest NT$ 4.5 billion (about USD
135 million) in THSRC. According to Lai, CADF
would finance the investment by selling
300 million shares of CAL stock. The Taiwan
press also reported that CADF held an
unscheduled board meeting to change the
foundation's charter in order to legitimize the
purchase of THSRC shares. The organization
added the assistance of "national critical
construction" to its primary goal of aviation
development.


5. (U) The Taiwan government's CTCI Foundation,
formerly known as China Technical Consultants
Inc., will also invest NT$ 3 billion (about
USD 90 million)in THSRC, making up the rest of
THSRC's NT$ 7.5 billion (USD 225 million)
shortfall. The CTCI Foundation, founded in
1959 has historically engaged in research and
design support for a range of industries in
Taiwan, especially petrochemicals, energy and
environmental protection. Although the
foundation has large financial resources, the
Taiwan government has not generally used it to
invest in targeted projects or industries.


6. (SBU) Comment: The Chen Administration may
have selected CADF and the CTCI Foundation as
the conduits for further investment in THSRC in
order to comply with the LY resolution intended
to freeze further state-owned enterprise
investment in the firm. The administration
could argue that CADF and the CTCI Foundation
are not technically state-owned enterprises but
are rather Taiwan government entities.
Furthermore, some observers have speculated that
administration officials may have hoped that
investment from these entities would attract
less attention than financing from more typical
government investment conduits like the
Executive Yuan Development Fund. End comment.

Criticism and Closer Scrutiny
--------------


7. (U) There has been a strong negative reaction
from a range of interests in Taiwan. Some
domestic air carriers object to the use of CADF,
which some feel has done little to assist local
carriers, to bail-out a future competitor. The
China Airlines Employees Union and Federation of
Aviation Employees filed suit against the board
of CADF on October 4. Others object more
broadly to the use of additional government
funding to bail-out a build-operate-transfer
project that was intended to relieve the
government of construction costs for the high-
speed rail.


8. (U) In a move likely aimed at muting such
criticism, the Executive Yuan established a task
force on October 3 to monitor the high-speed
rail. The interagency group will meet every two
weeks and representatives from the task force
will attend important THSRC meetings. In
addition, Premier Hsieh asked THSRC's Ing to add
a seat for a government representative on
THSRC's board. Deputy Director General Lee Yu-
ling of the Directorate General of Budget,
Accounting and Statistics was named to the new
seat.

Comment - BOT or JV?
--------------


9. (C) With a major infusion of funds and now a
seat on the board, the Taiwan government once
again may have escaped having to buy back the
high-speed rail project at a cost of over NT$
300 billion (about USD 9 billion) and then take
over construction. However, it may be more
accurate to call the high-speed rail project a
government joint venture rather than a build-
operate-transfer project. And the drama isn't
over yet. Inauguration of the program was
postponed last month from October 2005 to
October 2006. However, an AIT contact
associated with construction of the project
recently reiterated his prediction that rail
service would not be fully operational until
mid-2007. Despite the latest government
funding, the troubled THSRC still has financial
challenges ahead and the Chen Administration may
need to use government funding yet again to bail
it out. The torrid business environment and
optimistic economic assumptions made when THSRC
was conceived have greatly changed in recent
years. The new EY task force would do well to
reexamine assumptions and make the government's
procedures orthodox and transparent. End
comment.
PAAL