HIGH-SPEED RAIL BUY-BACK A LAST RESORT

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 000240

SIPDIS

SIPDIS

DEPT FOR EAP/TC

E.O. 12958: DECL: 01/24/2015
TAGS: ELTN ECON TW
SUBJECT: HIGH-SPEED RAIL BUY-BACK A LAST RESORT

REF: A. 05 TAIPEI 4125


B. TAIPEI 189

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


1. (C) Summary: Taiwan's Ministry of Transportation and
Communications (MOTC) is preparing contingency plans for
buying back the high-speed rail project, which is being
constructed by the Taiwan High-Speed Rail Corporation
(THSRC) under a build-operate-transfer (BOT) project. MOTC
officials believe that THSRC will be able to find the
necessary financing and finish construction. They assured
AIT/T that the buy-back option is a last resort, noting the
additional delay it would entail. The high-speed rail is
increasingly a political issue in Taiwan with serious
fiscal implications for Taiwan's government. End summary.


2. (U) Recent media reports have indicated that the Taiwan
government was studying the option of buying back the
build-operate-transfer (BOT) high-speed rail project from
THSRC. On September 8, 2005, THSRC announced that
completion of the project would be delayed one year until
October 2006, substantially increasing the total cost of
the project. Currently, total construction costs are
estimated at close to NT$ 500 billion (USD 15 billion).
THSRC is likely to require significant additional financing
to finish construction. Under the original BOT contract,
the Taiwan government agreed that if THSRC is unable to
meet the terms of the contract, the government would buy
back the project at a cost of up to NT$ 325.9 billion.


3. (C) On January 18, Econoff met with Director General Wu
Fu-hsiang and Section Chief Allen Hu (Hsiang-ling) of the
MOTC's Bureau of the High-Speed Rail to discuss the
government's contingency planning for the high-speed rail
project. Wu expressed optimism that THSRC will be able to
resolve the project's financial problems as well as
technical problems that forced the delay of the train's
inauguration. Wu emphasized that buying back the BOT
project would be a last resort for the Taiwan government,
but he stated clearly that the government would not invest
more public funds in the project if it stayed in the hands
of THSRC. He said that MOTC would provide financial
assistance to THSRC only by helping it to raise funds from
other sources.


4. (C) Wu noted that buying back the project would delay
the train's inauguration by an estimated two years. He
pointed out that if THSRC failed to meet its contractual
obligations, triggering the need for the government to buy
back the project, the government would first have to give
THSRC six months to resume compliance with the contract.
Then after the six-month period, the Executive Yuan (EY)
would have to seek funding from Legislative Yuan (LY).
Once funding was secured, the government would have to
negotiate new contracts to complete construction. Because
of such a lengthy delay and the high costs associated with
further delay, the government will do whatever it can to
avoid the buy-back option, according to Wu.


5. (C) Hu also tried to dispel rumors that the government
was taking over THSRC with the addition of three new board
members. THSRC agreed to add the seats when the China
Aviation Development Foundation (CADF) and the CTCI
Foundation, both government entities, agreed to invest NTD
7.5 billion (USD 230 million) in the project in September

2005. Hu commented that even after the addition of three
new board members, the seven board members from the private
sector would still outnumber government-appointed members.
Note: At the January 22 board meeting, Wang Tian-sheng, a
board member of CADF; John T. Yu, the Chairman of the CTCI
Foundation; and Arthur Chiao (Yu-cheng),Chairman of
Winbond Electronic Corporation, were appointed to the new
seats on the THSRC board. Although Chiao is not an
official of a government entity, observers believe that he
will vote with government appointees on the board. End
note.


TAIPEI 00000240 002 OF 002



6. (C) Wu acknowledged that the high-speed rail project has
highlighted many problems in the BOT model. He believes
that Taiwan will not use BOT contracts for large
infrastructure projects in the future. The possibility
that the Taiwan government might have to buy back the high-
speed rail project would have serious implications for the
government's fiscal situation and will increasingly become
a political issue. The high-speed rail's financial
problems may be partially responsible for the resignation
of MOTC Minister Lin Ling-san in the latest cabinet
reshuffle. As reported ref B, the KMT has identified the
high-speed rail's problems as an issue of primary concern
and has dedicated one of three special task forces to
working with the government towards a resolution. Comment:
THSRC will face more difficulties before the trains finally
start running. Those difficulties are increasingly the
Taiwan government's problems as well. End comment.
PAAL