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