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


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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


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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


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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


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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