HKS671

Case Number 1910.0

Taiwans High-Speed Rail:
A Public-Private Partnership Hits a Speed Bump

Towards the end of February 2009, Ms. Nita Ing, President of the Taiwan High Speed Rail
Corporation (THSRC), a private consortium that had won the right to build and operate a high-speed rail
system along the islands west coast, requested an urgent meeting with Chi-kuo Mao, Taiwans Minister of
Transportation and Communications, recently appointed after a presidential election in March 2008 had
brought Taiwans Kuomintang Party back to power. The system had opened only two years earlier, with a
concession period (starting when the contract was signed in 1998) of thirty-five years.
1

At a capital cost of $17 billion, the Taiwan high-speed railroad was one of the largest
infrastructure projects in the world. It was also the largest infrastructure project ever built, including in
places many times Taiwans size and population, using a method for infrastructure development where the
private sector would build and operate a project for several decades and then transfer ownership to the
government. The project was highly visible in Taiwan, having been discussed over five hundred times over
fifteen years in the legislature, and constantly by Taiwans growingly aggressive media. Ms. Ings message
was blunt. THSRC was in deep financial trouble, with ridership having consistently been under projections
and now in even worse shape because of the worldwide economic crisis that had hit export-dependent
Taiwan especially hard. It could not pay back the principal on bank loans, scheduled to begin later in the
year. THSRC wanted to hand the railroad over to the government to run. It requested that compensation
be set by an independent third party, as provided for in the event of a government takeover in the
governments original contract with the company.
Dr. Mao, an MIT PhD and long-time high civil servant and corporate executive, had himself served
as one of the first directors of the high-speed rail office in the Ministry in the early 1990s, and afterwards as
Deputy Minister. He had a good feeling for why THSRC, and the government, had gotten into this tough

Dollar amounts in this case will be given in US dollars. The exchange rate of the New Taiwan (NT) dollar has fluctuated
somewhat over the period covered by this case, but for the sake of simplicity, translations from NT dollars will be made
at a rate of US$=NT$30.
This case was written by Steven Kelman, Weatherhead Professor of Public Management, Harvard University John F.
Kennedy School of Government, and Chung-Yuang Jan, Professor of Public Administration, National Chengchi
University of Taiwan. (1109). HKS cases are developed solely as the basis for class discussion. Cases are not intended
to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright 2010 by the President and Fellows of Harvard College. No part of this publication may be reproduced,
revised, translated, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means
(electronic, mechanical, photocopying, recording, or otherwise) without the written permission of the Case Program.
For orders and copyright permission information, please visit our website at www.ksgcase.harvard.edu or send a
written request to Case Program, John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy
Street, Cambridge, MA 02138.
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situation. Fortunately, the meeting was private and not leaked to the media. However, he still needed to
decide what to do in response to THSRCs request.
Taiwan is an island off the southeastern coast of mainland China about the size of Maryland and
Rhode Island combined, with a population of about twenty-three million. It is located along major
earthquake fault lines, and its geological history has produced a rugged, mountainous landscape most
dramatically characterized by forbidding ranges spanning the center of the island. This has meant that
settlement has been concentrated along the coasts, particularly the west coast, where 95% of the
population lives. With a semi-tropical climate, the island is also frequently battered by the high winds and
strong rains of typhoons. These risks make infrastructure construction challenging.
The islands political situation is hardly less tempestuous. During the eighteenth and nineteenth
centuries, immigration from southern China gave the island a predominantly Chinese culture (the original
inhabitants were aboriginal tribes ethnically related to Indonesians, Polynesians, or Native Americans), and
the island came under the loose control of the Qing Dynasty in China. However, following Chinas defeat in
the 1894 war with Japan, Taiwan became a Japanese colony through 1945. Japanese rule brought the
beginnings of economic development, including a railroad network along the west coast and construction of
2

the port of Kaohsuing, originally to ship wood from Taiwans prodigious forests to Japan. When the
Nationalist (often called KMT, after the acronym for Kuomintang, or Nationalist Party in Chinese)
government was defeated in the Chinese civil war by the Communists in 1949, Nationalist soldiers and
officials fled to Taiwan, hoping to use it as a base eventually to reconquer the mainland. The Communist
Peoples Republic of China and the Taiwan-based KMT government fought for international recognition, a
battle turning decisively in favor of the Communists after the U.S. recognized the mainland government as
Chinas legitimate one in 1979 and broke formal ties with Taiwan (while maintaining informal ones). Only
about 12% of the population descend from mainlanders who came to Taiwan in 1949, but the island was for
decades ruled by mainlanders in a tightly controlled one-party system generally regarded as having high
levels of corruption.
Economically, though, starting around the 1970s and 1980s, Taiwan became a powerhouse, one
of the four Asian tigers, along with South Korea, Hong Kong, and Singapore, with export-led growth that
dramatically improved standards of living over a short period of time. Taiwanese firms now produce some
90% of the worlds laptops, and large percentages of world production of notebook computers, cellphones,
flat-panel monitors, and semiconductors. The export-led growth also reflected a new economic
development model for Taiwan, led by the private sector rather than by government-owned or backed
companies, the traditional approach of the statist KMT.

Romanization of names of places and people in Taiwan is complicated by a mixture of romanization systems used,
predominantly the older system called Wade-Giles but sometimes, more recently, the pinyin system used in mainland
China. This case uses the romanizations predominantly used for the places and by the individuals concerned.
Kaohsuing is a Wade-Giles romanization; in pinyin it would be Gaoxiung.

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Growth was concentrated along the western coast, especially Taipei, the capital and financial
center in the north, with about 5.7 million inhabitants; the port Kaohsuing in the south, with about 2.2
million people and during the 1990s the third-busiest container port in the world; and in-between
Taichung, a manufacturing center with about 1.7 million population.
The same period was also one of political ferment and transition. Chiang Kai-shek, the Nationalist
leader from the civil war, died in 1975. He was succeeded by his son, who began to open up the political
system to native-born Taiwanese, and lifted martial law in 1987, a year before his death. In 1988, Lee Tenghui, a KMT member but born in Taiwan rather than mainland China, became president. Around this time, an
opposition party, the Democratic Progressive Party (DPP), began to contest elections. The DPP was based
among native Taiwanese and favored Taiwan independence.
With economic growth came more travel on the west coast, as people relocated with their families
to take advantage of economic opportunities, businesspeople from one city needed to visit another, and
more cars as people became more prosperous. What followed was a dramatic growth in congestion. Auto
travel between Taipei and Kaohsuing, just over two-hundred miles (about the distance between Boston and
New York) often took between six and eight hours, twelve hours on weekends or holidays. In 1978, the first
3

major north-south freeway was completed. In 1983, a second was started.

The worlds first high-speed train, the Japanese Shinkansen between Tokyo and Osaka, opened in
1964. The Taiwan Railway Authority, a government-owned company that runs the islands railways,
suggested in 1974 introducing a high-speed rail train in Taiwan, and a report on the idea was published in
1981 but the suggestion went nowhere. With the growth of congestion, the idea was revived in 1987, the
same year the worlds second high-speed train, the French TGV, began operation, when the influential
Council on Economic Planning and Development requested that the Ministry of Transportation contract for
a feasibility study and benefit-cost analysis for building a high-speed rail system.
The report concluded that a high-speed rail was technically feasible and economically justifiable.
Very quickly after completion of the feasibility study, the government in 1990 approved the idea in
principle, and created a Provisional Office for High Speed Rail in the Ministry of Transportation and
Communication to work on it. Some Taiwanese academics who studied transportation issues felt a highspeed rail was unnecessary for such a small island, especially given the high construction costs. But deeper
than any benefit-cost analysis were the widely held views that, in the words of one official, It is a basic duty
of the public sector to provide trains, that railroad service was never financially profitable (its a natural
characteristic of railroad service), but that this shouldnt be a bar to doing it, and that big infrastructure
projects, since the 1960s, had been an important way government assisted growth of Taiwans economy.
States one official, Air was high-speed but low capacity. The existing railroads were high capacity but low
speed. High speed rail filled an empty box. President Lee Teng-hui was a supporter of big infrastructure

A third north-south highway was under consideration, but the idea was to be abandoned after the decision to build
the high-speed rail.

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projects period, (including highways), as statements of national development and optimism. He didnt like
planning or economic evaluation, one observer notes.
More specifically, the larger vision of high-speed rail was to link four locations; Taipei (the capital)
with its financial institutions and corporate headquarters; Kaohsuing with its port from which exports were
shipped; Taichung with its manufacturing plants; and Hsinchu with its Science Park and high-tech industries.
A 1993 government brochure about the project suggested that the high-speed rail would integrate the
economic forces of the existing three separate metropolitan areas in northern, central and southern
Taiwan, and accelerate the emergence of a new regional economic development structure for the 21

st

century. The idea was that these cities were complementary, and should develop as a region. We need
to think about the whole West Coast as one city, it was argued. According to one academic who was
initially skeptical but later became a convert, I concluded that to increase productivity in Taiwan, the only
way was the high-speed rail. A somewhat complementary, somewhat different vision was to balance
development more evenly around Taiwan, by making it easier to travel to parts of the country other than
Taipei and Kaohsuing.
This vision came complete with a slogan the high-speed rail would create a one-day society.
(People could travel from Taipei to Kaohsuing, get work done there, and come back the same day.) And it
also came with an arresting visual image, presented frequently by Ministry of Transportation leadership
promoting the project, where three separate circles morphed into one big one.
A formal cost-benefit analysis was conducted in 1992, in connection with obtaining final approval
for the project. (This analysis looked at the high-speed rail as a government project, not one run by the
private sector.) Most of the benefits reported came from the total value of time savings for consumers
using high-speed rail, from projected operating surpluses (excess of ticket revenues over operating
expenses), and from lower fares paid by travelers switching from airplane travel to the high-speed rail. In
calculating benefits, the study measured consumer surplus (total time savings rather than only the
portion reflected in actual ticket revenues), while if a private firm is contemplating an investment, it doesnt
5

receive the value consumers gain from the product over the price of the product. The study did not
include any benefits that would come from new businesses established because of agglomeration benefits
from establishing a larger area that would become attractive for establishing firms only because the highspeed rail existed; such possible benefits are difficult to estimate, nor did it include intangible benefits such
as national prestige.
However, the two headline numbers in the study were that the high-speed rail was expected to
have a social rate of return of 10% (though virtually all the benefits calculated came from benefits to the
travelers themselves) and that, with government investing half the project, the leveraged social rate of

Provisional Engineering Office of High Speed Rail, Taiwan West Corridor High Speed Rail Project, p.4.
5

This is, it should be noted, common practice in cost-benefit analyses of public-sector transportation projects.

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return was 20%. Fares were not expected to cover the costs of the project. Government investment was
concluded to be necessary to fund half the costs of the project.
The 1990 feasibility study had proposed seven stations, and a route (referred to by transportation
7

planners as an alignment) that would hug Taiwans coast and place stations in the center of the cities
where they were located. However, coastal and center-city land was more expensive to acquire, and also
raised more political problems involving displacement of existing residents. Furthermore, land speculators
began buying up land along the route that had been announced. The Prime Minister decided it wasnt fair
[to allow speculators to profit], an observer noted. So the government decided to move the route inland,
to the east of the cities being served rather than to the west, and to move all the stations, except those in
the big cities of Taipei, Kaohsuing, and Taichung onto greenfield sites outside developed areas in the
cities. This would save a good deal of political controversy as a good deal of the land over which the train
would now be routed belonged to the state-owned Taiwan Sugar Corporation, and could be purchased
without fights with private landowners. It was also decided that there would be eight stations, including
8

two in Taipei (See Exhibit One for a station map). The stations that were removed were in less built-up
areas and, in the view of some supporters, had been placed there to meet the intended role of the high9

speed rail in promoting more balanced regional development.

With stations to be built on greenfield sites, people in BOHSR (Bureau of High Speed Rail) started
thinking about land development revenues as a possible contributor to paying for the project. (No such
revenues had been included in the earlier financial analyses.) The expectation was that, with strong
economic growth, the area around these stations would expand quickly. The Director of BOSHR argued that
since the high-speed rail stations would increase the value of land around them, a way ought to be found to
internalize the external benefit to help fund the project. The decision was made to acquire land around
the stations themselves for retail, commercial, and housing development. Some outside advisors saw these
station districts as an opportunity to build new towns, intense urban-like development in newly
established areas. Interest in "new towns" was, coincidentally, growing just around the time of the
alignment shift, eventually producing two large new towns independent of the high-speed rail, neither of
which succeeded. Urban planners thus encouraged increasing the station land area for development. (One
might argue that out-of-town locations encouraged an undesirable urban sprawl, though Taipei itself is one

The latter was a very strange number as there seems to be no reason to ignore the governments spending in
calculating a social rate of return.
7

Existing track used by the Taiwan Railway Authority was not feasible to use for high-speed rail.
8

The station marked Zuoying is the one serving the large city of Kaohsuing.
9

There are ten counties along Taiwans western coast, and of course each county wanted a station. It was seen as
unfair to have the high-speed rail go through a county without the county getting its own station. However, the
greater the number of stations, the greater the cost, and also the slower the service, as time advantages of high-speed
rail get dissipated because of frequent station stops. After a great deal of local lobbying on behalf of additional stations,
going through the mid-nineties, the problem was eventually handled by specifying that three additional stations would
be built eventually, but that there would initially continue to be only eight stations.

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of the most densely populated cities in the world, with a population density of over 15,000 people/square
kilometer, compared to about 2,000 for New York and 3,500 for Paris.) It may be noted, however, moving
stations outside of city centers made use of high-speed rail less attractive for passengers, since travel
distance to the stations would increase.
In 1992 the legislature approved funding the high-speed rail on budget. However, there were soon
second thoughts about the government investment that would be required. Despite strong economic
growth, Taiwans public finances were a mess. A series of tax cuts, along with large spending for a new
national health insurance system and for pensions for a retiring generation of soldiers from the pre-1949
civil war, created a situation where the budget deficit in 1993 was a whopping 5.9% of GNP. [The highspeed rail] was huge! It was just going to cost so much money, a technocratic former Minister of Finance
then sitting in the legislature, Chien-Shien Wang, recalls. They said NT$400 billion. But our experience in
the past was that when they said a certain number, afterwards it went up 30-50%.
In this environment, Wang proposed, from his legislative perch, replacing a government-funded
project with a public-private partnership (PPP) project, a term of art that had at the time recently
emerged to refer to projects, typically infrastructure but possibly including anything from hospitals to
schools even to hotels, that were built and operated by the private sector, and could turn a profit through a
mixture of some initial government subsidy and ongoing revenues from
users. The flavor of PPP that Wang envisioned is called build/operate/transfer (BOT), whereby the private
concessionaire would build and operate the system, and give it to the government after thirty-five years.
The first known concession, to distribute water in Paris, was awarded in 1782 to the Perrier brothers. The
Suez Canal, opened in 1869, was built and operated under a ninety-nine-year concession. Concessions were
widely used in the nineteenth century, only to become much less-common by the first part of the
twentieth. Now, at the end of the twentieth century, they were making a comeback.
Wangs main argument for the PPP approach was budgetary. The feeling was that, with a PPP, if
the government could provide the land, private investors could pay for the rest of the project, making
budgetary outlays very much lower. Interest in a PPP, however, also reflected the spread of a free-market
ideology in tune both with Taiwans new export-led economic growth and with ideological trends in the
post-Communist world. However, there was some worry that Taiwan was entering into a very large BOT
project with no prior experience. And both President Lee himself and Ministry of Transportation officials still
believed that infrastructure is a government responsibility and should be kept inside government,
according to one high-placed source. The vote on Wangs proposal to stop the budget for the project and
convert it into a PPP was 49-48, with members of the opposition DPP voting with Wang. Shortly thereafter,
the government formally approved the project. Suddenly Taiwan, only six years removed from martial law,
with a newly invigorated parliament, opposition, and media, and never having attempted a PPP project at
all, found itself committed to the largest BOT project anywhere in the world.

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At the end of 1994, a law, Encouragement for Private Sector Participation in Transport
Infrastructure Development, was passed to authorize various government actions that would allow PPPs
to move forward. It specifically authorized government to assist a private concessionaire with land
acquisition or other financial assistance, and allowed a concessionaire to use government-owned land for
fifty years (rather than the ten years otherwise specified by law), including receiving real estate
development revenues. (According to one source, the law was drafted by the Ministry of Finance, because
the Ministry of Transportation wasnt particularly sympathetic to the idea.)
In October 1996, the government issued a request for proposals (RFP) for concessionaires. The
major performance requirements for the system were an operating speed of at least 300 km (about 190
10

miles)/hour, a journey time of a maximum of ninety minutes for express trains between Taipei and
Kaohsuing with one stop in-between (compared with 4 hours by conventional rail) or two hours with four
11

intermediate stops, operation for a minimum of eighteen hours a day, a minimum seating capacity per
trainset of eight-hundred, and a maximum average monthly load factor of 80% (so trains wouldnt be so
crowded that it would be difficult for people to buy tickets at busier times). There were no requirements
for a minimum number of trains stopping at some of the less-busy stations, such as Chiayi (as local
legislators would have liked). Performance requirements were established so that all three existing
international high-speed trains, from Japan, Germany, and France, would be able to be bid. There were no
requirements for local content or technology transfer to Taiwan companies.
According to the terms of the RFP, the concessionaire would construct at its expense the new
stations and build the track for the railroad, and then operate the railroad at no further expense to the
government. The stations themselves were to be designed by the concessionaire; each one was seen as
having its own identity as a landmark. For its part, the government committed to arranging and,
through eminent domain land acquisition powers, paying for land acquisition for the railway right-of-way,
stations, maintenance depots, and station development districts, these being the major subsidy the
government committed to giving the concessionaire. (Land acquisition would turn out to cost about $1.7
12

billion, or about 13% of total capital costs.)

In addition the government agreed to build roads into and

inside the new stations. The government also promised the concessionaire the right to real estate
development revenues for fifty years in the area right around the stations (though not the larger tract of
land around the stations that the government also had bought or taken over, where the government
retained development rights).
Finally, since the system had no secondary market value other than to the government, the
government promised to buy the system, if the concessionaire went bankrupt, at a price to be determined
by an independent third party, to help repay the concessionaires bank loans.

10

By comparison, the top speed of the Acela, the U.S. high-speed rail train, is 150 mph.
11

The Acela, which generally makes six intermediate stops, takes about 3 1/2 hours to travel between New York and
Boston.

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The RFP left undetermined who would pay for building civil works (bridges, viaducts, and tunnels)
13

for the project estimated to account for 45% of the capital costs. Bidders were allowed to propose any
arrangement, ranging from the government paying the entire costs to the concessionaire paying for
everything.
A key to determining the economic viability of the high-speed rail project was how many riders the
system would attract. There were four ridership studies in the years before the project was bid. In the 1991
study, assumptions about the probable costs of competing modes of transportation were made more
favorable to the high-speed rail (for example, it was assumed that highway tolls would rise, not assumed
earlier), producing higher ridership estimates. These changed assumptions also allowed a higher estimated
ticket price, increasing the economic viability of the project. In the ridership sensitivity analysis, the only
alternate assumption on the predicted rate of economic growth was to increase it by 1% a year. The 1997
estimate, made around the time of the RFP (though stated as being a guide, not a commitment), was for
about 215,000 passengers a day in the first year of operation, growing to around 250,000 passengers a day
five years after service began. As people primarily with backgrounds in transportation construction, officials
at BOHSR worried mostly about construction risks (delays and cost overruns), not ridership risks. According
to a manager at one of the lead banks, the lending banks undertook no independent evaluation of ridership
estimates.
Two consortia ended up bidding on the contract. They had the (for anyone Taiwanese) significant
names of the Chinese High Speed Rail Consortium and the Taiwan High Speed Rail Consortium (later
Corporation) or THSRC. The moniker Chinese in the first consortium signaled its connection with the
ruling KMT and the 1949 mainlander generation. Taiwan in the second signaled that groups connection
with the younger, Asian tiger generation of entrepreneurs, mostly native Taiwanese or at least Taiwanborn, who saw Taiwan as their country, not China. The Taiwan team was also led by the CEO of the
largest civil construction company in Taiwan, Nita Ing. She was a woman, rare in the male-dominated
Taiwan business world, a graduate of UCLA, an outspoken feminist, and a supporter of the opposition DPP
party. Both teams included big conglomerates that were in many businesses, including ones largely
unrelated to infrastructure construction and operation, but with divisions involved in real estate
development, construction, finance, and, peripherally, transportation (the THSRC team, for example,
included a large shipping and airline company).
The first team would have had to be considered front-runners. The same consortium had earlier
been chosen for a large, prestigious private-sector project to build and manage Taipei 101, an office and
retail complex planned to be the tallest building in the world. The leaders of the team were older, in a
culture that respects age. And of course they had significant relationships and connections with the

12

Actually, the total amount of land acquired, however, was somewhat less than for the Taipei international airport.
13

BOHSR had already done the basic design work for the civil works, though the concessionaire would need to do more
detailed design work. The RFP stated that structures had to be designed for a life of 100 years, with protection against
earthquakes and typhoons.

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government; the lead bank in the consortium was actually controlled by the KMT. (Some speculated that
President Lee, a native Taiwanese, wanted the Taiwan team to win. However, the CHSRC consortium was
chaired by a personal friend of his.)
THSRCs strategy for dealing with its underdog status was to present an extremely aggressive bid.
Taking BOHSR officials by surprise, the teams bid called for zero subsidy from the government for
14

constructing the civil works.

By contrast, the Chinese High Speed Rail Consortium bid called for a $5

billion subsidy. Not only that, the THSRC bid also stated that the company would provide the government
10% of its profits each year, with a minimum payment over the life of the concession period equal to the
governments contribution (such as for land acquisition) to the project, meaning that the final government
share of the investment would be zero (though, of course, not on a net present value basis). And THSRC
pledged to complete construction by 2003, compared to a 2005 date in the other proposal. According to a
number of sources, the dramatic difference in the bids made the decision to go with THSRC inevitable. It is
hard to imagine how a bidder with a significantly less-favorable proposal could have been chosen, especially
during a time of democratic transition and the growth of an aggressive media in Taiwan, when the team
with the less-aggressive bid was tied to the government. Senior officials outside the Ministry of
Transportation and the formal evaluation teams (chaired by the Minister of Transportation, and consisting
mostly of technical experts), were not, according to those involved, to have been involved in the contract
award decision. The question of a teams experience in running a railroad operation was not considered. In
September 1997, the government selected the Taiwan consortium as the winner.
However, this decision proved to be only the beginning of a lengthy, contentious, and sometimes
dramatic series of twists and turns that unfolded before construction actually began, two and a half years
later.
After THSRC was selected, the parties began negotiation on a more detailed construction and
operations contract. THSRC now became quite demanding, insisting on commitments the company wanted
the Ministry of Transportation and Communications to make about issues such as diversion of utility lines or
permits that needed signoffs from multiple government agencies. THSRC also wanted the government to
commit to time deadlines for obtaining permits and approvals. States a THSRC executive,
The way the government saw it, they] had no responsibilities. It would just wait
to collect the project thirty years later. People in the government didnt
understand the idea that this was a partnership, and that both sides had
responsibilities. We saw that there were lots of things we needed, and could only
get from the government, and they werent provided. We didnt initially

14

There would still be a subsidy through government land acquisition and other government-undertaken costs
discussed earlier.

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understand that we had problems here, because we had no experience doing this
15

kind of thing.

Asked how they were able to bid initially without these issues being resolved, the same executive
responded, We just assumed the government would take care of these things.
Over the next six months, there were two rounds of negotiations between the parties, aimed at
the July 1 deadline the government had established to sign a final contract. During the negotiations, THSRC
President Ing stated that the biggest risk for the success of the project was the governments behavior.
On the July 1 deadline, the government announced it had failed to reach agreement with THSRC. A
government spokesman was quoted as stating that the consortium had demanded much more than what
had previously been imagined would be stipulated in the final contract. The media was filled with
speculation that the government might switch to the other bidder (including speculation that senior KMT
officials had tried to sabotage the negotiations with THSRC to provide an excuse to switch back to the KMTlinked bidder).
After considering (but rejecting) the idea of throwing THSRC overboard and going to the rival
consortium, the government decided to form an interagency committee, chaired by the deputy Minister of
Transportation, to try to resolve the issues. At this point, THSRC presented the government with a list of
380 issues that needed to be resolved. After ten months of negotiations, these issues were finally resolved,
although only after the deputy minister told THSRC trust me about a few remaining points.
On a parallel track, bank negotiations had been proceeding during this time. The THSRC proposal
in 1997 had included a letter of intent from twenty-four banks to participate in loans to the project.
16

However, according to Shi-Chung Huang of Mega Bank, The banks did it because of their relationships
with the consortium companies. They didnt really understand this project. As it developed, THSRC
negotiated mostly with some large banks where the government was the majority shareholder. (The one
bank that was an affiliate of one of the members of the THSRC consortium was very small.)
The bank advising the government in evaluating proposals in 1997 had raised a number of
questions about financing the project in general (e.g., huge amount of funds required, regulatory limits on
the percentage of a banks loans that could go to one borrower) and the THSRC consortium in particular
(the value of the equity, that is, of shares issued by THSRC, the consortium promised to invest was greater

15

Consortium members had of course had experience doing building projects before, but they had only had to deal
with one local government, rather than many jurisdictions throughout Taiwan. They also needed to negotiate with
different central government authorities, some whose attitude was not so friendly.
16

This is the current name of the bank, formed by a merger of several other banks, not the name of the bank at the
time of the negotiations.

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17

than the members total equity for their entire companies ). Notes one bank source, Because the project
was a first priority for the government, we were ignored. The decision-makers were all engineers [in the
Ministry of Transportation]. They werent financial people. They just focused on engineering issues could
you build this?
THSRC probably believed they could overcome problems of getting domestic funds by obtaining
international financing, including from the European train manufacturers. However, in the meantime, the
1997 Asian financial crisis badly damaged Asian capital markets. Furthermore, in January 1998, the Ministry
of Finance announced it would not modify its regulations limiting foreign bank borrowing as a percentage of
project costs (making foreign bank participation more difficult). The 1997 Asian financial crisis also
produced Taiwans first-ever crash in real estate prices, reducing expectations about real estate revenues
from the project. Finally, lack of certainty about whether THSRC would buy the trains themselves from the
Europeans or the Japanese (to be discussed below) made it more difficult to arrange project financing from
18

the countries of the train manufacturers, which otherwise would likely have occurred.
Shortly after negotiations started with local banks, President Lee, through a meeting with the
Ministers of Finance and Transportation, made clear that the government wanted the banks to loan THSRC
the money they needed. The banks were worried that the loans would be very risky. Furthermore, new
bank reserve requirements from the Bank of International Settlements that was taking effect in January
1999 graduated requirements according to loan riskiness, and, to meet the new requirements, a new loan
of this size on these banks books would need to be classified as zero risk, a classification impossible
absent a government loan guarantee.
In this environment, in March 1999 the banks requested that the government guarantee the loans.
A month later, the government, with the Ministry of Finance taking the lead, agreed. The Ministry of
Transportation was more or less a passive spectator. The decision was controversial, criticized by many in
parliament.
The loan agreement with the banks was signed in February 2000. The NT$325 billion loan came
from a consortium of twenty-five Taiwanese banks, led by two majority-government owned banks. The
period of the loan was twenty years, and had a variable rate tied to a postal savings rate interest
benchmark. (Initially, that rate was 8%; as of early 2009, it was 2.4%.) Principal payments were to begin
after six years.

17

Both governments and bank lenders generally like concessionaires to invest significant equity in a project both
because it reduces project risk by reducing interest payments on debt and because it makes the concessionaire less
likely to walk away from a project running into trouble.
18

When THSRC finally chose the Japanese Shinkansen, it hoped to get financing from the Japanese government ExportImport Bank. However, Japanese government rules require borrowers to be from OECD (Organisation for Economic Cooperation and Development) member countries, of which the only two in Asia are Japan itself and South Korea.

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Another wrinkle in the transition from THSRCs selection to actual construction of the high-speed
rail was the companys decision, in December 2000, after the other negotiations were completed, to change
its train vendor from the European trains bid in its original proposal to the Shinkansen, the Japanese highspeed rail train originally bid by the rival team. With encouragement of the Japanese government, anxious
to export the train, the Shinkansen became very aggressive on price. And President Lee, who speaks
Japanese and was generally regarded as pro-Japanese, believed that choosing a Japanese train would help
Taiwans important foreign policy relationship with Japan (which, like the U.S., doesnt have formal
diplomatic relations but is an informal supporter). It is unclear whether President Lees views influenced
the behavior of THSRC. The Ministry of Transportations formal position was that this decision lay with
THSRC, as long as all performance specifications were met.
The construction and operation contract had specified that equity (i.e. investment in company
shares) correspond to one-quarter of the companys total assets. The initial 1998-99 equity investment of
the THSRC consortium members corresponded to only about 6% of the loan the company eventually took
out, giving the consortium only a modest sum at risk, compared to construction costs for the project. This
was topped up in 2000 by another 6% invested by individual company employees, and another 2% in 2001
from public investors. When the government pressed in 1999 on the one-quarter equity issue, THSRC stated
19

that the contract only required them eventually to have a quarter of the project value in equity.
According to one source, THSRC believed the 25% equity requirement was unrealistic, and they accepted it
consciously expecting to negotiate about this issue afterwards.
Meanwhile, in March 2000, the same month as construction of the high-speed rail finally began,
Taiwans move towards democratization was crowned by the presidential election victory of DPP candidate
Chen Shui-bian, a pro-independence lawyer and former mayor of Taipei, and the islands first democratic
transition of power to an opposition party. As noted, a number of THSRC companies had close ties with the
DPP. Between 2003 and 2005 the value of the companys equity was, at the insistence of some of the
lending banks, approximately doubled through purchases of preferred stock by state-owned companies
such as the Taiwan Sugar Corporation and China Aviation Corporation, and through non-voting shares
bought by government-controlled banks that were more like long-term loans. There have been rumors and
investigations of possible bribes by THSRC to President Chen Shui-bian (indicted after completing his term of
office on corruption charges) for his direction to government-controlled firms to buy shares in THSRC, as
well as unsuccessful strong-arm efforts to get private Taiwan firms to invest. In one case where Chen
sought investment from Formosa Plastic Corporation, the Presidents office released a press statement
saying company chairman Yong-ching Wang had consented to investing, which Wang then denied, and it
has been alleged that Wang paid Chen to avoid government retribution (such as tax audits) toward the
company, though the allegation was not included in Chens corruption indictment.

19

According to the contract, if a violation such as this affects the ability of THSRC to operate the railroad, the
government may terminate the contract.

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Actual construction of the system came in on time and very close to budget, only 6% over what
THSRC had estimated internally. (The original RFP had called for a thirty-year concession for system
operation and five-years allowance for construction. In the final contract, this was changed to a total
concession period of thirty-five years, to provide the company a further incentive for early completion.)
Construction success was all the more amazing considering the complex nature of the construction,
involving thirty miles of tunnel drilling into mountainsides, significant earthquake and typhoon protective
measures (though of course this was not the first time such protections were undertaken in Taiwan), and
the longest continuous railway bridge in the world. By contrast, a contemporaneous Korean high-speed rail
project, built as a standard government procurement, saw cost growth of almost 120%.
Separate from construction, there was a delay of over a year (a 21% time slippage) due to
contention over demands by THSRC that the Shinkansen modify its safety system to use more electrical and
mechanical fail-safe devices (as used in the European high-speed rail systems, and as the concessions specs
called for), as opposed to the Japanese approach, which put more emphasis on operator safety
responsibility. The Japanese tried to lobby the Ministry of Transportation to support them, but the
government took the position that it didnt want to interfere with the concessionaires judgments,
especially on safety issues. Even with this problem, time slippage was considerably lower than in the
Korean high-speed rail, where it was 80%.
During construction, the government monitored mostly THSRC quality assurance procedures,
rather than construction itself; less monitoring, according to government officials, than for a normal public
procurement construction project. THSRC officials complained, nonetheless, that monitoring was too
intrusive, creating bureaucratic costs without achieving benefits. Notes one government official from
outside the Ministry of Transportation: THSRC says this is a private-sector project, so the government
doesnt need to monitor during the construction period. The government thinking is, I cant wait. I need to
watch step by step. The contract also called for use of independent verification and validation firms to
certify the construction quality and use-worthiness of the system. Such independent inspection was a first
for Taiwan, although, unlike the situation when such firms are used in contracting in the United States, the
firms were paid by THSRC, not by the government. (However, the government had a veto over firm
selection.)
One issue receiving considerable attention before service was inaugurated was the mixture of
foreign (many of them French) and local train drivers, with risks for language miscommunications. THSRC
had hired foreign drivers because this was the quickest way to get drivers with high-speed rail experience,
so service could start as soon as possible. The opposition KMT party, joined by the head of Taiwans
consumer movement, repeatedly suggested that the train was unsafe, because the system mixed Japanese
trainsets with European signals, and had many European operators driving Japanese trains. (Anecdotally,
some strong KMT supporters were afraid to ride it when service began).

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Service on the high-speed rail was inaugurated in March 2007. It quickly emerged as an operational
20

success. Punctuality ran 99.5%, higher than in Japan or Europe. There have been in fact no major safety
problems or equipment malfunctions. 80% of drivers are now Taiwanese.
But while the high-speed rail was a construction and operating success, it soon became obvious the
project was turning into a financial catastrophe, as ridership fell well short of projections. Just before the
high-speed rail opened, THSRC scaled back its initial ridership estimates to 125,000 people a day, not
215,000 as the 1997 study had estimated. The reality turned out to be even grimmer. A year into
operation, ridership was averaging under 84,000 a day (See Table Two).
A major cause of the ridership shortfalls was the slowdown in Taiwans economy. In 1987, the year
the government ordered a feasibility study for a high-speed rail, Taiwans growth rate was almost 13%. In
1996, the year the RFP for the project was issued, it was 6.3%. The 1995 estimates used as a basis for
financial projections estimated an average economic growth rate between 20012010 of 5.5% a year (with
the optimistic scenario 6.5% a year and the pessimistic scenario 4.5%). In reality (see Table Three),
growth hit 5.5% for only two of those years; for five of the years, it was under 4.5%. The basic cause was
the increasing attractiveness of China as a location for investment for low-wage manufacturing.
Increasingly, Taiwanese companies began moving production facilities from Taiwan to mainland China.
With factories moving, the need for business travel between these factories and Taipei declined. With
businesspeople moving to the mainland to run or manage firms (400,000 Taiwanese out of a population of
around 23 million were estimated to live in Shanghai alone), population growth slowed as well (Table Four).
With lower economic growth, the total number of inter-city trips grew more slowly than originally
projected. In 1995, the prediction was for 2.4 million inter-city trips (greater than 25 km) daily in 2010,
21

compared with 1.4 million a day in 1989. Of these, it was predicted that 12.1% would use high-speed rail.
In 2008 there were 2,064,061 daily inter-city trips. A second problem, however, was that the high-speed
rail was taking away passengers mostly from the smallest segment of the market, those travelling by air. (In
fact, most air service between Taipei and Kaohsuing shut down.) However, the high-speed rail had trouble
coaxing people out of their cars, while the ridership forecasts had predicted that 45% of passengers would
come from people who had previously travelled by car, in reality it has been only 20%; the percentage of
inter-city trips by car has hardly budged. (Some observers suggest highway tolls be raised to correspond
more closely to the costs of car travel, which might also help traffic on the high-speed rail.)
By 2008, THSRCs monthly revenue was running about NT$2 billion, well ahead of operating costs
of NT$800 million (thus making the high-speed rail a better economic proposition than almost all American
or other international subway systems, few of which earn enough revenue to meet operating expenses),

20

Defined as trains less than five minutes late.

21

This projection assumed the train would start running in 2000, and traffic was seen as building up as a percentage of
journeys over time. For the first year of operation, the projection was that high-speed rail would account for 11.2% of
journeys.

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but not enough also to cover monthly interest payments of NT$1.3 billion, not to speak of principal
payments, scheduled to begin (after delay) in November 2009. The original 1991 feasibility study had
22

estimated revenues would run at slightly greater than twice costs, similar to the actual numbers, but that
23

report had assumed the private sector would fund only 45% of the project,

a much lower percentage of

private funding than the THSRC bid. For THSRC to be able to make both interest and principal payments,
revenue would need to double.
With the economic slowdown, real estate development around the new stations, and hence
24

development revenues for THSRC, also grew more slowly than many had originally expected. (See Exhibit
Two for a photo of the area around the station at Chiayi, as of early 2009.) Of the five greenfield stations,
there has been some beginning real estate development at only two, Hsinchu, a station close to Taipei and
location of a high-tech Science Park, and Taoyuan, also close to Taipei and ten minutes from Taipeis
international airport. According to one outside observer, Previous experience from other countries is that
stations built on greenfields take a long time before they generate any value. (BOHSR officials like to show
a visual of one Japanese Shinkansen greenfield station a few years after opening, still deserted, and today,
bustling with development.)
In the original RFP (and since), the government made no promises about how quickly it would
develop the station areas, which in turn would influence how quickly the concessionaire could develop the
smaller areas under its control. (Especially in the economic climate since 2008, government investment in
these areas is likely to precede private investment.) THSRC is not entitled to participate in planning for
these districts. Giving the concessionaire rights to income from land development was seen strictly as a
financial matter to improve the economic viability of high-speed rail, not as involving using private-sector
real estate expertise as part of the land development process.
Most of the government work on the station development areas is being done by BOSHR and by
local governments, though BOSHR is an agency with a transportation rather than a city planning mission.
The government has now made decisions on themes for each greenfield station, for example, for Taoyuan
(near Taipei and the international airport serving Taipei) it has been decided to encourage development of
corporate headquarters for international companies, for centrally located Taichung development of a
shopping mall, and for Chiayi, located near the tourist attractions Alishan Mountain and Sun Moon Lake, a
25

leisure park. Some suggest that as investment from mainland China in Taiwan becomes easier, this

22

The West Taiwan High Speed Rail Integrated Planning Project (1991), Ch. 13, p. 15.
23

The study hadnt assumed a PPP, but rather private funding through bonds or equity investments of an unspecified
type.
24

The area around new stations is divided into a zone right around the station itself (special zone), where TSHRC has
development rights for fifty years, and a much larger area (station district) controlled for now by BOHSR.
25

Such investment has long been banned for national security reasons, but these policies are being modified by the
KMT government that took power in 2008.

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should help real estate development in the station areas, because the Chinese often prefer large projects of
the kind the stations offer.
We saw the same thing with the high-speed rail in Japan, says Hank Huang of the Taiwan
Institute of Economic Research. If you have no location advantages, you will be hurt. If a city doesnt have
strengths on its own, trains wont help. A study by the Institute suggests that the high-speed rail is likely to
benefit the already-dominant cities of Taipei and Kaohsuing more than those in-between, contrary to the
vision that the high-speed rail might balance regional development.
Meanwhile, Taiwan continued to move forward on other PPPs, being promoted by the Public
Construction Commission (based on a separate law passed in 2000) for projects as diverse as the rebuilding
of the port of Taichung, and constructing hotels, water supply, and university dormitory facilities. By 2009,
over six hundred PPP deals had been signed. These projects, however, have been much smaller than the
high-speed rail, and none has included a loan guarantee. Often, the public contribution to the project is
limited to land acquisition and/or regulatory relaxation. During the 2008 presidential election campaign,
the KMT candidate, former Taipei mayor Ma Ying-jeou, proposed a series of new infrastructure projects to
jumpstart Taiwans economy (this occurred before the world economic crisis really hit Taiwan). When Ma
won the election and the infrastructure push was set in motion, the government announced they expected
a third of the projects would use PPPs. Again, budget issues, a shortage of funds to undertake so many
projects, seemed to play a central role in the policy, expressed with the aphorism without rice you still
have to cook.
In 2005, THSRC asked and received, from the lending banks a three-year delay in the scheduled
2006 start date for repayments of loan principal. Soon after the system opened, THSRC also asked the
banks for a further three-year grace period of three years after November 2009, and for a further decrease
in the interest rate, though these rates (because they are variable, and interest rates generally have gone
down since the original loan) are already considerably lower than originally. However, the interest rate
THSRC is paying is still above the rates charged the banks best customers. Some observers criticized the
banks for their unwillingness to lower the interest rate, even though the loan is guaranteed. Meanwhile,
media critics complained that construction companies in the THSRC consortium had already made lots of
money on construction contracts for building the high-speed rail, and, given the low value of their own
equity investments in the company, were indifferent to keeping the firm healthy or even alive.
In 2008 and 2009, the worldwide economic crisis added to the high-speed rails woes. The crisis hit
export-dependent Taiwan very badly. In January 2009, export revenues declined by over 40% compared
with the previous year, and in the first quarter of 2009, GNP contracted by over 10%. Starting in November
2008 and through March 2009, when THSRC asked the government to buy it out, ridership began declining
about 1% a month. By March 2009, it was down to 85,000 riders a day. That month the company publicly
announced a 13% cutback in service and cuts in management salaries.

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Now Minister Mao needed to decide what to do. He realized that purchasing the high-speed rail
from THSRC would probably represent about one-quarter of the governments entire annual budget, and
was a huge sum of money. THSRCs debt alone was almost NT$400 billion (about $13 billion). He also
realized that THSRC seemed to be reeling towards bankruptcy, and the day of reckoning would come less
than a year later, in November 2009, when principal payments on the companys debt were set to begin.

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TABLE ONE: DAILY RIDERSHIP ESTIMATES

First year of operation

After ten years

70,000
215,000
236,000
125,000

185,000
295,000
317,000
267,000

1993 (Sofrerail)
1997 (MVA Asia)
1997 (THSRC project bid)
2005 (THSRC revised estimate)

Note: Estimates are to the nearest 5,000 riders

Source: Taiwan Ministry of Transportation and Communications
http://www.motc.gov.tw/mocwebGIP/wSite/mp?mp=2

TABLE TWO: ACTUAL DAILY (AVERAGE) RIDERSHIP

Year
2007
2008
2009 (May)

42,500
83,600
87,200

Source: Taiwan Ministry of Transportation and Communications

http://www.motc.gov.tw/mocwebGIP/wSite/mp?mp=2

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TABLE THREE: TAIWAN GDP GROWTH RATE (Selected Years Since 1980)
Year
2009*

Percent Growth Rate

-2.97

2008

0.10

2007

5.70

2006

4.89

2005

4.16

2004

6.15

2003

3.50

2002

4.64

2001

-2.17

2000

5.77

1995

6.49

1990

5.70

1989

8.45

1988

8.04

1987

12.66

1986

11.49

1985

5.02

1980

7.36

*Projected
Source: Taiwan Department of Investment Services
http://investintaiwan.nat.gov.tw/en/env/stats/gdp_growth.html

TABLE FOUR: TAIWAN POPULATION GROWTH

1980:
1990:
2000:
2009:

17.8 million
20.4 million
22.2 million
23.0 million

Source: Taiwan Government

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EXHIBIT ONE: TAIWAN HSR STATION MAP

Source: Taiwan Ministry of Transportation and Communications

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EXHIBIT TWO: AREA AROUND THE STATION AT CHIAYI, AS OF EARLY 2009.

Source: Taiwan Ministry of Transportation and Communications

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