Government Takes Over to Keep High Speed Rail on Track

The government has made a move to take over the management of the Taiwan High Speed Rail Corp. (THSRC) and ward off its impending insolvency. The move spells the failure of the mega BOT (build-operate-transfer) project, the largest of its kind the world has ever seen.

The board of directors of the company elected THSRC president and CEO Ou Chin-teh to take over the chairmanship of the company from Nita Ing during a meeting on Sept. 22, nearly a year ahead of the expiration of Ing's second three-year term next August. Ou, who originally joined THSRC's board as a representative of the government-controlled China Aviation Development Foundation, will continue to hold the post of CEO.

The board also decided to call a provisional shareholders' meeting on Nov. 10 to reshuffle the board and elect Ou to a full three-year term as chairman. The government also plans to increase the number of its seats on the 15-member board to at least eight, up from five now, to reflect the size of its 36.2% stake in the company.

The government takeover is expected to facilitate the refinancing of THSRC's huge NT$390 billion (US$11.8 billion at NT$33:US$1) debt by a consortium headed by the state-run Bank of Taiwan. The refinancing program will bring crucial financial relief in the form of a lower interest rate and extended repayment period. The bankruptcy of the company would force the government to appropriate some NT$300 billion (US$9.1 billion) to buy it out.

Without the refinancing program, THSRC would become insolvent in November, when it will have to start repaying the principal of its loans. That will cost it another NT$1.5 billion a month, at least.

A government task force, headed by Vice Premier Eric Chu, will be formed to help tackle the company's critical financial problems.

As of March this year, THSRC had accumulated losses of more than NT$70 billion (US$2.1 billion), over 60% of its paid-in capital of NT$105.3 billion (US$3.2 billion), mostly from interest payments on its bank debt of NT$370 billion (US$11.2 billion), plus the cost for equipment depreciation. With a daily passenger load of 87,000 the company is raking in revenue of NT$2 billion (US$61 million) per month; after subtracting NT$1 billion for operating expenses, this is vastly insufficient to meet the cost of interest and depreciation.

The financial plight of the company derives from problems inherent in its financial structure. For the huge amount of financing needed for the project, the five original shareholders actually put up a total of only some NT$30 billion (US$909 million) and have refused to contribute anything to the company's capital increment plans over the past years; this has forced the government to cough up needed funds repeatedly, via state-run institutions and enterprises, in order to keep the High Speed Rail running.

As a result, in addition to spending of NT$108 billion (US$3.3 billion) to acquire land for the railway project, the government has actually contributed some NT$38 billion (US$1.2 billion) of the company's paid-in capital; this puts its stake in the company at 36.2%, compared with 27.9% owned by the five original shareholders: the Continental Engineering Corp., Fubon Group, Teco Group, Evergeen Group, and Pacific Electric Wire and Cable. Those original shareholders have actually recouped part of their investment by undertaking business related to the project.

The heavy government involvement violates the BOT (build-operate-transfer) principle of the project. In also dishonors the pledges made by the original shareholders back in 1997 (when they were bidding for the project against the Chunghwa High-Speed Rail Consortium, which had much stronger financial backing) that they would not need government capital and would pay NT$108 billion (US$3.3 billion) back to the government during the railway's 35-year franchise period.