Tuesday, 6 October 2009

On the THSRC mess

Both the Taipei Times and China Post have recently reported on the circumstances of the change of CEO at the High Speed Rail Corporation. What has happened is the following:

- The old CEO Miss Ing has stepped down to be replaced by Mr Ou Chin-der.
- The government has apparently made three decisions: first to refuse to make further tax dollars available to the company; second to 'persuade' the banks along with the five original shareholders to offer a new NT$390 billion loan and thus restructure the company's debt obligations; third to enforce the continued operation of trains, despite the company's problems, which are:

- Debts of around NT$450 billion, primarily in the form of two large bank loans.
- Capital depreciation costs.
- Passenger numbers far Lower than first envisaged - reportedly 80,000 per day as opposed to 230,000 per day - thus resulting in either operational losses or a very small profit margin.

The first event seems little more than a career story at this stage; I do not see how the new CEO is in himself a substantial reason for optimism that the current mess can be resolved one way or another.

The decision not to provide further tax dollars to the company is understandable from the point of view of a government attempting to maintain its' popularity among the voters, but otherwise somewhat ridiculous. Were the government to simply cough up the principle of NT$450 billion, then the banks would be happy and the company's immediate financial problems would seem to be over. There are several ways the government could finance this, the only remotely viable one being budget cuts elsewhere in the government's program of public spending. Alternative methods of government refinancing of the HSRC (borrowing-inflation and tax increases) are so bad as to be not worth contemplating.

The second decision to 'persuade' the banks and the five original shareholders (Fubon Bank, Continental Engineering, Teco Electric, Evergreen and Pacific Wire & Cable) to agree to a new loan of NT$390 billion is little more than a set of taxes in thin disguise.

Yet the third decision - to keep the trains operating - despite the company's financial problems brings to light the source of the company's current problems. The high speed rail project was not purely and properly conceived as a business. Its conception was based on mixed premises; on the one hand it was to be an investment in the economy by the government, on the other hand it was to be an efficiently run business to eventually be turned over to State control and above all it was to be a store of symbolic political value - unifying the north and south of the country in defiance of their political antagonism whilst projecting a modern and technologically sophisticated image of Taiwan. The high speed rail project was not a soberly considered business venture aimed purely at making a return on investment.

The problems with the high speed rail, as a business venture, include the following:

- The business assumptions were irrationally optimistic at the time (back in 1994) and have since proved to be invalid. It was assumed that both GDP growth and domestic flight passenger volume would both continue to increase or at least remain stable until 2033 at which point the company would transfer responsibility for the project to the government. That these assumptions were optimistic is indisputable, but that they were irrationally so may be evidenced by the economic emergence at the time of China and other South East Asian countries into industries in which Taiwan had long dominated - textiles and manufacturing. The comparative advantage of cheaper labour and utilities costs, and the implications these facts would have for Taiwanese industry, should have been obvious even then.

- It is too long. The railway connects Taipei to Kaohsiung largely for political value, but demand for the trains has been reasonably high between Taipei and Taichung yet pitifully low between Taichung and Kaohsiung. This left the company with the problem of financing about two-thirds of the capital costs for the entire project (i.e. that part of the rail link from the south to just past the middle of the country) from sources other than operational revenue. A soberly considered business would run the rail link only from Taipei to Taichung and reject any further extension to the south as unprofitable. It is too late for that now.

The current government's decision to keep the trains running between Taipei and Kaohsiung has nothing at all to do with protecting the interests of customers and everything to do with avoiding the political shame of allowing the high speed rail project to be shut down following a declaration of bankruptcy by the banks.

As to the future of the project, there are a number of possibilities.

It seems to me that the most obvious outcome in the short to medium term is that the banks along with the big five original shareholders will continue to be strongarmed by the government into financial maintenance of the high speed rail company against their own commercial interests. Until the emergence of a credible political opposition to the KMT, the banks and big five shareholders may find it difficult to put up any resistance.

In the longer term, the political costs to the government of choosing to force the continued running of the high speed rail at commercial loss would certainly be very significant if not unaffordable. Legislators will inevitably see the high speed rail crisis as an opportunity for pork barrel projects which will of course not only fail in themselves but further complicate any sincere attempt at reform in the future. These attempts must be publicly criticized and rejected. A genuine reform effort would need to consider the possibility of dismantling a large proportion of the rail link (e.g. between Kaohsiung and Taichung) and selling off the land - either to previous owners such as farmers, or to new investors who might make more productive use of it. Of course this is unlikely to happen barring a drastic change in political weather.

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