Encouraged by the successful launch of its
high-speed railway project, Taiwan is making a
concerted effort to promote major infrastructure
projects by the private sector.
With construction costs of US$13.6 billion (US$1=NT$32.5), the high-speed railway (HSR) is one of the world's largest transportation projects in recent years (comparable to Europe's Channel Tunnel at US$14.8 billion), and is Taiwan's largest-ever project undertaken on a "build-operate-transfer" (BOT) basis. If the concept is successful, it will revitalize the island's economy, as well as provide critical relief from the sluggish exports business, expected during the next several years.
Under the BOT concept, private builders construct public infrastructure facilities and are granted the rights to operate them for a specified period of time, thereby recovering construction and operating costs from operating income. Afterwards, ownership of the facilities is transferred to the government. Under a variant, known as "build-operate-own" (BOO), the builder retains ownership and operating rights indefinitely.
Taiwan favors the BOT method because it offers many advantages: cost savings, reduced construction time, high quality, and efficient operation. In the past, the island's public infrastructure projects were plagued with problems, such as repeated cost overruns, late deliveries, institutional corruption, and low operating efficiency. In addition, BOT methods can moderate Taiwan's financial burdens--especially at a time when soaring budget outlays for social welfare programs are feared.
One of the major BOT transportation projects underway is the mass rapid transit (MRT) system connecting Taipei to CKS International Airport. On May 26 last year, Cheng Sheng International Development outbid four competitors for the priority negotiation rights for the project. The company was organized by a consortium, headed by the Ever Fortune Group, a leading construction firm on the island, and includes such business heavyweights as China Development Corporation, Shin Kong Life Insurance, and Mitsubishi Heavy Industries Company. Cheng Sheng subsequently signed a preliminary contract with the Bureau of Taiwan High Speed Rail (BOTHSR), which allows it sixteen months to complete such preparatory work as the finalization of an environmental impact statement and securing financial commitments from domestic banks.
The consortium plans to invest NT$60 billion (US$1.85 billion) to build a twenty-two mile, fifteen-station MRT system connecting CKS International Airport and downtown Taipei. The system will operate trains produced by Mitsubishi, at an average speed of nearly forty miles an hour. The entire trip will therefore take just over half an hour.
The unusual element in Cheng Sheng's plan is the combination of the MRT project with the development of over 4,000 acres of suburbs along the route. Land values are expected to skyrocket as a result of the construction of the MRT system, even though the MRT route itself needs only seventy-four acres of land. The company proposes to spend NT$45.8 billion (US$1.4 billion), on behalf of local governments, to undertake development of the area.
In the process, the local governments are expected to expropriate from current owners a total of 740 acres of land, which will then be sold to the private sector. The expected income of NT$110 billion (US$3.38 billion) will be used to offset the development, construction and operating costs of the MRT system. This proposal was formulated to make up for the limited operating income expected from the system over the thirty-year operating period.
The Ever Fortune Group was also the winner of the Yuehmei Recreation World, another BOT project, whose construc tion of a 490-acre site provided by the state-run Taiwan Sugar Corporation in Tainan County was begun last summer. A major breakthrough for the project was achieved when the Ministry of Transportation and Communications (MOTC) agreed to build a special access ramp to the nearby north-south freeway, greatly enhancing the attraction of the site to visitors. It was concern over this very issue of freeway access which had prompted Warner Brothers, the original winner of the project, to withdraw, allowing Ever Fortune, the runner-up in the bidding, to take over the project.
With a projected investment outlay of NT$25 billion (US$770 million), the Yuehmei Recreation World is expected to be completed in three stages over a ten-year period and will include such facilities as an amusement park, a marine park, a shopping arcade, a family recreation center, a golf practice range, movie theaters, an executive club, an equestrian center, and hotels. The builder has confidence in the success of the project, especially with the coming implementation of Taiwan's five-day workweek, and expects Yuehmei Recreation World to attract three million visitors annually. The park will become opera tional next year, following completion of the first stage of construction, with the builder holding a fifty-year operating li cense.
Another major BOT project is the construction of the Taipei International Finance Center, which represents a major step in the government's plan to develop Taiwan into a regional financial center. The winner of the project bid, held on July 12, 1997, was a team led by China Development Corporation, which offered NT$20.6 billion (US$624 million) for the right to lease the 8.6-acre piece of land in the Hsinyi area near city hall, for a period of seventy years.
The 101-story building, the fourth-tallest structure in the world, will be a major tourist attraction, as well as a city landmark, providing space for the stock exchange, futures exchange, and other financial offices. The building will offer a complete range of facilities, including advanced telecommunications connections, access to the MRT, a panoramic view of the Taipei basin, an art display area, and outdoor illumination facilities. Construction is expected to be completed in three to four years at a total cost of NT$39 billion (US$1.2 billion). In addition to the expected annual rental income of NT$3.5 billion (US$108 million, a return on investment of seventeen to twenty percent), the developers will be able to use their towering building as a powerful advertising medium during the seventy-year lease.
As a key part of the plan, the Taipei International Finance Center is aimed at attracting leading financial firms, both domestic and foreign, by providing them with a superior work environment. The concentration of so many financial institu tions in the same building will produce a "clustering" effect, which, it is hoped, will greatly stimulate the development of the financial industry--just as the Hsinchu Science-based Industrial Park has done with high-tech firms.
To alleviate Taiwan's chronic power shortage, the government has also solicited eleven private builders of power plants, with projected total generating capacity of eleven million kilowatts. So far, only two of the power plants are under construc tion, while others are being blocked by environmental opposition and land acquisition difficulties.
Other ongoing projects on the agenda of the Council for Economic Planning and Development (CEPD) include several industrial zones, an industrial waste incinerator for the Tafa industrial zone, the Mailiao industrial harbor, and a Taichung shopping mall. Several major projects are on the drawing board, including the freeway between Toucheng (Ilan County) and Hualien in northeastern Taiwan, the MRT system in Kaohsiung, additional incinerators, and the second stage of construction on Tamsui harbor.
The BOT concept--at least in its current configuration in Taiwan--is not without its share of critics. For example, the MRT line to the CKS International Airport has generated much controversy. Critics argue that the Cheng Sheng plan savors more of land speculation than an MRT system project. To make matters worse, BES Engineering, the runner-up in the bidding, filed a lawsuit against BOTHSR, accusing it of colluding with the Ever Fortune Group in the case. As evidence, BES presented an internal document from the HSR bureau, which allegedly shows how the Ever Fortune Group was given preferential treat ment in the preliminary evaluation of the bidders' technical capabilities.
Finding additional problems with the MRT project, MOTC Minister Lin Fong-cheng agrees that there are serious defi ciencies in the government's planning procedures for the Taipei-CKS International Airport MRT system, since the govern ment specified only two terminal stations for the route, thus giving the private builder too much flexibility and causing serious disputes.
To head off new controversies, the Executive Yuan (the Cabinet) on July 7, 1998, instituted some official BOT guide lines. The guidelines stipulate that relevant government agencies conduct detailed planning in advance, and define clearly the specifics of the projects, the government's obligations, any assistance and incentives to be provided by the government, the obligations and rights of private builders, and the scope of peripheral investments allowed (such as related land development opportunities). Those specifics and conditions of the projects should be publicized before making a final determination, so that input from potential bidders can be properly evaluated.
The guidelines also require that private builders of public infrastructure projects obtain financing agreements from the boards of directors of financial institutions before any contract is signed or within a certain period thereafter; otherwise, the contracts will be canceled, and the investment opportunities will be transferred to the runner-up bidders. Without advance approval from their superiors, government agencies in charge of a project cannot undertake commitments on behalf of the government to purchase and/or take over BOT projects in the event that private builders cannot complete their contractual obligations.
Hu Chung-ying, director of the CEDP's Sectoral Planning Department, explains that "the most critical element for BOT projects is their financial planning. Therefore, banks should participate in the planning and bidding works at the early stage, so that they can have a complete understanding of the projects and the potential risks involved. They should also be able to supervise the projects and have the priority right to take over the projects should the private builders fail."
On July 16, 1998, the Executive Yuan passed the draft Statute for Promoting Private Participation in Public Infrastructure Projects, which is designed to replace the existing Statute for Encouraging Private Participation in Transportation Construction. The content of the draft law is quite similar to that of its predecessor, but with a much wider scope of applications to public projects. Also, private investors for such BOT projects are entitled to a five-year tax holiday or the right to deduct five to twenty percent of their investments from their business income taxes.
Government authorities can assist private investors in obtaining long-term, low-interest loans from financial institutions. In addition, with government approval, financial institutions can be granted exemptions from the restrictions on finance ceilings, as stipulated in the Banking Law, when extending such loans. In order to encourage private investors and increase the confidence of financial institutions, the government authorities in charge can provide guarantees of minimum business volumes for BOT projects, if necessary.
Extensive applications of BOT to public infrastructure construction projects will pose a major challenge to the capability of not only private builders, but also domestic financial institutions--especially in view of the size of the loans involved. The Taipei-CKS International Airport MRT system calls for another NT$45 billion (US$1.38 billion) loan, which translates into two-thirds of the total investment of NT$60 billion (US$1.82 billion). Theoretically, these loans are to be predicated solely on the basis of the projected operating income of the projects--a far cry from existing banking practices, under which loans are secured with mortgaged real estate as collateral.
Consequently, not only is the survival of the participating domestic financial institutions at risk, but also the stability of the island's financial structure, as a whole.
Brian Liu is a veteran journalist based in Taipei.
Copyright (c) 1999 by Brian Liu.