US embassy cable - 05TAIPEI1421

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001421 
 
SIPDIS 
 
STATE FOR EAP/RSP/TC AND EB/TPP/BTA, STATE PASS AIT/W AND 
USTR, USTR FOR KI AND FREEMAN, USDOC FOR 
4431/ITA/MAC/APOPB/MBMORGAN AND 
3132/USFCS/OIO/EAP/ABACHER/ADESARRAN AND USDA FOR FAS/ITP, 
GENEVA FOR USTR 
 
E.O. 12958: DECL: 03/23/2015 
TAGS: ECON, BEXP, ETRD, TW 
SUBJECT: PROCUREMENT STILL A CHALLENGE IN TAIWAN 
 
Classified By: AIT DIRECTOR DOUGLAS PAAL FOR REASONS 1.4 (B/D) 
 
1.  (U) Summary:  The public procurement process in Taiwan 
remains a longstanding irritant for US firms.  Several recent 
cases of US firms running into problems with the procurement 
process, including allegations of improper political 
influence in the tendering process, indicate that this issue 
should be raised at the upcoming trade talks scheduled for 
March 30-31.  End Summary. 
 
Problems in Public Procurement 
--------------------------------------- 
 
2.  (U) Public procurement has been a longstanding irritant 
for the US business community in Taiwan.  The American 
Chamber of Commerce has regularly been, in the words of its 
Executive Director, &beating its head against the wall8 on 
this issue for well over a decade.  In recent months, the 
Chamber has dramatically lowered its expectations on this 
issue.  Observing that the Construction Committee of the 
Chamber has all but disbanded and that its most active member 
is Germany's Siemens Corporation, the ED said most of the US 
construction and engineering industry has left Taiwan (bound 
for Mainland China) because the firms believe that they have 
little or no chance of winning any contracts on the island 
because of non-transparency in the procurement process. 
While there was some hope that things would improve with 
Taiwan's accession to the WTO in 2002 and its commitment to 
join the WTO Agreement on Government Procurement (GPA) and/or 
unilaterally abide by the GPA terms and conditions, many of 
those expectations have dissipated. 
 
3.  (U) Even if the Chamber is currently giving procurement a 
low priority, AIT/T believes we should continue to pursue 
this issue in an effort to increase the transparency of 
public procurement in Taiwan.  Any progress we can make in 
this area could provide increased business opportunities in 
Taiwan for US firms and highlight the need for Taiwan to 
adhere to its international trade commitments.  In the past 
few weeks some significant complaints have arisen about the 
procurement process, enabling us to gather some specific 
details about current cases of interest to US firms.  Taiwan 
business circles are often awash in rumor and innuendo about 
shady procurement practices, but details are generally hard 
to come by and even harder to confirm. 
 
Concerns over Terms, Administration and Appeals 
--------------------------------------------- -- 
 
4.  (U)  Generally speaking, US firms' complaints with 
Taiwan's public procurement process  fall into three areas: 
the terms and conditions (such as unlimited liability), 
non-transparent procurement administration and the appeals 
process.  Contract terms and conditions are often thought to 
be egregiously onerous, leading many US firms simply not to 
bid on the project at all.  U.S. firms often compare &Ts & 
Cs8 in Taiwan public tenders unfavorably with those in PRC 
tenders.  Many RFPs come with an unlimited contingent 
liability clause that gives pause to the legal departments of 
virtually all US international firms.  Several firms have 
commented that their legal departments simply reject 
submitting a bid based on a review of the RFP documents.  One 
local example of why unlimited liability has such a chilling 
effect:  last year during one of the many typhoons that hit 
Taiwan, floodwaters reached and flowed through a drainage 
culvert being built under the Danshui River for the subway 
system.  The result was severe flooding in Sanchong city, an 
areas that had not been hit by floods for some 26 years. It 
is still not clear who is responsible for footing the cleanup 
bill and for compensating the tens of thousands Sanchong 
residents affected by the flood, but US firms are rightly 
wary of entering into any contract that might involve such 
open-ended commitments.  Procurement administration, 
including technical evaluation of proposals, is frequently 
criticized as highly non-transparent and unpredictable.  U.S. 
firms attribute this in part to shortcomings in Taiwan's 
Government Procurement Law (GPL), which it follows in lieu of 
the WTO GPA.  Finally, the appeals process is handled by the 
Public Construction Commission (PCC) and is widely criticized 
by international bidders as non-transparent.  One U.S. 
company recently provided details on its case that is under 
mediation.  In short, the U.S. firm believes that a 
government ministry was actively working to rig the mediation 
process. 
 
5.  (SBU) AIT/T recommends that procurement concerns be 
raised during the upcoming trade consultations scheduled for 
March 30-31 in Taipei.  AIT consultants from USTR and AIT/W 
could usefully note concerns on procurement and ask that 
Taiwan officials work with AIT/T to see if we can make some 
progress in this area. 
 
Stone & Webster 
--------------- 
 
6.  (C) AIT/T met with Stone & Webster on March 21 (as we had 
in November 2004) to discuss its concerns about Taiwan 
legislators playing a major role in influencing procurement 
decisions on the 4th Nuclear Power Plant project.  Stone & 
Webster is a US engineering firm with the contract to conduct 
architectural and engineering work on 4NNP.  Under the terms 
of its contract Stone & Webster writes specifications and 
evaluates bids for various suppliers and subcontractors.  In 
the meeting and in a letter dated March 21, 2005, Stone & 
Webster detailed a history of pressure tactics utilized by 
Taiwan Legislative Yuan members (from the DPP) on Taiwan 
Power Company (TPC) executives and directly with Stone & 
Webster officers to influence contract awards.  The history 
of pressure tactics, including holding public hearings and 
accusing Stone & Webster of violating various sections of 
Taiwan's procurement law; TPC officials seeking Stone & 
Webster cooperation to direct contracts to certain firms 
while refusing to allow minutes of the meetings to be taken; 
TPC reprimands for Stone & Webster not &accommodating TPC's 
positions;8 and, most recently, threats of physical violence 
and police investigations against Stone & Webster employees. 
Stone & Webster assured us that it has refused to participate 
in any bid-rigging activities despite explicit requests from 
lawmakers and TPC officials to do so.  Further, it believes 
the situation may be resolvable with TPC, but it wanted to 
share its concerns with us over the procurement process 
should the situation deteriorate any further. 
 
Holtec & Duratek 
---------------- 
 
7.  (SBU) Holtec and Duratek bid on separate tenders from, 
again, TPC, to build nuclear waste storage facilities. 
Neither firm won the contract they bid on.  The likely winner 
in both cases will be INER (the Institute of Nuclear Energy 
Research) - a Taiwan state-owned entity.    There is some 
history to these tenders.  TPC had issued tenders on the same 
projects and received international bids substantially above 
TPC's budget for the project.  As such the contract was 
withdrawn and now reissued for another round of bidding.  In 
the current scenario, INER has bid on the projects at a price 
well below Holtec's and Duratek's.  Under the terms of 
Taiwan's government procurement law, in the absence of 
&qualified8 international bids (i.e., coming in at or lower 
than TPC's budgeted amount), INER, with no experience in the 
field, gets the contract. 
 
8.  (C) The US firms allege that TPC's budget for the 
projects is unrealistically low and the entire tendering 
process is simply a vehicle to deliver the contract to a 
local firm, in this case INER.  Many US firms suggest that 
the larger goal for Taiwan officials is to help develop 
specific technologies indigenously through guiding contracts 
to local firms while shutting out foreign competition.  These 
two firms have both sought assistance from the USDOC Advocacy 
Center and at least Duratek has filed an appeal to the PCC. 
AIT/T will continue to press the cases for Holtec and 
Duratek.  Unfortunately, in our experience, the PCC has been 
quite reluctant to intervene in procurement decisions absent 
a clear violation of the law.  Even more unfortunate, PCC 
rulings are advisory only.  They have no enforcement 
mechanism.  After filing the appeal, Duratek told us that it 
will simply walk away if the PCC does not provide 
satisfaction because "it can get much more business in China 
than in Taiwan for the same amount of aggravation." 
 
IBM 
----- 
 
9.  (C) Robert Huang, head of IBM Taiwan has advised AIT/T of 
concerns about Taiwan requirements that government 
procurement contracts include provisions that the buyer owns 
all the rights to the intellectual property in the product. 
Huang says that this provision prevents his company from 
bidding on a number of potentially desirable tenders.  It 
also allows the buyer to make its own modifications and 
distribute software as widely as it wants to potential users, 
thus eliminating future profits for the software designer. 
He views this provision as an effort to, again, steer 
contracts to local suppliers and shut out foreign bidders. 
Huang has made significant efforts on his own to argue the 
merits of this provision with Taiwan officials, including 
meeting with the PCC and economic officials. 
 
Comment 
------------ 
 
10.  (C) There is no shortage of other allegations of 
impropriety in contract awards in Taiwan.  The cases above 
provide a degree of specificity that is generally not 
available when claims and counterclaims are made about 
influence peddling.  The High Speed Rail system (THSR) is a 
good example of the rumor mill in operation.  THSR is due to 
start operation in October this year, yet it is several 
billion NT$ short of funds to finish the project and the 
general expectation is that it will not meet its start-up 
target.  One consistent allegation about the project is that 
it backtracked on the original contract award to European 
firms due to political pressure from the Taiwan Solidarity 
Union (TSU), a small pro-independence ally of the ruling 
Democratic Progressive Party (DPP), that favored awarding the 
contract to Japanese firms.  While no one wants to go on the 
record on this allegation of political meddling, it is public 
knowledge that THSR has paid the European consortium a US$140 
million fee for backing out of the original contract. 
Similarly, Taiwan paid a heavy financial (as well as 
political) price for stopping 4NPP in 2000.  These same 
excessive costs continue today as Stone & Webster reports 
that TPC is racking up large financial costs in its repeated 
delays of contract awards for the 4NPP. 
 
11. (C) These costs impose a significant burden on Taiwan's 
economic and political institutions.  Under the single-party 
rule of the KMT in Taiwan, there were regular allegations of 
a lack of transparency in procurement processes and business 
operations in General.  The DPP has billed itself as, and was 
initially accepted as, the party of reform willing and able 
to root out corruption and inefficiency.  In financial 
circles, the DPP has proclaimed itself as intent on 
financial-sector reform aimed at producing a more open, 
market-based financial industry.  The DPP implemented on July 
1, 2004 the Financial Supervisory Commission to provide a 
stronger, unified regulatory system for the financial sector. 
 We think that it is appropriate to urge Taiwan to implement 
these same kinds of commitments to its public procurement 
policy.  End comment. 
PAAL