US embassy cable - 05TAIPEI3779

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003779 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PASS AIT/W 
 
E.O. 12958: DECL: 09/12/2015 
TAGS: ELTN, ECON, TW, Transportation, Finance 
SUBJECT: TAIWAN,S HIGH-SPEED RAIL DELAYED ONE  YEAR 
 
REF: TAIPEI 490 
 
Classified By: AIT Acting Director David J. Keegan, Reason 1.5 d 
 
Summary 
------- 
 
1. (C) Taiwan High-Speed Rail Corporation (THSRC) 
announced September 8 that the inauguration of 
the high-speed rail will be delayed exactly one 
year to October 31, 2006.  Reports indicated that 
delays in construction of the signal and 
communications components of the core electrical 
machinery (EM) systems were to blame.  THSRC 
estimated the additional cost imposed by the 
delay to total NTD 19.3 billion (about USD 590 
million), which will only exacerbate the firm,s 
continuing financial problems.  Premier Frank 
Hsieh reiterated the government,s unwillingness 
to buy back the project as required if THSRC 
fails to complete construction, but the latest 
news suggests that a more active government role 
may be required.  End summary. 
 
THSRC Postpones Inauguration by One Year 
---------------------------------------- 
 
2. (U) THSRC Chairperson Nita Ing announced 
September 8 that the inauguration of Taiwan,s 
high-speed train that will connect Taipei and 
Kaohsiung along the island,s west coast will be 
delayed one year.  Originally scheduled to begin 
service on October 31, 2005, Ing indicated that 
the train will not begin operations until October 
31, 2006. 
 
3.  (U) Media reports blamed the delay on slow 
construction of the core electrical machinery 
(EM) system.  As of late August 2005, THSRC 
reports that work on civil engineering components 
(noise barriers, tunnels, etc.) and on the track 
itself is nearing final completion.  Construction 
of the passenger stations is not far behind, 
estimated at 92 percent complete.  However, only 
60.4 percent of the EM system is complete at this 
time. 
 
4. (U) A consortium of Japanese firms, Taiwan 
Shinkansen Corporation (TSC), is the contractor 
for the EM system.  TSC includes Mitsui Corp., 
Mitsubishi Heavy Industries, Mitsubishi Corp., 
Marubeni Corp., Sumitomo Corp., Kawasaki Heavy 
Industries and Toshiba Electric.  Some reports 
have blamed Mitsubishi Heavy Industry for the 
delay to the EM systems due to difficulties 
meeting quality specifications for the signal and 
communication systems. 
 
5. (C) A contact associated with one of the TSC 
consortium member firms told AIT econoff that the 
major problems lay mostly in the signal systems. 
He indicated that Mitsubishi Heavy Industry had 
reorganized the section working on those systems 
as a result of the delays.  He speculated that 
even the revised schedule may be difficult to 
meet and that although the high-speed rail might 
be able to offer limited service by the new 
deadline, full service may not be up and running 
until as late as mid-2007. 
 
6. (U) According to media reports, TSC proposed a 
new schedule to THSRC with new conditions, 
including higher compensation, no penalty for 
construction delay, new payment conditions and a 
three-month grace period for completion of 
construction.  TSC Chairman Sato Kazuo told the 
press that the two parties have different 
interpretations of their obligations under the 
contract.  So far, the two parties have only 
agreed on the new inauguration date.  THSRC Vice 
President Chian Chin-shan told the press that two 
sides would discuss compensation issues after 
construction is completed and the systems are 
turned over to THSRC.  In her statement, THSRC,s 
Ing emphasized the partnership between THSRC and 
TSC and priority placed on finishing the project. 
 
SIPDIS 
 
Costs Rise, More Scrambling for Financing 
----------------------------------------- 
 
7. (U) THSRC President George Liu told reporters 
that that the delay would increase construction 
costs by NTD 19.3 billion (about USD 590 
million).  This includes additional interest 
charges of NTD 13.8 billion and operational 
expenses of NTD 5.5 billion.  The total cost of 
the project will rise from NTD 460.7 billion to 
NTD 480 billion (nearly USD 15 billion).  More 
importantly, the one year delay significantly 
reduces the earnings potential of the 35-year 
build-operate-transfer project by cutting THSRC,s 
time to operate the railway.  Media reports have 
estimated the lost revenue to be as high as NT$ 
50 billion (about USD 1.5 billion). 
 
8. (U) The delay and associated costs will 
further exacerbate THSRC,s difficulty in 
financing the project.  THSRC has revised its 
financing arrangements with its creditors more 
than a dozen times since the project began.  It 
has renegotiated the financing three times since 
March.  Most recently, THSRC failed to meet its 
target of raising NT$ 5.5 billion (about USD 170 
million) by July 29.  As a result, Chiao Tung 
Bank, the lead bank of the consortium providing 
loans to THSRC, has imposed a contract violation 
penalty of an additional 0.005 percent interest 
on the firm,s debt.  THSRC and the banking 
consortium have yet to agree on a new financing 
plan. 
 
Will Government Pick Up the Pieces? 
----------------------------------- 
 
9. (U) According to media reports, THSRC,s Ing 
met with Taiwan Premier Frank Hsieh before the 
announcement to seek the government,s support for 
the decision to delay.  Hsieh reluctantly 
accepted THSRC,s new timetable but indicated that 
the schedule could only be changed once.  He 
promised Ing that the government would continue 
to coordinate with private entities, such as 
potential creditors and investors, in support of 
rail project.  Hsieh also reiterated the 
government,s unwillingness to buy back the 
project as required by the BOT contract if THSRC 
fails to complete construction. 
 
10. (U) THSRC also informed the Ministry of 
Transportation and Communications (MOTC) of the 
new project timetable.  MOTC Minister Lin lin-san 
confirmed to the press that THSRC,s time to 
operate the high-speed rail under the BOT 
contract would not be extended.  He emphasized 
MOTC,s primary concern is the quality of 
construction, and ensured that MOTC would take 
action to guarantee the level of quality if 
necessary. 
 
Comment - More Bad News for THSRC Likely 
---------------------------------------- 
 
11. (C) Rumors that the high-speed rail would not 
open on time have circulated for months.  THSRC 
executives have repeatedly denied them, but the 
announced delay comes as no surprise.   Further 
delays are not out of the question.  In addition, 
the inauguration postponement will only ensure 
continuing financial problems.  News that THSRC 
has failed to meet it latest finance targets has 
become routine.  The need for more drastic 
measures to assist the project seems more and 
more likely.  The Taiwan government may still be 
able to avoid buying back the project or 
investing its own resources, but it will probably 
have to take an active role in arranging for some 
other white knight to save the high-speed rail. 
12. (C) This news could hardly come at a worse 
time for the Taiwan government.  Whether the 
government should have, or even could have, 
exerted more control over the project is a topic 
of fierce debate, dividing along predictably 
partisan lines.  However, coming less than three 
months before island-wide elections and in the 
wake of labor and safety problems with the 
construction of the Kaohsiung subway and 
prolonged water shortages following recent 
typhoons, the Pan-Blue will seize this 
announcement as further proof of the DPP,s 
inability to govern. 
KEEGAN