US embassy cable - 05TAIPEI4125

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 004125 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PASS AIT/W 
 
E.O. 12958: DECL: 10/06/2015 
TAGS: ELTN, ECON, TW 
SUBJECT: TAIWAN GOVERNMENT BAILS OUT  HIGH-SPEED RAIL AGAIN 
 
REF: TAIPEI 3779 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 d 
 
1. (SBU) Summary.  Taiwan has leaned on 
government entities to bail out the financially 
strapped Taiwan High-Speed Rail Corporation 
(THSRC).  The China Aviation Development 
Foundation (CADF), the major shareholder of 
China Airlines, and the CTCI Foundation, both 
Taiwan government entities, will purchase a 
total of NTD 7.5 billion (about USD 225 
million) worth of preferred stock in THSRC. 
The bail-out spawned criticism and even a suit 
by aviation labor associations against CADF. 
The Executive Yuan (EY) formed a task force on 
October 3 to monitor the project.  The 
government has also obtained a seat on the 
board of directors.  The Taiwan government has 
avoided having to buy back the high-speed rail 
project, but THSRC still faces financial 
challenges.  End summary. 
 
THSRC Appeals to EY 
------------------- 
 
2. (U) Shortly after announcing a one-year delay 
in completion of Taiwan's high-speed rail 
project on September 8, 2005 (reftel), Nita Ing, 
THSRC's chairman, went to Taiwan Premier Frank 
Hsieh on September 26 to seek financial 
assistance from the government.  THSRC has had 
persistent difficulty raising funds from 
investors.  It has been forced to revise the 
financing agreement with its consortium of 
creditors more than a dozen times. 
 
3. (U) The government has already provided NT$ 
12.5 billion (about USD 375 million) to THSRC 
through state-owned Taiwan Sugar Corp., the Bank 
of Taiwan, and the Land Bank of Taiwan.  More 
recently, China Steel Corp. invested an 
additional NT$ 3.2 billion (about USD 95 
million) in THSRC in April 2005.  In 2002, the 
Legislative Yuan passed a resolution limiting 
total state-owned enterprise investment in the 
project to 12 percent of THSRC's paid-in 
capital.  However, on September 28, the press 
reported that a government official had 
indicated that the resolution was nonbinding and 
the EY would direct state-owned enterprises to 
further invest in THSRC. 
 
Unlikely Suspects Provide the Funds 
----------------------------------- 
 
4. (U) On September 29, KMT Legislator Lai Shyh- 
bao revealed in a Legislative Budget Committee 
meeting that the Taiwan government's Civil 
Aviation Development Fund (CADF), which owns 
over 65 percent of the shares in China Airlines 
(CAL), would invest NT$ 4.5 billion (about USD 
135 million) in THSRC.  According to Lai, CADF 
would finance the investment by selling 
300 million shares of CAL stock.  The Taiwan 
press also reported that CADF held an 
unscheduled board meeting to change the 
foundation's charter in order to legitimize the 
purchase of THSRC shares.  The organization 
added the assistance of "national critical 
construction" to its primary goal of aviation 
development. 
 
5. (U) The Taiwan government's CTCI Foundation, 
formerly known as China Technical Consultants 
Inc., will also invest NT$ 3 billion (about 
USD 90 million)in THSRC, making up the rest of 
THSRC's NT$ 7.5 billion (USD 225 million) 
shortfall.  The CTCI Foundation, founded in 
1959 has historically engaged in research and 
design support for a range of industries in 
Taiwan, especially petrochemicals, energy and 
environmental protection.  Although the 
foundation has large financial resources, the 
Taiwan government has not generally used it to 
invest in targeted projects or industries. 
 
6. (SBU) Comment: The Chen Administration may 
have selected CADF and the CTCI Foundation as 
the conduits for further investment in THSRC in 
order to comply with the LY resolution intended 
to freeze further state-owned enterprise 
investment in the firm.  The administration 
could argue that CADF and the CTCI Foundation 
are not technically state-owned enterprises but 
are rather Taiwan government entities. 
Furthermore, some observers have speculated that 
administration officials may have hoped that 
investment from these entities would attract 
less attention than financing from more typical 
government investment conduits like the 
Executive Yuan Development Fund.  End comment. 
 
Criticism and Closer Scrutiny 
----------------------------- 
 
7. (U) There has been a strong negative reaction 
from a range of interests in Taiwan.  Some 
domestic air carriers object to the use of CADF, 
which some feel has done little to assist local 
carriers, to bail-out a future competitor.  The 
China Airlines Employees Union and Federation of 
Aviation Employees filed suit against the board 
of CADF on October 4.  Others object more 
broadly to the use of additional government 
funding to bail-out a build-operate-transfer 
project that was intended to relieve the 
government of construction costs for the high- 
speed rail. 
 
8. (U) In a move likely aimed at muting such 
criticism, the Executive Yuan established a task 
force on October 3 to monitor the high-speed 
rail.  The interagency group will meet every two 
weeks and representatives from the task force 
will attend important THSRC meetings.  In 
addition, Premier Hsieh asked THSRC's Ing to add 
a seat for a government representative on 
THSRC's board.  Deputy Director General Lee Yu- 
ling of the Directorate General of Budget, 
Accounting and Statistics was named to the new 
seat. 
 
Comment - BOT or JV? 
-------------------- 
 
9. (C) With a major infusion of funds and now a 
seat on the board, the Taiwan government once 
again may have escaped having to buy back the 
high-speed rail project at a cost of over NT$ 
300 billion (about USD 9 billion) and then take 
over construction.  However, it may be more 
accurate to call the high-speed rail project a 
government joint venture rather than a build- 
operate-transfer project.  And the drama isn't 
over yet.  Inauguration of the program was 
postponed last month from October 2005 to 
October 2006.  However, an AIT contact 
associated with construction of the project 
recently reiterated his prediction that rail 
service would not be fully operational until 
mid-2007.  Despite the latest government 
funding, the troubled THSRC still has financial 
challenges ahead and the Chen Administration may 
need to use government funding yet again to bail 
it out.  The torrid business environment and 
optimistic economic assumptions made when THSRC 
was conceived have greatly changed in recent 
years.  The new EY task force would do well to 
reexamine assumptions and make the government's 
procedures orthodox and transparent.  End 
comment. 
PAAL