Jason McCoy Developing Infrastructure through PPPs March 10, 2015 Professor Featherston Max word limit: 1300 / 325 max per question; 250 ideally

1) Explain the precise nature of this public-private partnership ie: what are the

obligations of the private consortium and what are the obligations of government.

In February 2000 the Taiwan government and the Taiwan High Speed Rail Corporation

(THSRC) finalized a contract that codified their respective obligations under the BOT public-

private partnership model.

The governments primary obligation under the RFP was the acquisition and payment of the

land for the railway track, eight stations, maintenance depots, and station development districts

at a total cost of $1.7 billion. The government also granted THSRC the right to real estate

development revenues for 50 years in the areas immediately adjacent to the station called

special zones.1

It also granted THSRC the exclusive use of the land over the 35-year concession period.

The original RFP committed the government to acquiring and paying for the land for the railway

track, station, and maintenance depots, and granted THSRC the right to use the land over the

35-year concession period.

The government obligations:

o Station development districts (this was the large tracts of land the government had

purchased the surrounded the real estate THSRC controlled)

Made no promise on how quickly it would develop

THSRC is not entitled to participate in the planning or development process

of these areas

Provided the land for a 50 year concession period

Concession for real estate development revenues for 50 years in the areas around the

station (special zones)

Build roads into and out of the stations

Promised to buy the system if the winner went bankrupt at a price to be determined by an

independent 3rd party to help repay winners bank loans

1 The government envisioned strong economic developed in the areas surrounding the greenfield stations and

subsequently purchased large tracts of land, which the contract termed station districts. The government, however, did not make commitments on how quickly it would develop these areas, which had a direct impact on the real estate revenues THSRC could capture.

Jason McCoy Developing Infrastructure through PPPs March 10, 2015 Professor Featherston

Provided a loan guarantee to the bank consortium

Supervision of construction

From the negotiations:

o Permitting issues, commit to deadlines and provide support

o Diversion of utility lines

o Loan guarantee

Dates

RFP released in 1996

Guarantee signed in February 2000

Negotiations ended in ??

Construction began in March 2000

Transition to new government in March 2000

Equity stake increased over 2003-05 by state-owned companies (doesnt really solve the

issue)

Service began in March 2007 (12 month time slippage)

The PPP structure, high-level:

BOT model

Concession of 35 years (not 5 to build and 30 to operate incentive to complete on time)

The THSRC obligations:

Operational performance requirements

o P. 7

Financial obligations

o Pay for the capital expense of:

Stations

Trains Japanese company

Build the track

o Operating costs of the railroad

o Design

Stations with themes and identities

o Equity requirement 25 percent of the companys total assets (against the loan?)

Was eventually in the actual contract?

Unique to their bid what helped them win

o Pay for all the civil works (estimated 45 percent of capital expense)

o Complete construction by 2003 (not 2005)

35 year total concession period

o Provide 10 percent of its profits each year with a minimum payment over the life of

the concession period equal to governments contribution to the project

Jason McCoy Developing Infrastructure through PPPs March 10, 2015 Professor Featherston

What this means government investment would be zero over the life of the

project completely privately owned

Independent verification THSRC pays; government has veto power. This type of thing was

a first for Taiwan

2) Did the government consider all of the significant costs and benefits in its cost-

benefit analysis? If not, what else might it have considered?

What analysis is this all based on?

1990 study

Formal cost-benefit in 1992 to obtain final approval for the project

Ridership studies

1991 study distorted #s to favor high-speed rail

1997 estimate RFP released

o

Benefits

Ridership

Economic activity right not to include this

Environmental impact (reduced pollution)

Lower accident rates

Energy savings

Costs

Cost overruns

Time slippage

Actual capital expense #s (different technologies and approaches); media sources

reported various ranges from $12.5 to $18 BN (government)

Land OK

Project costs a hell of a lot less clear

Operating costs a hell of a lot less clear for the same reason

Financing costs for long-term borrowing

Impact on reduction in competing industries

Impact on time savings of shifting the railway to the East harder to get to and impact on

ridership

The greater the # of stations the greater the cost

Environmental

Worst case scenario expense?

Capital expense

Civil works expense

Jason McCoy Developing Infrastructure through PPPs March 10, 2015 Professor Featherston

Operating expense

Maintenance expense

Ridership predictions (main driver)

How many stations was the 1992 and 1997 estimates based on?

The main issue was with the approach:

Verifying assumptions

More conservative assumptions

Inclusion of terminal value?

Looking at global examples none of these other trains are economically viable!

3) In its procurement process (bidding) and negotiations with the winning consortium,

what might the government have done better to minimize the risk of a failed project?

General issues (move to other sections potentially)

Recognize their lack of experience, the size of the project, and the amount of money

involved (all significant risks) reach out to US, Japan, France governments for guidance

and advice

Ensure a balance between engineering teams (dominant) and financial folks (ignored)

Create systems for independent assessment and judgment (get politics out) maybe not

that feasible

Procurement issues:

Track record can you execute?

Selection committee was this the right group?

Financial letter of intent who? How serious?

Vetting of assumptions

o Ridership

Requirement of contingency plans

Validity of no need for a government subsidy on civil works

Opportunity to reach out to more established Western firms? Why didnt they end up bidding

on the project?

Transparency

Negotiation issues:

Better resources and provide more support (reduce time, damage to relationship)

Been more aggressive on the equity issue required that no state funds (outside the major

banks) could count toward the contribution (aligning incentives and distributing risk)

o So much government support what types of incentives does this create?

Jason McCoy Developing Infrastructure through PPPs March 10, 2015 Professor Featherston

o They obviously wanted to exit ASAP as soon as things looked bad

The requirement of the government guarantee should have been a serious red flag

Should have listened to the banks concerns

Being less stringent on international financing options diversify risk outside the state-

owned banks

4) What options does Chi-kuo Mao (Taiwans Minister of Transportation and

Communications) have in dealing with this problematic PPP? Which of those options

is the one that you would take if you were him?

What are Maos goals?

Avoid a $13 billion outlay (25 percent of budget)

Not lose face internationally embarrassing first PPP, tied to Taiwans growth and identity

Avoid political backlash from citizens

Find a way to make this work

Not adding to the existing financial constraints

Inability to operate (to avoid large gaps in service)

What are the key issues and constraints?

Bankruptcy or buying out are basically the same thing and leads to a worst case scenario

within the next 12 months; no secondary market value left with useless infrastructure

o Equity stakeholders were also state-owned companies (i.e., government had a lot at

stake indirectly)

Still on the hook due to the government guarantees

The key constraint is the interest and principal debt servicing government is in a good

position to help them restructure

THSRC is good at operations and construction

Mao has several options:

Allow THSRC to go into bankruptcy

Follow the original terms of the contract government buys the system

Provide technical assistance to

o Increase revenues

Integrate with broader transportation system

Identify most profitable customer segments and service them

o Decrease costs

Reduce frequency

Lay off staff or reduce hours

Prioritize most profitable lines, cut or reduce service to others

Allow a third party consortium to buy the system

o Political risk

o Public perception issue

o May not solve the actual issue

Jason McCoy Developing Infrastructure through PPPs March 10, 2015 Professor Featherston

o May not receive the full amount still stuck with debt

o Would this be attractive to anyone given the uncertainty of future long-term

revenues?

Gain control of the company (ensure immediate payments are satisfied) and leverage the

power of the government to renegotiate interest rates and tenor; revise depreciation rules

o Upside

More control and oversight; government owns the system (or at least a

majority stake)

THSRC has strong performance as an operator the real issue is their

massive debt

Restructure loan to pay off old loan at a lower interest rate