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End of the tunnel in Taiwan

by DoDo Wed Aug 25th, 2010 at 09:24:57 AM EST

It may be difficult to get our elected and unelected leaders to invest into public transport. However, once built, the public acceptance of (and support for) a system can gain a momentum that ensures maintenance and eventual expansions. Some levels of rail transport have an intrinsic high utility in our current urbanized world: light rail, metros, rapid transit, high-speed rail (HSR).

HSR is the one mode that is almost guaranteed to make a profit. Even badly managed projects work out eventually. To deny this, ideological opponents and lobbies of threatened rival modes of transport like to pick some examples of bad starts – and few bad starts were more spectacular than that of Taiwan High Speed Rail (THSR).

THSR started in 2007 with passenger numbers less than a third of initial ridership forecasts (and still barely got up to two-thirds of that level), and net losses dwarfing ticket revenue. Furthermore, contrary to promises, the operating company needed significant state funds during construction, and, after lots of twists and turns, it was semi-nationalised last year.

However, the above picture is quite incomplete. On one hand, the problems at the root of THSR's plight were primarily financial in nature – in fact, the story has a lot to do with the 'reforms', bubbles and shenanigans that led to the Global Financial Crisis. On the other hand, at the same time, THSR produced solid growth, and practically killed air transport on parallel routes. And this year, it is about to climb out of the red.

A THSRC 700T (derived from the Series 700 Shinkansen, with a sleeker nose) crosses National Highway No. 4, north of Taichung, on 30 June 2007. Photo by Harry Huang from Flickr under CC-by-nc 2.0


I first wrote about THSR in Puente AVE, an analysis of recent HSR traffic numbers and economics. This is an extended and updated version. There is a lot of shared information with the Wikipedia article because... it was me who put it in there too.


The incomplete completion

To uncover the problems at the root, let me start at the surface before digging deeper (and thus go back in time): the first thing to consider is that, despite an announced delay of almost a year, THSR opened half-finished.

The terminus in downtown Taipei (the capital) did not open for months after the line opened. Most wayside stations lacked urban mass transit connections (bus connections had to be established, urban rail connections are in construction now). An extension to the eastern suburbs of sprawling Taipei on one end, another from the current terminus in the suburbs of Kaohsiung to downtown at the other end (grey on map below), and three wayside stations (yellow on map) were delayed to a later date (some are in construction now).

Route map from Wikipedia. The line is currently 335.5 km long, non-stop trains travelling at 300 km/h cover it in 96–120 minutes (depending on the number of stops)

Trains themselves started with a reduced schedule, and with hefty ticket prices (standard adult ticket for a full-length one-way trip is NT$1,490 [c. €36.5 at current exchange rates], compare to NT$845 on conventional trains and NT$400-500 on buses), which the operator was forced to augment with discounts later.

Now, on one hand, under these circumstances, not meeting initial ridership predictions (originally: 180,000 a day, later reduced to 140,000) is no surprise at all, and the problem is a temporary one. On the other hand, these delays had their reasons.


Construction complications

Taiwan's west coast is a densely populated strip, comparable Japan's east coast. Such an area is ideally suited for a HSR line with traffic demand well beyond anything in Europe, but also calls for lots of expensive superstructure: bored tunnels across mountains, cut-and-cover tunnels or elevated sections to protect urban areas, and long elevated sections across swamps and agricultural land with unstable ground.

A THSRC 700T on a curved long viaduct near Shetou, south of Taichung station, on 17 April 2010. Photo by Johnson Wang from Flickr under CC-by-nc-sa 2.0

High infrastructure costs also bring the risk of high cost overruns. In THSR's case, cost overruns were largely the consequence of a switch of suppliers at a point in time when planning was already well-advanced.

In the competition to supply THSR, Alstom (one of the France-based companies building the TGV) and Siemens (one of the Germany-based companies building the ICE) teamed up in the Eurotrain consortium, which won the status of preferred bidder. Then they worked out infrastructure specifications, and demonstrated the hybrid train they offered: the more powerful tractor heads of two ICE 2 sets were attached to the lighter middle cars of a TGV Duplex set.

The Eurotrain at München-Laim. In a demonstration run on 4 May 1998, it easily achieved 316 km/h. Photo from André Werske's HSR site

The decision to ditch the preferred bidders and award the rival Japanese consortium instead was widely rumoured to have been political. It led to an epic political, media and court battle, ending in damage payments to Eurotrain. (As mentioned in Globalisation catches up with rail industry?, this heralded the coming of bidding duels until the last legal instance as regular competition practice in the industry.)

However, in the meantime, overseeing company Taiwan High Speed Rail Corporation (THSRC) stuck to its original specifications, forcing changes relative to the Japanese offer that weren't cost-neutral, for example:

  • tunnels were bored with the large diameters meeting European safety regulations, rather than barely wider than the trains as on Shinkansen lines in Japan;

    A THSRC 700T enters a tunnel near Tongsiao, north of Taichung, on a pre-opening test run on 28 April 2006. Photo by user jiadoldol from Flickr under CC-by-nc-nd 2.0

  • a German maker had to be contracted to supply special swing-nose slab track switches (fit for passage at high speed), because operation rules foresaw the possibility of changing tracks as on European mainlines, rather than the Shinkansen norm of strictly single-direction track usage (BTW, the switches malfunction);

    Commissioning of a RHEDA 2000 switch, made by RAIL.ONE, at the north end of Taichung station on 15 September 2005. The swing-nose is well visible along the centreline of the switch. Photo from Chan Chun Construction Co.

  • THSRC retained a pool of train drivers from Germany and France, who were contracted to operate trains until domestic drivers are sufficiently trained.

Eventually, project costs grew to $18 billion. However, the real problem was not the (elevated) fixed costs themselves.


Let there be private finance

The horror story that unfolds when one looks into THSRC's finances has much to do with the current economic paradigm: the assumption, shared by governments and economists alike, that private risk-taking is always preferable to government control in the economy. Thus, in the nineties, the Taiwanese government decided that THSR would be done as a build-operate-transfer (BOT) franchise: THSRC is in essence a private financial corporation taking credit and contracting out work. It won the franchise in 1997 with the promise of requiring zero public spending.

However, following the 1998 Asian Crisis, THSRC had trouble collecting the needed capital on financial markets. So it took what it could. That included hidden state support in the form of credit and capital from state companies, a 10% share sold to the Japanese construction companies – and credits from banks, including credits with above-market variable interest rates.

A decade later, when the global financial crisis hit, THSRC (which just began to carry passengers) was like American home-owners who took out subprime mortgages: its annual interest payments exploded. This outcome should have been expected with a certainty: exposed to the boom-and-bust, bubble-and-burst financial markets, a mega-project with such long-term financing is bound to face bad times, too. And even had times remained good, the financing was more expensive than government borrowing.

Even before interests, THSRC also faced high depreciation costs, due to an unreasonably short depreciation period of 26.5 years (while some THSR fixed assets might last 80–100 years). Furthermore, the unrealistic initial ridership forecasts can be seen as the result of wishful thinking by players eyeing quick success in private economy terms of quarterly results.

Though interest rates fell again in 2009, passenger numbers stagnated due to the downturn, thus overall losses were only narrowed, and the problem remained. But shareholders were neither willing to increase their own investments, nor to involve new foreign capital to refinance. The Taiwanese government had to step in. However, rather than admit that the BOT model was a bad idea and nationalise the company outright, it took over THSRC indirectly: it took majority control (directly and via state-owned companies) in November 2009.

To solve THSRC's twin financial problems, the government underwrote a massive refinancing loan from state-dominated banks, with lower interest rates and longer maturity; and allowed the company to apply depreciation charges that are a function of traffic volume.

In a further parallel to the Global Financial Crisis, on the sidelines of the government intervention, media and politicians engaged in a more symbolic name-and-shame campaign against "fat cats" receiving high salaries from THSRC, leading some managers to accept 50% pay cuts.


Balance sheets

I made an effort to represent the evolution of THSRC's finances graphically. Let's start with the first year, 2007, when net loss dwarfed ticked income:

Earnings before interest, taxes, depreciation and amortisation (EBITDA) is a metric frowned upon in recent times, however, in our case, it is useful to demonstrate that just running high-speed trains is a highly profitable business, even at the initial low traffic levels. The costs are dominated by fixed costs (what was spent on building the rail line, stations, and trains), hence the negative operating income ( = earnings before interest and taxes: EBIT). You also see that interests are of the same magnitude as depreciation!

A year later, as ridership climbed, ticket revenue increased – but, with the deepening of the global financial crisis, so did interest rates. Thus, operating loss narrowed, but net loss (which includes financial revenues and expenses) was almost as bad as the year before:

Recession hit Taiwan from the second half of 2008, with effect on traffic through 2009. But THSRC managed to hold income steady (more later), and then came the first improvements regarding depreciation charges and interest rates (see previous section). As a result, in 2009, the operating income turned positive and the net loss was cut radically:

With the refinancing deal and further traffic increase, this year shall show further improvement.


Turnaround?

One thing THSRC doesn't have to fear is airline competition. On all relations it serves combined, THSRC achieved an air/rail market share of 89% in the first year already, increasing to over 99.9%(!) in 2009: parallel domestic flights were de facto eliminated, with a Taipei–Kaohsiung alibi service remaining.

The effect on road traffic in available statistics for toll roads (most of which are the two highways paralleling the HSR line) is less clear: if it is there, it is overlaid with the effect of economic growth and recession; and the stats give only an aggregate figure for relevant buses and irrelevant (non-semi-trailer) trucks.

In THSRC's own traffic numbers, the one trace of the recession is the interruption to steady year-on-year growth in the middle of 2009.

Some irregular effects also indicated:

  • larger grey-framed squares: the Chinese New Year holiday, which shifts between January and February
  • smaller blue-framed squares: safety shut-downs due to major typhoons and earthquakes

As for this year: you see that growth picked up again. With that, revenue from tickets. Though Taiwan predicts an economic slowdown in the second half of 2010, at year end, I expect THSRC very close to break-even.

Let's hope that once THSRC turns a profit, management can be convinced to cut fares or expand discounts further. At least they now give more thought to commuters with newly introduced non-reserved periodic tickets.

A THSR train left one of the many shorter tunnels south of Hsinchu station, near Toufen, on 2 September 2007. Photo by Ernesto JT from Flickr under CC-by-nc-sa 2.0

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Display:
Meanwhile, Taiwan media and politicians moved on to be outraged about another rail mega-project: Taipei's in-construction rapid airport link, suffering cost overruns and delays too.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sun Aug 22nd, 2010 at 11:17:30 AM EST
Photo of swing-nose switch found, added.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sun Aug 22nd, 2010 at 01:39:29 PM EST
[ Parent ]
with several major subway projects at both ends of the line (kaohsiung will be much better when the HSR extension goes all the way to the train station, and it seems like every major boulevard in taipei is ripped up down the middle with new subway lines).

if there's two things taiwanese know how to do, it's pour concrete and get outraged about related corruption. at the end of the day, though, it gets done and works well.

by wu ming on Sun Aug 22nd, 2010 at 02:08:52 PM EST
[ Parent ]
if there's two things taiwanese know how to do, it's pour concrete and get outraged about related corruption. at the end of the day, though, it gets done and works well.

LOL, well said: that about sums up my diary in two lines :-)

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sun Aug 22nd, 2010 at 03:40:58 PM EST
[ Parent ]
By the way, can you find something about the current state of affairs with the five extra stations? From what I can find, Taipei-Nangang is in advanced construction; for the three in the middle, only planning seems to have been resumed; while I couldn't find anything about whether the moving of the commuter lines underground in Kaohsiung include the extension of HSR tracks.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sun Aug 22nd, 2010 at 04:04:09 PM EST
[ Parent ]
and they are steadily working away on it. the station building exterior is finished (not sure about the interior), they built a subway extension to connect with the nangang HSR station last fall, and put the regular rail station underground shortly after. it'll be helpful for feeding east coast ridership into the HSR system, as all trains to keelung and the east coast come through nangang. they just built a major bus terminal/subway station on the east side of town for similar reasons, taipei main station is horribly crowded, since everything goes through there.

i don't know much about the state of the three middle stations, unfortunately.

it is my understanding that the HSR will go to kaohsiung train station. i certainly hope that's still the case, it would be loads more convenient than the station in zuoying (which, to be fair, is still fairly well linked to kaohsiung's subway system, which opened just a couple of years ago).

by wu ming on Tue Aug 24th, 2010 at 10:07:59 PM EST
[ Parent ]
Thanks for those details!

it is my understanding that the HSR will go to kaohsiung train station.

My question wasn't clear on this. Every source I found agrees that THSR will reach Kaohsiung main station -- eventually. What I couldn't find out is whether this is part of the currently on-going construction work, or still just a plan that will need more digging.

At any rate, what do you think: with an extended intro, would this diary interest dKos readers?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Aug 25th, 2010 at 01:29:36 AM EST
[ Parent ]
Taiwan's eastern coast is a densely populated strip, comparable Japan's west coast.

Haven't you got those the wrong way round?
by Gag Halfrunt on Sun Aug 22nd, 2010 at 11:45:25 AM EST
As you say... now corrected :-)

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sun Aug 22nd, 2010 at 12:50:19 PM EST
[ Parent ]
the 1998 economic crisis didn't really dent taiwan's economy (and certainly not the HSR, which wasn't built then). i think you meant the 2008 economic crisis.
by wu ming on Sun Aug 22nd, 2010 at 02:10:04 PM EST
[ Parent ]
I did not say anything about 1998 denting Taiwan's economy. Its relevance was in preventing THSRC from getting together the financing, and that already before any earth was moved (or indeed before the messy selection of the main contractor).

I realise now that jumping a decade in the next paragraph might be confusing, so added "A decade later".

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sun Aug 22nd, 2010 at 03:39:08 PM EST
[ Parent ]
I see I forgot a sentence about the unrealistic initial ridership forecasts, now added.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sun Aug 22nd, 2010 at 03:52:08 PM EST
[ Parent ]
superb diary, this trainblogging is growing on me bigtime...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Mon Aug 23rd, 2010 at 05:02:43 PM EST
[ Parent ]
Perhaps a dedicated section should be added to the daily news entry.
by asdf on Mon Aug 23rd, 2010 at 09:42:07 PM EST
[ Parent ]


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