The Taiwan Banker

The Taiwan Banker

The economics and financing of rail construction: Taipei seminar

The

The Taiwan Banker NO.90106.06 / Zheng Wen

The economics and financing of rail construction: Taipei seminarStrengthen value added,Build the most effective rail system
Preface:Globally, railway transportation is becoming more common. With the Forward-looking Infrastructure Plan, Taiwan has an opportunity to further develop its railway network. It can do so by combining resources from the high-speed rail system and the Taiwan Railways system, using a regional concept to boost rail infrastructure, incorporating advanced technology such as the Internet of Things (IoT) and mobile paymetnts, and encouraging the use of public transportation. Industry, the government and scholars should work together to train talent to work in the railway sector. By enhancing its railway network, Taiwan can become a more advanced country. Content: The Forward-looking Infrastructure Plan has a budget of NT$880 billion to be used over an eight-year period. NT$420 billion will be allocated to railway development. Funding for infrastructure development will be financed by debt. Premier Lin Chuan emphasized that the government will use "the most moderate means to balance the budget." Given Taiwan's low birthrate and previous cases of white elephant infrastructure projects, people have high expectations this time. They expect the government to efficiently develop the nation's railway network, balance the budget and stimulate the economy. To address concerns about planned railway construction, the Taiwan Academy of Banking and Finance (TABF) recently hosted a private seminar in Taipei and Kaohsiung: "The Economics and Financing of Railway Construction."The seminar was held May 17 in Taipei. It was hosted by Huang Boyi, vice president of TABF. The five speakers at the seminar were from the private sector (including the transport sector), government and academia. The speakers included Huang Liang, chairman of Taiwan Rolling Stock Co; Wang Yi-Chuan, Director General of the Taichung City Transportation Bureau; Lung-Shih Yang, Ph.D., Senior Vice President and Honorary Professor, Feng Chia University; Professor Ruey-hua Liu, Department of Economics, National Tsing Hua University; and Johnson H.S. Lin Ph.D., Associate Professor, Department of Transportation Technology and Logistics Management, Chung Hua University. During his opening remarks, Huang Boyi said his hopes for the finance industry are similar to those of the Nobel Prize winner Robert J. Shiller as detailed in his book "Finance and the Good Society." Finance is more than an industry. It plays an important supporting role in good societal practices, boosting industry develop and providing funding for many different things. With the arrival of the Forward-looking Infrastructure Development Plan and new railway construction, finance will play an in important role. TABF believes that this merits serious discussion. Tsai Huang-liang emphasized that an important focus of the Forward-looking Infrastructure Development Program is railway construction. One of the main reasons for this is that the government believes further developing the nation's railways will provide abundant economic opportunities. Globally, the railway industry has a production value of 55 billion euros, which is expected to reach 61 billion euros by 2020. The entire world is developing railway networks; Taiwan should too Tsai noted that railway development is prevalent worldwide. As the railway sector is intimately involved with local communities, and will never be eliminated, it can be called an "industry of hope," Tsai said. One of the biggest benefits of expanding the railway system in Taiwan will be its ability to boost domestic demand and provide job opportunities. Furthermore, compared to driving or other forms of transportation, railway transportation is energy saving and low pollution, thus making it a valuable type of development. Worldwide, all different types of countries are focused on expanding their railway networks, from the United States and China to Southeast Asian countries such as Vietnam, Thailand an Indonesia. Tsai recalled that when he served as a legislator the Legislative Yuan passed legislation to support the development of the Taoyuan Airport Express Train. At that time, China had yet to plan its light rail system. 20 years later, the Taoyuan Airport Express has finally begun operation, but China is already one step ahead of Taiwan in railway development. China is now exporting its railway systems to Vietnam, Los Angeles and Philadelphia. Given the huge opportunity provided by the railway industry, Tsai said Taiwan cannot afford to miss out, especially as the government is dedicating NT$420 billion to railway construction. Taiwan Railways also recently began a 10-year train-purchasing plan to replace its old cars. It has a budget of roughly NT$100 billion. Taiwan Rolling Stock forecasts that if it is able to meet its objectives in railway development (rail cars made in Taiwan for Taiwan), NT$500 billion (the government’s NT$420 billion budget plus another almost NT$100 billion from Taiwan Railways for procurement of new cars) can create NT$67 billion in production value for Taiwan Rolling Stock spread among 1000 different industries (including screws, handles, air-conditioning, interior design) and create 15,000 job opportunities. This year is a key year for Taiwan's rail industry. With the support of the Forward-looking Infrastructure Development Program and the new Taiwan Railways program, Taiwan will achieve its future investment goals. This is the right policy for Taiwan's overall economic development. Wang Yi-Chuan, Director-General of the Taichung City Government Transportation Bureau, said that before President Tsai Ing-wen announced the Forward-looking Infrastructure Development Program, Taichung officials had been discussing what type of infrastructure could stimulate the economy and boost domestic demand. At that point, the government had yet to decide which areas of infrastructure it would focus on. Chang Ching-sen, Administrative Commissioner, spoke with all the city and county governments to understand their viewpoints. After speaking with all of them, he found that the most commonly mentioned type of infrastructure was railway networks. As a result, railway construction became an independent program. Yang Lung-Shih said that the Forward-looking Infrastructure Development Program could significantly boost public investment in the construction sector at a time when the housing market continues to lag (it will not reach its previous high point again). The program will also bolster industries related to rail construction, such as machines that control track systems. Meanwhile, Professor Ruey-hua Liu reminded the seminar participants that there were some unexpected events in 2016 which rattled global markets, such as Brexit and the election of Donald Trump as President of the United States of America. It is hard to say if there will be no further unexpected events ahead, he said. With this in mind, should a crisis occur, given that the Forward-looking Infrastructure Development Program uses a special budget, it will come under heavy pressure. Integrate the HSR and Taiwan Railways regionally How should the two rail systems be integrated? How can debt levels be kept to a minimum? Industry, government and scholars all believe the Forward-looking Infrastructure Development Program has the potential to create a win-win situation for Taiwan and the Taiwanese people. But it requires more than just leadership from the central government. It also requires comprehensive participation from all different parties involved to ensure fiscal issues are resolved and that the railway construction is successful. First, railway construction needs to be based on a regional integration of the HSR and Taiwan Railways, making use of existing resources. According to Wang Yi-Chuan, before Taiwan had the high-speed rail, Taiwan Railways was an important means of domestic transportation. Today, Taiwan has a growing HSR network, with an increasing number of stations. Given that the HSR is fast and efficient, it should be responsible for serving long-distance routes like Taipei-Kaohsiung. There is no need at this point for Taiwan Railways to provide Taipei-Kaoshsiung service, as it is both slow and not a good use of resources. Taiwan Railways should be transformed into a railway system for regional transportation. This can allow the Forward-looking Infrastructure Development Program to proceed smoothly. Otherwise, if things remain as they are, the program could be impeded, as it will be necessary to do construction on more tracks. In Yang Lung-Shih's view, the Forward-Looking Infrastructure Development Program should definitely integrate the HSR and Taiwan Railways. The HSR should become the main rail network serving city centers and their environs, as well as industrial parks, he said. For instance, the Wuri HSR station can be a gateway for industries in Taichung, Changhua and Nantou. Under this scheme, light rail can be used in urban areas and Taiwan Railways in the suburbs. Taiwan Railways has some spare tracks that can be used. The airport will also play a role. In this manner, we can reduce the cost of land, build railway tracks in the right areas and maximize efficiency. For instance, Wang noted that in Taichung, Taiwan Railways' Taichung Shangshou Line is an important means of transportation for Taichung, Changhua, Miaoli and other parts of central Taiwan. For the perspective of railway transportation, Taichung, Changhua, Nantou and Miaoli (an area home to more than 5 million people) should be managed as a single region, Wang said. Taichung and Nantou have always had close ties. Meanwhile, Wuri Station serving Taichung is right next to Changhua. The only thing separating them is a river. Many people drive from Wuri to Changhua to get an evening snack, while many students from Changhua attend senior high school in Taichung. Meanwhile, southern Miaoli is close to northern Taichung. Many students from Taichung's Dajia District attend senior high school in Miaoli's Yuanli District. The Taichung City government currently plans to use the Taichung Shanshou Line to combine the Dajia and Houli districts and link Taiwan Railways' Mountain and Ocean Lines so that the trains travel in a circle line. This can connect all of Taichung's major urban centers, boost Taichung's overall development and slowly expand to Changhua, Nantou and Miaoli. Wang Yi-Chuan said that at present, the hardware of the Forward-looking Infrastructure Development Program is not perfect. There are areas that can be improved and that have potential to be developed in the future. The government needs to increase the rate of public transportation use Lin Hisang-sheng said that the Forward-looking Infrastructure Development Program must be seen as a "conditional check." It is imperative that the program not become a tool for the government to simply disburse funds. The other major party should oversee the plan using objective oversight to ensure it does what it is supposed to do: boost the economy and increase job opportunities. The ruling party must be grateful for the people's trust and minimize any negative side effects of construction that could impact future generations. What is a so-called "conditional check?" What are the conditions that must be met? In Lin's view, those who are able to boost the rate of public transportation use should be rewarded with the greatest resources. At present in Taiwan, outside of Taipei City and New Taipei City, most people in Taiwan use private transportation. In Lin's view, this is due to the relatively low cost of using a private vehicle. In order to promote the Forward-looking Infrastructure Development Program, the government must work to curb use of scooters and cars, for example by making them more expensive to own and operate. Using Taichung's recent experience as an example, Wang Yi-Chuan noted that in the past five years it has been free to take the bus for trips that are 10 kilometers or less. Yet just 5% of people in Taichung take the bus daily. Another 5% take the train so the public transportation usage rate is just 10%. Despite the Taichung City government spending more than NT$20 billion to subsidize bus transportation and launch 210 bus lines, just 5% of the population uses the service.Even with another five years and NT$2 billion a year, growth in the use of Taichung bus transportation will be limited, Wang said, which explains why the Taichung City government believes at this point there is no need to push people to commute on the bus. Wang thinks that the government should instead directly invest in the construction of railway lines to change the way people use transportation in Taichung and stimulate the city's economy. The railway lines should circle around the city's borders as they do in Taipei. Young people will be likely to use the railway service in this case. In Taipei, many people live in the suburbs but commute to work on the MRT as it is convenient to do so. This is also Taichung City's goal. Industry, government and scholars should work together to provide training for railway construction At present, none of Taiwan's colleges or universities offer a major in railway engineering. At best, some mechanical engineering programs offer a few elective courses. This is a weak point for Taiwan given its ambitions in railway construction. Tsai Huang-liang said that the Forward-looking Infrastructure Development Program requires talented people for railway construction, as Taiwan's counties and cities will all develop their railway or light rail networks. Since he took his position has chairman of Taiwan Railways Administration, he has asked many universities to make railway engineering a key part of their curriculum and do their utmost to prepare students to do the work ahead. Tsai is glad that Taoyuan City's Ching-Hua Senior High School has already established a railway engineering major in which there are about 200 students enrolled. This is a positive start. Talent for the railway industry can be trained off campus too. The HSR recently established the Local Department, which endeavors to localize the R&D and design work for the nation's railway industry, as well as help Taiwan vendors gradually acquire key technology for components. Tsai said that Taiwan should not always let foreign vendors win railway construction business here. If we (all involved parties in Taiwan) can all come to a consensus, we can work together to train industry talent and integrate resources, he said. In the past, National Taiwan University tried to combine electrical engineering, information systems and civil engineering courses to promote railway engineering major. The major was eliminated after just a few years as few students chose to enroll. Wang Yi-Chuan pointed out that the Taipei Rapid Transit Corporation had planned to work together with universities to set up a railway engineering major, but ultimately they did not do so as they were concerned there would be an insufficient number of professors who could teach the courses. The professors with expertise in transportation were generally not specialized in railway engineering. In fact, in the universities involved in the project there were not more than ten professors in total who could teach railway engineering courses, not even one teacher per school. Thus, it was difficult to create the railway engineering major. Associate Professor Johnson H.S. Lin emphasized that in the railway industry, you can't expect revenue from ticket sales to be the main way to pay off debt. If that's what you think, you will be in trouble. According to experience, ticket prices cannot reflect actual costs of building, operating and maintaining railway networks. In the Singapore, Hong Kong and Japan railway sectors, 30%-50% of overall revenue comes from channels besides ticket sales. In Tsai's view, the overall railway industry and smaller players like the Taiwan Rolling Company share a common trait: They are both a traditional industry and technologically advanced. With this in mind, we cannot use a traditional mindset when we operate railways. Future trends must be taken into consideration. Yang said that when building railway hardware, you need to think about IT infrastructure too, as well as driverless trains and what is required to operate them. In addition to IoT related technology infrastructure construction, mobile payments will also be a good opportunity for the railway industry, Lin said. As an example, Lin notes Alibaba and Tencent cooperating in the ride-hailing sector by combining Didi Dache and Kuaidi Dache. Meanwhile, Apple CEO Tim Cook went to China to visit bike-sharing startup ofo. Both of these examples involve firms successful in the mobile payments industry and are focused on people who will use mobile payments for their transportation needs. If the government truly wants to develop the nation's railways under the Forward-looking Infrastructure Development Program, it must be on the lookout for these kinds of opportunities too. Liu reminded participants at the seminar that in 8 years it would be 2025, the time at which the ruling party should completely denuclearize Taiwan. Alternative energy sources will be needed to replace that nuclear energy. For now, green electricity is the best option. Electricity usage is bound to increase. Yet light rail requires a lot of electricity. How much will it require? How large-scale will light rail be? If you set up a bus line and it turns out to be a failure, you can eliminate certain bus lines. But if you set up light rail, it's not so easy to just terminate service. It is imperative that the government think about future trends. At the end of the seminar, Huang Boyi said that that after understanding the benefits of railway construction, the finance industry should help the government and related entities and live up to people’s expectations. With the Forward-looking Infrastructure Development Program, the Taiwan economy will mature and its outlook will be increasingly positive.