Taiwan HSR Generates Operating Profit

Jun 27th, 2010 | Posted by

In a major development with plenty of importance for the California High Speed Rail project, Taiwan’s high speed rail project generated an operating profit in 2009. Of course, HSR lines across the world routinely generate operating profits, so Taiwan isn’t breaking any new ground here. So why is this a “major development”?

Taiwan’s HSR system has been faced with financial problems since it opened in 2007, requiring a costly government bailout of the private investors who fronted the system’s operating costs. These problems, an artifact of a flawed overreliance on private funding, were frequently cited by HSR critics as proof the California system isn’t financially viable.

But if Taiwan can turn an operating profit even with these bigger financial problems, it validates the basic concept that HSR does indeed attract significant levels of ridership that can cover the trains’ operating costs – as is mandated here in California by Prop 1A.

First, let’s take a refresher course on Taiwan HSR. As Yonah Freemark points out at The Transport Politic, private funding brings considerable risks to the public:

In both Taiwan and the United Kingdom, private infrastructure firms managing the construction of new high-speed lines have gone broke because of their reliance on loans taken out at high rates, leaving the taxpayer to foot the bill on both line construction and loan back-payments. All the “creativity” in the world bulging from the minds of entrepreneurs didn’t save the people of either of those countries any money compared to what they would have gotten from a fully public operation. In each of those cases, the “risk” supposedly assumed by private corporations was dumped back onto the public sector because you don’t put billions of dollars in a high-speed rail program and then simply throw it away when private funds evaporate.

At least you shouldn’t.

It could be argued that governmental entities can manage infrastructure funding more effectively because they’re able to take out loans at much lower interest rates. This power could be expanded if the U.S. Congress establishes a national infrastructure bank, as has been recently suggested. A fully public operation would allow taxpayers to get some of their investment back through operational revenues; by contracting out a PPP, those profits will all go into the hands of corporations and their shareholders.

Taiwan’s HSR system met its ridership projections, though it took a year or two to get there. In his seminal Puente AVE article, DoDo explained why Taiwan’s successful HSR system did not translate into a successful PPP project:

For the THSR, cost overruns were largely the consequence of a switch to Japanese suppliers after planning based on European high-speed technology was already well-advanced. The decision was widely rumoured to have been political (and led to an epic political, media and court battle ending in damage payments to Eurotrain), and the overseeing company THSRC did not go with the actual Japanese offer, but stuck to its guns on specifications. Thus f.e. a German maker had to be contracted to supply fixed-track high-speed switches (no need for those on Shinkansen lines with their strictly single-direction tracks).

Likewise, both lines were opened half-finished: one-third of the Seoul-Busan KTX line was delayed (until 2011, now thanks to those sleepers maybe even further), THSRC started with a reduced schedule, both started with some stations unfinished (for the THSR, including both downtown terminuses!) or without urban transit connections. Also, both lines started with hefty ticket prices that had to be reduced later.

And yet Taiwan HSR overcame these problems:

The failure to meet expectations after the start was widely discussed as a national scandal in both countries. However, you can also see on the graphs that there was steady growth thereafter. And that at the expense of other modes of transport.

The modal shift was particularly spectacular in Taiwan. In just 20 months, all but one single daily flight between the cities served by THSRC was eliminated (last December, THSRC’s share of the air/rail market was 99.95%…), leaving the highway as only competition. Total domestic air passenger transport fell almost by half(!). The steady uninterrupted annual growth of highway traffic was not only stopped but turned back.

In short, Taiwan HSR is a successful project in terms of ridership and achieving many of its goals of shifting transportation modes. The problem with Taiwan HSR is largely with the method used to finance it – heavy private sector borrowing. The 80% private funding method left Taiwan HSR financially vulnerable to poor construction decisions, cost overruns, and the global recession.

And now Taiwan HSR is a successful project in terms of generating an operating profit:

Taiwan’s high-speed rail system operator, Taiwan High Speed Rail Corp. (THSRC) , posted its first ever net operating profit in 2009 but net income was still in the red, weighed down by high interest costs and depreciation.

At its annual shareholders meeting on Wednesday, the company reported operating revenues of NT$23.32 billion (US$728.76 million) and net operating income of NT$5.56 billion, its first positive result since beginning commercial operations in 2007.

THSRC said operating revenues rose by NT$270 million, or 1.2 percent, in 2009 while operating costs, excluding depreciation and amortization, fell by NT$770 million, or 7.5 percent.

The company said its bottom line was helped by higher passenger traffic, lower interest costs after its syndicated loans were renegotiated, and the change from a straight line depreciation method to one based on transport volume.

But high interest costs and depreciation and amortization still left THSRC with a net loss of NT$4.79 billion, or a loss per share of NT$1.03.

In other words, the Taiwan HSR system would be a very financially strong system were it not for the flawed method used to build it – which has left the system with debt issues, even though they have been significantly eased by the government bailout. Aside from that, however, the system does not require ongoing operating subsidies thanks to very high ridership. Remember back to the stats given by DoDo in the excerpt from his post – the modal shift toward rail in Taiwan was rapid and significant.

Had the Taiwanese government simply funded the HSR system itself as a piece of public infrastructure, without eventually having to bailout the private investors, then the system would almost certainly be completely in the black. Having 80% of the construction costs coming from the private sector was a disastrous move, but the Taiwan HSR system has overcome those issues.

What does this mean for us in California? Two things:

1. There is indeed every reason to believe that California’s HSR system will generate an operating profit. In fact, the case is so overwhelming given the other global HSR systems that the burden should be on those who deny the system will cover its costs to prove that it won’t.

2. We need to ensure that private funding is kept to a minimum. Both the state and federal government can afford to fund up to 75% of the construction costs; having private investors (defined broadly; it could include CalPERS) contribute 25% of the cost – with a clear recognition they are taking a risk and should not expect guarantees or bailouts – seems appropriate.

It’s unfortunate that we live in an era where a common sentiment, although one not yet shared by the majority, is that we should never invest in or build anything new, that we can extract wealth from and live off past investments and previously-built infrastructure forever, and that the status quo is just fine and is not threatened, or threatening.

But as the facts become known – that HSR is a smart, sensible, affordable investment in 21st economic prosperity – political leaders will come to realize that California voters knew perfectly well what they were doing in November 2008 when they voted to spend $10 billion of their own money (more when interest costs are added in) to start building the high speed rail project. Taiwan shows that HSR will not only be profitable – but that it will be of great use and value to California. Let’s not delay in bringing the global HSR success here to California.

  1. S.S. Sam Taylor
    Jun 27th, 2010 at 23:27

    “In other words, the Taiwan HSR system would be a very financially strong system were it not for the flawed method used to build it – which has left the system with debt issues, even though they have been significantly eased by the government bailout. Aside from that, however, the system does not require ongoing operating subsidies thanks to very high ridership.”

    And to say that this was a problem means that we have a bigger stretch in California. We don’t have an operator or any PPP investment. We just have the blind-faith of $9 billion in state bonds and $2.2 billion in federal funds. So, the California situation is so much more complicated.

    I have great trouble with the constant statements that CA HSR will generate an operating profit. Even with minimum operating segments, bridging the financial gaps from $11 billion to $45 billion to fill in the missing route miles to and from the Central Valley doesn’t necessary pencil out.

    I guess that in filling out the miles of Urban Rail in Los Angeles, we never had to worry about breaking even, just about being able to operate our new service based upon a 24% farebox recovery. Now that is pretty different from developing a physical plant that someone else is expected to operate covering the direct and indirect costs.

    And for you folks who blandly think that there should be some sort of subsidy to run the High-Speed, I remind you that Division of Rail operates a fairly robust network of trains in the state and the minute the state support goes away, the service levels go into a freefall.

    Maybe my colleague Spokker can take a peek at the latest Metrolink budget and repurpose it to see how High Speed Rail budget would look from LA to SF. I suspect that it will reveal that base tickets between Los Angeles and the Bay Area will be somewhere between $150 to $225 and segments such as between Los Angeles and Palmdale would price out at about $35 / ride.

    The lowball numbers thrown out by boosters are simply not in reality. Southwest tickets between LAX and SFO without advance purchase are between $146 and $161 in 2010. I don’t think any of the High-Speed Rail boosters should be discussing what ticket prices should be. Those numbers come from direct and indirect operating costs and based upon some of the gold-plated plans from some of the designs, a low cost, efficient operation isn’t part of the proposal.

    HSRforCali Reply:

    Are you seriously comparing commuter rail to high-speed rail? You’re even more unintelligent than I thought you were. Commuter rail is NOT meant to turn a profit; its main purpose is to serve those with a low income or those looking for a CHEAP alternative to driving. High-speed rail is way different from commuter rail.

    S.S. Sam Taylor Reply:

    You have a serious misunderstanding about rail transit. All transportation is meant to turn a profit. There are cases where the public has decided to subsidize parts of the service, but is that sustainable? There are serious issues when the users don’t pay the full costs. This is why Caltrain is falling apart.

    And I think you are misstating the purpose. Many times Urban bus systems have artificially low fares and that same public loses service for access when you have to cut costs (service) rather than increase prices.

    Commuter rail was in a survival mode for a long time, as there has been a shortage of practitioners around the country to make it work. Again, why don’t you make the business case
    why High-speed rail should and can operate differently from Regional rail. Is it the value charged for the fares? Is it the public subsidy on some properties?

    Peter Reply:

    “All transportation is meant to turn a profit. There are cases where the public has decided to subsidize parts of the service, but is that sustainable? There are serious issues when the users don’t pay the full costs.”

    Name me a single non-toll road that “turns a profit” (and I’m not even sure the toll roads turn a profit). No mode of transportation could function without subsidies, except perhaps merchant shipping. Arguing that passenger rail that performs a vital public service (yes, as important as police and fire services) should operate completely without subsidies, while not demanding the same of roads and airlines is hypocritical. And please don’t say those should not be subsidized either, because then only the seriously rich could ever afford to travel ANYWHERE.

    adirondacker12800 Reply:

    and I’m not even sure the toll roads turn a profit

    They do on paper. They borrow money at government rates in most cases. They don’t pay property taxes. The access roads to get vehicles to the entrances are usually paid for by other agencies. Two years ago I waded through the toll roads in the Northeast and Midwest. Median toll is 5 cents a mile for passenger automobiles. So in nice round numbers, if I-5 was tolled, the toll one way between San Francisco and Los Angeles would be 20 bucks.

    except perhaps merchant shipping.

    Who maintains the ports, harbors and shipping channels? Usually a government run port authorityh that borrows money at government rates and doesn’t pay property taxes….

    Robert Cruickshank Reply:

    The Orange County toll roads have been in financial trouble since the day they opened. The 91 express lanes – tolled carpool lanes operated by the private sector – failed and had to be taken over by OCTA.

    adirondacker12800 Reply:

    Putting a toll road right next to a free road doesn’t happen in most places. There is no viable alternative to the toll roads in the East most of the time. You grumble about the toll but it saves enough time to be worth it. The books, with the special accounting rules for toll roads, balance, When they don’t the tolls go up.

    Nathanael Reply:

    “There is no viable alternative to the toll roads in the East most of the time.”
    …if you want to go fast.

    The fact is that I take the non-grade-separated state roads if I’m not in a hurry. It’s more scenic. A lot more scenic.

    adirondacker12800 Reply:

    It’s scenic but most people don’t have most of a day to drive from New York City to Albany from Boston to Philadelphia. Though I doubt Boston to Philadelphia could be done in a day unless it was a very very long day.

    Spokker Reply:

    They even failed when they had a clause in the contract that the adjacent freeway and any adjacent rail service couldn’t be improved.

    OCTA probably bought the toll road so they could add a lane to the 91.

    thatbruce Reply:

    I’ve never been sure whether the OCTA buyout was a financial rescue, a way to make the lawsuit over Caltrans widening for the 241 interchange go away, or ensuring that future widening was legally possible.

    Citations for this case would be good.

    Peter Reply:

    Right, forgot about all the shore-based infrastructure for merchant shipping…

    Robert Cruickshank Reply:

    “All transportation is meant to turn a profit.”

    This is simply untrue. How much did you pay to drive on your local street this morning? On a freeway?

    Transportation is a public service that supports and sustains other economic activity. Its purpose isn’t to turn a profit but to move people and goods cheaply and efficiently.

    Rafael Reply:

    In theory, gas taxes are supposed to pay for road construction and maintenance in the US. In practice, they’re too low to cover those costs.

    What synonymouse and others fail to appreciate is that standard speed rail is strictly a public service all over the world. The experience in the US and elsewhere shows that if you’re running at less than ~125mph for long stretches, e.g. because you need to stop frequently, you’re probably going to need an operating subsidy from taxpayers, forever.

    On the other hand, if you can run at more than ~150mph for long stretches, you’re very likely to achieve a fare box recovery in excess of 100%. That means you can pay for operations and maintenance without taxpayers subsidies. What you won’t be able to do is service the debt on the starter line, because the profits are re-invested into network expansion.

    Btw: freight rail is profitable in the US. It’s a public service in the sense that it connects harbors on the coasts to the nation’s vast interior, but it doesn’t need subsidies. Indeed, it pays property taxes. So perhaps you’re painting with a brush that’s slightly too broad here.

    Spokker Reply:

    “In theory, gas taxes are supposed to pay for road construction and maintenance in the US. In practice, they’re too low to cover those costs.”

    The Libertarians will tell you that the road and highway system makes a profit.

    Alon Levy Reply:

    Not anymore. Even O’Toole has conceded a 72% recovery ratio, after overcounting receipts and undercounting spending (e.g. he counts the portion of the gas tax that goes to collecting the gas tax as revenue, but not as spending).

    adirondacker12800 Reply:

    They usually don’t account for the “last mile” either. The local road that gets you to your McMansion is almost always fully funded with property taxes. I can’t find numbers right now but roughly 50 % of police budgets go to work with automobiles, that usually isn’t accounted for either. Or the courts to administer the fines that were generated on the roads….

    Alon Levy Reply:

    At least at one point, the fines generated from fuel truck inspections were considered user fees.

    YesonHSR Reply:

    And you think that all we are ever going to get from Federal funding is 2.2billion?? And Southwests longer term fuel cost will have them limited in that low cost getaway fare stuff in the years to come

    Robert Cruickshank Reply:

    Yours is a misleading and dishonest comment.

    First, if the other construction funds don’t materialize, there is no construction. Do not make the same foolish error that the State Auditor made.

    Second, you go on to say “it doesn’t pencil out” without showing your work, explaining that conclusion – which means the conclusion is not justifiable.

    Third, you confuse commuter rail with high speed rail. As far as I know, every HSR system in the world generates an operating profit. Can you prove otherwise? HSR should be compared to other global HSR systems, not to Metrolink.

    Fourth, you claim the fares “are simply not in reality” without explaining why that is, so that claim can be discounted as well. Further, airline fares will be much, much higher in 2020 and 2035 than they are today, given peak oil and other related phenomena. You cannot exclude that from your calculations and expect to be taken seriously.

  2. wu ming
    Jun 28th, 2010 at 06:53

    having taken THSR many times, it is not at all surprising to see its success. especially if you’re starting or ending in taipei, where the underground station is linked up directly with the main train station and subway system (and an utterly byzantine underground shopping mall stretching for blocks, but that’s a separate issue), it is a snap getting anywhere on the west side of the island (which has the vast majority of the people), carrying luggage, without too much hassle. you can buy your ticket online and pick it up at the desk or an automated kiosk in minutes, or buy your tickets at the station kiosk a week in advance, or order them at corner 7-11s (not unusual, you can pay nearly all bills there), or just show up on a whim and ride in the car or two with unassigned seating.

    while some of the stations in the middle of the line are beetfield stops incovenient from city centers, and undoubtedly that siting a result of corrupt local powers wanting to flip some rural real estate for future development by siting it out in the middle of nowhere, the stations in taipei, banqiao (taipei suburbs), and zuoying (gaoxiong suburbs) are all very easy to get to, and have convinced me of the necessity of siting CAHSR stations as close to urban destinations as possible. they stupidly did not bring the HSR right up to the only real international airport, so i’ve never bothered to use it to and from a flight, although i hear they’re building rail lines to that airport from both taipei and the HSR station in taoyuan, the nearest city.

    it’s a very convenient, fast, clean and comfortable system, priced to fill seats, and with very nice stations while you’re waiting the 10-15″ between trains. i’m not surprised at all that it completely replaced domestic flights and freed up a ton of highway and slow train space (which were both at the point of system breakdown before the HSR was built). now if only they had the sense to do as prop 1a did and leverage it to build greater carbon-free electricity generation, and shut down the awful coal plants (and for that matter, the nuke plant built on an active fault), they could really start reducing carbon at the same time.

    as with opposition to much modern infrastructure and policy, conservative opposition to HSR can only be taken seriously if one pretends that the rest of the developed world simply does not exist.

    Caelestor Reply:

    I second this comment as a Taiwanese. TaHSR is comfortable and convenient. Yes, I do wonder why most of the stations are out in the middle of nowhere, but at least the major ones (Taipei, Banciao, Taichung, and Kaohsiung) are reasonably close to the city.

    Also Taipei Metro’s currently building a subway link from the airport direct to Taipei Main Station and Taoyuan HSR station, which is pretty nice.

  3. jimsf
    Jun 28th, 2010 at 08:21
  4. jimsf
    Jun 28th, 2010 at 08:22
  5. Kevin
    Jun 28th, 2010 at 10:47

    I agree with wu ming above – THSR is incredibly convenient, fast, and fairly priced. The location of the stations aside from Taipei and Kaohsiung are less than ideal, but with the complimentary shuttle service provided by THSR that runs from the stations to the cities, THSR has become more accessible than before. Again, not ideal to be running busses when they could have sited the stations closer to the city centers, but better than nothing. What concerns me is once they build some more in-fill stations like at Miaoli and Changhua, service times will be slowed down because of the additional stops.

    As for a connection to Taoyuan Airport, there is a very frequent shuttle bus service from the airport to Taoyuan HSR station (and vice versa), and quite a lot of people take that service. If you are coming up from the south, you can check-in for flights on China Airlines or Eva Air at Taoyuan HSR, be rid of your bags, and then just take the shuttle to the airport as I just did a couple weeks ago from Tainan. Once the airport MRT is finished connecting Taipei Main Station to the airport and then on to Taoyuan HSR, connectivity to both Taipei and southern Taiwan will be streamlined and more convenient.

    It always amazes me just how convenient and efficient public transportation is in Taiwan and Asia in general. If the Capitol Corridor were somehow upgraded to quasi-HSR standards, then travelling from Sacramento to SF would be more competitive than driving. I am planning a trip to the East Coast next month and I was shocked to see that for a trip on Acela from DC to NYC, not only does it take nearly twice as long to travel a comparable distance (160 mi btw Taipei and Kaohsiung vs. 205 miles btw DC and NYC) but it costs more than twice as much!

    wu ming Reply:

    it wouldn’t even take HSR-speeds for the capitol corridor to beat driving, it just needs a modest speed-up and a lot more frequency and later hours, so that you could stay in the city for drinks or dinner past 8 or 9pm before returning home to the valley.

    on a traffic-heavy day, when the whole bay area seems to be driving to tahoe (or back from tahoe), the train can be faster and way more pleasant than driving on 80. still far more expensive, though, esp. when you have several people in the car.

    Peter Reply:

    “not only does it take nearly twice as long to travel a comparable distance (160 mi btw Taipei and Kaohsiung vs. 205 miles btw DC and NYC) but it costs more than twice as much!”

    And the insane thing is: it still makes a profit.

    Caelestor Reply:

    I’ve heard of $1 buses in the Northeast. How is that even possible?

    Nathanael Reply:

    Teaser pricing. One seat on the bus goes for $1, after that one is sold the rest go for much higher prices.

    adirondacker12800 Reply:

    then travelling from Sacramento to SF

    Sacramento to Oakland. The train is never going to go to San Francisco from the East Bay. At least not in your grandchildren’s lifetime.

    I was shocked to see that for a trip on Acela from DC to NYC, not only does it take nearly twice as long to travel a comparable distance (160 mi btw Taipei and Kaohsiung vs. 205 miles btw DC and NYC) but it costs more than twice as much!

    Considering that there’s bits and pieces of it that were wonders of Post Civil War engineering and that most of it got it’s last major upgrade as a WPA project it gets there reasonably fast. It has to beat driving. Even the slower and cheaper regionals do that.

    People who want a cheap ride get on the bus. People who want a cheaper ride than Acela get on a regional. Poeple who can’t add gas+tolls+parking drive.

  6. Alon Levy
    Jun 28th, 2010 at 14:28

    The Taipei subway is profitable, too. East Asia isn’t like Europe, where intercity rail turns a profit but regional and local rail hogs subsidies.

    Caelestor Reply:

    How exactly does Asia make profits on its metro? I’m curious.
    Better pricing, larger share?

    wu ming Reply:

    lots of people use them. they’re priced very affordably, the smart cards work exceptionally well, density is very high, and they are generally very clean and reliable.

    at least that’s been my experience with subway systems in japan, korea, taiwan, and hong kong. beijing and shanghai’s systems were less nice, both because of initial shoddy workmanship and amazing stresses from huge ridership.

    Alon Levy Reply:

    Japan has a fraction of the staffing levels of Europe, and invests in low-maintenance trains and equipment. It’s also a little bit more expensive – average fares on the Tokyo subway are on a par with in New York, and a bit more (I think 20%) than Paris.

    I don’t know about the rest of East Asia, but Singapore has low wages, in addition to Japanese-style lean production.

    But not all of East Asia is the same. The Beijing subway has fares so low that it is heavily subsidized. Seoul Metro loses a little bit of money (but it’s just one of several Seoul subway operators). Toei makes small profits; Tokyo Metro and the Singapore MRT make large profits.

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