Taiwan HSR Generates Operating Profit
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.