Taiwan's US$15 billion high-speed rail, which runs the length of the island from Taipei in the north to Kaohsiung in the south, carried its first passengers in January this year. For travelers, the new rail has remarkable advantages: It is cheaper than an air ticket and it runs on schedule. It's also extremely fast: A one-stop express train takes just 90 minutes to travel from Taipei to Kaohsiung, a distance of 345 km, while a train that stops at seven stations takes just 120 minutes to reach Kaohsiung.
Taiwan's new rail is the latest development in a worldwide trend toward more high-speed rail transport. With the exception of America, with its reliance on cars and planes, most of the developed world has embraced high-speed trains as an efficient transportation option. Japan and Europe have extremely effective high-speed train networks, and Korea also boasts a new state-of-the-art system that opened in 2004. China plans to invest US$190 billion in railways over the next few years, including $80 billion to be spent on 12,000 km of high-speed rail, and earlier this month announced the start of its own high-speed rail between Beijing and Shanghai, which will carry passengers at 350 km between the two major cities. Meanwhile, with Vietnam, India, the state of California, and other governments also considering high-speed rails (trains that travel at least 250 kilometers per hour), a look at Taiwan's experience offers some instructive lessons.
Drop in Air Traffic, Car Usage
Taiwan's new rail is a high-tech marvel that has already revolutionized travel in Taiwan, just eight months after it opened. Domestic airlines are canceling dozens of flights as business travelers flock to the new rail, and air traffic on some competing routes has plummeted more than 50%. Tour agencies are busy launching new travel packages to serve vacation areas that are suddenly much easier to reach, while other passengers have abandoned their cars, leading to a 10% decline in traffic on the main north-south freeway, according to one estimate. Meanwhile, buses are much emptier, and the conventional Taiwan Rail is suffering reduced ridership as well. After more than a decade of planning and building -- a process that included a great deal of arguing and finger-pointing -- the Taiwan High-Speed Rail is at last up and running, and it has been warmly embraced by Taiwan's traveling public. "People have looked forward to the high-speed rail in Taiwan for a very long time, especially high-end passengers," said Tony Tsai, Representative Director at Moody's Taiwan Corp.
It wasn't an easy project to finish, especially in a politically divided region like Taiwan. The system suffered cost overruns, financing problems and political delays, and the Taiwan High-Speed Rail Corporation (THSRC) struggled to complete the mammoth undertaking, which ended up being the biggest and most expensive Build Operate Transfer (BOT) project in history.
But finish it they did, and the train finally began running in January, with limited services. It has been steadily ramping up its frequencies and services since then, as it hurtles toward full operations in the first quarter of 2008. Now, with the landmark train halfway to full operations, the time is ripe for a thorough assessment of the rail and its prospects.
The new rail is owned and operated by the THSRC, a private company with strong links to the Taiwan government. The US$15 billion train has remarkable technology, much of it adopted from Japan: The elevated tracks run 345 km down the West coast, and many of the stations are brand-new and beautifully designed.
But the train's key feature is speed. Between stations, the electric-powered, Japanese-built bullet trains reach almost 300 km per hour, although they could travel 350 kmph, if necessary. The trip from Taipei to Hsinchu, the hub of Taiwan's high-tech industry, takes just 40 minutes, while the trip to Taichung, the island’s manufacturing center, takes 68 minutes. The trains that make seven stops take two hours to travel from Taipei to Kaohsiung, Taiwan's second-largest city, while the express trains make a single stop, a three-minute transfer in Taichung, and travel from north to south in just 90 minutes. From a passenger's perspective, the train is already a success. "In terms of comfort, a lot of passengers give it very high credit in this regard, and compared to taking a flight from Taipei to Kaohsiung, the whole trip is quite comfortable," said Tsai.
For people in Taiwan, a middle-class society with an annual per capita GDP of about US$16,000, the High Speed Rail is quite affordable. A one-way ticket from Taipei to Zuoying, on the outskirts of Kaohsiung, costs NT$1,490, or NT$2,440 (US$45 and $74, respectively) for business class. By comparison, a one-way Taipei-to-Kaohsiung air ticket costs about NT$2,200 (US$67), a Taiwan Rail train ticket costs NT$840 (US$25), and an express bus ticket is $600 ($18). The bus and the regular train each take about five hours to travel from Taipei to Kaohsiung, although the buses can be slower if traffic is heavy.
The High-Speed Rail opened in January with limited operations, and has been steadily increasing frequencies since its opening, according to Samuel Lin, THSRC deputy chief operation officer. Service began in January with 19 frequencies per day; on March 31, it increased to 25 frequencies per day; on June 1 it increased to 31 per day, then 37 on July 27, and 46 frequencies per day on September 14. By the first quarter of 2008, the rail will operate 88 times per day. The system is further expandable if demand requires. The 88 frequencies per day will use 30 12-car train sets, but the system can carry 54 train sets, which would boost operations to 120 frequencies per day.
The train appeals to three kinds of travelers, said Lin. "Generally speaking, number one are passengers who are doing one-day business trips. Number two are people visiting their friends and relatives, and number three, a market that was induced with the launch of high-speed rail service, are the travel agents who have established one-day tour packages."
The new bullet train has generated new tourist traffic because it passes through holiday destinations like Tainan, a historic city filled with temples and traditional food, and the seaside city of Kaohsiung, and it also passes through the gateways to attractions like Yu Shan National Park and Kenting National Park. The High-Speed Rail also hopes to attract same-day commuter traffic, but that market segment has not yet materialized, said Lin, because the services are not yet frequent enough.
The number of riders has been increasing with the frequencies. Currently, the rail has a 50% load factor on weekdays and a 60% load on weekends. "Generally speaking, in terms of the number of trains we operate and the number of passengers we serve, the growth has met our expectations," said Lin. The break-even point, he said, is a 60% load factor at a frequency of 88 trains per day.
However, according to Tsai, it may prove difficult for the rail to attract that many passengers. "That (break-even load factor) will be quite challenging to achieve, because if you increase your capacity and also expect the load factor to remain the same as it is currently, that means you have to find new customers. Given the current economic environment, I don't think that will be easy."
A High Price Tag
At a price tag of $15 billion, which works out to US$43.5 million per kilometer of track, the rail was very expensive to build for several reasons. First, unlike some other high-speed systems, the entire line is new, rather than simply laid over an existing train line, which sharply raised construction costs. Second, the THSRC switched its core systems supplier three years into the project, changing from the Eurotrain Consortium to the Taiwan Shinkansen Consortium of Japan in 2000, for reasons that appeared to be more political than economic. The THSRC eventually had to pay US$70 million in damages to Eurotrain, and the switch slowed the project considerably.
Another variable that increased the construction price was the rugged, hilly terrain of western Taiwan. The cheapest available land was inland, farther from the cities and factories on the West coast, but closer to the mountains. Because high-speed trains operate best in straight lines, the hilly topography required long stretches of elevated track and many tunnels. Altogether, the line has 48 tunnels, including one that is 7.5 km long, and in all, 62 km of track, or 18% of the total length, is underground. Meanwhile, 73% of the line is elevated, held aloft by 30,000 massive concrete supports, which makes the Taiwan high-speed rail the longest continuously elevated railway in the world. In all, just 9% of the track was built on the ground.
The percentage of cheaper, on-the-ground track could have been increased, but elevated track has its advantages: The train doesn't stop traffic, the way normal trains often do, while farmers beneath the tracks have access to their fields and village life is not disrupted.
The THSRC also spent lavishly on train stations. Eight stations are currently open, with four more either under construction or in planning. In Taipei, the high-speed rail shares a station with the Taiwan Railway Administration, and in Nangang and Banciao and Taoyuan, the stations are underground. Elsewhere, the stations are elevated and all of them feature automated ticket machines. Information desks are staffed by helpful multilingual employees.
Many of the stations are beautifully designed, and several have won architecture awards. Hsinchu station, for example, was designed to resemble a traditional Hakka dwelling (Hsinchu has a large Hakka population), while the Tainan station features a beautiful design with tubular steel supports, floor-to-ceiling glass walls, see-through elevators, and red and black decorative highlights. The Chiayi and Taichung stations, among others, are similarly eye-catching, and expensive. In Japan, by contrast, the bullet train stations are strictly functional.
The THSRC splurged on the stations for two reasons, said Lin. First, they are designed to carry high volumes of traffic, and they won't reach their capacity limits for at least 25 years. In addition, the THSRC wanted the stations to be attractive. "Of course, we always try to control our budgeting for everything, including the stations," he noted. "But to build a station for the high-speed rail service, our philosophy was that we would make the design and utility of the stations match the image of the high-speed rail service."
The stations also generate revenue, with Starbucks, Mos Burger and 7-Eleven stores featured in most of the stations. "The percentage of revenue (from the stations) is quite low; 98% is from fares while only 2% is non fare revenue," said Lin. "That 2% is from franchise stores in the stations, and second, from advertising in the stations and on the trains." The THSRC also has the rights to construct and operate commercial developments on the land near the stations for 50 years, he added, although that is not yet a significant source of revenue.
The Business Case
Pleasant, affordable and efficient though it is for passengers, the THSRC also aims to turn a profit from the system, and it has just 26 more years to do so. Although it is a private company, the THSRC operates the rail under a BOT contract: It built the rail and will own and operate it until 2033, when ownership will be transferred to the Taiwan government.
The idea behind a BOT project is that a private company is a more efficient manager than a government would be. In addition, according to Lin, the BOT setup was an effective option that reduced construction time. "Because we completed this project under the private sector, we were able to expedite the construction schedule based on our own plans, rather than under the constraints of the government budgeting process," he said. "Yes, we did receive a lot of support from the government under the BOT contract, and they did help us remove obstacles in terms of the land required, the environmental [concerns], issues with the local population during the construction and so on. But we had to make the finance plan independently."
Funding for the rail came from two main sources: Shareholder equity accounted for 20% while the rest was borrowed, mostly from local banking groups, said THSRC senior manager Maggie Tseng, who is an expert in finance. However, the loans were arranged so that the repayment schedule suits the THSRC’s business model, with escalated repayment of the loans coming from future revenues. "The syndication loans are for 20 years, and the repayment schedule is not a straight line," said Tseng. "Starting from the first few years of operation, we pay a low percentage and then step up the amount, so it is quite in line with our fare expectations." The project would have been difficult without assistance from the island’s banks, added Tseng. "To make this project successful, we needed very strong support from local banks, and mostly they are government owned," she noted.
However, given the large amount of money that the THSRC borrowed, the company may have a tough time turning a profit. "When they built the project, the financial forecast was very optimistic," says Tsai of Moody's Taiwan Corp. "They underestimated the construction costs and they overestimated the ridership. And secondly, the Taiwan economy is not as good as the original forecasts. That's the problem right now." With just 23 million people, Taiwan has a much smaller population than Japan, Europe and other places with high-speed rail networks.
For other countries that are currently building or planning high-speed rails of their own, Lin has this advice. "It required a lot of expertise to finish this project, and what we learned is that we made it happen, and successfully completed the construction, because we invited (overseas) experts to join our project in Taiwan rather than hiring local engineers," he said.
Many of those experts, including civil, electrical and mechanical engineers, are now free to work on projects elsewhere. "Upon completion of this project in Taiwan, those international experts are available in the job market," noted Lin. "So their expertise, plus their hands-on experience, is a very valuable resource for any other country that is interested in a high speed rail project."
Because the government has set an upper limit on ticket prices, the solvency of the THSRC means little to the growing number of passengers who are using it. For them, the new bullet train provides an unparalleled travel experience. The Shinkansen 700T trains and carriages, made by Kawasaki and other Japanese companies, feature excellent views from broad picture windows. The trains whistle around cambered corners, slip in and out of tunnels, and soar above the rivers and factories of western Taiwan. Even at top speed, the train makes very little noise, and it delivers customers to their destinations on time at an affordable price. Ask any passenger, and they will tell you the same thing: The new rail is an excellent travel experience and a worthy addition to the already-excellent infrastructure of Taiwan.