It’s well established that infrastructure development correlates positively with economic growth.
So it should come as little surprise that the island nation of Taiwan – which together with Hong-Kong, Singapore and South Korea is known as one of the four Asian tigers for its strong economic growth – has recently decided to put infrastructure development at the heart of its plans to sustain high growth rates over the next eight years.
With the International Monetary Fund having predicted in April this year that Taiwan was on track to record real economic growth of 6.5 percent in 2010, the nation, which has a population of 23 million, is set to outpace its three Asian tiger rivals.
Future growth prospects have also been given a significant boost by a historic bilateral trade agreement signed with its bigger neighbour, China. Inked at the end of June, the Economic Co-operation Framework Agreement (ECFA) removes tariffs on hundreds of products and is set to boost a bilateral trade between the two nations that already reaches some $110 billion annually.
While it’s logical to hear Taiwanese president Ma Ying-Jeou remark that Taiwan needs to upgrade its infrastructure to international standards in order to spur the island’s competitiveness and complement its impressive economic characteristics, it is perhaps not so well known that it plans to leverage the private sector to pay for a significant amount of its planned infrastructure development.
In fact, you might be surprised to learn that the Asian tiger intends to spend $124 billion to revamp its infrastructure over the next eight years and wants the private sector to help fund 30 percent of that amount. Or that several government agencies are already actively discussing how to use public-private partnerships (PPPs) to carry out Taiwan’s public works programme.
Christina Liu, the minister of Taiwan’s Council for Economic Development, concedes that “maybe not enough people know about” Taiwan’s infrastructure plans but counters that the government is working to raise awareness about its plans over the next year.
This education process will introduce them to i-Taiwan Infrastructure Projects, one of the key platforms of president Ying-Jeou’s 2008 presidential campaign, which revolves around 12 key infrastructure projects encompassing everything from transportation links to government accommodation, water and wastewater projects, as well as renewable energy.
These 12 projects, Liu clarifies, are not really “12 standalone projects but refer to bundles in different sectors, so there will be hundreds of projects,” many of them set to be procured as PPPs.
The decision to use PPPs arose from a mix of budgetary concern and a desire to attract the greater efficiency the private sector is considered to bring to infrastructure development.
“Currently, our budget is not bad at all,” Liu says. “Our debt-to-GDP ratio stands at 37 percent, which is low by international standards, but by law we cannot exceed a 48 percent debt-to-GDP ratio, so it is better to have private sector participation [for infrastructure]. Also, we are aware that the private sector brings greater efficiency to infrastructure building and managing,” she adds.
Taiwan has used PPPs in the past, and is home to the world’s largest build-operate-transfer (BOT) rail project – a $15 billion high-speed rail (HSR) line connecting the entire island over 345 kilometres of track.
That project was a learning experience, explains Liu: “When we did the [HSR] project, some people weren’t satisfied with the procedure. They felt the government helped the winning consortium too much. But after it was completed, and now that it’s running well, people became more accepting of that issue.”
Samuel Lin, deputy chief operating officer of THSRC, the consortium that won the contract, acknowledges the government’s help: “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 acquired, the environmental concerns, issues with the local population during construction and so on,” he admitted in an interview with a local newspaper.
But while popular sentiment might have been against the government’s helping hand, investors today are still concerned with some of the issues Lin refers to. Land acquisition, in particular, can be especially slow in Taiwan, sometimes taking years to complete the whole process.
Liu is aware that some of Taiwan’s bureaucracy may be an obstacle, but promises the government is “planning to do all we can to speed up land acquisition and encourage people to invest. Some of the land in Taiwan is government-owned but most of the land is in private hands, and in these cases the local governments will also help facilitate the process,” she said. Liu also pledges the government’s support to help accelerate procurement of the necessary environmental permits.
Above all, Liu wants to emphasise to potential investors that the government will be flexible in its approach to PPPs. This will apply not only to land acquisition but also to other issues such as risk mitigation or government guarantees for infrastructure projects.
“There are all sorts of possibilities and we are open to discussing projects on a case-by-case approach,” Liu says, adding that “our PPP law is very flexible and allows for different structures to the BOT model we have been using.”
That flexibility was highlighted by Fan Liang-Shiow, minister of Taiwan’s Public Construction Commission (PCC), in a recent interview, in which he explains the PCC’s financial assistance programme to lower risk for banks wanting to lend to infrastructure.
The programme calls for government agencies, banks and private organisations to sign a three-way contract to guarantee banks’ creditor rights and implement a mechanism for controlling the proper use of funds for projects.
That should make infrastructure lending even more attractive for a local debt market that, according to Liu, is already keen to invest in the asset class: “We really welcome foreign companies to come here and borrow funds from here. We have a huge supply of capital so interest rates are quite low – about 1.3 percent. A significant part of these funds are in private banks but we also have a lot of excess supply of savings and our insurance companies have accumulated a lot of funds they would like to invest,” Liu said.
Taiwan’s island-wide HSR line seems to attest to the robustness of the local bank market, with Maggie Tseng, a senior manager at THSRC, saying in a local interview the consortium borrowed 80 percent of the project’s cost, or $12 billion, from local banking groups.
With a stable and flexible PPP law and a well capitalised debt market, Taiwan may prove appealing to investors thinking of targeting Asian infrastructure, but somewhat reluctant to tackle some of the risks that many of the continent’s less developed nations carry.
Now the challenge is to spread the word on Taiwan’s infrastructure plans and divert attention from some of its more high-profile neighbours, like India.
“We plan to do that within the next half-year, with road shows scheduled for Japan and the US,” Liu says, adding: “Over the course of the next year, people will know more about us.”