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When Japanese bullet train flopped in Taiwan: Lessons for India?

After seven years of running, it teetered on the verge of bankruptcy. The Taiwan government had to bail it out of the crisis with nearly $1 billion of public money.

ET Online|
Sep 18, 2017, 04.42 PM IST
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NEW DELHI: Bullet trains are not a hit everywhere. While a debate is raging over viability of India's bullet train project which was inaugurated by Prime Minister Narendra Modi and Japanese Prime Minister Shinzo Abe last week, it would be worthwhile to know how bullet train fared in Taiwan. It flopped, actually.

A consortium of private Taiwanese companies started the project in early nineties. In 2007, it ran the bullet train which was based on the Japanese Shinkansen technology, the same that India will use. The project cost $14.3 billion. Seven years later, in 2014, the government hinted that the rail operator could go bankrupt. Cumulative losses stood at 46.6 billion New Taiwan dollars or roughly $1.5 billion. Since it was an important piece of public infrastructure which had to be rescued, the Taiwanese government bailed it out next year by injecting nearly $1 billion of public money which reduced the operator's share by 60 per cent.

The private companies were building the bullet train under the 'build, operate and transfer' model. They had to hand it over to the government in 2033. But the government bailout put off the transition to 2068.

What went wrong?
Depreciation and interest payments weighed heavily on the company, making it difficult to erase losses that built up over time, according to a report in Nikkei Asian Review. The cost and ridership estimates too had gone awry. The forecast was of 240,000 passengers a day in 2008. In 2015, daily traffic was less than 140,000 passengers, barely half the initial estimate. Taiwan's low economic growth, which was probably not reckoned earlier, also impacted the project.

The company had to cut fares in exchange for the bailout, which was not seen to be helping its balance sheets. About a year later, it opened three new stations. This move too was criticised for weighing down on its financial condition.

What worked against Taiwanese bullet train
1) Ridership
After seven years of operation, the ridership was almost half of what was initially estimated.

2) Interest and depreciation costs
High interest and depreciation costs put a pressure on the finances of the project.

3) Cost overrun
Taiwanese bullet train came at an expensive price tag of $14.3 billion. The train passes through rugged, hilly terrain where construction becomes costlier. Most of it had to be built on an elevated track.

4) Low economic growth
Just after the bullet train was launched in 2007, Taiwan faced one of its worst phases of economic growth. Such a big public infrastructure project could not remain unaffected by the overall economic slump.

India's bullet train project, which is funded nearly 80% by Japan at a 0.1% interest with a moratorium of 15 years, cannot be compared to the Taiwanese project. Unlike the Taiwanese project, ridership will not be a challenge for bullet train as the Ahmedabad-Mumbai stretch is dotted with dense industrial and commercial area. Interest payment too should not be a big problem as the Japanese loan will start after 15 years and the rate too is quite low.

However, cost overruns could be a problem for India's bullet train too because such a large construction project spread over a long period can face various challenges. Cost overrun can also lead to higher ticket prices which would impact ridership.

As it happened in Taiwan, India's overall economic climate will certainly impact the bullet train. A resurgent economy will support the project but sliding economic growth will hit its viability.
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