Rent dissipation in high-speed rail construction in China and Taiwan

3.1 The market as an allocative device

The market allows people with different beliefs, values and income to exchange their goods or services at mutually agreeable prices [1, p.50]. It operates “within a framework of law which recognizes individual rights to private property” and allows the exchange of rights to services and goods [36, p.14]. If, for any reason, property rights to resources in the market are not clearly defined, then the transactions will be impeded and result in rent dissipation.

Free market is arguably the most efficient way to allocate resources [2]. In the market, money judges and measures the contribution of each individual. The market directs the efforts of market participants into those channels in which they best serve the wants of their fellow people. The market operates peacefully, without compulsion and coercion [46]. All other criteria of the allocation of resources involve rent dissipation. For example, the allocation of resources by queuing or ‘first come first serves basis’ renders a waste of time in lining up, which brings no benefit to anyone. The queuing time implies rent dissipation [13]. Other criteria such as violence, rank or seniority, personal relationship provide no benefit to the society. Rent is dissipated during the process of non-market competition.

3.2 Problems of using the market to build a high-speed train

If we rely on the market (without the government at all) to build a high-speed train, huge transaction costs will be involved. Assume that some people in the community foresee that there is a need to build a high-speed train. People who do not use the service will show no interest at all. Some people may hide their preference and attempt to be a free rider in the future. Those who feel the need to use the train will gather to discuss the issue. However, without a central coordinator, planning would never realize. Assume that there is a volunteer leader to initiate the planning. The costs of identifying the interested parties, meeting, negotiation and bargaining can be prohibitive. Furthermore, those who are interested in the project will have to share the high costs of production. As a result, they may feel better off to use the existing rail. We can imagine that using the market based on pure voluntary exchange, a high-speed train will not be built.

Assume further that in free market, a group of business people foresee that there is a profit (economic rent) from operating a high-speed train and want to form a consortium to build the rail. Risk and uncertainty may prohibit them to proceed. Lewis [41, p.182] states that “the private enterprise economy will be retarded if ... its businessmen are reluctant to take risks”. Suppose that an infrastructure consortium considers to construct a high-speed train system. The high fixed costs involved means that the project will be unprofitable in the absence of a huge demand of passengers. Yet if the train is built and service is supplied at low-enough prices, the demand for the train may increase substantially. Now the crucial question remains: can a firm, in deciding future ticket prices of the high-speed train, predict all the changes in the demand for services in the future? Given uncertainty, there is often no incentive for firms to initiate this project. Even if the consortium is extremely confident in its own insight into the construction of the high-speed rail, lenders may not be convinced to finance the project [33, p.65]. This is in fact associated with ‘dynamic transaction costs’ [39]. Hence, Schumpeter [51, p.88] argues that “long range investing under rapidly changing conditions, especially under conditions that change or may change at any moment under the impact of new commodities and technologies, is like shooting at a target that is not only indistinct but moving...”

If transaction cost is zero, the problem of risk and uncertainty associated with the construction of the high-speed train may be solved. Cheung [16] conceives that, without transaction costs, potential consumers of the high-speed rail can sign a forward contract with the firm. The contract shows the future ticket prices and the terms of use, etc. Based on the forward contracts, firms can then form a consortium to buy land and resettle residents in order to build the rail. The developer is willing to go ahead with the project because consumers already sign the forward contracts. The problem is that transaction cost is never zero in reality. It is impossible in reality to remove risk and uncertainty by signing forward contract with unidentified consumers. In short, transaction costs associated with uncertainty, knowledge and coordination problems suffocate the construction of the high-speed rail in the free market. As a result, despite yielding much economic rent to the community, high-speed rail will not be built. An alternative way to build the HSR may be used instead. Specifically, a central planner or government is called for to solve transaction costs problem.

3.3 Central planning under one-party autocratic state

In an economy with one-party autocratic state, a strong central planner replacing the market mechanism can save certain transaction costs. However, without the free market based on private property rights, massive rent dissipation will also occur. Hierarchical ranking as an allocative device emerges so to avoid full rent dissipation [15, p.249]. In other words, in an economy under one-party autocratic state, the rights to use the resources are defined by hierarchical ranking which in turn is determined by the party member’s seniority, family background, work experience, ideology and loyalty, etc. Accordingly, a senior comrade’s son is ranked higher than an ordinary citizen’s son and hence the former has better access to resources. The rights to the access of resources have nothing to do with whether the person is rich or intelligent. People living in a society with one-party autocratic state are simply not equal. Hence, it would be absurd to consider introducing a set of law because people under such a society are not equal before the law. An economy under one-party autocratic state functions according to the party’s discipline - another type of rules of game – but not the judicial system [15].

In an economy with one-party autocratic state, the construction of the high-speed rail is decided by party leaders on the behalf of the people. An autocratic but competent government will construct a project based on both private and public interests. However, a vampire state will construct the project according to the leader’s own desire and greed, but at the expense of the people. Cheung [12] remarks that an autocratic but competent government is the most desirable model for economic growth in the sense that transaction costs of building a public project are the lowest. For example, under Chiang Ching Kuo’s ruling, Taiwan had an autocratic but competent government [12, p.84]. At that time, Taiwan experienced impressive economic growth. Likewise, colonial Hong Kong essentially lacked political freedom under British rule. Hong Kong was referred by Harris [31, pp.9, 11] as “administrative no-party state”. The colony was best known by its former financial secretary, Sir John Cowperthwaite who managed Hong Kong’s economic affairs in absolute authority. Together with a team of competent civil servants, Hong Kong charted into one of the East Asian miracles in the 1960s [62, pp.137-141].

However, economic miracles in Taiwan and Hong Kong bestowed by competent governments can only be God-gifted. On the contrary, if a vampire leader took control of Taiwan and Hong Kong, the two island economies would end up in economic disaster. It may need a revolution to remove a corrupted government, resulting in extremely high costs.

3.4 Representative democracy

In a democratic society, a representative government is elected by people through voting. Voting directs resource usage. Voting unavoidably leads to the violation of private property rights. As Cheung [15, p.247] explains, “without a well-defined and well-enforced constitution, voting would merely become a means of destroying the private property system”. For example, if we suggest using voting to determine whether rent control should be implemented in a city, it is most likely that rent control bill will be passed because there are more tenants than landlords. Hence, the property rights of house owners will be deprived. This is the case of “tyranny of the majority without the protection of the minority”. Unfortunately, if we “allow a few individuals to be sacrificed for the good of more individuals, then eventually the majority will be sacrificed” [15].

An elected government in a truly democratic society with constitutional liberalism does not have the absolute authority nor power in determining a public project. The government is elected by people and its behavior and policy decision are subjected to voters’ preferences. In the construction of a public project, if the elected government does not comply with the preference of majority voters, it will lose its popularity and will be replaced by the opposition party in the next election. As Anderson [4, p.50] notes, “voting allows democracies to mete out decisions in the face of conflicting perspectives. Majority rule caters to the desires of the greatest numbers; unanimity adds gratifying consensus.” Having said that, Zakaria [64, pp.22-43] argues that in an illiberal democratic regime, though regular elections are conducted, media are in fact controlled by the state. The ruling party may use red tape, economic pressure or imprisonment against its critics. Lack of freedom of speech and freedom of assembly make opposition extremely difficult. For example, for many political analysts, Taiwan “epitomizes the success of democracy in Asia” [10]. However, it must be pointed out that in Taiwan, the iron rectangle of the state (i.e., congressional committee, the bureaucracy and the interested groups), the ruling party, local factions, and conglomerates have dominated Taiwan’s political economy at the expense of distributional equality and economic efficiency [38, pp.85-111].

Though the emergence of the elected government can reduce transaction costs that cannot be otherwise achieved in the pure market economy, resource allocation via representative democracy renders huge transaction costs in policy making. Obviously, it is more difficult to get things done through general voting compared to the decision made by rulers with absolute power. In the former, it needs more time, money and effort to reach a decision. However, the result isn’t always the best because it is a compromise among the preferences of citizens, all of which have to be treated with respect and equal. With divergent views, a decision has to take into account at least those views that have majority support. In some cases, divergent views can even mean incompatibility, ending in a deadlock [55].

Furthermore, benefits arising from the public project cannot be accrued to individual government officials in the representative democratic economy. To avoid rent dissipation, government officials use every means to capture those benefits left in the public domain. They can reap non-pecuniary benefits such as holiday, luxurious overseas visit, patronage, personal image and even money benefit from corruption or bribery.

4.1 Time required in making a decision

In China, decision making on a gigantic public project is not determined by one person. It involves a circle of trusted comrades, provincial officers, bureaucratic units, engineering expertise, consultants, professional teams, etc. Each party reports and advises to the central leaders or senior party members concerned. Compared to representative democracy, an authoritative state initiates fewer consultancy reports. There is no long process of public consultation and voting. Taking Donghai Bridge in Shanghai as an example, during the years of planning, structural design and financial calculation, each level of government approved the project with a rubber stamp and the project was started as quickly as it could be. Such efficiency could only be done in China [16].

Decision making for a public project in a representative democracy such as Taiwan is more complicated and requires longer time. Cheung [16] reports that Toronto (Canada) planned to build a cultural recreational center with its size smaller than the Donghai Bridge. After 10 years of planning, the project was still not implemented. Similarly, in the United States, local citizens planned to build a highway. It went through several years of debates with respect to environmental issues, acquisition of lands, etc. After nearly a decade of hassles, the project was finally put in construction. Unfortunately, the progress was further blocked by the labor union and pressure groups. The disputes were brought into the court for settlement. As a result, the construction costs inflated tremendously. Without sufficient funding, the design of the highway was modified. Eventually, the project was laid idle and the half-finished structure was hung in the sky like a modern sculpture. The story testifies the problems of voting as a resource allocative mechanism [16].

Reduction in time for decision-making of a public project means saving in transaction costs. In this article, we shall compare high-speed rails in China and Taiwan in terms of time spent on planning, design and construction.

4.2 The chance of committing errors

We argue that decision making in one-party autocratic state is quicker and less complicated than in a voting economy. It then comes to the crucial issue of committing errors. Error in this regard is referred to as error in decision making, rather than “the failure due to corruption”. This article attempts to examine whether the public project is found to be worthwhile after it is built. In other words, in which economy, China or Taiwan, the leaders are more liable to make error.

Cheung [16] argues that government spending on the public school in the United States was the result of public voting in the community. In his view, money wasted on American public schools is much larger than money wasted on Shanghai Maglev Train. The decision making in the American economy is governed by votes, not by consumer sovereignty as in free market. If voting by money, consumers immediately feel the pleasure and pain of each dollar spent on the commodity. Hence, they will count every dollar very carefully and wisely. On the other hand, in the voting system, money spent on public goods does not directly come from consumers’ wallets. Through voting, citizens wish to transfer benefits from other people to their own. The cost of a public project is not as obvious and direct. In addition, citizens’ decisions can be easily misguided and aroused by interest groups or political parties. As a result, voters cannot carefully evaluate each dollar spent on the public project. Flawed decision on a public project may occur, ending in the so-called “a white elephant” which cannot be disposed of but the maintenance cost of it is out of proportion to its usefulness.

In China, there is, of course, a chance for party leaders to commit errors. Given uncertainty, no one can effectively anticipate the future. When facing uncertainty, party leaders, just like any private businessperson, rely on instinct, common sense or intuition. They bet on their judgments. Due to uncertainty, judgments can be erroneous [37]. If a public project is correctly judged, then the party leaders will provide the nation with a productive infrastructure. If not, they will commit errors. In short, we argue that it is inevitable for leaders in China to make errors. However, Cheung [16] argues that party leaders in China exhibit a smaller chance of making errors than public officials in Taiwan. Decision making in China is largely confined to a small number of party members. Policy making is not influenced by voters, opposition leaders nor political parties. Party members need not compromise with interest groups and political parties. Using “the chance of making less error” as a criterion for comparison, Cheung [15] then asserts that leaders in China tend to make less error than those in Taiwan.

Having said that, in one-party autocratic state, when decision making of a large public project lies in the hands of a small number of policy makers who are ignorant in the construction of the infrastructure, then the outcome could be catastrophic. This is the case of Chairman Mao Zedong who knew little about economics but single-handedly called for radical economic reforms in China via the ‘Great Leap Forward’ and the ‘Cultural Revolution’, ending in human disasters. On the other hand, in the society with elected government, though there are plenty of hassles during the process of decision making, the final outcome goes through a lot of debates by politicians, interest groups, experts and bureaucratic officers. The outcome, though it may be second-best or third-best, will still be preferable to Mao’s case.

After all, Cheung [16] concludes that economic judgment made in both China and Taiwan cannot be compared to the market mechanism, in which money directly measures the cost a person pays and benefit received. It is the most precise tool in measuring people’s preferences among the three types of allocative methods.

In this article, we shall investigate whether the high-speed rails in China and Taiwan become “white elephants” after they were launched. In order to do so, we shall compare the ridership, annual revenue, capital costs and net profit of both rails.

4.3 Capturing economic rent through corruption

Public officials in both China and Taiwan have the incentives to capture economic rent left in the public domain through cheating or corruption. Monitoring the performance of public agents in both regimes renders high transaction costs. In China, corruption is widespread and systemic. In 2013, China was ranked 80th out of 178 countries by Corruption Perceptions Index and more than 160,000 Communist Party officials were punished for convicting corruption [54].

On the other hand, although Taiwan shows poorer anti-corruption campaign than Singapore and Hong Kong, Taiwan was ranked 36th out of 178 countries by Corruption Perceptions Index in 2013 [54]. Top public officials in Taiwan were frequently reported of committing corruption. In 2010, former President Chen Shui-bian and his wife were sentenced 20 years in jail for bribery and money laundering. Shortly afterwards, three High Court judges were alleged of accepting bribes to clear corruption charges of a former Kuomintang legislator. Apart from the high-profile incidents, hundreds of alleged corruption cases were also reported in public sectors, including the judiciary, healthcare sector, police force and government procurement [29].

Cheung [15] argues that corruption is widespread in China, but not as bad as in most of the so-called ‘democratic’ countries in Asia such as India, South Korea and Thailand. Furthermore, in Cheung’s view [17], corruption is pervasive for sons and daughters of some high cadres but not amongst those on top in China. The reason is, in Cheung view [17, p.94], “to the top leaders, the cost of corruption is lower with democracy but higher in a dictatorial state. Power itself is an economic good. Corruption may bring an end to power. In a democratic state, power is transient, and therefore its leaders have less to lose if bribery is found. In a dictatorial state, power may last a lifetime – thus a higher corruption cost to its leaders”. He illustrates his argument with the Asian experience. He said, “In voting societies in Asia corruption is from the top down, whereas in dictatorships corruption is from the bottom up. Corruption in China, though still widespread, has not reached the top level” [17, p.94]. Cheung’s view consists of some insights. However, he overlooks the point that China lacks an independent anti-corruption agency to monitor the top leadership. Top leaders in China may also involve in corruption but in a subtle manner. It is reported that close relatives of China’s top leaders registered offshore companies based in tax havens to cover the Communist elite’s wealth [8].

For top leaders in China, corruption undermines the legitimacy of the party leadership, intensifies economic inequality, jeopardizes the environment and fuels social unrest. Using the Tiananmen protest movement of 1989 as an example, Sun [57] argues that social dissatisfaction in China was caused by corruption. However, anti-corruption campaign in China is only a mean, not an end. In other words, it is a mean of power struggle. The punishment of corruption is severe, ranging from expulsion from the party, property confiscation, life imprisonment and/or even death sentence. In Taiwan, punishments for top leaders who commit corruption may lead to loss of job, jail sentence or the confiscation of property. Death sentence due to corruption is seldom executed in Taiwan in particular and many Asian economies in general.

In China, the high-speed rail corporation is owned by the state. It opens plenty of opportunities for public agents to cheat and behave opportunistically. In Taiwan, the construction of the high-speed rail was first handled by the private company, but later was taken over and operated by the government due to heavy debt of the rail (see below). The costs of corruption and bribery, in the forms of inefficiency and poor service, will be borne by the general public. In this study, we shall compare the scale of corruption and bribery involving in the construction of the two rails, the number of corruption cases reported, amount of money (bribe) involved and ranks of officers prosecuted and sacked.

4.4 Capturing economic rent through deteriorating the quality of works

In a private market economy, a gigantic public project is owned by a private consortium. Private property rights ensure that the quality of work of the project is built up to minimum safety requirements. Serious testing is conducted before the project is put in service. If the project is publicly owned (i.e., no one owns the project), there is an incentive for public officials to capture the economic rent in the public domain. This can be done either by embezzlement or deteriorating the quality of works such as using inferior materials, cutting down construction materials, employing unqualified workers, lazy in checking or monitoring the performance of the project. This phenomenon occurs whenever the projects are publicly owned and operated.

However, there is one major difference between China and Taiwan in monitoring misconduct. In China, the wrongdoing is checked by the party rules and codes, not by the law. In many cases, the wrongdoing is tolerated. If substandard work is found, party members in charge often end up in moderate penalty such as temporary suspension of job. In Taiwan, any move or policy implementation made by public officials is checked by the opposition party. In the case of pseudo democracy where media are controlled by the state and the regime may use all means including violence against its critics, the opposition power is seriously restricted. In this article, we compare the accidents and malfunctions reported in the two rails after they were launched.

5.1 China’s Beijing–Shanghai (Jinghu) High-speed Rail

The Beijing–Shanghai HSR is a 1,318 km long rail that links two economic zones, namely the Bohai and Yangtze River Delta Economic Rims. There are 24 stations, including Tianjin, Jinan, Xuzhou, Bengbu and Nanjing. The journey takes around 4 hours and 48 minutes between Beijing South and Shanghai [6]. In 2006, it was estimated that the HSR would cost between 130 and 170 billion Yuan (US$16.25–21.25 billion) to build. By July 2008, the cost was revised upward to 220 billion Yuan (US$32 billion) [68]. The state-owned company of the Beijing–Shanghai High-speed Railway was responsible to raise funds for the HSR project. It had successfully raised 110 billion Yuan, with the remaining amount to be funded from local governments, share offerings, bank loans and foreign investment. The total investment in the project was 217.6 billion Yuan (US$34.7 billion) [45]. The Beijing–Shanghai High-Speed Railway Co. Ltd. was in charge of the construction. The rail was put in service in 2011.

5.2 Taiwan’s High-speed Rail

Taiwan’s HSR is approximately 345 km long on the west coast of Taiwan, from Taipei in the north to Kaohsiung in the south, reaching almost 90% of Taiwan’s population. The rail covers the whole journey within 96 minutes at a maximum speed of 300 km per hour. The total construction cost was estimated at US$18 billion [32]. At first, the government of Taiwan attempted to build the rail on the private funds but failed. Eventually, the government took up the full responsibility of the rail in ‘Build, Operate and Transfer’ (BOT) scheme. The rail mainly adopted Japan’s Shinkansen technology.

Since the project was launched, problems and uncertainties in budget, compatibility, safety and actual usage of the system have occurred. Technological constraints also delayed the inauguration of the rail until January 2007 [32].

As mentioned, this article attempts to show how people in China and Taiwan minimize economic waste or capture maximum rents in the public domain. It will compare HSRs in China and Taiwan in terms of the time spent on decision, implementation and production, error in decision making, scale of corruption and bribery, and the quality of works.

6.1 Planning and construction time for the Beijing–Shanghai HSR

In 1978, Deng Xiaoping visited Japan. He was arranged to take Shinkansen train with the speed up to 270 km per hour. After the ride, Deng commented that China needed to speed up its rail transport [23, p.193]. In 1986, Song Jian of State Scientific and Technological Commission (PRC) started a research on maglev train at National University of Defense Technology (PRC). Due to the lack of funding, the research was terminated.

In December 1990, the Ministry of Railways proposed to the National People’s Congress for building a HSR in parallel with old Beijing-Shanghai railway line. In 1995, the project was put into the 9th Five Year Plan (1996–2000). The Ministry of Railways completed a blueprint of the HSR line and submitted for state approval in June 1998. The construction plan was set in 2004.

The construction work began on 18 April 2008. Rail track-laying was begun in July 2010 and finished in November 2010 [50]. The installation of overhead electric system was completed in February 2011. When a trial run was held on 3 December 2010, a 6-car trainset ran at a speed record of 486.4 km/hour on the Zaozhuang West to Bengbu section [52]. On 10 January 2011, another 16-car trainset broke a speed record of 487.3 km/hour during a test run. The train started its service on 24 June 2011 [50].

If we consider 1990 as the year of proposing the Beijing–Shanghai HSR and 2011 as its completion year, then it takes China 21 years to build the rail. We summarize the time required to construct the HSR as follows:

From proposal (1990) to work commencement (2008), it takes 18 years.

6.2 Planning and construction time for HSR in Taiwan

The idea of building a new high-speed rail in Taiwan came up in 1973, and informal planning began in 1980 [5]. In 1987, the Executive Yuan (the executive branch of the government of Taiwan) told the Ministry of Transportation to initiate a feasibility study for a high-speed rail network in the west coast of Taiwan [23, p.189]. The feasibility study was completed in 1990. Accordingly, compared with other solutions to traffic problems in the west coast of Taiwan, a high-speed rail would increase transit volume and improve energy efficiency but reduce land use and pollution. The Preparation Office of High Speed Rail (POHSR) was established in July 1990. The rail network was selected in 1991. The HSR project was subsequently approved by the Executive Yuan and the Legislative Yuan in June 1992 and 1993 consecutively. In 1995, the Bureau of High Speed Rail (BOHSR) replaced POHSR and started to tender high-speed rail as a build-operate-transfer (BOT) scheme in 1996.

Taiwan High Speed Rail Consortium (THSRC) and the Chunghwa High Speed Rail Consortium (CHSRC) were the two consortiums in the bidding process. THSRC’s bid was based on the high-speed rail technology platform of Eurotrain, the main maker of the French TGV, and Siemens, while CHSRC’s bid was based on Japanese Shinkansen technology supplied by Taiwan Shinkansen Consortium (TSC), a joint venture of Japanese companies. THSRC was chosen as preferred bidder in September 1997. The BOT agreement of the HSR was finally endorsed by THSRC and the government on 23 July 1998.

However, in May 1999, THSRC faced difficulties in raising capital. The government of Japan agreed to provide loans if THSRC switched to the Taiwan Shinkansen Corporation (TSC). Although Eurotrain agreed to match TSC’s financial offerings, ultimately TSC was selected as the preferred rolling-stock supplier in December 1999. Eurotrain filed for a US$800 million damage claim against THSRC at the Singapore International Arbitration Centre. After a lengthy arbitration process, the court ruled in March 2004 that THSRC should pay a compensation for US$32.4 million Eurotrain spent on development and US$35.7 million for unjust enrichment. THSRC agreed to pay US$89 million with interest to Eurotrain in November 2004 [58].

The construction of HSR in Taiwan commenced on 1 March 2000 and the rail started operation on 5 January 2007 [23, pp.189-190]. The timeline of the construction of the Taiwan HSR is summarized as below:

1980: informal planning

Hence, we summarize the construction time for Taiwan HSR as follows:

From proposal (1987) to the government approval (1992), it takes 5 years;

As a comparison, from proposal to work commencement, China took longer years than Taiwan (18 years in China vs 13 years in Taiwan). However, China performs better in the construction speed than Taiwan. It can be calculated as follows: The length of the Beijing-Shanghai HSR is 1,318 km and the construction time is 3 years. Therefore, in China, it was able to build 440 km in one year. The length of Taiwan HSR is 345 km. It takes 7 years to complete. Hence, in Taiwan, it was able to complete 49 km a year. China has better performance in the construction speed than Taiwan because China saves time in environmental debate and land acquisition process. Absolute authority can avoid delays.

7.1 Train fare, ridership and profitability in the Jinghu HSR

On June 24, 2011, the first day of the Jinghu HSR service, tickets were sold out within an hour. To compete with the new train service, airline companies cut the airfares between Beijing and Shanghai up to 65%. Economy airfares between Beijing and Shanghai fell by 52%. In the second week of the operation, there were three breakdowns in the HSR system in four days. As a result, air ticket prices rebounded. Airline ticket sales decreased 5% between June and July 2011. Moreover, two weeks after the service began, only 85.6% of trains arrived on time. The average daily ridership was 165,000 passengers while 80,000 passengers daily continued to take the slower and less expensive old railway. Daily riders of 165,000 was three-quarters of the original forecast of 220,000. By March 2013, the line was reported to carry 100 million passengers [20]. According to Xinhua News Agency [9], the Beijing-Shanghai HSR recorded a ticket sales totaled 17.4 billion Yuan and the line recorded a loss of 3.7 billion Yuan in 2012. However, in the third year of operation, the rail had profit for the first time because of a surge in passenger traffic. In 2014, it earned 30 billion Yuan (US$4.8 billion) from ticket sales, with an estimated net profit of 1.2 billion Yuan. More than 100 million passengers (or 27% increase from 2013 to 2014) travelled between Beijing and the coastal cities by the HSR. The project was forecasted to break even after five years of operation, but it reached that target earlier [9].

Such optimistic estimation raises doubt and speculation. According to Liu [43], the HSR’s high ridership and profit could be the result of what Zhang and Meng [65] refers to as “involuntary high-speed railway travel”. In other words, given that ticket prices of HSR are higher than those in traditional trains, if the number of traditional trains in some cities was reduced in order to boost HSR sales, then people may be forced to pay higher fare to take high-speed trains when traveling.

The traditional rail takes 13 hours between Beijing and Shanghai, with economy class priced at 179 Yuan. The Jinghu HSR takes 5 hours and 40 minutes only but the price of second class seat is 553 Yuan. So, it costs 53 Yuan for each hour saved. For an ordinary citizen working with a minimum wage of 10 Yuan, such extra spending on HSR seems a bit luxurious [43]. As soon as the Jinghu HSR started operating, the railway corporation cut 47 ordinary passenger trains from its timetable. Hence, travelers were ‘forced’ to take HSR. The effect of “involuntary high-speed railway travel” was at work. If the number of traditional train mode was not reduced, HSR might not compete with the traditional rail and could not realize a profit of 1.2 billion Yuan [43].

Furthermore, Liu [43] doubts whether the net revenue of 1.2 billion Yuan has taken into the account of capital finance and depreciation. If it is not included, then it is impossible to repay an investment of 220.9 billion Yuan in HSR, given a net revenue of only 1.2 billion Yuan a year. If a loan rate of 6 percent per annum is assumed, interest payment for 220.9 billion Yuan of loan is 13.3 billion Yuan. Obviously, a revenue of 1.2 billion Yuan is unable to cover the interest payment. In Liu’s view, even if we assume zero interest rate, with a net revenue of 1.2 billion Yuan, it will take 184 years to repay 220.9 billion Yuan, keeping in mind that the life span of a HSR is usually estimated at 80 years. Liu concludes that the Jinghu HSR realizing a net profit for the first time should not be taken too far [43]. If he is right, the HSR debt will be eventually paid by the government.

7.2 Ridership, seat occupancy and net income in Taiwan’s HSR

Since the high-speed rail in Taiwan went into service in 2007, ridership has never come close to expectation. The actual daily ridership falls short of the original estimate in the feasibility study [28].

Although daily ridership was estimated to increase from 180,000 to 400,000 between 2007 and 2036, the actual initial ridership was still smaller than the projections. In September 2007, six months after the opening, THSRC carried about 50,000 passengers daily [40]. The number of passengers showed a twofold increase in the second year and the average daily ridership grew to 88,000 passengers in the third year and over 120,000 passengers in 2012. Seat occupancy was around 45% in the first three years and reached 57% in 2014. On 1 January 2013, the daily ridership was 212,000 passengers [40, see Table 1 for annual figures].

In short, this study finds that ridership of both HSRs in China and Taiwan fall short of expectation. The revenue from ticket sales cannot cover capital and operating costs. As a result, both rails become white elephants and the financial loss will be eventually borne by the government.

8.1 Corruption and bribery in China’s HSR

Since there is no opposition party in China, corruption and bribery are prevalent. Corruption increases rail construction costs. The National Audit Office in China discovers financial irregularities amounting to 5 billion Yuan in the Beijing-Shanghai HSR [67].

In February 2011, Liu Zhijun, the Railway Minister who advocated rail expansion in China, was sacked for corruption [54]. He reportedly accepted 1 billion Yuan bribery (US$152 million) for railway construction projects [27]. He was alleged of misappropriation of another 187 million Yuan (US$28.5 million) from the Beijing–Shanghai HSR in 2010.

Zhang Shuguang, a top official of the Railways Ministry, was also fired after he was charged for accepting bribes from private Chinese firms bidding on the contracts for more than 11 years. He was reported of putting US$2.8 billion in Swiss and US banks, despite his job as a prefecture-level official with a monthly salary of 8,000 Yuan (US$1,220) [61]. He was reported of acting recklessly with “protective umbrella” provided by Liu Zhijun. According to Xinhua News Agency, Zhang was given a death sentence with a 2-year reprieve. Zhang’s prominent assistant, Su Shunhu, was sentenced to life in prison for taking 24 million Yuan in bribes [30].

On September 24, 2013, Ding Shumiao, a businesswoman, admitted in court that she offered bribes of 49 million Yuan to Liu Zhijun and 40 million Yuan to Fan Zengyu, former vice director of the State Council’s Poverty Relief Office, who helped 23 construction companies win contracts of 57 railway projects between 2007 and 2010. Ding earned illegal commission fee of more than 2 billion Yuan (US$484 million). On December 16, 2014, she was sentenced to 20 years in prison, fined 2.5 billion Yuan (US$404 million) and had 20 million Yuan personal property confiscated [53].

It goes without saying that corruption and bribery in China’s HSR are prevalent and systemic. In this article, these people tried to capture maximum economic rent in the economy where resource allocation is done by hierarchical rank.

8.2 Rent-seeking in Taiwan’s HSR

Unlike China, systemic corruption has not been found in connection with Taiwan’s HSR. In Taiwan, the ruling party is in close surveillance by the opposition party. However, this does not mean that capturing economic rent from Taiwan’s HSR project does not exist. It is only that rent capturing is not done directly by corruption or bribery but in different forms such as rent-seeking or prebendalism [44, p.14]. According to public choice theories, rent-seeking refers to the case that public officials get “rents” through granting a license or monopoly to their clients. In other words, it is an earning as a result of a restricted market. Prebendalism means that public and private business collaboration enables government officials to turn those enterprises into “resource banks” where interests can be drawn. Prebendal corruption needs not to be monetary gains but may include seizing official privilege, backdoor deals, clientelism, cronyism and nepotism. The huge debt in Taiwan’s HSR can be regarded as a result of rent-seeking.

Although benefits from building HSR, including reduction in commuting time and encouragement of regional development, were identified in the feasibility report in 1987, the Ministry of Finance of Taiwan foresaw that the construction would bring heavy fiscal burden and refused to allocate the budget to the project [32]. Instead, it adopted ‘Build, Operate, Transfer’ scheme. The government was responsible for providing financial support and concessions. The Bureau of High Speed Rail, previously called Preparatory Office of the High Speed Rail System, was granted a franchise to prepare, design, manage and supervise the HSR within a specific period of time. At the end of the concession period, the HSR will be transferred to the government.

Taiwan’s HSR began operating in 2007. At that time, THSRC projected that the number of passengers would reach 240,000 a day in 2008. However, in 2014, only a little more than 130,000 passengers used the train a day [42]. The construction cost of the HSR was NT$480 billion (US$15.09 billion). Heavy depreciation charges and interest burdens accounted to 95% of HSR’s accumulated debt [40]. To reduce its interest loan, THSRC sought to revise its loan structure in 2008 and 2009 to reduce depreciation costs by increasing the amortization time. It was put under new management in September 2009. Due to heavy financial losses, the government took over THSRC in November 2009. When THSRC realized an aggregate loss of more than NT$70 billion (or roughly two thirds of its capitalization) [42], it signed a government-guaranteed refinancing deal in which eight government-dominated banks provided NT$382 billion at lower interest rates and longer maturity. Under the new structure, the government became a majority shareholder in THSRC, but the HSR continued to be privately managed. Government-controlled companies increased their stake from 22.1% to 63.9%, while large private shareholders cut their holdings from 37.4% to 17.4%. THSRC reduced its capital by 60% or NT$39 billion to cover its losses before raising its capital by NT$30 billion. Of the NT$30 billion capital, NT$24 billion came from the government’s High-Speed Rail Construction Fund with banks providing the remainder. The operating concession for the project would also be extended from 30 to 70 years [66]. It can be seen that the government took up the whole HSR after the HSR was in near bankruptcy.

According to Yu and Johannesson [63, pp.14-22], major players in the HSR skillfully used HSR for their own interests. The two major players in the project were the Taiwan government and the original shareholders of the THSRC [Continental Engineering Corporation (CEC), Pacific Electric Wire and Cable Company (PEWC), Evergreen International Corporation (Evergreen), TECO Electric & Machinery Company (TECO Group), and Taipei Fubon Commercial Bank Company (TaipeiFubon)]. The two players were convinced and endorsed the export credit agencies or bank to provide turnkey financing.

First of all, the government should take major responsibility in making the HSR bear heavy debt burden [60]. It is likely that government officials were willing to be involved in the project, knowingly it might be a hoax. By doing so, many public officials or party leaders received benefits in the HSR project. Chi Ing, the former chair of the THSRC, admitted in September 2009 that the government overstated the estimates to make the railway more attractive to investors [60]. The Council of Economic Planning and Development (CEPD) also painted a rosy picture that the construction of the HSR network could create 480,000 jobs and contribute positively to economic growth [63, p.18], including property developments surrounding the train stations and depots.

The original shareholders of the THSRC also boosted the construction that the HSR could relieve traffic congestion, save energy and preserve the environment. They knew that Paris-Lyon and Tokyo-Osaka routes were the only rails in the world that have broken even [3, p.158]. However, they would not challenge the planners’ projection on ridership, i.e., 280,000 a day, as opposed to only 87,000 in September 2009. Instead, during the bidding of the HSR project, they promised the public that there was no need for the government to put money into the project. Through the new project, the original shareholders were awarded contracts for core systems, trains, electrification, signaling, and other electric and mechanical systems to companies with whom they have been associated [63]. According to the Control Yuan, a government investigatory agency in Taiwan, the HSR contracts were awarded to the following groups of shareholders:

the Continental Engineering Corporation: NT$106.2 billion

Assuming a (net) profit rate of 10 percent, the original shareholders would earn more than NT$25 billion profits in these projects. Comparing this figure to the amount the four original shareholders put in, the shareholders have already earned more than enough [22]. At the end of the day, if the HSR runs into heavy debt, the government will have no choice but take it over and all taxpayers will have to foot the bill.

All these evidences suggest that the Taiwan HSR project is a typical example of the government failure in the sense that interest groups sought economic rent from the HSR project via rent-seeking. In short, this research suggests that capturing economic rent appears in both HSRs in China and Taiwan, either via corruption, bribery or rent-seeking activities.

9.1 Malfunctions and delays in the Beijing-Shanghai HSR and the Wenzhou accident

Since the Beijing-Shanghai HSR operated on June 30, 2016, frequent accidents and delays prompted the public to question the safety of HSR in China [34]. In its second week in service, the Beijing-Shanghai HSR experienced three malfunctions in four days. Two trains were delayed by power failure in Shandong province and Suzhou on July 10 and July 12, 2011 respectively. Another train was forced to cut the top speed by half due to a transformer malfunction in Changzhou. Two weeks after the service started, only 85.6% of trains arrived on time [34, 49].

The malfunctions and delays in the Beijing-Shanghai HSR may not be fatal. Unfortunately, on 23 July 2011, when one high-speed train traveling near Wenzhou was stuck by lightning, another high-speed train behind kept running by signal malfunction and crashed into the back of the stalled train. Several carriages derailed. In this Wenzhou accident, it was reported that there were at least 40 deaths and 192 people hospitalized, including 12 who were severely injured [48]. 54 officials were identified to bear the responsibility for the accident [56]. Liu Zhijun was the most senior official implicated in the report. He had been detained on corruption charges before the Wenzhou accident (see the section on corruption). He was accused of raising the operating speed of the Ningbo-Taizhou-Wenzhou Railway improperly and compressing the construction schedule of the HSR. Under Liu’s leadership, the Railways Ministry failed to oversee the HSR, conspire the regulatory mechanism and introduce proper inspection procedures for the equipment. As a result, the defective signal equipment was put into operation. The report also assigned fault to executives and engineers of the China Railway Signal and Communications Corporation (also executives of the Beijing-Shanghai Railway Corporation) to permit faulty equipment to be installed in the HSR and hence, resulting a breach of contractual terms [56].

9.2 Incidents in Taiwan’s HSR

Taiwan’s HSR service was delayed by a series of incidents since it began selling tickets on 2 January 2007. According to Jong et al. [35], in 2007, rolling stocks, tracks and signal failures were the main reasons leading to Taiwan HSR delays. Since the HSR was put into service for 6 years, there were a total of 182 incidents. 64 cases of them led to a delay of over 30 minutes [10]. Perhaps, the most serious incident occurred on January 11, 2007 [21]. When a train was speeding at close to 300 kilometers per hour toward Hsinchu, smoke billowed from the seventh car while passing Miaoli between 7 : 30pm and 7 : 50pm. Passengers were evacuated to safer cars. No injuries were reported. The train delayed its arrival by 20 minutes. Investigation shows smoke came out possibly because of mechanical trouble with the air-conditioning system in the carriage.

Natural disaster also poses a risk to the safety of Taiwan’s HSR. On 4 March 2010, a powerful earthquake measuring 6.4 on the Richter scale struck off southern Taiwan. One operating train was slightly derailed in Tainan and six trains were stopped on the track. There was no damage nor casualties in this temporary service suspension. 2,500 passengers were affected and evacuated safely from the train in two hours. No injuries were reported. Service resumed the next day [59]. It is reported that the HSR established a Disaster Warning Systems (DWS) to respond to natural disasters and unexpected intrusion onto the right-of-way [7].

In summary, compared to China’s HSR, Taiwan’s HSR has not exhibited serious accidents like the Wenzhou event. Most incidents related to Taiwan’s HSR are natural disasters or non-human errors such as bomb threat. This phenomenon may be attributed to a series of run test done before the train was put in service. Unlike the Beijing-Shanghai HSR which was launched earlier for the Chinese Communist Party’s 90th anniversary celebration [49], the opening of Taiwan’s HSR was postponed many times due to repeated test run as monitored by the expert consultants. This may explain a better safety performance in Taiwan’s HSR.