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Civil Engineering Firms Diversify Operations

As tight government budgets cause the public construction market to shrink, companies turn to housing and BOT projects. BY PHILIP LIU Faced with a drastic reduction in public construction projects due to completion of major transportation projects and the government’s financial constraints, Taiwanese civil-engineering companies have been seeking to diversify their operations. Many have made forays into the housing sector, either for construction or as developers. The government budget for 2014 includes only NT$161.3 billion (US$5.4 billion) in appropriations for major public construction projects. The figure represents 8.77% of the central government’s budgeted outlay of NT$1.9 trillion (US$63.3 billion) for the year, compared with NT$190 billion (US$6.3 billion) or 9.77% for 2103. The meager budget has elicited a warning from the Council for Economic Planning and Development (CEPD), the Cabinet’s think tank, that the amount is insufficient to sustain economic growth momentum. CEPD has asked the Executive Yuan to set aside an extra NT$36 billion (US$1.2 billion) in 2014 to fund urgently needed projects, a request that is still under consideration. Even with the additional amount, the central government expenditure on public construction projects would come to far less than the NT$300 billion to $400 billion level that was the norm in past years. In addition to the government’s financial difficulties, another major reason for the decline in the outlay for public construction projects is the completion of most of the island’s major transportation projects, traditionally the major infrastructure sector. The pace of construction for Taipei’s mass rapid transit (MRT) system, for example, has slowed down conspicuously, following its formation into a grid network. The system now consists of 10 lines totaling 115.6 kilometers in length, with a daily passenger load in July of 1.7 million riders. Following the inauguration by year-end of the 6.4-kilometer Xinyi Line, the major ongoing MRT project is the ring line, located entirely within New Taipei City and encircling the existing network. The line’s 34-kilometer first-stage section, connecting Dapinglin Station in Xindian District with the Wugu Industrial Zone Station, is scheduled to be operational by 2016. The ring or Circle Line, which will also be known as the Yellow Line, will be an elevated, medium-capacity system similar to the Wenhu Line. The Italian company AnsaldoBreda has won the first-stage contract for the electrical system, which will feature four-car driverless trains with

With a budget of NT$5. the city government in June this year kicked off first-stage engineering for a ring-shaped light-rail line extending 8. A team consisting of Kawasaki Heavy Industries of Japan. It will pass through many key facilities. which is being supplied by Marubeni Corp. (松山線?) Another major current mass-rapid-transit project is the 53-kilometer Taoyuan International Airport MRT. The MRT will cut the traveling time from the Taipei Station to the Taoyuan Airport to only 35 minutes for direct trains. of Taiwan is responsible for the electrical-mechanical system. mainly due to repeated aborted biddings for the electrical-mechanical system.8 billion). is taking charge of rail engineering. The original schedule had called for mid-2012 completion of the elevated section between Sanchong in New Taipei City and Zhongli of Taoyuan County. it will feature steel wheels on steel rails.and third-stage projects – with lengths of 14. A medium-capacity elevated system. . the line will take advantage of existing railway tracks along the coast by Kaohsiung Harbor.2 and 5. After the Circle Line’s first-stage project is launched in the southwestern portion of greater Taipei. work will proceed simultaneously on the second.7-kilometer green line of Taichung City’s MRT system.steel wheels on steel rails.7 kilometers. Alstom of France. as well as an orange line connecting the Shuinan economic zone and Wufeng. CAF of Spain is responsible for the electrical-mechanical system and Taiwan’s Evergreen Construction Corp. the Airport MRT is scheduled for inauguration by the end of 2015. such as a projected multi-functional economic and trade park and the Kaohsiung Software Technology Park. Also under construction is the 16.6 kilometers respectively – completing the ring and intersecting with five lines of the existing MRT network. With a total budget of NT$114 billion (US$3. The line is scheduled for inauguration in the fourth quarter of 2017. being built at a cost of NT$50 billion (US$1.67 billion). with its two MRT lines already in place forming a cross shape. The north-south green line will be followed by an east-west blue line connecting the Taichung train station with Tunghai University. while Taiwan’s Continental Engineering Corp. and CTCI Corp. of Japan. In Kaohsiung. and October 2014 completion for the underground section from Sanchong to the Taipei Railway Station.68 billion (US$189 million). two years later than originally planned. The delay was due mainly to problems with the electrical-mechanical system. (長鴻營造)for the engineering work.

Unlike traditional light-rail systems. thanks in large part to the completion in the first quarter of sales at its “Wenhuayuan” (文華 苑) luxury-housing project on the site of the former Magnolia Hotel (中泰賓館) on Taipei’s Duanhua North Road. With a total budget of NT$16. The line is scheduled to become operational by 2015 and then be followed by a 22. have benefited from other lines of business with higher margins. which in the past specialized in MRT and other public-construction projects. The diminished demand has intensified competition. These projects are in line with the company’s strategy in . Tougher competition Aside from those ongoing MRT projects. The few with better performance.5 billion (US$550 million). expects to reach NT$13 billion (US$433 million) in revenue this year. of the 14 publicly listed civil-engineering companies. as its trains will be powered by super batteries that can be recharged in 20 minutes. It also won the superficies rights (地上權) for a plot of land on Xinan Street (信安街) in Taipei. Most of them have been focusing on the housing market – both as constructors and developers – which offer higher margins and shorter construction periods.1-kilometer second-stage section. such as CTCI Corp. greatly enhancing the convenience of the MRT system and increasing the passenger load. In addition. and Ruentex(潤泰). driving down gross margins for civil-engineering work on public-construction projects to as low as 3-4%. a leading housing-project developer. Da Cin served as both the constructor and the developer. the line will have no overhanging electrical lines or poles on the sides. leading to substantial shrinkage in the island’s public-construction market. few other major transportation projects are underway or in the pipeline. which have share prices of double their book value. Civil-engineering companies that previously relied primarily on public infrastructure projects are having to turn elsewhere for business opportunities. for joint development of the “Oceanic Downtown” housing project in New Taipei City’s Danhai New Town. the share prices of eight have dropped to less than their book values. with earnings per share (EPS) of an exceptional NT$3. on August 28 Da Cin signed a contract with Hung Sheng Construction (宏 盛). As a result. on which it will build a hotel. the light-rail line will supplement the city’s two existing lines. Da Cin Construction (達欣). The construction of factory buildings is another area of activity.

147 billion (US$38 million) in after-tax net profits. Another 47% came from factory buildings. and supervision.83 billion) worth of civil-engineering contracts in hand.3 billion) worth of contracts in hand. it has set up a 20-person team to focus on urban renewal projects. and environmental engineering. a record high. Although CTCI Corp. Its major project in hand is the rebuilding of Agora Garden (亞太會館) in downtown Taipei’s Xinyi planned area into a 21-story luxury-housing complex. last year took in NT$1. Continental Holdings. and the remainder from office buildings. CEO of Continental Holdings. petrochemicals. These include the ring line of the Taipei MRT. in 2012 revenue from public construction projects accounted for only 15% of the company’s total revenue. In fact. for which it still has over NT$40 billion (US$1. for EPS of NT$1. In addition. as well as niche technologies. Due to the injection of profits from housing projects. These development projects will supplement the company’s civil-engineering works for public construction projects.recent years of diversifying its operation to sectors other than civil engineering for public construction projects. incinerators. Construction is scheduled for completion in 2015. electrical power.05 billion) worth of civil-engineering contracts.5 billion (US$950 million). on revenue of NT$28. Hung Yi-chien.36.4 billion) in Taiwan and NT$12 billion (US$400 million) overseas. reports that the company this year expects to roll out housing projects worth NT$15 billion (US$500 million) in value while undertaking NT$31. . including transportation. It currently holds NT$170 billion (US$5. the parent company of Continental Engineering and Continental Construction. outsourcing. 25% from housing projects. is also stepping into the property market. it still concentrates on civil-engineering works and factory buildings. The company now has NT$55 billion (US$1. BES Engineering has also been actively moving into the housing sector in recent years. construction. expressways. and part of the intercontinental container center project at Kaohsiung Harbor. from which it can still garner handsome profits as a result of its ability as a general contractor to cover design.7 billion) worth of contracts. including NT$43 billion (US$1. The company has also purchased a plot of land formerly occupied by a Catholic church in Taipei’s Jiantan area for housing construction. in a wide range of fields.5 billion (US$1. mainly for MRT projects and bridges.

the company has also made major inroads into overseas markets in recent years. The huge potential of the BOT market has even attracted the participation of foreign investors. mainly for petrochemical plants in such Middle Eastern countries as Saudi Arabia and Qatar. power plants. BES was the runner-up in the initial bidding for the NT$35. including some unconventional undertakings. with EPS reaching NT$3. In a reversal of the previous situation.32. signed a 50-year BOT contract with the New Taipei City government to build a large-scale outlet park on 6. (三井不動產) . restaurants. BOT projects organized by municipal governments now account for 70% of the total. up 8%. In addition. is in active talks with the Taipei city government about taking over the twin-tower buildings near the Taipei Railway Station – one of 56 stories and the other 76 stories. but now has a second chance following the default of the original winning bidder. commercial buildings.000 job opportunities.74 hectares of municipal government-owned land in Linkou. leaving only 30% for the central government. BES Engineering. for instance. it is expected to generate 2. despite the heavy investments and slow returns involved. In July this year. and movie theaters.7 billion (US$2 billion). The NT$5.In addition to the home front. and MRT lines in Southeast Asia. a major Japanese realty developer. The total scale of BOT projects this year is expected to hit NT$150 billion (US$5 billion).2 billion) project. for instance.3 billion) in 2011.7 billion (US$1. it has gained a solid foothold in Beijing for petrochemical plants.5 billion (US$183 million) facility will accommodate outlets for branded products. BOT projects now cover a wide range. and in Shanghai for hi-tech factories. More BOT activity Some civil-engineering firms have even sought to undertake BOT (build-operate-transfer) projects.7 billion) in 2012 and NT$40 billion (US$1. compared with NT$142 billion (US$4. The company recorded 2012 revenue of NT$60. scheduled for June 2017. BOT has emerged as the preferred method for public construction projects. . and hospitals. Due to the central government’s financial straits. according to the Public Construction Commission (PCC). It is now setting its sights on natural gas and oil shale projects in overseas markets. After its inauguration. a supermarket. Mitsui Fudosan Co. as well as petrochemical facilities. It is situated near a station of the Airport MRT and a freeway ramp.

or 670. In October 2012. With their huge amounts of funds to invest.000 jobs when it is operational. the PCC has been promoting the “optimal bid” system. For the company. Among other functions. and museums.3 billion) in the project. the island’s leading life insurer. boosting the penetration rate of the sewerage system in the county to 51.3 billion (US$143 million) for the 50-year franchise. The prevalence of BOT projects may contribute to improving the quality of public construction projects. Last December. Former PCC Minister Chen Chen-chuan notes that the selection of winning bids according to the lowest offer often leads to substandard quality for public construction projects and discourages the use of innovative civil-engineering technologies.000 people. At that time the system will serve 250. Cathay will pay the government NT$4. the NT$20 billion (US$666 million) facility will accommodate outlets of branded products.8-hectare (over 4 acres) plot of land on the existing site of the second exhibition hall of the Taipei World Trade Center near Taipei 101. freeing contractors from the considerable rigidities and red tape that accompany government projects. In addition to NT$27 billion (US$900 million) for the 50-year franchise fee. 40-50 stories high. As a result. It is expected to generate 2. The twin buildings will serve as corporate offices.For instance. The tendency of the government to award contracts by lowest bid has also been the subject of criticism. The facility is expected to generate 9.700 employment opportunities. on a 1. under which a screening panel will take the qualifications and track records of bidders as a major . enhancing its cash flow. the project will be carried out in four stages and is scheduled for completion in 19 years. Cathay Life Insurance. attract 7 million visitors a year.000 households. the facility will generate steady income. is constructing a sewerage system for Taoyuan County on a BOT basis. scheduled for completion in seven years. and create NT$10 billion (US$333 million) in annual revenue. Nan Shan Life Insurance inked a BOT contract with the Taipei city government to construct two tower buildings. a realty developer noted for buildings above Taipei MRT stations. With an expected investment of NT$20 billion (US$666 million) and a 35-year franchise. life insurance firms are major undertakers of BOT projects. Nan Shan will invest NT$40 billion (US$1. signed a BOT contract with the Bureau of High Speed Rail under the Ministry of Transportation and Communications to develop a 22-hectare plot near the Taoyuan High-Speed Rail Station. Radium Life Tech (日勝生活科技).18%. shopping centers.

. PCC pledges to maintain seamless service during the transition period and to continue to contribute to Taiwan’s living environment. civil-engineering industry. national competitiveness. Li Si-chuan. Ministry of Finance (MOF). The restructuring of departments under the Executive Yuan is being carried out in accordance with legislation passed in January 2010. most government agencies still prefer the lowest-bid practice. 23 years after a plan was first proposed to downsize and streamline the government structure.consideration in determining the winning bid. the Cabinet-level Public Construction Commission (PCC) will soon cease to exist. and economic development under the new structure. and decreasing the number of central government employees from 190. saying that “When you decide the contract constructor. down from the previous 37. deputy mayor of New Taiwan City. and a new National Development Commission (NDC) respectively. PCC Prepares to Exit from the Scene Under a government restructuring plan.200 to 173.000. functions of the Public Construction Commission will be divided among various departments. BY PHILIP LIU As part of a comprehensive restructuring of Taiwan’s central government. The revised law calls for reducing the number of first-tier (ministry-level) agencies under the Executive Yuan to 22. supports the optimal-bid practice. as optimal bids entail a complicated screening process and often lead to losing bidders charging government officials with favoritism towards the winning bidders.” However. you decide the quality of a public-construction project. and convenience for the public in using government services. allowing for more flexibility in such areas as personnel administration in order to augment government efficacy. Its functions will be divided into three parts and incorporated into the Ministry of Transportation and Construction (MOTC). The initiative embraces the concept of “corporate-type” government.

it was decided that the Construction and Planning Agency. the Construction and Planning Agency will remain under the jurisdiction of the Ministry of the Interior (MOI). Over the years. will be taken over by the NDC. and Central Procurement Supervision Unit. supervision of engineering technology consulting companies. its authority has been extended to include affairs related to the Government Procurement Law. Engineering Technique Corroboration Committee. The revised organizational laws of both the MOTC and NDC are still awaiting approval by the Legislative Yuan. with its operations divided into three parts and transferred to other agencies. which will be renamed the Ministry of Transportation and Construction. The review of engineering technologies and budgets. Department of Technology. including the Department of Planning. the Executive Yuan began to implement the restructuring from January 1. whose authority includes the construction of urban roads. and supervision of public-construction works. The remaining functions. During deliberation last November by the judicial committee of the Legislative Yuan. coordination. Professional Engineering Disciplinary Retrial Committee. and responsibility for the database of public-works costs. will be incorporated into the Ministry of Transportation and Communications. should remain as part of the MOI so as not to jeopardize the ministry’s ability to execute urban development planning. Complaint Review Board for Government Procurement. Regulation of BOT business was already transferred to the MOF at the beginning of this year. following steady expansion in the scale and budget for national infrastructure projects. as well as responsibility for auditing the quality of public-construction works. Government procurement and private participation in public construction. Development and Evaluation Commission (RDEC). Department of Construction Management. but in a reversal of the original plan. Administrative Appeal Review Committee. The PCC was established in 1995 to take charge of the planning. including oversight over the construction engineering profession.Following a two-year grace period. or build-operate-transfer (BOT). review. Legal Affairs Committee. the PCC will be dismantled. As part of the program. 2012. will be the purview of the MOF. MOTC will in fact take over the bulk of PCC’s existing units. following enactment of a revised organizational law for the ministry in February 2012. a new agency to be created by merging the Council for Economic Planning and Development (CEPD) and the Research. Civil .

the PCC carried out spot checks of 44 public construction works by means of concrete drilling. The evaluation will serve as reference for government agencies in selecting contractors in the future.9%. those figures were 63. In addition.2% and 70. which won the support of the cross-ministerial meeting for supervision of public construction works this June. the PCC has been promoting the use of optimal bids and general contractors. With its assistance. the PCC is considered to have made significant achievements in improving the quality of public construction works. and Statute for Management of Civil-Engineering Consulting Companies. During the final three months of 2012. cracking down on irregularities in those projects. is designed to provide an objective quality target for government agencies in charge of a project. To crack down on corruption related to public construction. For instance. Its mission was enlarged from that of supervision and review of the public construction market to fostering the development of that market. and assisting the development of the civil engineering industry.Engineering Technician Law. respectively.1% in terms of value. Another PCC initiative is to establish a mechanism for performance evaluation of public construction works after their completion. central-government agencies and municipal governments have set up 49 engineering inspection panels to check the quality of public construction works under their jurisdiction. to remedy the negative effect of the lowest bid system on the quality of public-construction works. As a result. It also serves as guidance in carrying out responsibilities for repair and maintenance. thereby encouraging contractors to strive to achieve a good quality record.4% in terms of the number of projects and 93. Law for Private Participation in Public Works. as well as for the design engineers and constructors.268 government staff members were dismissed and 276 public construction works dismantled for reconstruction. In recent years. Since 2004. In early 2012. 1. Five projects failed the check and were torn down for rebuilding. as of June this year the share of optimal bids in the procurement of technical services had reached 84. as a result. especially for the procurement of technical services. The PCC has also been promoting a system of defining the lifespan for public construction works. the PCC has joined . the Commission has intensified efforts to crack down on public construction works with substandard quality. The policy.

it has been offering guidance to domestic enterprises in undertaking BOT projects.hands with the Ministry of Justice in establishing a “platform for joint auditing of government procurement.5 times the value of NT$40. The firm. In addition. As part of the Executive Yuan’s program to try to revitalize the sluggish economy. the PCC is generally regarded by Taiwan’s civil-engineering industry as having created a favorable environment for its development.24 billion. Among other things. As of July 19. For instance. 99 BOT contracts valued at NT$142 billion were signed in 2012. this June it took the initiative to run a check on overdue payments for public construction work. which is designed to provide households in the area with a more stable water supply. to help contractors avoid the protracted arbitration process or even lawsuits. Under its promotion and assistance. it had helped contractor firms collect NT$613 million in outstanding payments. Meanwhile. will be headquartered abroad. Further. it has arranged for the government to permit civil-engineering firms to obtain low-interest loans for major overseas projects by accessing the NT$10 billion special fund provided by the National Development Fund for the export of green-energy and industrial equipment.1 billion in 2011 and well above the average of NT$50 billion in previous years. In less than two months. As it prepares to turn over its functions to other agencies. . the PCC has been actively mediating disputes arising from the performance of contracts for public construction works. it is assisting several large domestic civil-engineering consulting firms in setting up a joint-venture company for bidding on overseas civil-engineering projects. the PCC has been seeking to assist civil-engineering firms in undertaking public infrastructure projects. including mainland China. The PCC has also been helping the civil-engineering industry tap the global market. Moreover. which is still on the drawing board.” The effort takes advantage of the PCC’s various information systems on public construction works to identify potential irregularities. such as the NT$230 million water-pressure augmenting station Bali District of New Taipei City. That was 3. the PCC in early June began to actively help government agencies overcome difficulties that had stalled public construction projects. it had restarted projects worth NT$2.