2022 Volume 39 Pages 25-46
Abstract
Strains were evident in the supply and demand for electric power during World War I. Taiwan Electric Power Co., Ltd. was founded in 1919 during the postwar economic boom in order to carry out the Sun-Moon Lake (Jitsugetsutan) project, whose purpose was to develop of a high-capacity hydroelectric power plant. However, there was no clear electric power consumption plan that would have been able to mitigate the lack of investment incentives. After the postwar economic panic, procuring financing from the capital market stagnated, and the project was suspended. Following this experience, Taiwan Electric Power Co., Ltd. in the second half of the 1920s drew up an investment funds redemption plan based on a power consumption plan that seemed more certain to be realized. Against this backdrop, there was a steady increase in small-lot demand mainly from the rice husking and rice polishing industries. The capital needed for the project was procured thanks to the issuance of foreign bonds in June 1931. However, the investment funds redemption plan collapsed due to a foreign exchange loss that came with a crash in the yen exchange rate six months later. Taiwan Electric Power Co., Ltd., having reduced its foreign exchange loss by purchasing its foreign debt, was able to capture large-lot demand by selling electric power at cut-rate prices. In the mid-1930s, it put its investment funds redemption plan on course and won the confidence of the capital market. The problem of insufficient investment incentives disappeared, and Taiwan Electric Power Co., Ltd. was able to procure the capital needed for developing new sources of electric power from the capital market by issuing new shares.
The focus of the present article is to analyze the procurement of financing and the investment fund redemption plans regarding the Sun-Moon Lake hydroelectric power development project (hereafter the Sun-Moon Lake project) undertaken by Taiwan Electric Power Co., Ltd. (hereafter TEP) during the interwar period. It is known that after the completion of the Sun-Moon Lake Power Plant in 1934, energy-intensive munitions industries such as aluminum refiners were promoted in Taiwan. However, various complications had to be overcome before the Sun-Moon Lake Power Plant was completed. The dramatic increase in demand for electricity during World War I is what lay behind the Governor-General of Taiwan to found the half-public, half-private TEP in 1919. However, procuring financing became impossible owing to concerns about increases in the amount of capital deemed necessary as well as about how much electric power might be consumed after the power plant’s completion. The project was called off in 1926. In 1928, the decision was made to relaunch the project, and in June 1931 an issuance of foreign bonds was procured to finance it. However, the crash in yen exchange rates that occurred hand in hand with the renewed ban on gold exports that December caused a foreign exchange loss in interest payments on foreign bonds. With that, the investment funds redemption plan devised at the time the project was restarted collapsed. Eventually, it was decided that an aluminum refining plant would be built, and with expectations that power would be consumed now in sight work began on the Sun-Moon Lake Power Plant.
The present article, which analyzes the Sun-Moon Lake project as it developed through all the foregoing complications, is focused on the research question of how the capital needed for the development of a high-capacity power source that would produce a supply surplus to existing demand was procured. This issue is directly connected with the problem of capital formation in late developing states that Ragnar Nurkse has brought up. Nurkse pointed out that a lack of savings is the problem that lays behind the supply of capital, while a lack of investment incentives is the problem behind the demand for capital (Nurkse 1953). Nurkse has argued that the former was resolved through the mobilization of “disguised unemployed” (i.e., savings potential) in rural communities. As to the latter, Nurkse argues that it was solved through balanced growth. This was achieved through improved purchasing power—itself the product of increased agricultural productivity—that brought about industrialization whose aim was to satisfy domestic demand. Nurkse’s balanced growth also developed in interwar Taiwan, with light industry centered on the rice husking and rice polishing businesses being developed by Taiwanese capital (Horiuchi 2016). However, light industries in which getting investments from agricultural surplus is relatively easy should not be spoken of as being on the same level as the electric power or the heavy and chemical industries, where it is not. Investments in the electric power or the heavy and chemical industries require accumulating capital that is dispersed throughout society. This in turn calls for the functions of a capital market where stocks and bonds are issued and circulate. In fact, it was basically presumed from the start that the capital for the Sun-Moon Lake project would be procured from the capital markets. Accordingly, the research question presented above could be rephrased as, Why was it possible to obtain from the capital market the financing needed to develop a high-capacity power source that would generate a supply that would be surplus to the existing demand? Whatever the case, our focus must be on how to resolve the issue that Nurkse has pointed out—namely, the lack of investment incentives.1
Previous research has discussed the investments made in the electric power and munitions industries based on the national policy of turning Taiwan into a base for any southern advance (Tu 1975, 147–151). In contrast, the present article focuses on the process through which the constraints on the lack of investment incentives were relaxed owing to a gradual increase in electric power demand during the interwar period, and TEP’s ability to create an investment funds redemption plan on that basis. With respect to the Sun-Moon Lake project, the investment funds redemption plan collapsed once due to the impact of the crash in yen exchange rates. Accordingly, with TEP having absorbed that impact, the investment funds redemption plan was stabilized. Our analysis here will focus on the period up to the mid-1930s when the plan finally won the trust of the capital markets.
The Governor-General of Taiwan made its Sun-Moon Lake project proposal during World War I when electric power supply and demand was tight. The Sun-Moon Lake project would combine the development of high-capacity hydroelectric power (100,000 kW, or approx. 130,000 horsepower) with long-distance high-voltage power transmission. The plan was to create a high-capacity reservoir-based power plant at Sun-Moon Lake in Taiwan’s central mountain range. The project would connect Kee-lung 200 km to the north of Sun-Moon Lake with Takao (Kaohsiung) 160 km to the south through a 115,000V high-voltage power line.
The electric power supply contract signed in 1917 with the Governor-General of Taiwan’s Works Office was for 9,771 horsepower (Taiwan Sōtokufu, Minseibu, Dobokukyoku 1918). The Governor-General of Taiwan presented as follows a consumption plan for around 13 times the amount of excess energy (Taiwan Sōtokufu, Minseibu, Dobokukyoku 1918). The seven-year forecast for the natural increase for electric lighting and power use was 20,000 horsepower; 20,000 horsepower for the electrification of sugar manufactories; and 8,000 horsepower for electrifying one section of the railroads. The total demand forecast was therefore 48,000 horsepower. There had been plans to provide surplus electric power to industries that were to be promoted. The power to be consumed was broken down as 50,000 horsepower for ammonium sulfate production, 10,000 horsepower for textile production, 10,000 horsepower for iron manufacturing, and 10,000 horsepower for the paper-making and soda production industries.
The Governor-General of Taiwan began doing field work in 1917. It came up with a state-run proposition that called for the issuance of government bonds worth ¥43.5 million to fund the construction costs. It asked that this be added to the 1918 budget, but after entering negotiations with the Ministry of Finance this was rejected. In 1918, the Governor-General of Taiwan came up with a plan for a state-run project that called for the issuance of government bonds worth ¥48 million. It asked that this be added to the 1919 budget, but this again was rejected. The proposal was then switched to a plan for incorporating as a joint-stock company. This was a change to a plan that would create a half-public, half-private joint-stock company, and that would lead to procuring project funds through charges on paid-in capital and on the issuance of bonds. The state of the Japanese economy at this time was one in which an increase in exports was bringing about an excess in the balance of payments receipts. This led the emergence of easy credit, and so there was optimism about being able to procure financing from the capital markets.2
In April 1919, the Taiwan Electric Power Co., Ltd. Decree (Taishō-8-nen ritsurei dai-1-gō) was promulgated (Taiwan Sōtokufu, Dobokukyoku 1919). Its capital fund was set at ¥30 million, of which the government was to provide ¥12 million (Article 2). The Governor-General of Taiwan was assigned the authority to appoint the company’s officers (Article 9). The Governor-General was to appoint the president and vice-president (5-year terms). As to the directors (4-year terms), a general stockholders meeting comprising stockholders who held 100 shares or more would select candidates, and the Governor-General would then choose the directors to appoint from among those individuals. There were also many other provisions establishing the ways in which Governor-General of Taiwan could intervene in the company. Bond offerings (Article 11), amendments to the articles of incorporation (Article 13), the disposal of retained earnings (Article 14), and electricity rates (Article 18) all required the Governor-General’s approval. Furthermore, with regard to the company’s operations, it was stipulated that the Governor-General could issue orders when necessary from a supervisory perspective (Article 19). In addition, if a corporate resolution or the conduct of an officer is deemed to violate the articles of incorporation or to be detrimental to the public interest, the Governor-General could rescind the resolution or relieve the officer of his position (Article 20). Furthermore, the Governor-General could appoint a supervisor to monitor the company’s operations (Article 21). This supervisor could not only order the company to report on its business accounts and conditions, but also attend the general meeting of stockholders and other gatherings to express his opinions (Article 22). Aside from this provisions regarding the Governor-General of Taiwan’s right to supervise the company, there were other provisions that granted the company with certain privileges. If the dividend on private shares did not reach 8%, it was allowed to not offer a dividend on government-owned shares (Article 15). A dividend of 6% on private shares was also guaranteed for the first six years after the company’s incorporation (Article 17). As we can see from the foregoing, the legislation on the company’s incorporation contained both strong restrictions on the company, including the Governor-General of Taiwan’s authority over personnel matters, as well as privileges that would restrict intervention into management affairs by private shareholders while also making it easier to procure financing from the capital market.
TEP was founded in August 1919. The Governor-General of Taiwan contributed its ¥12 million share of the ¥30 million capital fund through investments in kind, such as electrical utility equipment, while the remaining ¥18 million came from the private sector through a stock offering. There were no major changes to the power consumption plan with the shift from government-operated proposal to the proposal to incorporate as a joint-stock company. The outlook for power consumption remained optimistic, with power consumption on the order of 130,000 horsepower thought to be assured (Minato 2011, 30–31).
2. The Speculative Capital Market and Procuring FinancingTEP created a financing plan in which it budgeted ¥48 million for the Sun-Moon Lake project. Of this, ¥18 million was to come from stock payment deposits and ¥30 million from the issuance of bonds. However, the plan did not take into account the working capital for existing facilities and bond interest payments for the period until the power plant was completed. They had no choice but to cover this with operating income from the existing facilities (Ogura 1932). One surmises that the reason behind such a tight financing plan was to increase the government’s shareholding ratio as much as possible, based on the assumption that the estimated value of the government’s asset contribution would be ¥12 million, and that calculations were based on the assumption that every effort would be made to ensure that the proportion from the issuance of bonds would be higher than that from stock issues (Ogura 1932). The former presumes that the Governor-General of Taiwan sought to rely on private-sector financing while trying to seize control of TEP, and that it wanted to make the most of the privilege of not having to pay dividends on government-owned shares. As to the latter, the interest rates on power company bonds issued in 1919 were all in the 7% range. This was low compared to the average dividend rate on power company stocks, which topped 10% (Kikkawa 1995, 26, 57). The costs for procuring financing were lower for issuing bonds than for collecting stock payments. However, at the time, owing to Article 200 of the Commercial Code, which prohibits the value of bond issues from exceeding the amount of stock payments, it was not possible to earmark all ¥48 million of the financing plan as coming from bond issues. It appears that the plan for procuring the ¥48 million in total arose from the assumption that the total permissible amount for a bond issue would be ¥30 million due to having solicited ¥18 million for private-sector stocks in addition to the ¥12 million capital fund raised from the Governor-General of Taiwan’s investments in kind. In short, it can be said that the Governor-General of Taiwan wanted to seize control of TEP while it created a financing plan that was conscious of the costs of procuring financing from the capital market of the time. The plan was that the construction of the Sun-Moon Lake project would take five-and-a-half years (to be completed at the end of 1924). The payments for the ¥18 million worth of stocks were to be collected in four installments, and once those payments had been made ¥30 million in bonds would be issued.3
There would be 360,000 private stocks divided into 210,000 allocated shares and 150,000 publicly offered shares; the latter, in turn would be split into 90,000 Japanese shares and 60,000 Taiwanese shares. The easy credit of the World War I years was apparent not only in Japan but in Taiwan as well (Olds 2018). When they began to accept applications for the publicly offered shares in June 1919, Japanese and Taiwanese banks applied for around 44.38 million shares (37.08 million to Japan and 7.3 million to Taiwan). In response, TEP adopted a policy to limit large-lot applications and give small-lot applications priority. As a result, as shown on Table 1 the company had 11,036 private shareholders at the time of its incorporation (July 1919). Here, we should note that there were many private shareholders from more common backgrounds at the time of the company’s incorporation, and approximately 42% of the private stocks were held in Taiwan. In July 1919, TEP collected its first payment of ¥12.5 per share from its confirmed shareholders, and through this raised ¥4.5 million.45
| 1919/7/ | 1920/2/ | 1920/8/ | 1921/2/ | 1922/2/ | 1922/8/ | ||
| Number of People (Unit : Person) |
Japanese in Japan | 5,196 | 4,156 | 3,996 | 4,144 | 4,486 | 4,572 |
| Japanese in Taiwan | 2,082 | 1,094 | 930 | 867 | 1,081 | 737 | |
| Taiwanese in Taiwan | 3,735 | 3,059 | 2,942 | 2,618 | 1,814 | 1,872 | |
| Others | 23 | 23 | 21 | 25 | 22 | 22 | |
| Total | 11,036 | 8,332 | 7,889 | 7,654 | 7,403 | 7,203 | |
| Percentage of Shares Held (Unit : %) |
Japanese in Japan | 57.4 | 52.9 | 51.9 | 67.3 | 69.1 | 71.7 |
| Japanese in Taiwan | 25.2 | 15.7 | 14.5 | 14.8 | 12.6 | 11.3 | |
| Taiwanese in Taiwan | 17.2 | 31.3 | 33.4 | 17.7 | 18.2 | 16.7 | |
| Others | 0.1 | 0.1 | 0.1 | 0.2 | 0.1 | 0.4 | |
| Total | 100 | 100 | 100 | 100 | 100 | 100 | |
Source: Taiwan Denryoku Gaisha Shahō, No. 20, 1922/11/21.
Following this, the number of private shareholders fell dramatically. As of February 1920, it had lost 2,704 persons, falling to 8,332 (Table 1). Many Japanese living in Japan or residing in Taiwan gave up their shares, while many Taiwanese in Taiwan had acquired shares. As a result, more than 47% of the private stocks would be located in Taiwan. One surmises that behind this lay the activities of people in Taiwan engaged in cash trading. Given that both the Taiwan Stock Dealers Association and the Taiwan Stock Dealers Trade Association were founded in April 1920, it seems likely that shares flowed from Japanese into Taiwanese hands through these cash traders who had already been on the scene. The average cash transaction price for TEP shares on the Tokyo Stock Exchange (par value ¥12.5) hovered above 20 yen from July 1919 to February 1920 (Minato 2011, 34). If this price may be assumed to have been used as the index for off-floor trading, then one surmises that most Japanese shareholders sold their stocks after the company’s incorporation to reap a bumper profit.6
From March 20–25, 1920, TEP collected its second payment of ¥20 per share, seeking to raise ¥72 million. However, the collapse of Japanese stock markets had already begun, and the collection did not go smooth. More than 10,000 stocks went unpaid at the due date. TEP sent call notices to the non-paying shareholders warning that they would be in forfeit. When the period to make the call had expired, TEP had no choice but to notify 69 of the non-paying shareholders who held 1,569 stocks that they had forfeited their shares. The average cash transaction price on the Tokyo Stock Exchange for TEP shares that in March 1920 had a par value of ¥32.5, plummeted that May to below face value and hovered in the lower 20-yen range through that August (Minato 2011, 34). The gains to be made from selling stocks had been lost thanks to the low share prices, and the shift in who the private shareholders were continued as it did before (Table 1). From February to August 1920, the total number of shareholders declined. While the proportion of shares held by Japanese living in Japan or residing in Taiwan fell, that of Taiwanese living in Taiwan rose. The percentage of private stocks located in Taiwan rose to 47.9%.78
However, starting in August 1920 this shifting of stocks moved in a way that had never happened before (Table 1). From August 1920 through February 1921, the percentage of shares held by Japanese living in Japan jumped from 51.9% to 67.3%, while that of Taiwanese living Taiwan plunged from 33.4% to 17.7%. During this period, the percentage of private stocks that were located in Taiwan rapidly declined from 47.9% to 32.5%. From the date of its incorporation through August 1920, stocks in TEP had flowed from Japan to Taiwan. After that, however, the direction began to reverse to flow from Taiwan to Japan (Shimizu 2015, 167). As will be discussed later, TEP increased its dividend from 6% to 7% in the first half of 1920, and then up to 7.5% in the second half. However, the average spot transaction price for TEP shares on the Tokyo Stock Exchange hovered in the lower 20-yen range. While it did rise to the upper 20-yen range in February 1921, the share price remained below face value (Minato 2011, 34). Based on the above situation, one surmises that Japanese living in Japan purchased TEP stocks expecting high returns. In May 1922, TEP collected its third payment of ¥12.5 per share, raising ¥4.5 million. From February to August 1922, a period that straddled this third call for payments, the number of shareholders continued to decline, as did the transfer of stocks from Taiwan to Japan. The percentage of shares held by Japanese living in Japan rose further from 69.1% to 71.7%. During that time, until March 1922 the average spot transaction price for TEP shares on the Tokyo Stock Exchange hovered around ¥30, close to the par value of ¥32.5. However, it began to fall in May when the payment collections began, and from June on the par value dropped to around the ¥35 level, well below the par value of ¥45 (Minato 2011, 34). One surmises that during this period as well, Japanese living in Japan continued to purchase TEP stocks expecting high returns.
However, while TEP continued to generate capital through the collection of stock payments, dark clouds were already starting to hover over the financing plan. Due to a sharp rise in labor costs, immediately after work began construction costs ballooned to ¥64 million, and the forecast was for a ¥16 million shortfall. Meanwhile, thanks to the aforementioned plummet to below face value, TEP was forced to suspend its collection of stock payments and issue bonds earlier than had been planned. TEP made its bond issue with a total value of ¥5 million in May 1921, followed in July by a second issue for ¥10 million. Both bond issues were underwritten by a banking syndicate (comprising the Bank of Taiwan, the Industrial Bank of Japan (hereafter IBJ), Daiichi Bank, Mitsui Bank, Mitsubishi Bank, Jūgo Bank, and Sanjūyon Bank), with the Bank of Taiwan serving as the managing underwriter. At this point, TEP had procured ¥26.7 million from the capital markets. However, it was already certain that construction costs would go over budget due to the sharp rise in labor costs mentioned earlier. A ¥29 million shortfall was forecast for 1921, and while efforts were being made to cut construction costs a ¥25.2 million shortfall was forecast for 1922.91011
In 1922, TEP attempted to issue ¥15 million worth of bonds, but the banking syndicate refused to underwrite it due to concerns about power consumption once the power plant had been completed. The electric power industry was the greatest object for investments in 1920s Japan. The first half of the 1920s was a transitional period in which efforts to procure financing by Japan’s power industry changed its focus from issuing stocks to issuing bonds (Kikkawa 1995, 53). Despite this state of affairs, TEP attempted to issue bonds, however, it was unable to do so.1213
We can examine the reasons for this by using Figure 1, which shows trends in TEP’s average returns on paid-in capital and dividend payout ratio. Revenues from the electric power business had steadily increased, and from the first half of 1921 onward the returns on paid-in capital were in the 10% to 11% range. The dividend payout ratio along with the dividend, which was increased from 6% to 7% in the first half of 1920 and then to 7.5% in the second half. However, the payout ratio fell from the first of 1921 onward, which made it possible to implement the privilege of not having to pay any dividends on government-owned shares.
Figure 1: Return on Paid-in Capital and Dividend Payout Ratio of TEP
Source: TEP, Eigyō Hōkokusho, 1st-35th.
Note 1. Return on Paid-in Capital = ｛(Net Profit ＋ Depreciations - Reversal of Reserved Fund) / ( Paid-in Capital at Beginnig of Term ＋End of Term )÷2｝× 2.
Note 2. Dividend Payout Ratio = Dividend / (Net Profit ＋ Depreciations - Reversal of Reserved Fund).
At first glance, such management may appear to have been sound, but it created structural problems with the total assets held by TEP. The return on paid-in capital was high, but it was based on revenue from the electric power business arising from the Governor-General of Taiwan’s investments-in-kind facilities. Most of the total assets were accounted for by the construction costs for the uncompleted Sun-Moon Lake hydroelectric power project, and the amount of financing that would be needed to complete it had ballooned beyond what had been planned. TEP’s sluggish share prices made it unrealistic for the company to make good for the financing deficit by issuing new shares. The need to prepare for making interest payments on and redeeming bonds meant TEP had no choice but to increase its internal reserves ratio. This limited its ability to offer the high dividends that would increase the price of its stocks. Despite the high earnings, the dividend for the second half of 1922 was reduced to 7.0% from the previous year. In addition, the growth in the amount of capital required meant a rise in the costs of generating power was unavoidable. Owing to concerns about how much electric power might be consumed after the power plant’s completion, there were no financial institutions in the capital market who would underwrite any of the TEP bonds needed to make up for any financing deficit.
Furthermore, the Bank of Taiwan, which was serving as the managing underwriter for the banking syndicate, was rapidly losing its soundness in the wake of the 1920 panic (Itō 1989, 175–188). The Bank of Taiwan’s deposits declined sharply after World War I, while its bad loans to the Suzuki Shōten dramatically increased. As a consequence, for raising finances it had become dependent on call money and on Bank of Japan loans (rediscounts on promissory note) (Namikata 1985, 488–517). From this time forward, nobody who had been involved with the Bank of Taiwan would be appointed one of the company’s directors, and the relationship between TEP and the banking syndicate would dim.
Thus, faced in mid-1922 with difficulties in procuring financing, TEP decided to temporarily halt the Sun-Moon Lake project.
3. The Halting of the Sun-Moon Lake ProjectThe measure that the Governor-General of Taiwan took in response to TEP having failed in its aim to procuring financing from the capital markets was to petition the Japanese government for its help (Minato 2011, 40). In 1923, the Governor-General of Taiwan petitioned the Ministry of Finance for a loan on the capital from the Deposits Department. In response, the Ministry decided in April of that year that it would lend TEP ¥5 million through the IBJ. But this policy was wiped out with the Great Kantō Earthquake that occurred that September. In 1924, the Governor-General of Taiwan again petitioned the Ministry of Finance to help TEP. However, the Ministry decided it would loan only ¥1.5 million to halt construction. With this financing, TEP did its utmost to keep the Sun-Moon Lake project going.
While the Sun-Moon Lake project made little progress after 1924, interest-bearing debts such as bonds and notes payable were on the rise. In order to reduce the interest payment burden and refinance the 1st and 2nd bond issues, in April 1926 TEP offered a third bond issue worth ¥7 million (interest rate 7.0%), followed that July by the fourth issue worth ¥8 million (interest rate 7.0%). Both issues were underwritten by the banking syndicate. The banking syndicate did not work together to help TEP to procure new financing, but it did help with refinancing at a lower interest rate.
Furthermore, as we can see from Figure 1, the return on paid-in capital remained stable in the 10% to 11% range after the first half of 1923. That said, the dividend reduction continued from 7.5% in the second half of 1922 to 7.0%, and it fell further to 6.0% in the first half of 1923, where it stabilized. The dividend payout ratio tended to fall owing to the company’s preparations to deal with interest payments and redemptions on bonds.
In order to solve the aforementioned problems regarding TEP’s financial affairs and budgetary structure, it was necessary to procure new financing in order to complete the Sun-Moon Lake Power Plant. That said, TEP also realized at the end of 1926 that it would have to raise more than ¥50 million in new capital in order to complete the Sun-Moon Lake Power Plant. As noted above, it was almost impossible for TEP to procure new financing from the capital markets. Furthermore, based on the financial situation at the time it was impossible to transition to government ownership through government asset contributions or issuing government bonds premised by the idea that no dividends would be paid. With this, the Sun-Moon Lake project came to a complete standstill, and in December 1926 the Governor-General of Taiwan announced that the Sun-Moon Lake project would be halted.1415
After the Sun-Moon Lake project was brought to a halt, TEP soon began putting together a plan to resume work on it. In March 1928, the cost to restart work would be projected to cost around ¥55.19 million. However, with the subsequent changes that were made to the construction design, the figure was revised to ¥44.4 million.16
TEP made a fifth bond issue with a total value of ¥6 million (interest rate 7.3%) in April 1927, after the Sun-Moon Lake project had been halted. The purpose was not to procure new financing, but rather to cover the notes payable on the costs for the construction equipment used for the project. These bonds were underwritten by Oda Shintaku Bank and Fujimoto Bill Broker and Bank. This was the first time a TEP bond issue had been underwritten by any financial institution other a member of the banking syndicate. Most likely, this was because the syndicate’s managing underwriter the Bank of Taiwan was in the depths of a financial crisis. In June 1928, TEP made a sixth bond issue worth ¥6 million (6.5% interest rate) that was meant to refinance the fifth issue. This sixth issue was underwritten by Kyōdō Shintaku Bank, Oda Shintaku Bank, and Fujimoto Bill Broker and Bank. The reason behind refinancing the bonds was the drop in interest rates in the wake of the financial panic. For the Governor-General of Taiwan and TEP, which had both been looking for the opportune moment to relaunch the Sun-Moon Lake project, the drop in interest rates presented a window of opportunity. TEP then petitioned the Governor-General of Taiwan to relaunch the Sun Moon Lake project, and in response the Governor-General in August 1928 decided to follow through.17
The Governor-General of Taiwan decided to relaunch the project, but the long-term clearing price for TEP shares on the Tokyo Stock Exchange was well below the par value of ¥45 (Minato 2011, 74). In light of these circumstances, the Governor-General of Taiwan and TEP came up with the following plan to finance the project. Under the plan, the approximately ¥44.4 million in financing that would have to be raised for the four-year relaunch project was to come from ¥1.8 million from uncollected stock payments, issuing new shares worth ¥20 million, issuing ¥21 million in bonds, a transfer of operating income for ¥1.386 million, and obtaining ¥210,000 in loans. The plan was for the the Governor-General of Taiwan to fund the issuing of new shares, and for that ¥20 million to come from the issuance of government bonds.18
We should consider here why issuing new private shares was not chosen as a means for procuring financing. As is shown in Figure 1, the returns on paid-in capital rose as far as the 10% to 13% range from the first half of 1923 to the first half of 1927, but from the second half of 1927 onward they fell to the 8% range. The reason why the returns on paid-in capital fell despite the increase in revenues from the electric power business was that bond interest was included as expenses on the earnings statement. The situation was such that even when it came to the disposal of retained earnings, it was necessary to increase the internal reserves ratio to prepare for making interest payments on bonds. Despite the dividend rate remaining at 6%, the dividend payout ratio rose from the 30% range to the 40% range. Increasing the dividend as a means for increasing the share price to the level needed to issue new shares was difficult. The sluggish share prices and the difficulties over a dividend increase made it impossible for TEP to procure financing by issuing new private shares.
One surmises that the banking syndicate led by the Bank of Taiwan was the underwriting group that was in mind for the ¥21 million bond issue. The basis for this interpretation is that, after the decision was made to relaunch the Sun-Moon Lake project, a reshuffle took place among TEP’s leadership that suggested a renewed strengthening of its connections with the banking syndicate. In September 1928, the Bank of Taiwan sent Yamanaka Yoshinobu to serve as a director for TEP. This was the first time since 1922 that someone connected with the Bank of Taiwan had become a director of TEP. In November 1928, TEP made a seventh bond issue worth ¥6.5 million (7.0% interest rate) that was meant to refinance the third issue (7.0% interest rate). This was underwritten by a banking syndicate. Specifically, it was the first banking syndicate that provided underwriting after the Sun-Moon Lake project had been halted. Based on the above, one surmises that the plan was to procure the ¥21 million needed to resume work on the Sun-Moon Lake project by having the banking syndicate underwrite the bonds. However, the question remains as to whether TEP had come up with an investment funds redemption plan that the banking syndicate would underwrite.19
The investment funds redemption plan that had been prepared for the project’s resumption was as follows. According to the aforementioned investment procurement plan, the total amount of interest payments on debt and dividend amounts after the first fiscal year (fiscal 1933) following the completion of the Sun-Moon Lake Power Plant would be ¥2.9 million per year. This would create sufficient surplus to address income and expenditures. Specifically, expenditures for fiscal 1933 were expected to increase by ¥3.2 million. This was to come from ¥300,000 for the Sun-Moon Lake Power Plant operating expenses, ¥1.575 million from interest on bonds, ¥17,000 from interest on loans, and ¥1.308 million from dividends. Meanwhile, it was expected that there would be ¥4.154 million from new financial resources, including ¥1.812 million from expenses saved for the power plant’s completion, plus another ¥2.342 million from the natural increase in profits. The annual increase in demand based on the natural increase calculations was basically calculated as being 5% for electric lighting and 6% for small-lot power demand (10% after fiscal 1936), as well as 15% for electric lighting and 10% for small-lot power demand from newly supplied areas. The calculations had been made for a six-months portion of the anticipated annual increase in demand. The plan was that most of the ¥955,000 surplus generated the first year after the plant was completed would be directed to internal reserves in order to prepare for either the sale of fixed assets or a fall in electric power costs. It then called for ¥1.6 million-worth of the bonds to be redeemed annually starting in the third year after the power plant’s completion (fiscal 1935), followed by ¥3.6 million annually beginning in fiscal 1939, and then for the redemptions to be concluded in fiscal 1946. In short, when it came to relaunching the Sun-Moon Lake project, TEP presented a financing plan based not on the prospect that energy-intensive industries would flourish, but solely on the natural increase in demand for electric lighting and small-lot power demand. Behind this was the steady increase in small-lot power demand, mainly from the rice husking and rice polishing industries (Horiuchi 2016). Actual revenues from the electric power business likely served as an indicator for determining whether or not the forecasted increase for such revenues was accurate. However, the investment funds redemption plan did not anticipate the merger with Taiwan Electric Industrial Company of July 1929 or the 13% drop in lighting rates and 10% drop in power rates that occurred in May 1930. If we estimate the annual revenues from the electric power business on the assumption that neither the merger nor the rate reductions had occurred, then the actual increases in those revenues from fiscal 1929 to fiscal 1933 would have been above projections (Minato 2011, 58). The natural increase that TEP had forecast would certainly not have been overly optimistic. Based on its bitter experience with delays in procuring financing from the capital markets, TEP then created a more sound investment funds redemption plan.20
As the foregoing shows, the investment funds redemption plan took into account only the natural increase in demand for the electric light and small-lot power uses. However, this is not to say that the concept of promoting energy-intensive industries by offering a low-cost and abundant supply of power had disappeared. The total amount of power available for large-lot use was calculated as 39,000 kW. In detail, the Sun-Moon Lake Power Plant’s total output was calculated as 100,000 kW. Subtracting the 8,000 kW that would be lost en route to the point of consumption leaves 92,000 kW. From this we further subtract 33,000 kW for the natural increase in demand for lighting, heating, and small-lot demand over seven years, plus 20,000 kW as alternative to thermal power plants. In short, the idea was to stimulate large-lot demand with inexpensive electricity and consume 39,000 kW. The new source of large-lot power demand was expected to come from the ammonium sulfate industry, which was around the same time as the Sun-Moon Lake project was being planned during World War I. Demand in Taiwan for the fertilizer needed for the rice and sugar cane crops was high (Hirai 2016). Imports of ammonium sulfate grew rapidly in the 1920s; the increase in the volume imported from Germany was especially dramatic from the mid-1920s onward. Against the backdrop of this dramatic rise in ammonium sulfate imports, a plan was drawn up to promote import substitutions after the completion of the Sun-Moon Lake Power Plant by supplying 25,000 kW of electricity to an ammonium sulfate industry that would have an annual production capacity of 50,000 tons. The plan held that TEP’s annual profits would increase by around ¥2 million annually from having captured this large-lot power demand, and this would finance a dividend increase (4%).2122
2. Finalizing the Foreign Bond Proposal and Adjusting the Plan for Redeeming Investment FundsThe plan to relaunch the Sun-Moon Lake project by procuring financing through investments from the Governor-General of Taiwan and the issue of domestic bonds that was to be funded by the issue of government bonds that the Governor-General and TEP had created, as discussed in the previous section, was changed in September 1928 to one of issuing foreign bonds due to the wishes of the Ministry of Finance, which was seeking to compensate for foreign currency funds in preparation for the lifting of the gold embargo (Ogura 1931,Ogura 1932). In order to carry out the proposed issuance of foreign bonds, the decisions were made to implement in Taiwan the Electric Utility Law and, for the purpose of increasing paid-in capital, merge TEP with Taiwan Electric Industrial Company (paid-in capital: ¥4.495 million). Together with the proposed changes over the foreign bond issue, the cost of relaunching the project was estimated to be around ¥48.6 million (¥42.68 million for construction, ¥4.75 million for interest during construction, and ¥1.17 million for dividends on newly paid-in shares), with ¥4.5 million from the Governor-General of Taiwan, ¥1.8 million in unpaid share collection, ¥670,000 from operating income, and ¥41.65 million (¥49 million face value) from proceeds of the foreign bond issue. The proposed issuance of up to ¥49 million foreign bonds, with the Japanese government guaranteeing payment of the principal and interest, was submitted to 56th Imperial Diet in February 1929 and approved in March.2324
With the change to the foreign bond proposal, interest payments were planned as follows (Minato 2011, 69). With the bond set to be issued in May 1930, during construction (from fiscal 1929 through fiscal 1932) interest on them was to be recorded on the balance sheet under the “Sun-Moon Lake Hydroelectric Power Plant construction costs” account. After construction was completed (fiscal 1933 and beyond), it was to be recorded on the earnings statement as an expense. Under this plan, while the financial results would become important after 1933 when the expenses on the earnings statement would surge, from that year forward they would also be able to pay a 6% dividend with room to spare. The plan was for bond interest payments would steadily decrease from 1934 onward while net income steadily increased. The dividend would increase to 8% in 1937, and up to 10% in 1939. As had been the case before it was changed, this interest payment plan was drawn up on the basis of a projected natural increase in power demand while giving no consideration to the expected increase in large-lot power demand. The projected annual increase in power business revenues shown on the investment funds redemption plan was exactly the same as it had been prior to the change regarding the plan for issuing foreign bonds, and the amounts for bond interest payments and dividends for the four years after the year in which construction would be completed were also almost the same. The surplus generated each year from power business revenues that were expected to gradually increase would be used to cover the construction costs that would come with increasing supply as well as to redeem foreign and domestic bonds, and to gradually reduce bond interest payments. It is apparent that TEP faced the issuance of foreign bonds with its meticulously detailed investment funds redemption plan in hand.
In September 1930, based on a suggestion from the Ministry of Finance (which was hastening its foreign currency compensation effort), changes were made to the foreign bond issue proposal to remove the ¥4.5 million investment by the Governor-General of Taiwan from the plan, and limit the size of the issue to ¥45.8 million, to be preceded by collecting the ¥1.8 million in unpaid stock payments (Minato 2011, 80). Although it was much later than planned, US$22.8 million (approx. ¥45.73 million) in foreign bonds underwritten by J.P. Morgan & Co., among others, were issued in June 1931. The terms were favorable: a 5.5% interest rate, a 40-year term of redemption (equal semiannual principal and interest payments starting three years after the issue), and an issue price of US$93.50. TEP received US$20.45 million (approx. ¥41 million) of the total issue amount, minus overhead costs (Matsuki Kan’ichirō Denki Hensankai 1941, 192), which it deposited with banks and trust companies. The balance sheet from December 1931 showed that the bank deposits and trusts had increased by ¥26 million over the previous term, and that securities had increased by ¥11.59 million (Minato 2011, 72–73). The increased securities were discounted debentures issued by the IBJ, which were underwritten by TEP with the funds received from the foreign bond issue.2526
As shown in Figure 1, from the first half of 1929 onward the return on paid-in capital for TEP recovered. However, the company did not increase its dividend and continued to dispose of retained earnings in order to once again increase the retained ratio. What shocked TEP—which had continued to steadily dispose of its retained earnings—was the December 1931 renewed ban on gold exports. The sharp drop in the yen’s exchange rate precipitated a foreign exchange loss for TEP’s interest payments on foreign bonds. The interest payments for those bonds were US$627,000 per half year, or, at an exchange rate of ¥100 = US$49.85, ¥1.258 million. However, the first interest payment made in December 1931 resulted in a foreign exchange loss of ¥372,000 yen with the exchange rate at ¥100 = US$38.50. When the second payment was made in June 1932, the rate now stood at ¥100 = US$31.20, yielding a foreign exchange loss of ¥757,000.
These foreign exchange losses immediately led to the collapse of the investment funds redemption plan discussed in the previous section. In August 1932, the president of TEP asked the Governor-General of Taiwan for permission to purchase its own foreign bonds. The price of TEP’s foreign bonds on the New York Stock Exchange dropped sharply starting in September 1931, and it would fall to below half their face value from 1932 onward (Minato 2011, 99). Even factoring in the strong dollar, reducing foreign exchange losses through the purchase of the company’s own foreign bonds was expected to have a considerable impact. The third interest payment made in December 1932 was executed at an exchange rate of ¥100 = US$21.40, resulting in a foreign exchange loss of ¥1.67 million. The exchange rate at the time the fourth was made in June 1933 stood at ¥100 = US$22.30, yielding a foreign exchange loss of ¥1.554 million (Ke and Lu 1952, 204). In response, starting in fiscal 1933 TEP began to purchase its own foreign bonds. Of the company’s ¥11.61 million in securities holdings in the second half of 1931, ¥11.52 million were accounted for by the discounted IBJ debentures. By the latter half of 1933, however, of the ¥10.58 million in TEP’s securities holdings, ¥10.49 million were the company’s own foreign bonds. In short, one surmises that TEP had underwritten the discounted IBJ debentures with a portion of the funds received from the foreign bond issue, but after the foreign exchange losses it released them all to obtain capital which it then used for the purchase of its own foreign bonds. The face value on TEP’s foreign bonds that the company purchased with the Japanese government’s permission reached US$2.68 million by the end of the first half of 1933, and ¥4.88 million by the end of the second half.2728293031
When the U.S. also abandoned the gold standard in April 1933, the yen exchange rate began to recover. The enactment of the Foreign Exchange Control Law that year also had an impact. Starting in mid-1933, the exchange rate hovered around ¥100 = US$30, and then stabilized at this level from 1934 onward. The price of TEP’s foreign bonds on the New York Stock Exchange also rose starting in mid-1933 (Minato 2011, 99). These developments began to diminish the impact of TEP purchasing its own foreign bonds, and by the start of 1934 the company had become less interested in making the purchases. This is evident from the fact that the total amount of its own foreign bonds that it held at the of 1934 was US$5 million, which was little more than the ¥4.88 million it held at the end of the previous year. In January 1935, TEP made an eleventh bond issue with a total value of ¥3 million (interest rate 4.5%), which was to fund the purchase of foreign bonds. This was underwritten by the Postal Life Insurance Bureau. Beginning that year, TEP once again became active in purchasing foreign bonds. At the end of the first half of 1935, the face value of its own foreign bonds that it had purchased reached ¥6.485 million. From the second half of 1934 onward, TEP had to earmark US$100,200 each fiscal year for a debt service fund. Accordingly, by purchasing 28.4% of the face value of the foreign bonds it had issued, the US$1.454 million in annual principal and interest payments that it would have had to make if it had not purchased foreign bonds was reduced to ¥1.0977 million. Moreover, since the US investment bank group that included J.P. Morgan allowed TEP to apply the foreign bonds that it held toward the debt service fund at their purchase price, one can safely assume for the moment that any foreign exchange loss would be incurred only on interest payments. That would amount to US$897,300 per year. Accordingly, the annual principal and interest payments that would have ballooned from ¥2.918 million to ¥4.848 million with the yen exchange rate having dropped to ¥100 = US$30 instead were kept down to ¥3.325 million thanks to the company purchasing its own foreign bonds. The foreign exchange loss that ought to have amounted to ¥1.93 million annually had fallen to ¥407,000 thanks to those bond purchases.32333435
2. Low-Interest Refinancing of Domestic BondsThe fall in interest rates at this time created the possibility for TEP to refinance its domestic bonds at a lower interest rate. In May 1933, TEP made an eighth bond issue worth ¥6 million (interest rate 5.5%) to refinance its fourth bond issue (interest rate 7.0%). This was underwritten by the banking syndicate. That August, TEP made a ninth bond issue worth ¥8.5 million (interest rate 5.0%) to refinance its sixth issue (interest rate 6.5%) (¥6 million) and to fund new projects (¥2.5 million). This was underwritten by a group of securities companies that included Yamaichi, Koike, Kyōdō, and Fujimoto Bill Broker and Bank. At the time of the ninth bond issue, TEP had been negotiating with the Bank of Taiwan, which was the managing underwriter for the banking syndicate. However, the two parties could not come to agreement over the redemption method, the term limit, or the underwriting fees. It was for this reason that the aforementioned group of securities companies underwrote the issue. Although the issuance of secured corporate bonds had been on the rise since the start of the 1930s, securities companies were actively underwriting unsecured bonds, creating a situation that saw them competing with one another over bond underwriting (Shimura 1969, 326–333). This was the case, too, with TEP’s ninth bond issue, which was unsecured. The securities companies actively lobbied to underwrite them. The underwriting fee that the securities companies wanted at the face value of ¥100 was ¥0.5 vs. the ¥2 demanded by the banking syndicate. By sorting through the underwriting institutions for the ninth bond issue, TEP saved approximately ¥130,000 in fees. The situation in the bond market where these unsecured bonds were rampant was favorable for TEP, which had been incurring foreign exchange losses as it pursued low-interest refinancing. That September, TEP made a tenth bond issue worth ¥5 million (interest rate 5.0%) to refinance the seventh corporate bond issue (interest rate 6.0%). This was underwritten by the banking syndicate, with a group of securities companies comprising Yamaichi, Koike, Nomura, and Fujimoto Bill Broker and Bank taking on secondary underwriter duties. By refinancing three of its bond issues in 1933, TEP managed to save ¥225,000 per year.36373839
In September 1935, TEP made a twelfth bond issue worth ¥8.5 million (interest rate 4.35%) to refinance the ninth corporate bond, as well as a thirteenth issue for ¥6 million (interest rate 4.3%) to refinance the eighth bond. The former was underwritten by the securities companies Kyōdō, Fujimoto Bill Broker and Bank, Yamaichi, and Koike, while the latter was underwritten by the banking syndicate. At the time of the thirteenth bond issue, the IBJ requested that the completed Sun-Moon Lake Power Plant be included as collateral, but TEP refused, citing the time that would be needed to establish a factory foundation as well as the expenses required for putting the plant up as collateral. In response, the IBJ withdrew from the banking syndicate that underwrote the thirteenth bond issue, and also did not join them in underwriting the subsequent fourteenth issue for ¥5 million (interest rate 4.3%). All secured low-interest domestic bonds at the time had a debt service fund attached (Kikkawa 1995, 132-133). One presumes that this is why TEP opted to refinance at a lower interest rate by issuing unsecured corporate bonds, even if it led to a standoff with banking syndicate member the IBJ. Issuing secured bonds carries with it the obligation of including a debt service fund, making it an option that TEP with its foreign exchange losses wanted to avoid.40
As the foregoing shows, TEP absorbed most of the impact from its foreign exchange losses by using the capital markets to purchase its own foreign bonds and to refinance its domestic bonds. While growth in revenues from the electric power business was slow, increases in bond interest had also been kept under control. As Figure 1 shows, TEP’s return on paid-in capital after having incurred its foreign exchange losses rose from the 13% range to the 16% range. Regardless, the dividend payout ratio was trending downward and the company continued its steady disposal of retained earnings. This steady course was meant to prepare the company for the change in how it accounted for interest payments on foreign bonds from the second half of 1934 onward. Until the Sun-Moon Lake Power Plant was completed, interest payments on foreign bonds had been transferred to the “Sun-Moon Lake Hydroelectric Power Plant construction costs” account on the balance sheet. However, starting in the second half of 1934 when the plant would be complete, they had to be recorded as expenditures in the earnings statement. As previously mentioned, the interest on foreign bonds was US$627,000 per half year, or approximately ¥2.09 million at an exchange rate of ¥100 = US$30. Since TEP had purchased US$4.88 million of its own foreign bonds as of the end of the second half of 1933, it would have to record ¥1.64 million—minus ¥450,000 in interest—as an expense every half year.
3. Securing Large-Lot DemandFor the time being, TEP dealt with recording the expense of foreign bond interest on its earnings statement by recording a profit on a reversal of reserve funds. As much as ¥517,000 in the second half of 1934 and ¥628,000 in the first half of 1935 were recorded as reversals on reserve and contingency funds (Minato 2011, 156–157). If we exclude this profit and calculate the return on paid-in capital, as Figure 1 shows the rate fell sharply in the second half of 1934 to 7.4% compared to 17.6% for the previous term. In the first half of 1934, TEP paid an 8% dividend rather than the usual 6% to commemorate the plant’s completion, though the high net income for the term kept the dividend payout ratio from rising. However, a sharp decline in net income for the second half of the year caused a dramatic increase in the dividend payout ratio. The only way to resolve these constraints on the flow of funds would be to rapidly increase revenue from the electric power business immediately after the plant’s completion. TEP would have to increase those revenues by capturing large-lot demand, which had not been a part of the investment funds redemption plan. This would depend on whether or not energy-intensive industries were to be promoted, and in this regard the economic policies of then-Finance Minister Takahashi Korekiyo (his so-called “Takahashi zaisei”) provided indirect support. The policy of not interfering with the low exchange rates had an import-suppressing effect, while the aggressive fiscal policies that came with expansion in military demand stimulated the heavy and chemical industries, and this in turn led to more investment in Taiwan.
The Governor-General of Taiwan and TEP were aiming for import substitutions by promoting the ammonium sulfate industry once the Sun-Moon Lake Power Plant was completed. However, because the economic recovery that began at the end of 1932 led to more capital investment in the ammonium sulfate industry in Japan and Manchukuo, it was not promoted in Taiwan. In its place, the falling exchange rates along with the sharp rise in the prices of imported goods and expanding military demand mitigated the risk of entering the market for the aluminum refining industry. That industry was successfully enticed to Taiwan with the understanding that it would receive abundant low-cost power from TEP. The decision to establish the Nippon Aluminum Co., Ltd. (hereafter NAC) was made at the start of 1934, and the company was incorporated with a capital fund of ¥10 million in June 1935. The power demand and supply contract between TEP and NAC was for the former to supply 27,000 kW at the low price of \.0005 per kWh. The contract introduced a sliding scale system. NAC would launch operations at the foregoing power rates, and the rates would be increased corresponding to increases in NAC’s profit ratio. This guaranteed increased revenues for TEP on the order of ¥1 million at minimum and ¥2.5 million at maximum.41
TEP acquired other large-lot demand customers beyond NAC. With investments from electrochemical companies, Taiwan Electrification Company (capitalized at ¥2 million) was established in May 1935 to produce carbide, lime nitrogen, ferrosilicon, ferromanganese, and other products. In addition, in April 1933 Nippon Mining Company acquired and established Taiwan Mining Company with a capital fund of ¥10 million. The company increased the capital fund to ¥20 million in October 1934 with the goal of increasing the amount of gold being mined and reducing production costs. It began work on expanding its gold washing plant and on constructing a state-of-the-art refinery. These expansions to its facilities led to a sharp increase the company’s electric power demand.42
It was in this way that the development of investment in Taiwan led to a rapid rise in demand for power from TEP. The renewed ban on gold exports that had caused the failure of the investment funds redemption plan drafted at the time the Sun-Moon Lake project was resumed also encouraged Japanese investment in Taiwan and increased the pace of the increase in electric power demand faster than expected in the plan. The contracted kW that TEP produced increased rapidly after the Sun-Moon Lake Power Plant was completed. It had changed from mainly small-lot demand from agriculture and the foodstuffs industry to large-lot demand from the metal-working industry and mining (Minato 2011, 129). This dramatic increase in large-lot demand for electric power showed it was possible that 100,000 kW would be consumed a mere four years after the plant had been completed. TEP now had to develop new power sources.
TEP decided to invest approximately ¥7 million to build the No. 2 Sun-Moon Lake Power Plant (43,500 kW output). The construction costs for the plant were procured by issuing new private shares. As shown on Figure 2, the long-term clearing price for TEP shares on the Tokyo Stock Exchange with their par value of ¥45 plunged in mid-1932 when the foreign exchange losses had become severe. However, as the yen exchange rate began to rise starting in April 1933, TEP’s share price likewise began to recover. Furthermore, with 1934 when the decision was made to build an aluminum refining plant, TEP’s share price exceeded its face value. This led the company to opt for issuing new shares as the means for procuring financing. TEP now saw its way clear to capturing large-lot demand, and the company’s valuation on the stock markets rose. In October 1935, TEP increased the value of its private shares by half (¥10.255 million). In December 1935, work began on construction of the No. 2 Sun-Moon Lake Power Plant, which was completed in August 1937.
Figure 2: Long Term Transaction Price in Tokyo Stock Exchange and Yield of TEP Share
Source: Tō̄yō keizai Shinpō, Tō̄yō Keizai Nenkan, 16th-20th.
Note 1. Jun 1934, Face value changed from \45 to \50.
Note 2. Dividend rate is 6%, apart from 8% during Jan-Jun 1934.
It should be noted that a number of life insurance companies emerged as top shareholders after the issue of new shares (Minato 2011, 127). Teikoku Mutual Life Insurance and Meiji Mutual Life Insurance first became owners of TEP shares in 1935 (Asajima 1991, 738, 772). Beginning in the second half of the 1920s, life insurance companies had been rapidly expanding the amounts of capital they held and were actively putting those funds to use. After the start of the 1930s, they rapidly increased their investing in stocks. In response to TEP issuing new shares out of its need for funds to develop new power sources, life insurance companies—which had built up their position as institutional investors on the capital markets—made the company an object for putting their capital to use. Importantly, this was premised by the returns on TEP stocks remaining stable at the 6% level, as shown on Figure 2.
Aware of the lack of investment incentives for capital formation in late developing states that Nurkse has brought up, this article posed the following research question: Why was it possible to procure from capital markets the financing required for the high-capacity hydroelectric power development that would generate excess capacity relative to existing electric power demand? As this article has made plain, when it came to the advisability of procuring financing from capital markets, the crucial point was that the investment funds redemption plan was drafted based on the electric power consumption plan created by TEP, which in turn was responsible for developing electric power sources.
The semi-private TEP was established in 1919 by the Governor-General of Taiwan for the purpose of building the Sun-Moon Lake Power Plant. This plan to develop hydroelectric power with a capacity on a scale vastly different from what had been required before did include policies meant to promote energy-intensive industries such as the ammonium sulfate industry by offering a low-cost and abundant supply of power, but it did not provide a specific power consumption plan. When it came to procuring the finances needed for high-capacity hydroelectric power development, the plan that was drawn up was premised by wartime economic conditions. Despite the power consumption plan having many uncertainties, the state of the capital markets during World War I made the Governor-General of Taiwan optimistic about procuring financing from those markets through the issuing of stocks and bonds. The company was established during the postwar economic boom, and procuring financing from the capital markets for capital investments was developing. However, when the capital market rapidly lost liquidity due to the postwar panic of 1920, in an instant it became difficult for TEP to procuring financing. In 1926, the Sun-Moon Lake project had been halted. While electric power demand had been steadily rising, there were concerns about rising construction costs as well as what the levels of electric power consumption would be after the power plant was completed. These uncertainties made it difficult to procuring financing from the capital markets.
In the late 1920s, with interest rates having fallen after the financial panic, the Governor-General of Taiwan decided to relaunch the Sun-Moon Lake project, which also included a plan to issue public and domestic bonds. At the time, the policy of trying to substitute imports by promoting the ammonium sulfate industry had not been abandoned. However, TEP—based on its own bitter experiences—prepared a meticulously detailed investment funds redemption plan that was based on an electric power consumption plan that in turn was based solely on almost certainly definite natural increases. Behind this lay the steady increase in small-lot electric power demand, mainly from the rice husking and rice polishing industries. The development of industrialization led by local capital alleviated the problem of insufficient investment incentives. These developments in turn made it possible to come up with the plan to procure from the capital markets the financing needed for high-capacity hydroelectric power development in a colony. This financing plan that accompanied the resumption of the project was changed to the plan to issue foreign bonds owing to the desire of a Ministry of Finance that was planning to lift its ban on gold. The investment funds redemption plan that seemed more certain to be realized was thus maintained and, though it was behind schedule, in June 1931 TEP issued the foreign bonds to raise the financing that made it possible to develop a high-capacity hydroelectric power project.
However, a sharp drop in the yen exchange rate following the renewed ban on gold exports in December 1931 created a massive foreign exchange loss for TEP and led to the collapse of its investment funds redemption plan. TEP absorbed most of the impact from this loss by purchasing its own foreign bonds and refinancing its domestic bonds at low interest rates. TEP succeeded in mitigated these foreign exchange losses by using the capital markets. Furthermore, the Japanese government’s adoption of measures to stabilize the low exchange rate encourage the heavy and chemical industries to make investments in Taiwan. For TEP, this immediately led to a jump in revenues by selling large amounts of excess electric power at cut-rate prices. Before the Sun-Moon Lake Power Plant was completed in 1934, capital investment in the ammonium sulfate industry may have been pursued throughout the Japanese empire but it was not promoted in Taiwan. However, the import-suppressing effect of the low exchange rate and the expansion in military demand mitigated the risks of investing in the heavy and chemical industries, with the result that customers such as NAC that had large-lot electric power demands emerged. With this, the redemption plan for the funds procured for the Sun-Moon Lake project got on track.
TEP was obliged to develop a new source of power earlier than planned, and the capital for this was procured by issuing new private shares. This capital increase was made possible by the rise in TEP’s share prices that followed on the decision to establish NAC. With the issuing of these new shares, institutional investors such as life insurance companies emerged as the company’s top shareholders. As the foregoing shows, once it was expected that the oversupplied electric power market would rapidly achieve equilibrium, and when the financing required for the development of further sources of power was procured from the capital markets, the problem of insufficient investment incentives would go away. As a result, shares in TEP—the company responsible for developing sources of electric power—became an object for institutional investors to put their capital to use.
1 The question on which the research in the present article is focused is an amended and expanded version of one proposed in Minato(2011).
2 “Taiwan Denryoku Kakubushiki-gaisha no enkaku oyobi genkyō.” Ōkura-shō, Shōwa Zaisei-shi Henshūshitsu-hen, Shōwa zaisei-shi shiryō. Vol. 5, No. 164. Subsequent references to this collection will be referred to as Shōwa zaisei-shi shiryō, 5-164.
3 “Taiwan Denryoku no zento.” Daiyamondo. May 1, 1920.
4 “Denryoku kabu seiri.” Taiwan Nichi-nichi Shinpō. June 22, 1919.
5 “Denryoku kabu wari-ate.” Taiwan Nichi-nichi Shinpō. June 22, 1919.
6 “Genbutsu-akinai kumiai.” Taiwan Nichi-nichi Shinpō. April 4, 1920. “Kabushiki dōgyō kumiai.” Taiwan Nichi-nichi Shinpō. April 5, 1920.
7 “Taiwan Denryoku sōkai.” Taiwan Nichi-nichi Shinpō. August 18, 1920.
8 Taiwan Electric Power Co., Ltd. Dai-3-kai Eigyō Hōkoku-sho, 1920-shimoki.
9 “Jitsugetsutan suiryoku denki kōji saikō keikaku no yōshi.” N.d. Shōwa zaisei-shi shiryō, 5-164.
10 “Taiwan Denryoku no kessan to zento.” Daiyamondo. September 1, 1920.
11 “Jitsugetsutan suiryoku denki kōji saikō keikaku no yōshi.” N.d. Shōwa zaisei-shi shiryō, 5-164.
12 “Taiwan Denryoku yukifusagaru.” Daiyamondo. August 21, 1922.
13 “Taiwan Denryoku Gaisha no zento.” Tōkyō keizai-shi. July 5, 1922.
14 Statement on the halting of the Sun-Moon Lake project by the Governor-General of Taiwan, introduced by Representative Den Akira to the minutes (shorthand) of the 56th Imperial Diet, House of Representatives Budget Committee, 3rd Subcommittee (under the Ministry of Finance), 4th Meeting, February 8, 1929.
15 Ibid.
16 “Jitsugetsutan kōji oyobi kōji-hi kaisetsu.” N.d. Shōwa zaisei-shi shiryō, 5-164.
17 “Jitsugetsutan kōji o Shōwa 4-nen yori saikō suru o yōsuru riyū-sho.” N.d. Shōwa zaisei-shi shiryō, 5-164.
18 “Jitsugetsutan kōji saikō no saisan gaiyō.” N.d. Shōwa zaisei-shi shiryō, 5-164.
19 Jūgo Bank withdrew from the banking syndicate after the financial panic.
20 “Jitsugetsutan kōji saikō no saisan gaiyō.” N.d. Shōwa zaisei-shi shiryō, 5-164.
21 “Jitsugetsutan suiryoku denki kōji saikō shikin.” N.d. Shōwa zaisei-shi shiryō, 5-164.
22 Ibid.
23 The Electric Utility Law was not in effect in Taiwan at the time. According to Article 200 of the Commercial Code, TEP—which had ¥28.2 million in paid-in shares and ¥20 million in outstanding bonds—had an ¥8.2 million bond issue margin.
24 Taiwan Sōtokufu. “Jitsugetsutan suiryoku denki kōji saikō keikaku ni tsuite.” N.d. Shōwa zaisei-shi shiryō, 5-164.
25 In addition to J.P. Morgan, Kuhn Loeb & Co., National City Co., First National Bank, and the New York branch of Yokohama Specie Bank also underwrote the issue.
26 Tōyō Keizai Shinpō. July 25, 1931.
27 Taiwan Electric Power Co., Ltd. “Taiwan Denryoku Kabushiki-gaisha shasai ganribarai kawase-sason no taisaku ni tsuki rinshinsho.” August 1932. Shōwa zaisei-shi shiryō, 5-164.
28 “Dai-25-ki kessan-sho.” TEP. Dai-25-ki yosan kankei shorui-tsuzuri (Taiwan Denryoku kankei shiryō. University of Tokyo Library of Economics.)
29 “Dai-29-ki kessan-sho.” TEP. Dai-29-ki yosan kankei shorui-tsuzuri. (Taiwan Denryoku kankei shiryō).
30 “Taiwan Denryoku kabu wariyasu.” Daiyamondo. July 1, 1933.
31 Statement by the president of TEP to the February 1934 general meeting of stockholders (“Jitsugetsutan no shōka mondai to dai-ni dengen.” Taiwan Nichi-nichi Shinpō. March 12, 1934).
32 “Gaisai kaiire seigen to roku-dai-denryoku gaisha.” Tōyō Keizai Shinpō. January 19, 1945.
33 “Taiwan Denryoku wa futatabi tachinaoru.” Daiyamondo. August 21, 1935. “Wanden-zōshigo no zōhairyoku.” Tōyō Keizai Shinpō. September 7, 1935.
34 “Taiwan Denryoku wa futatabi tachinaoru.” Daiyamondo. August 21, 1935.
35 Taiwan Electric Power Co., Ltd. “Kawase sason taisaku jisshi ni kansuru kibō jikō.” August 1932. Shōwa zaisei-shi shiryō, 5-164.
36 “Taiwan Denryoku no shin-shasai.” Tōyō Keizai Shinpō. August 12, 1933.
37 Ibid.
38 Tōyō Keizai Shinpō. September 16, 1933, p. 39.
39 “Jitsugetsutan suiden no shōka mondai to dai-ni-dengen.” Taiwan Nichi-Nichi Shinpō. March 12, 1934.
40 Naikoku Ginkō Yōhō. August 20, 1935, p. 170.
41 “Taiwan Denryoku no kaifuku.” Ekonomisuto. September 21, 1935.
42 “Taiwan kōgyō no yakushin to Kinkaseki no sankin jigyō.” Taiwan Nichi-Nichi Shinpō. October 17, 1935.
