The Utilization of Long-Term Funding System (the system thereinafter) has made great contribution on supporting Taiwan’s important investment projects initiated by the public and private sectors since its inception in 1994. The system has delivered satisfactory performance in industrial and social development, public investment, as well as macroeconomic stability. During the last 14 years, the fund disbursed by the system amounts to 14% of total new lending by all financial institutions in Taiwan. The induced investment from the funding of the system is equivalent to 14% of (accumulative) gross domestic capital formation. Finally, the funding of the system has created 340,000 long-term job opportunity. However, it seems that the necessity of keeping the system is decreasing with the alteration of economic and financial situation in recent years. For instance, the main capital supplier of this system, Chunghwa Post, has been transformed and the interest rates offered by this system are no longer attractive. This study, considering the experiences from Singapore’s Central Provident Fund System (CPF) and Japan’s Fiscal Investment and Loan Plan (FILP), evaluates the possibility of abolishing or transforming Taiwan’s system for the reference of the related authority. The FILP in Japan, which serves as a mechanism to link interest-bearing funds with appropriate government policies, is similar to the system in Taiwan. The stagnation of funds and huge bad debts, due to inflexibility, made the FILP step into the second reform in 2001. The second reform targeted on two main focuses which are the market mechanism of fund-raising and adoption of policy-cost analysis. The purpose of the former focus is to change from the compulsive deposits fund-raising to the market-based orientation. Moreover, the contribution of the latter is to disclose vital information of the FILP agents which makes the operation more transparent. Since 2001, the reform on the three-party, which consists of the government, the Post Office and FILP agents, has successfully improved the circulation and flexibility of the FILP fund. In Singapore, via the most important pension fund, saving, and insurance mechanism CPF, huge amount of capital was injected to support domestic investments. However, as the economic and financial conditions converted, similar to Taiwan, Singapore government now has to look for investment targets for CPF. Singapore’s experience shows it is more efficient to have clear and pure (not to be confused with each other) policy targets within one government entity. This study finds that the rising of Taiwan’s domestic extra saving, since 2001, has been mainly due to the slump of investment inclination. With the economic recession and uncertainty caused by the financial tsunami, the high possibility of emergence of liquidity trap and market failure have made it necessary for the government to stimulate and to lead the private investments. It is suggested that the system should be transformed and to play different roles under different circumstances. This project identifies the scenario under affluent capital situation in which the Long -Term Funding should involve. When the private capital is adequate, however, there is no need for the Long-Term Funding to get involved into non-policy related private investments. The Long -Term Funding can join the government investments with high externality, high risk, and with some profitable possibility. The coordination between private and government investments is expected to be helpful in raising the rate of return of government investments. When the investment is with high externality, high risk, and with very low profitable possibility, government budget should be injected alone to accomplish social benefits. Under scarce capital situation, in contrast, the role of the Long -Term Funding will be recovered as it played before—if the investment is evaluated to be helpful to the economy then the Long-Term Funding can be injected. This study also makes other suggestions with regard to the operation mechanism of this system. First, the original bank-based system is suggested to be maintained to deal with information asymmetric investment situation. Secondly, to achieve the policy targets more efficiently, the “Committee for Planning and Promoting the Utilization of Long-Term Funding” should be active in setting up annual plan and include various units in CEPD as staffs. Thirdly, it is proposed that the lending interest rate adopted by the system should be adjusted form “Cost-Markup Pricing” to “Market Rate Pricing”. To reduce the (currently large) discrepancy between the interest rate of utilizing the fund of the system and the cost of funds of lending banks, it is advised that the lending rate of the system is determined by the market interest rate of inter-banks credit market, adjusted for maturity premium, that is: Lending Rate of the system= Inter-Bank Lending Rate + Maturity Premium The cost-benefit analysis of the proposed transformation can be summarized as: 1. under the new proposal, non-policy related private investments are excluded from the system, which will save the government some trouble, while expending more energies on policy-related projects ; 2. the sources of funds are widened, while this will cause some problems on the choices of the sources; 3. Better cooperation and coordination between various policies and government organizations are needed, which will, however, bring some challenges for the government.
