MTRC (Amendment) Bill 1996
MTR Corporation's Response to the suggestions
made by the Hon Sin Chung-kai at the Bills Committee Meeting
held on 5 March 1997
1.1 At the Bills Committee Meeting on the MTRC (Amendment) Bill 1996 and the KCRC (Amendment) Bill 1996 held on 5 March 1997, the Hon Sin Chung-kai suggested that four alternative financing methods could be considered for the two Railway Corporations, being:-
- The Hong Kong Government borrowing from the market and then lending the proceeds to the Railway Corporations.
- The Hong Kong Government acting as guarantor for the borrowings of the two Railway Corporations.
- The Hong Kong Government utilising the assets of the Capital Investment Fund to lend to the two Railway Corporations.
- The two Railway Corporations issuing bonds with smaller denominations in order to raise funds from the public in Hong Kong.
1.2 We have set out below comments on options (i), (ii) and (iii), which are similar in characteristics as they all involve Government funding support. We have separately commented on option (iv) later in this paper.
2. A change from external financing to Government funding would destroy the commercial principles on which the Corporation has operated successfully to-date
2.1 The Hon Sin Chung-kai has stated publicly several times that the intention of his Bill is not to make any fundamental changes to the existing framework whereby the Corporations operate on Prudent Commercial Principles. He has stated that he is simply seeking to increase the degree of accountability and transparency of the two Corporations through the proposed revised fare setting process.
However, if the effect of the Amendment Bill is that the Corporation becomes funded by Government under any of options (i), (ii) or (iii), then clearly a very fundamental change would have been made with the Corporation departing from commercial principles and the whole foundation on which the MTRC Ordinance was based would need to be re-examined carefully.
2.2 At present, the Corporation is obliged to plan and arrange its own finances. This involves a high degree of commercial discipline to ensure that the business remains financially viable and that borrowings can be repaid. The market is free to choose whether and at what terms to lend to the Corporation and will assess its borrowings to the Corporation on a commercial basis.
If the responsibility for making financing decisions is transferred to Government, the need to exercise such commercial discipline would be reduced. Management would inevitably feel that their commercial responsibility has lessened, with Government having underwritten the financing of the Corporation irrespective of commercial performance. We have seen in many overseas examples that this form of Government subsidy will ultimately lead to reduced operating efficiency, deterioration of the system and reduced profitability.
In this situation, by what criteria would Government judge the amount of funds to be allocated to the Corporation in the face of competing demands for funds from other public services? How will Government make decisions on the appropriate amounts to borrow and/or guarantee?
2.3 If Government starts to subsidise the MTRC or KCRC through the suggested financing arrangements, this may disadvantage other transport operators who would not receive such a subsidy. Also, if this practice were to be extended generally, Government would end up subsidising other utility providers in order to avoid tariff increases.
2.4 In addition to the above general points, our comments specifically on the three options are as follows:-
It is unlikely that the Government would be able to borrow in the international capital markets at a significantly lower interest margin than the Corporation, as MTRC is already regarded as the sovereign benchmark for Hong Kong. The Corporation has an established track record in the US, Euro and Japanese markets and its Yankee Bonds have consistently traded below the interest margin for Chinese Government Bonds. Although 5-year Exchange Fund Notes trade at around 30 basis points below those of the Corporation under the Hong Kong Monetary Authority note issuance programme, this is partly because Exchange Fund Notes are tax exempt. No such difference in tax exemption applies to borrowings from other sources.
A Government guarantee would carry the same obligations on Government as Government borrowings and so the comments on option (i) above apply equally to this option. Thus, we would not expect the existence of a Government guarantee to lower our borrowing costs significantly. Government guarantees are usually obtained only where the corporation concerned is unable to borrow on its own credit strength.
The provision of guarantees by the Government would use up part of Government's borrowing capacity and reduce its ability to finance other required public expenditure.
The ongoing burden of having to fund the two Railway Corporations over the required lengthy time frame would be a huge undertaking even for the Capital Investment Fund.
For MTRC alone, the financing programme is in excess of HK$55 billion over the next five years even before taking into account any further projects beyond the Tseung Kwan O Extension. For KCRC, we understand the requirement may be even larger. It would not be prudent for all or the majority of the assets of the Capital Investment Fund to be invested in the two Railway Corporations.
The return generated by a portfolio of investments normally reflects the risk, length of maturity and spread of that portfolio. If the Capital Investment Fund were to invest its assets in long-term funding for the two Railway Corporations, at the same rate as its current return, the risk of its portfolio would be likely to increase (with the spread of investments being narrowed and maturities lengthened) without any increase in return.
2.5 Once the Corporation becomes dependent on Government funding, its borrowing capabilities in the international markets would be reduced and it would become more difficult to go back to these markets if such need should arise again in the future.
3. We will continue to pursue option (iv) although this source of financing would only cover a very small part of our financing requirements.
3.1 Under our existing Note Issuance Facility with the Hong Kong Monetary Authority, the minimum denomination is HK$50,000 and therefore the notes are accessible to public investors. However, demand from public investors for Exchange Fund Notes and MTRC Notes has to-date been small. It would be unthinkable for any corporation of the size of the MTRC anywhere in the world to rely solely on financing from small public investors and to ignore the institutional markets.
3.2 The public tends to prefer to deposit money in short-term investments such as Savings Accounts. One cannot compare Savings Accounts interest rates with interest rates for a long-term investment of 5-10 years or even more, as would be required to fund railway projects.
3.3 There is no evidence that small investors would accept a lower interest rate for their investment than institutional investors. If MTRC's credit perception were to be lowered as a result of the Amendment Bill, small investors would also require a higher return in order to lend to the MTRC.
Last Updated on 16 December 1998