LegCo Paper No. CB(1) 1480/96-97
(These minutes have been seen
by the Administration)
Ref : CB1/PL/TP/1

LegCo Panel on Transport

Minutes of special meeting held on Monday, 3 March 1997, at 8:30 am in the Legislative Council Chamber

Members present :

    Hon Mrs Miriam LAU Kin-yee, OBE, JP (Chairman)
    Hon Zachary WONG Wai-yin (Deputy Chairman)
    Hon Mrs Selina CHOW, OBE, JP
    Hon Albert CHAN Wai-yip
    Hon LEE Wing-tat
    Dr Hon Samuel WONG Ping-wai, OBE, FEng, JP
    Hon CHAN Kam-lam
    Hon CHAN Wing-chan
    Hon LEE Kai-ming
    Hon TSANG Kin-shing

Members absent :

    Hon Edward S T HO, OBE, JP
    Dr Hon Philip WONG Yu-hong
    Hon CHEUNG Hon-chung
    Hon CHOY Kan-pui, JP
    Hon Albert HO Chun-yan
    Hon LAU Chin-shek
    Dr Hon LAW Cheung-kwok
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai
    Hon Lawrence YUM Sin-ling

Public officers attending :

    Transport Branch

    Mr Gordon SIU, JP,
    Secretary for Transport

    Miss Nancy LAW, JP,
    Deputy Secretary for Transport

    Mr Allan CHOW,
    Principal Assistant Secretary for Transport

    Finance Branch

    Miss Victoria TANG,
    Principal Assistant Secretary for the Treasury (Investments)

    Transport Department

    Dr Ernest LEE, JP,
    Assistant Commissioner for Transport

    Mrs Judy LI,
    Principal Transport Officer

    Mrs Iris WONG,
    Senior Treasury Account

    BZW Asia Limited

    Mr Robert Montanari,
    Assistant Director, Investment Banking

    Mr Wallace T C FOO,
    Assistant Manager, Investment Banking

Clerk in attendance :

    Miss Odelia LEUNG,
    Chief Assistant Secretary (1)1

Staff in attendance :

    Mr Matthew LOO,
    Senior Assistant Secretary (1)4 (Atg)

I.Confirmation of minutes of previous meetings and matters arising

(LegCo Paper No. CB(1) 960/96-97 and 961/96-97)

The minutes of the meetings held on 10 and 24 January 1997 were confirmed.

II.Information papers issued since last meeting

2.Members noted that no information paper had been issued since last meeting.

III.Toll levels for the Lantau Link

(LegCo Paper No. CB(1) 882/96-97(04) and 958/96-97(05))

3.At the Chairman’s invitation, the Principal Assistant Secretary for the Treasury (Investments) (PAS for Tsy) briefed the Panel on the Administration’s response to members’ concerns raised at the meeting on 21 February 1997. In essence, the Tsing Ma Control Area (TMCA) was designed and constructed as a cohesive system and its individual components such as bridges and tunnels could not be operated separately. As had been explained to members of the Bills Committee on the TMCA Bill, contracting-out was the most cost-effective approach to management, operation and maintenance of the TMCA. On the financial modelling, calculation of the average rate of return on Average Net Fixed Assets (ANFA) on the basis of a 20-year period, as recommended by the consultants would be acceptable as this was broadly consistent with other Government projects. Adopting a longer period as the basis might have distortionary impact on the financial projections. In the Administration’s view, a long term target rate of 12% on ANFA with a base toll of $30 was reasonable and consistent with the transport policy and the "user-pays" principle.

Toll levels and financial modelling

Admin 4.Members disagreed with the Administration’s approach in determining the toll levels for the Lantau Link on the basis of the full asset of the TMCA. Under this arrangement, the Link users would have to subsidize users of other components of the TMCA, which did not accord with the "user-pays" principle. Furthermore, some members recalled that the Administration had advised the Finance Committee that the Tsing Ma Bridge would be the only tolled facility in the TMCA. They called for an explanation as to why the toll paid at the Lantau end of the TMCA was deemed to include a toll for use of other parts of the TMCA. In response, PAS for Tsy said that for practical transport operational reasons, the Administration proposed to collect tolls from its users only at the Lantau Toll Plaza on the basis that a considerable portion of users would eventually pass that way. Rather than using up valuable land in constructing a second toll plaza at the Cheung Ching Tunnel and the Ting Kau Bridge and put efficient transport management at risk, the Administration had proposed that the toll paid at the Lantau end of the TMCA should include a toll for use of the Cheung Ching Tunnel or the Ting Kau Bridge or other connecting parts of the TMCA. The Secretary for Transport (S for T) added that the Administration had studied different options and considered the current proposal most suitable for transport management. Whilst the arrangement might to certain extent not be in line with the "user-pays" principle, traffic management was also an important factor to be considered. He undertook to clarify if the proposed tolls for the Tsing Ma Bridge were intended to cover usage of all facilities in the TMCA and provide the justifications for setting up only one toll collection plaza.

5.A member pointed out that a property developer was planning to build a road connecting Ma Wan to the Lantau Link. This road would bypass the Lantau Toll Plaza and the residents in Ma Wan could use the Link free of charge. In response, the Assistant Commissioner for Transport (AC for T) advised that under the preliminary design, the developer would fund the erection of a toll plaza in Ma Wan to collect tolls for the Administration but the details had yet to be finalized. PAS for Tsy said that the additional toll income generated from the development in Ma Wan had not been included in the current estimates and adjustments would be made when more details were available. In response to members’ concerns about the possibility of constructing a road to connect the Lantau Link with North Lantau, S for T advised that the possibility was remote since such a road would be very expensive given the geographical features between Kap Shui Mun and the Toll Plaza.

6.As regards the toll levels, PAS for Tsy explained that the initial differential toll levels for the Lantau Link were based on different factors including public acceptability and affordability, comparability with alternative means of transport and other tolled transport infrastructures in Hong Kong as well as the "user-pays" principle. There was also a need to yield a reasonable return to cover the substantial investment of public capital in the TMCA; otherwise Hong Kong taxpayers would have to subsidize TMCA users. The TMCA was operated and maintained as a single unit and was a single cost centre. If the Administration switched from the measured asset base to that of conventional tolled facilities such as bridges and tunnel, it had to liaise with the contractor to conduct a rigorous annual cost-apportionment exercise for management, operation and maintenance costs in respect of these structures. Moreover, the Administration would have to open an advance account to make up for the shortfall in remunerating the contractor as the toll income could not cover his remuneration in full prior to the opening of the New Airport. If the initial toll was too low to be capable of yielding reasonable revenues, the Administration would not have the confidence in opening such an advance account.

Admin 7.On the reasons for estimating the average return on the basis of a 20-year period, PAS for Tsy advised that the average return on ANFA of the TMCA would be increased from 12.34% to 25.90% if the base period was lengthened from 20 to 30 years. This big increase was due to depreciation of ANFA from $21.9 billion to $14.1 billion over a 30-year period. It reflected how the estimated rate of return might be distorted if the period was lengthened. Indeed, a positive rate of return might be derived even though there was no profit. The use of a 20-year period in the financial model was based on the consultant’s advice; this period would vary for each project and some might use even a shorter period for the purpose of estimating ANFA. Other public utilities such as the New Airport and the Airport Railway had also adopted this approach. She undertook to provide members with examples of these public utilities for reference. Mr Robert Montanari of BZW Asia Limited supplemented that return on ANFA was accepted by Finance Branch in its report "Review on Government Utilities" dated October 1994 as the most suitable estimator for the rate of return, for such public utilities as tunnels, on a year-to-year operating performance measurement basis. This measure is different from the Internal Rate of Return (IRR) which covers the entire economic life of a facility and is normally used in investment analysis. As regards the reasons for an increase in ANFA in 2008 and 2009, Mr Montanari explained that it was the result of the accumulation of new assets from capital maintenance works. Maintenance works could be classified as capital maintenance and operating maintenance. The former included such capital works as replacement of assets and any new capital works, which can be capitalized to the balance sheet. The latter includes such works as re-painting of bridges and replacement of electric cabling which was to upkeep the infrastructure of the TMCA which could not be capitalized. He would provide members with additional details on the reasons for the increase in ANFA from 2007 onwards and a list of operating and capitalized maintenance items. The DS for T noted a member’s concern over the inclusion of maintenance costs to be shouldered by the contractor in the projected expenditure and would confirm in writing that such maintenance costs had been excluded from the projected expenditure.

Admin 8.Mr Montanari explained in response to a member that the estimated IRR of the TMCA was 11.2% over its life of 100 years and that this was lower than those of Route 3 (Country Park Section) and Western Harbour Crossing which were 15.18% and 16.5% respectively over a 30-year franchise. Unlike this return on ANFA, the IRR of an investment is determined over its entire economic life and will remain substantially unchanged regardless of the projection timeframe. The upward adjustments of the TMCA IRR over the longer projection periods (as shown in the table) might be the result of slightly differing assumptions of the projected capital expenditure for the lengthened periods. Nevertheless, the differences were less than 0.5% and are regarded to be negligible technically. Regarding some members’ enquiry about the upsurge in expenditure in 2002 and 2007, he clarified that the increase in expenditure would mostly be in line with inflation, and would have no correlation with toll increases as suggested by some members. The increase was substantially due to the capital investments for the maintenance of the TMCA as advised by the engineering consultant. He undertook to provide details of the capital investments which accounted for the increase.
Admin 9.As regards depreciation of the TMCA, DS for T and PAS for Tsy advised that the depreciated value had been included in its overall expenditure. Mr Montanari confirmed that the depreciation tables assumed for TMCA are in accordance with the general accounting principles adopted in Hong Kong and Government’s Operating Accounts for Toll-Tunnels. Depreciation of different asset components of the TMCA would vary depending on their valuable economic life which was not fixed at a simple rate. For example, the economic life for bridges and tunnels were 100 years while that for buildings would be 50 years. He undertook to provide members with a breakdown of the projected expenditure for the TMCA in a particular year including depreciation and staff costs.
Admin 10.Members were not satisfied with the Administration’s explanations for the financial modelling of the TMCA and were of the view that the toll levels should be calculated on the basis of the asset of the Lantau Link only. A member pointed out that as compared with the average return for low-risk public utilities which was around 8%, the rate of return for the TMCA was too high. Members requested the Administration to estimate the average rate of return on ANFA and IRR for the Link over a period of 30 years on the basis of the estimated project cost of $11,019.19 million (including Tsing Ma Bridge, Kap Shui Mun Bridge and Ma Wan Viaduct, and Lantau Toll Plaza including roadworks) and the opening toll of $30. The estimated expenditure should also be worked out on the same basis. The Administration was also requested to provide a breakdown of the estimated project cost of $7,952.21 million for the Tsing Ma Bridge.

Traffic projections

Admin 11.Some members were concerned about the accuracy of the traffic projections for the Lantau Link. AC for T responded that the projections were made using computerized models, and reference was made of estimates by the ‘Transport Studies for the New Airport’ and ‘the Second Comprehensive Transport Study Update’. The proposed tolls for the Lantau Link, land use on Lantau Island, economic growth etc. were used as input in the modelling process. To facilitate members’ understanding, he undertook to advise in writing the basis upon which the Administration estimated traffic from models.
Admin 12.In response to a member’s enquiry about the impact of "in-town check-in" services for the New Airport on the utilization of the Lantau Link, the Secretary for Transport (S for T) said that the Administration was still considering the feasibility of providing these services. Works such as the construction of the second runway would also affect traffic flow. He undertook to provide the Panel with an updated traffic projection taking into account factors such as "in-town check-in" services.
Admin 13.A member noted that the projected traffic flow would decrease in 2006 and 2011. AC for T advised that these downward projections were attributed to the anticipated opening of new links to Lantau, from Sham Tseng. Members were concerned with frequent delays in completion of large-scale infrastructural projects, and enquired about the consequential change in traffic projections in the event of delays in these two projects. In reply, AC for T undertook to provide the revised estimated tolls and traffic projections for the Lantau Link should these passageways be delayed for opening by two years.

14.Members agreed to hold another special meeting to discuss the subject upon receiving the Administration’s response to concerns raised at the current meeting.

(Post-meeting note : A special meeting was arranged on 13 March 1997.)

IV.Any other business

15.There being no other business, the meeting ended at 10:40 a.m.

Legislative Council Secretariat

5 May 1997

Last Updated on 22 August 1998