For discussion
on 2 July 1999


New Subhead "Ma On Shan to Tai Wai Rail Link and Kowloon-Canton Railway Extension from Hung Hom to Tsim Sha Tsui"

    Members are invited to approve a commitment of $8,500 million under the Capital Investment Fund for equity injection into the Kowloon-Canton Railway Corporation to allow major works on the Ma On Shan to Tai Wai Rail Link and Kowloon-Canton Railway Extension from Hung Hom to Tsim Sha Tsui to proceed.


We need to inject equity into the Kowloon-Canton Railway Corporation (KCRC) to enable it to begin construction of the Ma On Shan to Tai Wai Rail Link (MOS Rail) and the Kowloon-Canton Railway Extension from Hung Hom to Tsim Sha Tsui (TST Extension).


2. We propose that Members approve a commitment of up to $8,500 million under from the Capital Investment Fund for to be injected as equity injection into the KCRC for undertaking the MOS Rail and TST Extension.


Project Cost Estimates

3. KCRC's latest cost estimate for the MOS Rail and TST Extension is $16.38 billion (in money-of-the-day (MOD) prices), broken down as follows -

$ billion
Capital cost 15.1
Financing cost 1.72

Total 16.83

Government's assessment

4. We consider KCRC's capital cost estimate generally in order and financing cost within an acceptable range. The capital cost estimate has included provisions for some minor land resumption and related compensation items. It however does not take into account additional costs that may arise due to development of the air space above any MOS Rail stations and depots (please refer to paragraphs 11 and 12 below).

5. Taking into account latest capital cost estimate, revised inflation forecast and property development profits, KCRC has estimated that the project internal rate of return (IRR) of the MOS Rail and TST Extension lies between 7.3% and 8.4%. Government is of the view that the high-side scenario of 8.4% IRR is in line with the current planning intention for Ma On Shan.

Financing arrangements

6. We have studied the KCRC's capital structure, borrowing power, property development proposals and other commitments such as West Rail to evaluate the Corporation's borrowing capacity and an appropriate mix of debt and equity financing for the MOS Rail and TST Extension. We have agreed with KCRC on an optimal financing arrangement that would minimise the use of public funds and at the same time allow the Corporation to service its capital in the most cost-effective manner. The total project cost is intended to be financed as follows -

$ billion
KCRC borrowings 7.8
Government equity 8.5

Total 16.3

KCRC's borrowings

7. KCRC is well-placed to raise finance at a corporate level through commercial loans, given the Corporation's high international credit ratings, its robust financial record, and the support of Government as its sole shareholder. For instance, the Corporation has demonstrated its ability to tap both the local and international financial markets by launching a $10 billion Hong Kong Monetary Authority note issuance programme and a US$1.5 billion medium term note programme. That said, an appropriate amount of equity contribution from Government is also required in order to demonstrate Government's continued support of KCRC to credit rating agencies, creditors and potential investors.

8. Having regard to KCRC's overall financial position, we believe that a Government commitment to inject equity of up to $8.5 billion, together with the property development rights described in paragraphs 11 and 12 below, would be an appropriate level of financial support for construction of the MOS Rail and TST Extension, and would allow the KCRC to raise the balance required for their funding of the MOS Rail and TST Extension through commercial borrowings.

9. The current proposal to inject equity of up to $8.5 billion in KCRC will enable the Corporation to tap both the local and international financial markets. The financing arrangements will allow KCRC to maintain a minimum Debt Service Coverage ratio of 1.25 and a maximum total debt to total capital ratio of 3832%. These financial indicators demonstrate clearly that KCRC will be able to raise the proposed debt cost-effectively and support it comfortably.


10. The proposed equity injection by Government, at about half of the total project cost estimate, is in line with the proportion of Government funding for West Rail. This amount should provide KCRC with a reasonably strong equity base in comparison with the loans to be raised and also let KCRC have sufficient flexibility in arranging its finances. The amount will also give a clear signal to the financial market about the extent of Government commitment to the project, and should further strengthen the confidence of lenders in providing loans at competitive rates to KCRC.

Property Development

11. KCRC has proposed to help support their borrowing programme by seeking property development rights on the MOS Rail alignment above Tai Wai Station and depot, and Lee On and Sha Tin Tau Stations, and on two East Rail sites at Fo Tan and Ho Tung Lau.

12. In line with existing policy, we consider it appropriate to grant the requested property development rights to the KCRC so as to ensure the timely delivery of housing supply and better integration between the housing developments and the railway stations. Furthermore, KCRC considers that such rights will be a strong indication to the markets of ongoing Government financial support. KCRC estimates that this will generate profits of up to $4.3 billion between 2004 and 2007 which will contribute to its debt repayment and thus strengthen its financial position in the early years of its new projects' operations. The Government and KCRC have agreed in principle that any property development profits in excess of the estimated figure should be distributed to Government in full by means of extraordinary dividends, unless they are required to finance other railway projects. This arrangement will ensure that those profits in excess of KCRC's financing requirements will be channelled back to General Revenue.

Project Evaluation

13. Government considers that the higher project IRR of 8.4% estimated by KCRC, which is comparable to the projected 8.5% IRR for the Mass Transit Railway Corporation's Tseung Kwan O Extension, is achievable. We consider the proposed equity injection of $8.5 billion into KCRC a prudent investment.

14. In order for major expenditure on detailed design work to proceed to achieve opening in 2004, the KCRC needs a commitment from Government that it will fund its share of project costs. In turn this will allow the KCRC to approach the financial markets to arrange the necessary borrowings.


15. Subject to Members' approval, wWe will intend to inject $6 billion of equity into KCRC early in the financial year 2000-01, and the balance of $2.5 billion around one year later.

16. We will also need to carry out some essential public infrastructure works in the order of $1.2 billion (in 1999 prices) to enable the MOS Rail and TST Extension to be open for use by the public. Such works include the provision of access roads, construction of public transport interchanges, pedestrian subways etc. They will be entrusted to KCRC and their costs will be reimbursed by Government, through funding from the Capital Works Reserve Fund. Funding approval for these works will be sought separately from the Finance Committee in due course.


17. As part of the Government engineering feasibility study for the MOS Rail and TST Extension, an Environmental Feasibility Study (EFS) was completed in March 1997 which had not identified any insurmountable environmental problems associated with the project, and . Tthe EFS was endorsed by the Advisory Council on the Environment (ACE) in April 1997, subject to a more detailed Environmental Impact AssessmentStudy (EIA) Study. KCRC also completed a Preliminary Environmental Review (PER) on the MOS Rail and TST Extension in early 1998, and the findings of the PER indicated that with the implementation of the recommended mitigation measures, that the environmental impacts can be controlled within the established standards.

18. The MOS Rail and TST Extension projects constitute designated projects under Schedule 2 to the EIA Ordinance (Cap. 499). Environmental permits are required for the construction and operation of the projects. In accordance with the EIA Ordinance, the KCRC will soon complete a more detailed EIA study and will consult the ACE and members of the public on the findings in the EIA report. The KCRC will implement all recommended mitigation measures identified in the approved EIA report and those imposed as conditions for approval.


19. We briefed the Legislative Council Transport Panel on these proposals on 25 June 1999. Members expressed concerned about the viability of the MOS Rail and requested that the proposed further extension from Tai Wai to urban Kowloon together with the MOS Rail be implemented in one go, even if this would delay the targetted completion date of 2004 for the MOS Railcompletion date of 2004. The MOS Rail will connect to the East Rail at Tai Wai Station where cross-platform transfer will facilitate Kowloon bound passengers from the Ma On Shan area. With an expanded and improved Tai Wai Station proposed in the MOS Rail implementation programme, the Tai Wai Station will have sufficient capacity to handle the combined patronage from the East Rail and MOS Rail until about 2011. The second connection between Tai Wai and Kowloon is under study in the second Railway Development Study. We believe a phased approach should be adopted so that the MOS Rail can be provided earlyier. 20. We briefed the Legislative Council Transport Panel on these proposals on 25 June 1999.


20. The MOS Rail together with the TST Extension form one of the priority railway projects recommended in the 1994 Railway Development Strategy. The MOS Rail is essential for improving the access to Ma On Shan and to facilitate further development of the area, while the TST Extension is essential for the smooth operation of the MOS Rail by providing another point of interchange with the Mass Transit Railway network. In September 1998, the Executive Council decided to ask the KCRC to proceed with detailed planning and design of both projects and to have the project agreement finalised in 1999.

21. In accordance with the project programme and under the Railways Ordinance, we gazetted the railway schemes for the MOS Rail and the TST Extension on 25 26 March 19998 and 30 April 19998 respectively. 67 objections to the MOS Rail, involving more than 1 000 standard letters, have beenwere received within the 60-day statutory objection period. The majority of these objections relate to the viaduct design in the Ma On Shan segment of the railway, the proposed further extension from Tai Wai to urban Kowloon, and the perceived inconvenience in the interchange arrangements for interchanging onto the East Rail at Tai Wai Station. For the TST Extension, five objections have been received so far. Under the Railways Ordinance, these objections will be handled within a period of nine months upon the expiry of the objection period. The relevant railway schemes and any unwithdrawn objections will be submitted to the Executive Council for consideration in February 2000.

22. Another planned extension of the East Rail, the Sheung Shui to Lok Ma Chau Spur Line (Spur Line), will be funded wholly by the KCRC via commercial borrowings. The estimated capital cost of the Spur Line is $8.59 billion plus $0.5 billion in essential public infrastructure works (in MOD prices). The railway scheme for the Spur Line will be gazetted under the Railways Ordinance in September 1999.

23. Subject to authorisation of the railway schemes by the Chief Executive in Council, the Project Agreement for the three East Rail Extensions will be executed. KCRC will raise the necessary additional finance, and will design and complete the construction of MOS Rail, TST Extension and the Spur Line in order to bring the extensions into operation by 2004.


Finance Bureau
June 1999