on 21 May 1999
ITEM FOR FINANCE COMMITTEE
HEAD 274 - TOURISM
New Subhead "Ocean Park Lowland Redevelopment Fund"
Members are invited to approve the creation of a new subhead "Ocean Park Lowland Redevelopment Fund" under Head 274 Tourism under the Loan Fund, with a commitment of $500 million to provide a loan facility for the Ocean Park Corporation to improve its recreation and education facilities.
The Ocean Park Corporation (OPC) seeks a $500 million loan to finance the acceleration of the construction of "Adventure Bay" in its Lowland Redevelopment Project (the Redevelopment).
2. We propose to provide a loan facility of $500 million to the OPC for a period of 15 years with interest at 5% per annum on the outstanding balance.
3. Ocean Park has been in operation for 22 years and during that time it has become one of the major attractions for both Hong Kong residents and international visitors. However, in recent years, it has become necessary for Ocean Park to maintain its competitive position, particularly vis--vis those theme parks that spring up in neighbouring areas in the past few years. Also, with the increasing number of water parks being introduced by the Municipal Councils, the appeal of "Water World" has diminished and annual attendance is now on average 30% below capacity. "Water World" occupies a large portion of the Lowland and is only open for business for 120 days a year.
4. The OPC intends to redevelop the Lowland. The Redevelopment aims to provide new recreation and education facilities to stimulate repeat visitations, to draw more tourists to Hong Kong and to encourage interest in environmental conservation. The Redevelopment project entails closing "Water World" and improving the utilisation of the Lowland area with, inter alia, an interactive "dark" ride, an expansion of "Kids' World" and a major new theme area called "Adventure Bay". The OPC plans to complete the Redevelopment by 2009 at a cost of $1.2 billion (money-of-the-day (MOD)). The OPC has commenced the Redevelopment and has funded "Sea Lion Fun Time" and "Film Fantasia" with cashflow from operations. The Hong Kong Jockey Club co-funded the "Giant Panda Habitat".
5. The OPC proposes to accelerate - from 2005 to 2002 - the completion of "Adventure Bay", which is estimated to cost $527 million (MOD), with a $500 million loan from the Government. "Adventure Bay" will include a new world-class marine mammal facility, an exciting new water ride and a seaport-style village. It will offer live entertainment, recreational facilities, educational exhibits and programmes, and venues for dining, shopping and relaxation, providing ample opportunities for both day and night operations.
6. With the completion of "Adventure Bay", the Park expects that the ratio of tourists to local visitors will increase from the present 3:7 to 3.5:6.5 in 2002-03 and eventually to 4:6. The number of tourists visiting the Park is expected to rise from an annual average of 822 000 over the past five years to 1.4 million in 2002-03. Surveys by the Hong Kong Tourist Association (HKTA) have shown that tourists who visit Ocean Park typically spend an extra 1.2 nights in Hong Kong. Given that the average tourist spends about $1,600 daily, on this basis the Park, after redevelopment, would help to bring some $2.7 billion (at 1998 price levels) tourism receipts to Hong Kong by 2002-03.
7. The Redevelopment will strengthen Ocean Park's attractiveness to locals and international visitors and draw focus on Hong Kong's efforts on conservation. Economic benefits emanating from the Redevelopment include tourism receipts brought about by the increased visitor arrivals or extended stays, and income and employment generated for the local economy from tourism and increased business for Ocean Park's service providers and franchisees. The project is expected to generate 88 new permanent jobs when "Adventure Bay" is opened in 2002, and 330 temporary positions during the three years of construction.
Terms and Conditions of the Loan
Proposed drawdown schedule
8. The loan facility will be available for a period of 15 years with interest charged at 5% per annum on the outstanding amount of the loan. The loan would be drawn down as required. A tentative draw-down schedule based on the projected funding requirement of the Redevelopment Project is shown below -
|Main attractions of "Adventure Bay"
|Marine Mammal Attraction
|Food and Retail
|Total ($500 million)
9. The proposed interest rate of 5% per annum is a concessionary rate charged on loans under the Loan Fund to statutory bodies or organisations delivering public services. The OPC is a non-profit making statutory body with a mandate to provide a balanced mix of recreation, education and conservation facilities to the public on a self-financing basis. A higher interest rate would increase Ocean Park's cost of operation and reduce the amount of funds available for future development projects.
10. We have provided loans at this concessionary rate to other statutory bodies such as the Hong Kong Housing Society to provide affordable housing and to the HKTA to set up the International Events Fund to promote tourism.
11. The OPC will be required to repay the loan by ten equal instalments of $50 million each, plus interest, due on 30 June each year from 2004, one year after the final drawdown. The first instalment would be due on 30 June 2004. With the prior approval of the Financial Secretary, the OPC may amend the repayment schedule or extend the loan repayment period.
Alternative Sources of Financing
12. Ocean Park has considered other sources of financing for this redevelopment project. These options include soliciting commercial sponsorship for the new facility as well as borrowing from commercial banks. However, neither of these represent a viable alternative. A review of the sponsorship option clearly demonstrates that the long construction time would not provide the immediate major publicity and marketing opportunities that companies require as part of their sponsorship programmes. This has been confirmed by an internationally recognized consultant who is an expert on these matters. Commercial borrowing is not a viable option because commercial interest rates would require the diversion of a significant level of operating cashflow that is otherwise required to develop additional recreational and educational facilities. Also, it is unlikely that commercial banks would be willing to provide such a substantial loan without security. For Ocean Park, the only property which could be used as security would be special purpose equipment and buildings. It is unlikely that they would be given a high loan value by the banks.
13. The proposed loan facility is an one-off commitment. There are no recurrent financial implications. As the Government would charge the OPC interest at the concessionary rate of 5% per annum on the loan, the net present value of maximum interest forgone discounted at the current "no-gain, no-loss" interest rate would be $38 million.
14. We briefed the Legislative Council Panel on Home Affairs on 10 May 1999 on the proposal. Additional information is provided as follows in response to Members' enquiries -
- a higher interest rate would impose an additional financial burden on the OPC and divert the Corporation's cashflow which could, otherwise, be used to develop additional recreational and educational facilities and promote environmental conservation. The OPC's mandate is to provide a balanced mix of recreation, education and conservation facilities to the public. At the same time, the Corporation is expected to maintain financial viability. Moreover, many of the OPC's operating policies and services offered to the public have been developed from non-commercial considerations, including free admission to seniors, heavily subsidized on-site educational tour programmes, free outreach educational programmes, administration and funding support to conservation activities, and low admission rates for welfare and student groups. The purpose of the OPC's request for the loan is to advance its "Adventure Bay" development in order to help stimulate the economy and revitalize the tourism industry. The Government's earlier loan to the HKTA was made for a similar purpose. Therefore, it would be equitable to charge the OPC the same interest rate as the HKTA;
- the reasons for the OPC not borrowing money from commercial banks are set out in paragraph 12 above. Moreover, the OPC is a non-profit-making public corporation. Unlike a commercial operation, the Corporation also provides public services as set out in sub-paragraph (a) above;
- the forecast of attendance at Ocean Park has been made on the assumption that the Park will continue to operate in a stable economic environment and that it will maintain an appeal in both the local and tourist markets through its focused marketing strategy and continued investment in new attractions. Historically, attendance at the Park grew at an annual average rate of 6% over the last ten years.
The Park expects attendance to grow at a faster rate with the accelerated new development. Despite the recent downturn in tourism, the industry is expected to grow at a steady rate over the long term, and Ocean Park will stand to benefit from the increase. A recent HKTA visitor survey also indicates that there is potential for Ocean Park to extend its market share further among visitors to Hong Kong;
- Ocean Park has a proven track record of managing its finances on a prudent basis. Following the formation of the OPC as a statutory body in 1987, the Corporation has remained financially self-sufficient. It has not required any subsidies from the Government or any other sources to fund its operations. Except for the year 1997-98, the OPC has generated operating surpluses every year, and these surpluses have been reinvested into the Park to develop its facilities further, to upgrade the quality of its guest services and to promote environmental conservation. Even in 1997-98, when the Park incurred a deficit as a result of a number of external factors, including the Asian financial crisis, the slowdown of the local economy and unfavourable weather conditions, the Park was still able to achieve a break-even on cashflow for operating activities without raising the admission price above the 1991 level. The OPC will continue to adopt a prudent practice of managing its business in order to secure a stable and healthy financial position. The Corporation also strongly believes that the introduction of "Adventure Bay" will further strengthen the Park as a preferred recreational and educational venue for local residents as well as a must-see destination for overseas visitors. The revenue generated in the years to come will not only ensure that the loan can be repaid but also enable the Park to continue its reinvestment programme to provide more updated recreational and educational facilities to the public; and
- the Lowland Redevelopment Project would cost approximately $1.2 billion over the next ten years. Within the next six years, the cost would be $885 million.
The $500 million loan will be used to finance the "Adventure Bay" development, which is estimated to cost $527 million. The OPC has an experienced team of project development staff who would monitor and work closely with outside consultants to ensure that the project is completed on budget and on a timely basis.
15. Ocean Park was officially opened to the public in 1977. Its construction was funded by the Hong Kong Jockey Club on land provided free by the Government. On 1 July 1987, Ocean Park ceased to be a subsidiary of the Hong Kong Jockey Club and became an independent non-profit-making body, the OPC. The Corporation is a statutory body incorporated under the Ocean Park Corporation Ordinance, (Cap. 388). The Corporation's operations are overseen by a Board appointed by the Chief Executive. Pursuant to the Ocean Park Corporation Ordinance, the functions of the Corporation are -
- to manage and control Ocean Park as a public recreational and educational park;
- to provide at Ocean Park recreational and educational facilities and other related facilities as it thinks fit;
- to develop Ocean Park for the purposes of recreation and education generally in such manner as it thinks fit; and
- to apply its profits howsoever derived towards the promotion of its functions specified in paragraphs (a), (b) and (c).
16. The Board of the OPC has approved the Lowland Redevelopment Project which entails the closure of "Water World" and the redevelopment of the greater part of the Park's Lowland Area into an "Adventure Bay". The Lowland Redevelopment will also include other attractions. A copy of the redevelopment plan is at the Enclosure
Home Affairs Bureau