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Legislative Council Panel on Transport

Financing of Ma On Shan to Tai Wai Rail Link and KCR Extension to Tsim Sha Tsui


This paper sets out the intended submission to the Finance Committee for a commitment of up to $8.5 billion from the Capital Investment Fund to be injected as equity into the Kowloon-Canton Railway Corporation (KCRC) for undertaking the Ma On Shan to Tai Wai Rail Link (MOS Rail) and the KCR Extension from Hung Hom to Tsim Sha Tsui (TST Extension).


2. The MOS Rail together with the TST Extension form one of the priority railway projects recommended in the 1994 Railway Development Strategy. Both projects are essential for improving the access to Ma On Shan and to facilitate further development of the area. The TST Extension is essential for the smooth operation of MOS Rail by providing another point of interchange with the MTR 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.

3. 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 26 March 1998 and 30 April 1998 respectively. Subject to authorisation of the railway schemes by the Chief Executive in Council, the KCRC will raise the necessary additional finance, and will design and complete the construction of MOS Rail and TST Extension in order to bring the extensions into operation by 2004.

Project Cost Estimates

4. KCRC's latest cost estimate for the MOS Rail and TST Extension is $16.3 billion (in MOD prices), broken down as follows -

(money of the day)
Capital costs15.1
Financing costs 1.2
Total :16.3

5. 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 12 and 13 below).

6. 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 planning intention for Ma On Shan.

Financing arrangements

7. 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 costs are intended to be financed as follows -

$ billion
KCRC borrowings7.8
Government equity8.5
Total : 16.3

(a) KCRC's borrowings

8. 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 towards the new projects is also required in order to demonstrate Government's continued support of KCRC to credit rating agencies, creditors and potential investors.

9. 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 12 and 13 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. 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 $8.5 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 Railway Ordinance in September 1999.

10. The current proposal to inject equity of up to $8.5 billion in KCRC will enable the Corporation to continue 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 32%. These financial indicators demonstrate clearly that KCRC will be able to raise the proposed debt cost-effectively and support it comfortably.

(b) Equity

11. 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

12. 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.

13. In line with existing policy, we consider it appropriate to grant the requested property development rights to 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 2004-2007 which will contribute to 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

14. 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 are reasonably confident that the MOS Rail and TST Extension will be a commercially viable project. We therefore consider the proposed equity injection of $8.5 billion into KCRC a prudent investment. Subject to the funding approval of the Finance Committee, we will 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.

15. 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.

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.

Transport Bureau
June 1999