Speech of the Hon SIN Chung-kai
at the meeting of the Bills Committee on
Mass Transit Railway Corporation (Amendment) Bill 1996
and Kowloon-Canton Railway Corporation
(Amendment) Bill 1996 held on 3 March 1997


At the meeting of the LegCo Panel on Transport on 25 September 1996, the Mass Transit Railway Corporation (MTRC), the Kowloon-Canton Railway Corporation (KCRC) and the Government expressed their views on my two bills. At the last meeting, the two railway corporations highlighted the downside of the two bills, emphasizing that the passage of the bills would downgrade the corporations' credit ratings, weaken their ability to raise loans and increase the cost of financing. This would only result in greater pressure on fares and hinder the long-term investment of the two corporations, and thus was not in the interest of both the corporations and the passengers.

However, I am of the view that the way in which the two corporations borrow from the international financial markets today is not the most cost-effective one. Nor is it in the best interest of the public. I would propose four options of raising loans for consideration by the two railway corporations and the Government, and I hope that they can study them in detail. I believe that these proposals, if adopted by the two corporations and the Government, will certainly reduce the interest costs borne by the corporations, thereby relieving the pressure for fare increases. Besides, these alternative ways of raising capital will free the MTRC and the KCRC of undue worry that any future changes in credit ratings may undermine their borrowing capacity.

Details of the proposals

Option 1:

Given that the Hong Kong Government is certainly in a better position than the MTRC and the KCRC to secure loans on more favourable terms from the international financial markets, one option worth considering is that the Government may borrow in its name and then transfer the funds in the form of loans to the two corporations. This can not only reduce the interest costs of the two railway corporations, but also cushion the corporations against the impact of credit rating changes in future.

This way of borrowing will not increase government expenditure. In other words, the question of subsidy from public revenue does not exist. The two railway corporations, however, can benefit from better borrowing terms, which will then help to cut down on interest costs and reduce pressure on fares.

Option 2:

The two railway corporations can borrow from the international financial markets with the Government as the guarantor. The Government’s guarantee can help to stabilize the credit ratings of the two corporations and enable them to secure loans on more favourable terms. As this is beneficial to the whole community in the territory and bearing in mind that the MTRC and the KCRC are public corporations wholly owned by the Government, it indeed has no excuse to evade its duty to provide that guarantee.

Option 3:

The Government can make loans to the two railway corporations from the Capital Investment Fund (CIF). The information on the CIF contained in the Budget shows that the Government has granted loans from time to time to such bodies as the Housing Authority from the CIF at the interest rate of 5% per annum. According to the paper submitted by the Monetary Authority to the LegCo Panel on Financial Affairs on 3 March this year, the amount of Government’s fiscal reserves deposited with the Exchange Fund, the amount of interest earned and the rate of return in each of the past four years are as follows:



Interest Earned

Yearly Rate of Return

















The above figures show that the rate of return for the Government’s fiscal reserves deposited with the Exchange Fund is in the neighbourhood of 5% per annum. If the Government grants loans to the two railway corporations from the CIF, with annual interest to be calculated on the basis of the rate of return for the fiscal reserves with the Exchange Fund, the yield will not be any less, which means that the Government will not suffer any losses. However, if the MTRC and the KCRC can obtain loans from the CIF at a lower annual interest rate, their interest costs will be reduced significantly.

According to the 1995 Annual Report of the MTRC, the company has debts totalling $15,376 million in 1995, with interest expenses for that year amounting to $1,289 million. The division of $1,289 million by $15,376 million gives the borrowing cost of the MTRC at 8.38%, which is 2.6% in excess of the 5.78% rate of return earned by the Government from its investments in the Exchange Fund in 1995.

If the Government had made loans to the MTRC at an interest rate of 5.78% per annum in 1995, the MTRC would have been able to save interest expenses amounting to $400 million for that year: ($1,289 - $15,376 x 5.78%) million = $400 million. In years to come, if the Government can provide loans to the MTRC and the KCRC from its huge fiscal reserves (estimated to stand at some HK$150 billion at the end of 1996), the interest costs of the two corporations will certainly be cut by a big margin and the need to increase fares will also be greatly reduced.

Option 4:

The two railway corporations can raise capital from the public by issuing debentures of lower face value, thus avoiding the need to borrow from the international financial markets with higher financing cost.

Last Updated on 16 December 1998