LegCo Paper No. CB(1) 588/96-97
(These minutes have been seen by the Administration)
Ref : CB1/PS/8/95/1

LegCo Panel on Transport
Subcommittee on Western Corridor Railway

Minutes of the Meeting on
Friday, 12 July 1996 at 8:30 a.m.
in the Chamber of the Legislative Council Building

Members present :

    Hon Mrs Miriam LAU Kin-yee, OBE, JP (Chairman)
    Hon Mrs Selina CHOW, OBE, JP
    Hon Albert CHAN Wai-yip
    Hon LEE Wing-tat
    Hon Zachary WONG Wai-yin
    Hon Albert HO Chun-yan
    Hon NGAN Kam-chuen
    Hon SIN Chung-kai

Members attending:

    Hon Eric LI Ka-cheung, OBE, JP
    Dr Hon Samuel WONG Ping-wai, MBE, FEng, JP
    Hon Ambrose LAU Hon-chuen, JP

Members absent :

    Hon Edward S T HO, OBE, JP
    Hon CHAN Wing-chan
    Hon CHEUNG Hon-chung
    Dr Hon LAW Cheung-kwok
    Hon LEE Kai-ming
    Hon TSANG Kin-shing
    Hon Lawrence YUM Sin-ling

Public officers attending :

Mr Gordon SIU, JP
Secretary for Transport
Mr Paul LEUNG, JP
Deputy Secretary for Transport
Mrs Jenny Wallis
Principal Assistant Secretary for Transport
Mr L N Parker
Government Engineer/Railway Development
Highways Department
Mr C K MAK
Chief Engineer/Railway
Highways Department
Mr George LAI
Chief Engineer/Territory Transport Planning
Transport Department

Attendance by invitation :

From Kowloon-Canton Railway Corporation
Mr Kevin Hyde
Chairman
Mr Ian McPherson
Director, West Rail

From A T Kearney (Hong Kong) Ltd
Mr Robert Tasiaux
Vice President, Great China

From Pacific Bechtel Corporation
Mr Thomas M McCarthy
Project Manager

From HSBC Investment Bank Asia Limited
Mr Nicholas Hann
Project Finance Director
Mr Conrad S L MA
Associate Director, Project Finance

Clerk in attendance:

    Mrs Vivian KAM

Staff in attendance :

Mr Billy TAM
Senior Assistant Secretary (1)4

I Presentation on Financial Analysis

At the invitation of the Chairman, Mr Ian McPherson of the Kowloon-Canton Railway Corporation (KCRC) introduced the consultants to members. With the aid of slides, Mr Tom McCarthy of the Pacific Bechtel Corporation briefed members on details of the estimated costs of the Western Corridor Railway (WCR) and Mr Conrad MA and Mr Nicholas Hann of HSBC Investment Bank Asia Ltd. provided details on the commercial return and the financial roles of KCRC and the Administration. Mr McPherson concluded the presentation by emphasising that the cost estimates were realistic and in line with projects of similar sizes and nature. He affirmed that extensive analysis had demonstrated the commercial viability of WCR and the project was a good investment for the Administration and KCRC.

(Post-meeting note: At members’ request, KCRC provided more legible copies of the presentation materials and these were circulated to members vide LegCo Paper No. CB(1) 1832/95-96.)

II Discussion on Financial Analysis

Contingency and project reserve

2. A member asked for the purposes of the contingency and project reserve and sought assurance on the reasonableness of the project reserve in the amount of $6.1 billion. Mr McCarthy quoted as an example the Mei Foo Station which was designed to be a surface station, and when there was another option of an underground alignment requiring an additional construction costs of $1 billion. If the alternative were adopted, the extra sum would be drawn from the project reserve. A similar need might exist in other stations such as Lok Ma Chau. Mr McCarthy added that the project reserve was estimated to be about 10% of the costs. As for the basis for the reserve and whether 10% was a normal percentage, Mr McCarthy confirmed that the base was $59.37 billion (including construction, systems and commissioning estimate, rolling stock and contingency) and 10% was an appropriate rate for such a level of design. He re-iterated that the reserve would not be spent if there were no major changes in the project.

3. A member enquired about the need for a financing cost of $7.5 billion for a loan amount of $25 billion as represented an interest rate of 30%. Mr Hann explained that the amount of $7.5 billion was the financing cost in the form of capitalized interest costs for a five-year construction period. The loan of $25 billion would be drawn down in stages at an estimated market interest rate of 10%. Mr Hann agreed to provide for members’ reference schedules of loan drawdowns and amounts of capitalized interest for different years.

Return on investment and capital injection to loan ratio

4. On the cumulative return on investment to Government, a member was amazed to find that the projection would reach $1,000 billion in the year 2034. He expressed concern on exorbitant profits being squeezed from commuters. Another member commented that it was financially unhealthy to have the capital injection to loan ratio of two to one, as compared with a ratio of one to three for the Airport Railway.

Assumptions for passenger freight

5. A member enquired about the impact on the rate of return for passenger freight and the loan repayment ability of WCR if the fare assumptions for passenger freight were incorrect. He asked if subsidies from other activities would be incurred or if the rate of return would be adjusted downwards in the event of inaccurate fare assumptions in order not to affect passenger fares. Mr McPherson explained that KCRC was confident in the robustness of the passenger numbers as the analysis had considered both the upside and the downside scenarios. The project was a viable one in all respects.

6. In response to a member on the reason for not having considered a zero rate of investment return (IRR), Mr Hann advised that there was no direct relationship between rate of return and fare. Rather, it was a choice between a commercially viable project and a project with Government subsidy. A project with a zero return would mean that its revenue was solely for recouping initial investment and operating costs; it was however not possible to set the rate of return to 0% and then assess the impact on fares. Revenue on the other hand would serve three purposes: to cover operating costs, to repay debt, and to provide a return. The 12% rate of return for the WCR project was a modest return in private sector infrastructure. Mr Hann emphasized that the return had not taken into account inflation. With inflation at a rate of 7 %, the real rate of return would only be 5 %.

Financial support

7. A member asked if finances from KCRC would be used to subsidize the WCR. He also asked for an assessment on the effect on the East Rail and the Light Rail Transit (LRT) if KCRC did not spend the cash amount of $4.3 billion on the WCR project. Mr Hann said in response that the debt serviced by KCRC was financed through the normal business of KCRC and required no subsidy. Part of the surplus from the existing business were used to invest and finance debt in the WCR project. Mr Kevin Hyde added that the cash was from KCRC’s existing business, excluding income from passenger service.

Value-engineering technique

8. In response to a member on the value-engineering technique which had assisted in the reduction of costs on past occasions but had not been mentioned in the full proposal, Mr McPherson explained that he had been misquoted by the press. He clarified that KCRC had used value-engineering techniques in the past to reduce costs. The same technique could be used in the WCR project and in some cases the cost might be reduced by 10%.

9. On the subject of sensitivity analysis, a member enquired about the reason for not having considered different scenarios independently, about the absence of a "worst scenario analysis" and of scenarios dealing with combinations of adverse factors. Overall, he considered the full proposal too optimistic and had focused only on the merits of the project. In response, Mr Hann advised that over 700 sensitivity analyses had been conducted and only a few had impact of significant magnitude. He would be happy to present any one of the 700 analyses to members if so requested. As the project was still in the financial strategy phase, consideration of a detailed financial plan would be premature at that stage.

10. Hon LEE Wing-tat doubted the capability of the Administration-appointed consultants in assessing the project and in determining the amount of Government injection in the absence of the afore-mentioned analyses. He also expressed dissatisfaction at the full proposal of having only reported the best scenarios. Mr McPherson drew attention to the difficulty in producing the analyses requested by the member at the preliminary 5% design stage. KCRC had no intention to hide adverse scenarios but would draw up worst scenario analysis at a later stage.

KCRC corporate structure

11. On the three options for the KCRC corporate structure listed in paragraph 8.1 of Volume 3 (Financial Analysis) of the full proposal, Mr Hann advised that the proposed structures would only have an impact after completion of the project and WCR became operational. Before that point of time, no material impact on financing by KCRC, borrowing ability of WCR and financial implications for the Government was envisaged. Mr Hann undertook to prepare a paper showing the differences of the three options at the time when the project had been completed.

Government injection

12. In response to a member on whether Government injection would be required when the project reserve proved insufficient, Mr McPherson gave an assurance that the reserve amount would not be exceeded and the need for further Government injection was not envisaged.

Financial forecast

13. Hon Albert HO Chun-yan referred to Annex E.1 of Volume 5 of the full proposal and noted that the operating revenue of the Kowloon-Canton Railway (KCR) and WCR were similar at the beginning but that the subsequent growth rate for WCR was much higher than that for KCR; the operating costs on the other hand did not grow correspondingly. Mr Hann explained that WCR and KCR were different in length and in the number of passengers carried. The new purpose-design rail system for WCR would not reach maximum efficiency at the early stage but operating revenue would grow quickly. On the other hand, efficiency had already been built in existing KCR services. Mr McPherson reckoned that the major difference with WCR revenue figures was on account of the rapid growth in container-freight service against a decline in break-bulk transport on train. Furthermore, WCR would carry more passengers through longer distances.

Confidence in the project

14. Hon Eric LI Ka-cheung held the view that KCRC with an asset value of $8.5 billion was only a small-size corporation, whereas uncommitted funds would increase by $11 billions if the WCR was constructed independently. He was concerned that finance companies would not have confidence in the project as reflected by the assumption that they were only willing to lend money for 15 years for a project spanning 40 years.

15. Hon Eric LI Ka-cheung further enquired whether the consultants were confident of obtaining financing without government guarantee, and sought confirmation on whether this was a normal assumption. He also asked if borrowing would become severely difficult if the Chinese Government would not provide guarantee. Mr Hann informed that the loan amount of $25 billion over 15 years was what the market would prudently accept. As a stand-alone project, the WCR would need additional level of funding, either from the Government or from other means. In the absence of Government guarantee, borrowing capacity would definitely be higher. On the weight of Government support, Mr Hann explained that in their analysis, Government support was normally confined to approval of the project as the major shareholder. The financial analysis on the other hand was based on the amount that could be raised with WCR as an independent corporation. Mr Hann supplemented that a trend had emerged in Asian countries for infrastructural projects to be undertaken by private enterprises.

Dividend payments

16. In response to a member on whether KCRC would pay dividends to the Government, Mr Hann advised that the assumption in cashflow projection was that during the construction period, dividends payable to the Government were re-invested in the WCR project. Resumption of dividend payments by KCRC would be in the year 2004.

III Follow-up on Transportation Planning in respect of Freight Services

17. Mr McPherson apologised for the editorial error in paragraph 2.2 in Volume 2 of the full proposal and confirmed that the capacity under the new freight systems should be ‘doubled’ instead of ‘tripled’. Apart from this, he assured that all figures in the proposal were correct.

Transportation Planning

18. In referring to the just-in-time mode of operation suggested in KCRC’s proposal, Hon LEE Wing-tat asked if the four existing container terminal operators and the Port Development Authority had been consulted. He doubted the practicality of containers handled by WCR being able to get priority processing in the future to achieve the "just-in-time" target. Mr McPherson confirmed that the operators had been consulted and in general were supportive of the project as it provided better backup. They also viewed the operation as an opportunity to increase their throughput.

19. Hon LEE Wing-tat considered it un-realistic to assume that consolidation and deconsolidation activities and the storage of empties containers would be performed off site near the Northern Freight Yard (NFY). He pointed out the impracticality of containers being downloaded at the Public Cargo Working Area in Kwai Chung, transported back to NFY for the above activities and then moved back to container terminals for shipment. He pointed out that break-bulk transport on train not suitable for containers would still travel on the existing railway to Hunghom.

20. On the "just-in-time" mechanism, Mr McPherson said that this was developed in the United States and would be feasible in Hong Kong. A member was however of the view that the situation in Hong Kong was different as land for support services near the container terminals was scarce. Mr C K MAK on the other hand considered this to be a feasible concept. He explained that the on-dock or near-dock mode of operation would reduce road traffic as less container vehicles would run on the roads. He was nevertheless in support of the suggestion for the consultants to re-consider the case in the light of the real life situation in Hong Kong.

Gaolan Port

21. A member requested a re-assessment of the impact of the development of Gaolan Port in China; he remained of the view that the consultants had under-assessed the potential impact. Mr Robert Tasiaux of A. T. Kearney (Hong Kong) Ltd. explained that ports to the west of the Pearl River Delta had been targeted to attract traffic from Guangdong. He nevertheless undertook to collect more information on how shipping companies would classify existing ports in regions near Hong Kong as hub ports and as feeder ports.

IV Any Other Business

22. With regard to the Subcommittee’s request for KCRC to withhold the award of contracts for the technical studies, members asked for a written submission setting out the reasons if the restrictions were to be lifted. Members agreed that the next meeting on 19 July 1996 at 8:30 a.m. would be for discussion of the subjects of Legal Empowerment and Land Requirements.

23. There being no further business, the meeting ended at 10:45 a.m.

Legislative Council Secretariat
30 December 1996

Last Updated on 21 Aug, 1998