Castle in the air has foundations in solid profit
I CANNOT IMAGINE the Hong Kong Monetary Authority being all that pleased by Chief Executive Tung Chee-hwa's description on Sunday of IFC2, its future offices and Hong Kong's tallest building.
To the crowds at a groundbreaking ceremony at the Disney Park, Mr Tung said: 'I look forward to seeing all of you again, ladies and gentlemen, on this very same piece of land with Sleeping Beauty Castle towering in the background. . .'
Very apt, Mr Tung. I do not know about Beauty but sleeping certainly describes what the HKMA was doing when it decided to go there. The HK$3.7 billion it paid for its 14 floors is twice the going rate for Grade A office property and more than your equity subscription to Disney Park.
And, talking of sleeping on the job, I have some questions relating to that about Disney as well, not that I would call your chief representative in those negotiations a beauty either, not with that haircut he sports, much as you favour the bogbrush appearance.
As I understand it, the original Phase One of this development was to extend up to 2020, with 5.2 million visitors expected in 2005, the year of opening, and this number rising to 10 million visitors by 2020, when a second phase might commence. I now hear and see reports of a second phase as early as 2012 with the attendance goal of 10 million visitors also shifted forward to 2012.
There is nothing wrong with this. Back when the deal was announced there was no way of knowing that visitor arrivals to Hong Kong, which were running at 11.2 million a year, would rise to 16.5 million three years later.
But it brings the arrangements for a second phase all that much closer to the spotlight. The original briefing paper states that Hong Kong International Theme Parks, the joint venture with Disney, has an option for 20 years after the park opens to purchase the Phase Two site for HK$2.812 billion, subject to adjustments for inflation.
If visitor arrivals continue to grow at their present pace this will be a very valuable option indeed for Disney. Let us remember that it holds 43 per cent of the equity in the park and, with loan financing, most of it provided by the government, has to dig into its own pockets for only 17.4 per cent of the capital cost of Phase One.
Could those arrangements not have featured a way of clawing back more for ourselves if things went well? It seems to me that Disney now has one of those guaranteed win options on an expansion that will take place much sooner than earlier envisaged. The joint venture, by the way, also has right of first refusal on a third site east of Phase Two.
Next we get to that matter of the fees Disney will get for licensing its intellectual property to the park. The briefing says these will be similar to what Disney gets from its Tokyo and Paris parks. This is interesting as I have a Bloomberg snippet quoting an American consultant as saying that Disney's licensing and gate attendance fees amount to US$100 million annually in Japan and the figure is likely to be the same in Hong Kong.
Just think of that. If it is true, then before dividing up the pot with us on returns from our investment Disney will first reach into the tills every year for an amount equivalent to 32 per cent of the capital it has subscribed to the park, all incremental proceeds that it would be unlikely to take in otherwise and we get none of it. We just put up most of the loan capital.
It is not illegal. You can even say it is not unfair. It would have been nice, however, to have known this from the beginning. It is the sort of thing that might have enticed you or me to ask for a tougher stance on Phase Two. Disney wins again.
And then, watching the news on Sunday night, I recall seeing a Disney official telling us that the park will be a good thing because it will provide employment across the Asian region. I will not swear to the exact words. They were here and gone and I did not note the man's name.
It raises certain questions, however. I have always been of the view that Disney will not look for its low-paid burger flippers and ride attendants in Hong Kong but rather recruit them from Philippine and mainland migrant labour. Hong Kong people look for better opportunities.
We now seem to have Disney itself conceding this in a quick here and gone flash reminiscent of how it also let on that it was negotiating for a park in Shanghai.
What now of all your promises of job creation in Hong Kong, Mr Tung?