Bid to squeeze tunnel firm takes toll on government's moral capital

PUBLISHED : Tuesday, 15 March, 2005, 12:00am
UPDATED : Tuesday, 15 March, 2005, 12:00am

'The Administration had also reminded the Company of the importance of striking a balance between the interests of the community at large and commercial considerations in devising their tolling strategy but to no avail.'

Legco briefing paper

June 2003

HOW SAD, all to no avail. The directors of the Eastern Harbour Crossing just would not pay any heed to their social obligations, you see, and insisted on taking their case for higher tolls to arbitration.

They have now won that case. The result is that, instead of paying $5 more per crossing, as the company earlier proposed, motorists will now have to pay $10 more. Surely we can sympathise with a government spokesman who lamented on Friday that: 'We are very disappointed at the outcome of the arbitration and are extremely concerned about the toll increase.'

Sympathise if you will. I do not. What we have here is a government that tried to pander to populist causes by reneging on an explicit agreement and was very properly stopped by arbitrators who came to exactly the same conclusion that previous arbitrators had done.

Let us accept first of all that the company is not really looking at hard times. It made a net profit in 2003 of $255 million, which represents a 20.5 per cent return on its investment. This is a handsome return by the standards of any normal company.

But New Hong Kong Tunnel is not a normal company. Its one asset, that Eastern Harbour Crossing, is held under a build, operate and transfer (BOT) scheme.

The company built and operates the tunnel and, in return, was granted the right by law to a 'reasonable but not excessive remuneration' from tunnel tolls for 30 years. This period ends in 2016 and full ownership of the tunnel then reverts to the government.

Now here is a question for you. If you were to give me $30 now in exchange for a 'reasonable but not excessive' annual payment every year for the next 30 years, how much should that annual payment be?

Do I hear you say $1 per year? Give me that $30 then. The deal is yours. If I do not have to give you your $30 back, then I am in clover on this sort of deal. Add a few zeros to the $30, please, the more the better. I can only win.

Very well, we shall accept that this annual return to you should be more than $1 a year. How much more?

Good question. We are now in the realms of high finance.

I am not privy to all the calculations that the arbitrators made to establish exactly what it should be for the Eastern Harbour Crossing but I do know that they agreed completely with the findings of earlier arbitrators in 1997.

They said that a 'reasonable but not excessive remuneration' would be an internal rate of return (IRR) on equity after tax of 15 to 17 per cent over the life of the 30-year franchise.

They furthermore agreed with the firm that its IRR would fall below this level without a toll increase and that achieving it over the life of the franchise meant that tolls should now be raised by an average of 66 per cent rather than the 33 per cent the firm asked for in 2002.

It may seem to you that 15 to 17 per cent is a high figure. You certainly do not get that on a bank deposit. Leaving aside, however, that an investment in a vehicle tunnel is riskier than a bank deposit, you get your deposit back from your bank when you want it.

But the company will never get its original capital back. This is a BOT scheme. In 2016 it loses it all. An IRR of 15 to 17 per cent to make up for that eventual loss sounds about right to me in this sort of proposition.

As much to the point, I find it objectionable that government should presume to lecture a private partner in a BOT project on 'the interests of the community at large' when that lesson should be read to government itself.

If any entity has an obligation to the community in a BOT project, it is the government when it makes promises to members of the community in order to induce them to participate in such a project.

In this case, it tried to break its promises on the flimsiest of reasons and, to add insult to injury, then had the gall to declare itself 'disappointed' when arbitrators insisted that it live up to those promises.

If this is to set the tone for future public-private partnership projects, then I think I know why there are so few of them in the pipeline. The one reason that so many of these projects fail around the world is that the government partner cheats on the spurious pretext of 'the interests of the community at large'.

Let us be grateful that the rule of law has proved it still can restrain our government in Hong Kong.