Building on mistakes

The decision by the operators of the Eastern Harbour Tunnel to raise tolls after the government's opposition was defeated in an arbitration hearing has focused attention on the so-called 'build, operate and transfer' (BOT) model of constructing big infrastructural projects.

A comparison of the laws governing the operations of various tunnels reveals that the government learned well before the current row that it needed to tighten the screws on BOT franchise holders.

The Eastern Harbour Crossing Ordinance, which was passed in 1986, says that the operator can reap reasonable but not excessive remuneration and that any differences between the operator and the government will be settled by arbitration.

Opinions differ as to whether these provisions are adequate to protect the public interest and whether the government is to blame for failing to crush the operator's case for raising tolls.

Francis Lui Ting-ming, an economics professor at the Hong Kong University of Science and Technology, says that the operator's argument for increasing charges because it failed to achieve a reasonable internal rate of return is weak, as its profits have been commensurate with the growth rate of the economy.

Significantly, two tunnels built in the 1990s have incorporated mechanisms to cap the operators' returns. Both the Tai Lam Tunnel and the Western Harbour Tunnel are required to deposit revenues beyond specific levels into toll stabilisation funds, whose balances are used to cushion against future toll increases.

How this arrangement will work out remains to be seen, as traffic through both has been lower than projections. Despite having the right to raise tolls without the government's consent, the Western Harbour Tunnel operator has not been able to increase charges as much as it could, as the government-owned Cross-Harbour Tunnel offers competition by charging low tolls.

With hindsight, the government should not have structured the BOT contracts as if they had no bearing on one another. Provisions empowering the government to regulate tolls and impose 'passage taxes' on traffic-management grounds should have been built in.

By charging suitable tolls at each tunnel, a road-pricing scheme could easily be implemented throughout Hong Kong. But this cannot be done now because the tunnels have different owners and the terms of their franchises differ.

Notwithstanding these loopholes, the BOT model has obvious merits. It mobilises private investment to undertake big projects with slow returns and takes the business risks off the government.

BOT contracts are about striking a balance between requiring private investors to underwrite the risks of spending billions on long-haul projects and ensuring they do not reap excessive profits. Having struck a deal, the duty falls on both sides to respect the terms of the contract.

Secretary for Environment, Transport and Works Sarah Liao Sau-tung said she would be very careful about applying the BOT model to future projects, including the Hong Kong-Zhuhai-Macau bridge.

The public expects her to try to negotiate the best deal with potential investors. To strengthen her position, she might want to discuss with her mainland counterparts the idea of the governments building the bridge and financing it by issuing long-term bonds or low-interest loans. The catch is that the governments may have to dip into their coffers to cover potential losses should traffic projections turn out too rosy, as has happened to some of our tunnels.

C. K. Lau is the Post's executive editor, policy