Enough already - let's keep this railway boss in the driver's seat

PUBLISHED : Monday, 10 April, 2006, 12:00am
UPDATED : Monday, 10 April, 2006, 12:00am

MERGER? NO WAY. What we have in the latest ill-considered government proposal to force our two railway systems together is just another shambles that is likely to force our best man in railways out of his job.

The chief executive of MTR Corp, Chow Chung-kong, will have to tell his board to advise minority shareholders that they must reject this plan, so egregious is its offence to their interests.

And if he does tell them to reject it, our government will take it as an offence to itself.

The members of the executive council who are now getting ready to push the idea through may be complete amateurs in modern business practices but they will not tolerate being crossed by people whom they consider their underlings.

Let us set the background here. A few years ago, our government proposed merging MTR (76 per cent government owned) and the Kowloon-Canton Railway Corp (100 per cent government owned) as a way of resolving a spat between them about the building of a new Sha Tin to Central link and inter-system access to it.

The idea was that there would be economies of scale, fare reductions for passengers and good things for all.

No such luck. In the first place, the MTR was running a consistent deficit on railway operations and the KCRC was quickly headed for the same fix, which is hardly an environment for grandiose corporate shuffles. One would have to take over the other, and either way, there would have to be massive write-downs of share capital, a prospect from which the bureaucracy shrank.

In addition, the two railways have different operating systems, and thus, they would have to remain separate operating entities. The economies of scale could be minor ones alone. There was, and still is, no room for anything more than token fare reductions.

And there the matter has stood for years. Dropping the idea, however, would mean a loss of face for our government, and so now, we have a face-saving idea.

It is described as an asset-leasing arrangement. The MTR will pay $6 billion immediately plus a rent of $500 million a year for the KCRC's railway assets and take over running of rail services. The government will then take the KCRC's other property assets and sell them for a hoped-for $4 billion and we will think about it all again in 20 years' time, perhaps earlier.

The immediate trouble is that if you take away the KCRC's property assets, you take away any profits it makes, at least judging by the corporation's 2004 accounts.

But it may be worse than that. The KCRC's East Rail is a profitable operation, but then you get the newer projects - West Rail, Ma On Shan Extension, Light Rail, Lok Ma Chau Spur Line, Kowloon Southern Link and Sha Tin-Central Link, all of them either proven losers or dubious prospects. This company is headed into the red for a few years and probably more than just a few.

So if you are a minority shareholder of the MTR, what do you think of fronting up $6 billion plus an additional $500 million a year for the right to run another railway company that has been stripped of its profit-making property assets and is likely to give you nothing back for many years to come?

And what do you think of the idea that, if the KCRC does finally start to give you a decent return, the government will turn around and say: 'It's time to rethink our arrangement. We want more from you now'.

What do you think of the idea that legislators say they will not approve even this loser of a proposal unless both railways cut their fares by 10 per cent?

What you should say is: 'Thank you very much. This looks more like a management contract and I think we should restructure the financial terms to reflect it.'

You then propose that MTR manage the KCRC on the payment of annual fee by government to the MTR with performance incentives included in that contract if the MTR management does a good job.

'Get it straight, fellas,' you say. 'If you want us to run the KCRC then we don't pay you. You pay us.'

I do not see how MTR directors can possibly look at this proposal on anything but these terms and this means that I would not want to sit behind Mr Chow's desk just now. He must tell the board that it cannot accede to this ramshackle Exco idea without a breach of fiduciary duty to shareholders, one that could easily result in a lawsuit.

But if he does it, Exco will know who is behind the rejection and he will be an easy scapegoat for their wrath. He does not control any votes in the electoral committee for Hong Kong's chief executive, nor any rotten borough seats in Legco.

I suppose his only way out is somehow to encourage legislators to stick to their demands of a 10 per cent fare cut. That will kill the proposal before it gets to his desk. We have lost enough competent railway executives recently. Let us not lose this one.