Will it fly? Let investors decide

PUBLISHED : Sunday, 03 July, 2011, 12:00am
UPDATED : Sunday, 03 July, 2011, 12:00am

Before legislators get carried away on the public relations wave created by the Airport Authority and Cathay Pacific in support of spending HK$100 billion or so of public money on a new runway, they should consider the government's abysmal records both in forecasting and infrastructure planning.

The nearest comparison to the airport proposal is container terminals. Remember how long the government insisted that new terminals at Tsing Yi/northwest Lantau were essential to keep up with trade growth and to retain Hong Kong's position as the world's top port? Of course, if planning by bureaucrats consists of drawing straight lines on graphs, that is the result. As late as 2008, it was still insisting on the need for CT 10 despite the massive container development across the border. It wasted a way-over-budget HK$3.7 billion on Stonecutters Bridge, which was justified on the grounds of developments that never happened. Hong Kong has now lost out to Shenzhen and Shanghai in container port throughput but do we now care that we missed out on more of these low-wage, polluting activities? Of course not.

There are plenty of other examples of wasted investment by bureaucrats with their straight-line growth charts.

Some aspects of aviation are high-value business compared with container handling, but not all. Simply acting as an interchange hub is of limited value-added, and, for low-end travel, Hong Kong should not try to compete with Pearl River Delta airports with their plentiful land and access to government largesse. The pollution issue is as serious for aviation as it is for shipping.

The government should also be reminded that the Airport Authority was supposed to be partly privatised and face the same financial disciplines and return expectations as other listed and privately owned or operated airports such as those in Beijing, Sydney, Frankfurt and London. So let's see such a move in supposedly free-market Hong Kong before any decision is made on expansion. That would provide a sterner test of the claims in the authority's financial and overall economic projections. If this is such a good deal, why not try to raise, say, HK$35 billion from an offering of new shares, giving outside investors a 50 per cent or so stake and the company an equity base of HK$70 billion, and borrow the rest as and when needed?

Meanwhile, one must wonder about returns on a much enlarged equity when, even now, its profits are hardly spectacular - HK$4.03 billion in 2010/11 on equity of HK$36.38 billion, or 11.1 per cent. The airport is little used at night and flight frequency is constrained by air traffic issues out of Hong Kong's control. The ability to keep raising fees in line with inflation with a huge increase in capacity is also debatable, given the regional competition and the fact that Hong Kong's charges are already high - suggesting that maintaining its position as a premium airport is more important than going after volume.

The authority's overriding requirement is to 'maximise value' for Hong Kong's benefit. That means maximising its returns, not putting out contentious claims about its contribution to gross domestic product. That may justify expansion but let the private sector, and the aviation industry itself, bear the risk and reward.

The government's so-called planning is no more than knee-jerk responses to particular vested interests - including those of its own departments. In total, the airport, express railway and bridge to Zhuhai and Macau constitute spending of about HK$200 billion at today's prices. Officials justify them all not by the rate of return but by the general benefits of improving links with the mainland and the outside world.

Yet, quite extraordinarily, there is no logical connection between the three. The bridge links to the airport but, being only a road bridge, does not link to the existing airport rail line - another expensive, money-losing piece of publicly financed infrastructure. The ultra-expensive high-speed railway goes nowhere near the airport but, for reasons best known to vested interests, to the dense heart of Kowloon, a shopping and residential area more than a business district. It will take the high-speed train 20 minutes to reach the border - compared with 25 minutes by car from Central via the western tunnel - and only be of use to travellers going to middle- distance cities. The problem of border controls is brought up to support expanding Chek Lap Kok rather than making more use of delta airports, but the same argument is never used to show the futility of high-speed trains which cannot reach very high speeds over such a short distance.

Other mega projects sponsored by interest groups are already consuming large sums of money for pouring concrete. One is the cruise liner terminal, which will serve a tiny percentage of visitors at huge opportunity cost in terms of harbourfront land. Another is the sports stadium when the existing Hong Kong Stadium is only filled once a year. But with this government and its cronies, big vanity projects always take precedence over sports facilities for schools and the public.

Economics is about choosing how to use scarce resources. Unfortunately, Hong Kong's HK$1.2 trillion reserves are not scarce enough to be used prudently or efficiently. They are now the plaything of officials and vested interests. Legislative Council, wake up to this fact. There may be justification for the new runway, but let investors decide. Aviation does not merit implicit public subsidy.

Philip Bowring is a Hong Kong-based journalist and commentator


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