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MTR

MTR

MTR’s small shareholders should reject proposal to fund overbudget high-speed rail

Albert Cheng says the case for a link to the mainland grid has weakened considerably in the wake of the MTR’s deal with the government to finance its overbudget and much-delayed line

PUBLISHED : Thursday, 03 December, 2015, 5:30pm
UPDATED : Thursday, 03 December, 2015, 5:30pm

Small shareholders of the MTR Corporation should reject the proposed financial package for funding the cost overrun of the problematic express rail link, or they might end up in a hole of financial liability.

The cost of the 26km high-speed link from West Kowloon to Guangzhou is now estimated to be some HK$19 billion overbudget and three years behind schedule. On Monday, Secretary for Transport and Housing Anthony Cheung Bing-leung closed ranks with MTR chairman Raymond Chien Kuo-fung and his successor, Frederick Ma Si-hang, at a press conference to announce their effort to keep the project on track.

Under the new agreement, the government will ask the Legislative Council to approve HK$19.6 billion in extra funding by February. The same amount will eventually be recouped through a special dividend to be paid by the MTR Corp. It has pledged to pay HK$25.76 billion in dividends at the rate of HK$4.40 per share – four times last year’s payout – in two stages. The government, which holds 76 per cent of MTR shares, will get HK$19.5 billion, while other shareholders will pocket an unexpected bonanza of HK$6.2 billion. This is obviously meant to be a sweetener for small shareholders to accept the deal.

READ MORE: Hong Kong government allies may block rail link funding bid, warns Finance Committee chairman

READ MORE: Incestuous relationship between MTR and the government is at root of Hong Kong’s high-speed rail woes

MTR shareholders must not fall into this trap. Behind the immediate payout of dividends is a much bigger long-term potential financial liability. The MTR Corp has agreed to cap the total cost of the project at HK$84.42 billion and will have to dig into its own pocket for anything over that ceiling.

Both the government and the MTR Corp have stressed that the special dividends are not meant to offset the amount to be approved by the Legco Finance Committee. This is sheer hypocrisy. The two sums are, of course, related. It is highly irregular for a listed company to borrow or raise money just to enable it to pay special dividends to shareholders.

Behind the immediate payout of dividends is a much bigger long-term potential financial liability

The MTR Corp’s project performance has been so poor that the government has engaged legal experts to look into possible compensation. This is on top of the pile of pending claims from contractors, who have complained about changes in designs and timetables.

Should there be further cost overruns, the MTR Corp would first forfeit its HK$6 billion project management fee. Any amount beyond that would have to be paid by shareholders one way or another. It is anybody’s guess what the final bill may be: I would bet around HK$100 billion.

MTR chairman-designate Ma recently joined Cheung on radio talk shows to promote the financial package, proudly publicising that it had come from the MTR. If there is any lobbying to do, it is only proper for the incumbent chairman to do it. Ma will not take over until next year.

READ MORE: No ‘plan B’: Hong Kong transport chief says high-speed MTR rail link to Guangzhou in jeopardy without extra funding

The independent non-executive directors of the MTR board should look out for the interests of the small shareholders, which should not be sacrificed in this way. Many are senior citizens who see their investments as a stable and low-risk income.

To protect their interests, small shareholders should question the corporation’s logic and veto the dividend proposal. They could also exert pressure on legislators to ensure the request for additional funds is not endorsed. As a last resort, they could seek a judicial review. Another alternative is, of course, to sell their shares as soon they have collected the special dividend.

READ MORE: MTR minority shareholders should vote against ‘bribe’ special dividend

I was a supporter of a high-speed rail system that connects Hong Kong with the mainland’s national grid. It is indispensable to sustain our economic growth into the next decade and beyond. Yet, the case for the rail link is now much weaker as the number of mainland visitors continues to fall.

The railway’s future effectiveness is also in doubt due to controversy over the possibility of stationing mainland customs and immigration officials at the West Kowloon checkpoints. Should that happen, it would constitute a serious erosion of the Basic Law. There is no solution in sight. Travellers might eventually have to pass through two separate checkpoints, negating the project’s emphasis on speed.

The urgency to complete the rail link is simply no longer there.

Albert Cheng King-hon is a political commentator. taipan@albertcheng.h­k