DO NOT CALL the KCRC a country railway and definitely do not suggest its main competitor is a racing certainty to win the crucial Central to Sha Tin rail route. Kowloon Canton Railway Corp wants to be taken seriously as a metropolitan rail operator and badly needs the cross-harbour link. A decision on whether it or MTR Corp wins the contract is expected shortly. Victory for the KCRC would make it the SAR's dominant rail operator, with a fully integrated network across Hong Kong and into the mainland. Executives enthuse of a future where passengers board a sleek luxury train in Central and disembark in Beijing. More prosaically, securing the Central to Sha Tin line would enshrine the KCRC's New Territories rail monopoly and wrestle a big slice of the lucrative cross-harbour traffic from the MTR Corp. The battle for the Sha Tin commuter is, at one level, a simple turf war between two Government-controlled rail operators, but it has far reaching implications for shareholders in the MTR Corp and the planned privatisation of the KCRC. Merrill Lynch estimates the MTRC would lose annual fare income of up to HK$1.6 billion should the KCRC win the HK$30-billion contract linking Tai Wai (the Sha Tin terminus) Hunghom and Central. As a recently privatised firm that saw passenger patronage fall 1.5 per cent on its core urban network in the first nine months, that would hurt. It would also have hit government attempts to sell a second tranche of MTR Corp shares - previously scheduled for this year. Now, with the MTR Corp offering on hold due to poor market conditions the pendulum looks to have swung towards the KCRC. A government gag order prevents either firm talking about their tender documents ahead of a decision that is expected soon. Recent Chinese-language Press reports, however, have suggested the odds have been moving in KCRC's favour. Its finance director, Samuel Lai Man-hay, is uncomfortable with that suggestion: 'I have had assurances from government quarters that this [timing of the MTR Corp share sale] will not be a consideration, because everything will be evaluated on a level playing field. 'The fact we are 100 per cent owned by the Government will not give us any benefit.' However, in an apparent equivocation on this point Mr Lai went on to add that: 'Of course any benefit accruing to the KCRC all goes to the taxpayer, whereas, with a private company, part goes to the taxpayer and part goes to private profit.' The MTR Corp remains the clear favourite to win the Central to Sha Tin link but it is the suggestion of being uncompetitive that annoys KCRC management. 'We have submitted a very good proposal which from our point of view is the best. There is some misconception in the market that the KCRC is a rural operation running in the countryside, which is not true. 'We are running 500 trains a day carrying 800,000 people. By any measure it is mass-transit. We serve Kowloon, which is as urban as anywhere in the world, so there is no reason why we cannot serve Hong Kong Island.' The KCRC is in the throes of an extensive network expansion that lies at the heart of the Government's rail-led transportation strategy. Construction on its West Rail route - linking west Kowloon with the northwest New Territories - was finished ahead of schedule and under budget, with contractors now working on the track and signalling ahead of a 2003 opening. Extensions to the East Rail service, linking to Ma On Shan and Tsim Sha Tsui, are scheduled to open by 2004. Analysts have argued that the MTR Corp remains the better bet for the cross-harbour route because of operational savings it can wring due to its existing subway and rolling stock resources. That is rejected by Mr Lai, who points to a 'critical mass' of the project-management expertise the KCRC has assembled to handle its network expansion. This has involved buying state-of-the-art tunnelling machinery that can reduce over-ground disruptions. 'They should have confidence in us. We have over 1,000 people in our project management team. They all came from building the airport [Chep Lap Kok] and the airport railway and railways elsewhere in the world. Project expertise will come wherever the project is,' he said. The KCRC differs from the MTR Corp in not relying on property development to bankroll its projects. Direct government equity injections have funded its network expansion. The firm's gearing stands at 30 per cent and as of December 31 the KCRC had a US$3.5 billion portfolio of securities and cash on hand of US$1.1 billion. Ahead of a future privatisation of the KCRC that distinction is one Mr Lai is keen to promote. While it will develop property along the West Kowloon route it will do so purely as a government agent with profit flowing to Treasury coffers. 'Investors have learnt that, if we are not dependent on property, that is a major plus, because the property market is up and down and there is no sign of it recovering soon. [This is] unlike our sister company [MTR Corp], which is perhaps a mixed bag and its transportation business is not doing as well as expected.' The timing of any KCRC share sale remains with the Government, but Mr Lai believes that major projects should be completed before equity investors are sought. 'An investor will say 'okay you are investing in two major rail expansion projects'. Now we are progressing well and investors can see this. But, to eliminate everyone's doubts, the best time [for a privatisation] is when we complete the railway and they can see it is earning revenue and therefore project risk is eliminated,' he said. That suggests a share sale at 2004 by the earliest. However, whether a cash-strapped Government agrees is another matter. The KCRC faces an additional HK$2 billion bill to tunnel under the Long Valley to complete its controversial Lok Ma Chau spur line, and it is investigating a cargo-only route directly linking to the Kwai Chung container terminal. That project remains in the consultancy stage and was largely dependent on the building of a sound commercial case that the high fixed-cost KCRC could compete with other transport modes such as barge and truck haulage, Mr Lai said. As such it must pass the 'commercial principles' criteria the SAR's railway development has been based on. With its property business looking sickly, The MTR Corp is betting on the Government maintaining its exclusive cross-harbour traffic so as not to undermine its operating position. The KCRC points to reduced interchanges for New Territories commuters should it get the Sha Tin link. You can be sure the Treasury will be doing its sums with reference to a future privatisation of a 100 per cent owned corporation. Being second to the stock market could yet end up in the country railway's favour.