But experts say the government-owned operator's decision will make a possible merger with the MTRC more difficult The chairman of Kowloon-Canton Railway Corp (KCRC) has played down the impact on the rail operator's profits of its decision to return its property development rights to the government. Michael Tien Puk-sun yesterday forecast $1.1 billion profit would be foregone over the next 10 years through the corporation giving up rights to develop 11,000 apartments along the East Rail line between Hung Hom and Lowu and the planned Ma On Shan extension. Although Mr Tien described the foregone profit as 'not much' to the KCRC, financial experts said the corporation's decision would make a possible merger between government-owned KCRC and partly privatised MTR Corp (MTRC) more difficult. 'KCRC's decision on the property development rights will prompt a chain reaction on the merger,' a director at a United States investment bank said. 'Without property income, KCRC's internal rate of return on rail lines will be lowered, which will in turn hurt its valuation and sale price. 'This means it is more difficult for the government to sell KCRC to MTRC if it wants to in the near future. The merger has already been complicated by the recent resignation of the financial secretary and the proposed transport fare-setting policy,' he said. KCRC's decision to relinquish property development will help government efforts to halt a slump in the sector, which has seen prices fall 60 per cent from their 1997 peak. A government spokeswoman said yesterday a feasibility study on the merger was continuing but she declined to specify a completion date. An analyst at a US brokerage said KCRC's internal rate of return would be halved to 5 per cent without any property income, based on KCRC and MTRC's common practice of funding half their spending on rail line construction through property income. KCRC's latest annual report revealed that the East Rail section between Hung Hom and Sheung Shui lost $58 million last year, a result offset by profitable border-crossing services at Lowu. Mr Tien argued that KCRC's future profits would be supported by fare revenue based on the estimated 40,000 households, or 110,000 population, residing at proposed residential developments along the East Rail and Ma On Shan rail extension. He called on the government to place development priority on these two rail lines so that demand for train services was boosted. MTRC, 76 per cent owned by the government, has said it will not give up its property development rights as it believes the property-based financing formula had served the company and Hong Kong well. The government's hands are tied by an operating agreement with the corporation, with any amendments needing both parties' consent.