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Jake Van Der Kamp

'To pick Lantau would be indicative of not understanding the industry. If you follow that logic, we should have kept Kai Tak running after we opened Chek Lap Kok to provide more capacity for the airlines.'

John Meredith

Group managing director

Hutchison Port Holdings

MR MEREDITH CAN be quick to tell some people (yours truly, for instance) that they do not understand the port industry. Compared to his own knowledge, it is undoubtedly true but knowledge can be compromised by conflict of interest in matters of introducing more competition to an industry.

Mr Meredith's job is to make money for Hutchison. This is not our purpose in questions of whether container berths should be built on Lantau.

For starters, let us do as he suggests and follow the logic. If it does not make sense to have a second container terminal on Lantau, why does Hutchison control and operate another container terminal just over the border at Yantian? They both serve our hinterland on the mainland.

And is it really nonsensical for a city to operate two airports at the same time? London operates five.

I shall grant him that the existing port business at Kwai Chung is not as buoyant as it could be. On a six-month average basis, container throughput at our terminals is declining by 3 per cent year  on year.

The river terminals have doubled their share of total container throughput to about 12 per cent over the past six years; and over those same six years the proportion of the mainland's exports coming through Hong Kong as re-exports has fallen by more than half.

Let us leave this aside, however, and go to the nub of the matter. In order to maintain our position as a leading international trade and service centre, we must have the capacity and we must mind our costs. Chief Executive Tung Chee-hwa laid special emphasis on this in his recent policy address and he is absolutely right.

I am happy to accept that the Kwai Chung container port is very efficient on an operating basis but we are talking cost now and I am not sure that it is quite so efficient on a cost basis. It may be for Hutchison. It is a money spinner for the group.

This, however, is not the same as being efficient on a cost basis for Hong Kong.

I cannot be sure, as I say, because I cannot break down from Hutchison's accounts the specific returns, cash flow and equity base of its Hongkong International Terminals (HIT)  operation at Kwai Chung. It is all mixed up with other ports and related services.

Other people have tried, however, and, as a rough calculation from Swire Pacific's accounts, the annual return on equity of the competing Modern Terminals at Kwai Chung is about 40 per cent. It could be higher, depending on the accounting treatment and it is my guess that it is higher for HIT.

So let me stick my neck out here. I say HIT enjoys an annual return on equity of at least 60 per cent, which would make it a very lucrative business for Hutchison, one that the rest of us might say has a good deal of fat that could do with some trimming if Hong Kong is to keep its costs low.

But I stand open to correction here. Show us those accounts for HIT, Mr Meredith. Reveal to us your return on equity on a cash-for-cash basis.

No one objects to you making a decent return on the business but we might see your comments on Lantau in another light if it is a high one. And, if you are not prepared to show us, I have another suggestion. To get an estimate of what a container berth is worth, you take its projected earnings over its useful life span, apply an appropriate annual discount rate to those earnings and you get its net present value.

We do not need to have a government official make those calculations. We can let the private sector do them for us. If a container berth is a money spinner, then port operators will bid a very high figure at an auction for the right to build and operate one. If it is a loss-making business, they will not bid at all.

And where we, the general public of Hong Kong, are concerned, the ideal state of affairs would be one in which the charges levied by operators are so low and their profits so marginal that they would not wish to bid more than HK$1 for a container berth. That would be the figure that gives us both the capacity we need and the greatest cost efficiency for our ports.

So what we will do is hold auctions for the right to build and operate new container berths until that auction price falls to HK$1. Mr Meredith may be entirely right that Lantau is the wrong place to build them but we will leave this decision to the auction. If it is the wrong place then operators will not bid for it.

What about it, Sir? If HIT is a highly cost-efficient operation in terms of public interest then this idea should not trouble you at all. Open HIT's books and we will see the answer to that question even sooner. I think I know what it might be.



HIT is cost-efficient for itself, not for us