WHAT IS A binding promise worth? It is a question that our government has completely ignored in announcing the forced marriage of MTR Corp and the Kowloon-Canton Railway Corp. MTR minority shareholders, however, have good reason to insist it be answered. When the government listed the MTR on the stock market, it made a very firm promise to investors who wanted assurances that their interests would not be forgotten in decisions on setting passenger fares. Do not worry, it said. The MTR will have fare autonomy. This was a promise written into the prospectus and therefore an absolutely binding one. You and I may say, nonetheless, that it was unlikely to be honoured. Government remained a 76 per cent shareholder of the MTR and it would always lean on the MTR directors to cancel fare rises if legislators objected. But that does not matter here. A promise like this carries a legal definition and that legal definition is fare autonomy exactly as the prospectus says it is, not fare autonomy as in, hah-hah, we had our fingers crossed. That legal definition also has a commercial value and, when a new formula for setting fares is proposed, a dollar figure can be calculated for the difference in value between fare autonomy and the new formula. Such a new formula has now been proposed for the forced marriage. It will limit fare increases to the average annual change of the consumer price index and of the nominal wage index for transport workers less a factor for productivity. Time to play with some numbers. To set things in perspective, the red line in the chart shows you the movement of the CPI component for MTR fares over the past 10 years. The blue line shows you the equivalent index for transport worker wages and the green line shows you the overall CPI. Now let us assume that 10 years ago the MTR was forced to abandon fare autonomy and accept this new fare formula. What difference would this have made in total to its fare revenues over those 10 years? I don't have the space here to present the entire spreadsheet on which I have made the calculations, but the cumulative figure I arrive at for these 10 years is $3 billion less than it actually generated. That $3 billion would have come straight off its pretax earnings for those years. You may, of course, argue that the figure is so large because the past 10 years were unusual. MTR fares rose while the CPI and transport wages fell since 1998. They previously had been much more in line. True, but this only points out the big flaw in the new formula. It bears no relation to the MTR's cost structure. The MTR did not suddenly make big profits from 1998 onwards. Its costs rose although Hong Kong's CPI did not. For various good reasons, those costs are likely to continue rising faster than the CPI for a number of years. The new formula is a serious mismatch. Let us look at it another way. The forced marriage is to have a lifespan of 50 years. Let us look only at MTR revenues (the KCRC has no autonomy pledge) and let us assume that the CPI and nominal transport wages will rise in tandem by 2 per cent a year over those 50 years. We shall add an extra factor of 1 per cent a year for increase in number of passengers. Let us also look at fare autonomy again. It was made as a pledge for minority shareholders and the interests of these people are that they have a decent return on their investment. They get it at the moment through government property injections but they cannot count on these forever. Their difficulty is that the MTR makes no money for them on railway operations. These at best break even at present and will probably not do so after the fare cuts that the forced marriage also imposes. Thus, unless we empty our treasury of public land for the next 50 years, we must accept that fare autonomy would mean fare increases to give the minority shareholders a decent return on their money. My model, therefore, assumes an extra 0.5 per cent annual increase in fares for the first 10 years of the forced marriage and no increases over what the formula would grant for the next 40 years, plus no more property injections. In year 10, this means fares would be 5.1 per cent higher than the formula allows, enough to satisfy investor requirements under fare autonomy but certainly not by a wide margin. Let me stress the crucial point about fare autonomy again. It might never have resulted in such fare increases, but if it is to be taken away from MTR shareholders, its commercial value lies in the purpose for which it was promised and the stated legal definition of the promise, not in the hah-hah crossed-fingers sort of definition. And here comes the kicker. By my calculations, the net present value of this fare autonomy model on a discount rate of 7 per cent over 50 years would be $5.2 billion more than the new formula allows. Let me say it again, a difference of $5.2 billion in net present value. Now comes an even bigger kicker. The MTR is to give this away for free. It is to surrender the difference between the commercial value of fare autonomy and of the new formula and get nothing in return under the forced marriage. If I were an MTR shareholder, I would scream in rage at such presumptuous treatment of a binding promise given to me. I would certainly never vote for the deal and would want to consult my lawyer about the fiduciary duty of MTR directors who have the temerity to recommend it to me.