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

The MTR’s closeness with Hong Kong government begs curly questions when billions flow

PUBLISHED : Tuesday, 01 December, 2015, 8:10pm
UPDATED : Tuesday, 01 December, 2015, 10:21pm

Taxpayers are now on the hook for HK$19.42 billion. That’s how much the government needs to bail out the MTR over the cost overrun of the much-delayed high-speed rail link between Hong Kong and Guangzhou. No worries, say officials, the MTR will pay us back with a special dividend worth HK$19.51 billion, as the government is the rail operator’s largest shareholder.

This weird scheme exposes a fundamental problem in the relationship between the MTR and the government. That relationship makes the MTR both a public utility and an arm of the government, an identity full of fundamental conflicts of interest.

The opening date for the Guangzhou-Shenzhen-Hong Kong Express Rail Link has been pushed back from this year to late 2018. The MTR blames adverse and unforeseen underground conditions, which makes the engineering much tougher than anticipated. As the main contractor, was the MTR negligent in conducting due diligence before it started the project? Or was it under pressure to go ahead because of the symbolic significance of this massive cross-border infrastructure? If it had been a “normal” publicly listed company, would it have been more diligent and more resistant to outside pressures? Probably, but we will never know for sure.

As for the complicated bailout, it is the direct consequence of the incestuous relationship between the MTR and the government. Essentially, it’s the government as the MTR’s majority shareholder paying back the government as the MTR’s disappointed client.

Still, for the bailout to work, it needs to get over two hurdles: an approval by lawmakers for the bailout and an approval by MTR’s minority shareholders for the special dividend, neither one of which can be taken for granted.

Imagine if the government had been an outside client and the MTR a fully private independent contractor. The MTR would likely have gone to the banks for loans to cover the cost overrun. Given its high credit rating and the current low interest rate environment, it would have been able to borrow at favourable terms. It’s time for the government to either withdraw ownership entirely from the MTR or take it over as a public utility. The current flawed arrangement is the source of much trouble.