KOWLOON-CANTON RAILWAY CORPORATION
SUBMISSION TO THE TRANSPORT PANEL OF THE
LEGISLATIVE COUNCIL ON
KCRC (AMENDMENT) BILL 1996

Introduction

This submission sets out the views of the KCRC on the Kowloon-Canton Railway Corporation (Amendment) Bill 1996. The KCRC is very concerned that enactment of the Bill would have serious negative consequences for Hong Kong’s public transport system generally, and KCRC in particular.

The discipline imposed by existing statutory requirements already guarantee value for money

2. KCRC provides and maintains high quality and efficient rail services. They are one of the most cost-effective heavy rail systems in the world, with its fares being among the world’s lowest. KCRC’s success is the product of statutory provision which requires KCRC to perform its functions "with a view to achieving a rate of return on assets employed which, having regard to all the circumstances of the undertakings, and in accordance with ordinary commercial criteria, is satisfactory." This statutory requirement encourages fiscal prudence, commercial acumen, responsible management and the generation of a reasonable rate of return on assets. Implicit in this requirement is that the KCRC is given autonomy for determination of its fares.

3. Notwithstanding this autonomy, KCRC determines its fares only after extensive consultation with passengers, (through its passenger liaison groups, customer service centres and surveys), District Boards and with other bodies, including the Transport Advisory Committee, the Transport Panel of the Legislative Council and the Executive Council. This highly transparent process of consultation and debate results in KCRC’s fare proposals receiving very high levels of scrutiny, and is not a mere formality. To the extent that these bodies are representative of various interests, the Board of KCRC receives at the end of the consultative process a very complete picture as to appropriate fare levels. The result has been that KCRC’s fare increases have been closely related to known inflation for the past ten years.

Likely effect of the amending Bill

4. By removing from KCRC the autonomy to determine fares and transferring this power to the legislature, the amending Bill will create a large degree of uncertainty for the KCRC. In the first place, the amending Bill does not subject the legislative to the kind of discipline that KCRC must by law exercise. Secondly, KCRC as a service provider and business would not be able to plan and finance future improvements and developments, because it could not demonstrate with any degree of certainty its revenue-earnings and debt-servicing potential.

International experience

5. The observation made in paragraph 4 is not speculative.

A recent study undertaken by the MTRC concluded that, whilst a basic level of regulation over fundamental safety and service performance is necessary, government involvement outside these areas, particularly in the fare setting process, has resulted in a degradation of both service and commercial vitality.

6. KCRC has also commissioned a study by A.T. Kearney, a firm of international management consultants. A copy of the study is attached. It surveyed 37 railway systems in Asia, Europe and North America, and the impact of Government determination of fare setting for these systems. The findings are that a high level of government involvement in fare setting introduces external influences which, no matter how well-intentioned, has resulted in serious service deterioration, inefficiencies, and the injection of massive recurrent subsidies at the expense of the general taxpayer. The message that is becoming increasing apparent to these railway systems and their governments is that they have not been, but should be, allowed to run their operations on a responsible business.

7. The notable exception in this worldwide survey is Hong Kong, where there is no government involvement in the fare setting process, no reliance on subsidies and a heavy emphasis on achieving and maintaining commercial viability. The result has been relatively low fares, high ridership, and the ability to rely on fare revenue to cover both operating costs and capital investment.

Impact of the Bill on KCRC’s future Projects

8. KCRC is required under the Rail Development Strategy to position itself for massive expansion in the future. Its capital projects, which include the Western Corridor Railway, possibly the Ma On Shan to Tai Wai Extension, and the link between Hung Hom and West Kowloon, are such that substantial borrowing will be required. Lenders will place considerable weight on KCRC’s credit rating and its ability to determine and secure its revenue as a means of servicing debt. Any amending legislation which fetters KCRC’s autonomy in this respect will degrade KCRC’s credit rating and damage its borrowing capacity. In other words, KCRC would not be able to borrow as much it expects to do so. This would almost certainly entail a larger injection of Government equity - on which a return must be earned through fares - as well as higher interest costs, which will also have to be serviced by income from fares. Ultimately, it will be the passenger who would lose out.

Kowloon-Canton Railway Corporation
22 February 1997

Last Updated on 16 December 1998