LegCo Paper No. CB(1) 366/96-97
(These minutes have been seen
by the Administration)
Ref : CB1/PL/TP/1

LegCo Panel on Transport

Minutes of the Special Meeting on Wednesday, 25 September 1996 at 8:30 a.m. in the Chamber of the Legislative Council Building

Members present :

Members absent :

Member attending :

Public officers attending : Item I

Mr Gordon SIU, JP: Secretary for Transport
Mr Paul LEUNG, JP: Deputy Secretary for Transport
Mr Isaac CHOW: Deputy Secretary for Transport
Mr K C LAU: Principal Assistant Secretary for Transport
Mrs Violet CHAN: Principal Assistant Secretary for Treasury

Item II

Mr Gordon SIU, JP: Secretary for Transport
Mr Paul LEUNG, JP: Deputy Secretary for Transport
Miss Nancy LAW: Deputy Secretary for Transport
Miss Maureen WONG: Principal Assistant Secretary for Transport
Mr P C LIM: Principal Assistant Secretary for Economic Services
Ms Ivy CHAN: Acting Senior Treasury Accountant

Transport Department

Mrs Lily YAM: Commissioner for Transport
Dr Ernest LEE: Assistant Commissioner for Transport
Mr Anthony LOO: Acting Chief Engineer

Attendance by invitation : Item I
From the Kowloon-Canton Railway Corporation (KCRC)

Mr Kevin Hyde, JP: Chairman
Mr Samuel LAI: Director, East Rail
Mr Jonathan YU, JP: Director, Light Rail
Mr Barry CHOI: General Manager, Corporate Affairs

From the Mass Transit Railway Corporation (MTRC)

Mr Jack C K SO, OBE, JP: Chairman
Mr Rob Noble: Marketing & Planning Director
Mr Clement KWOK: Finance Director
Mrs Miranda LEUNG: Corporate Relations Manager
Mr Eric TANG: Corporate Controller
Mr Paul C Coughlin: Managing Director, Hong Kong Office, Standard & Poor's
Mr Tony S K LI: Managing Director, Chase Manhattan Asia Ltd
Ms Anne A LeBourgeois: Vice President, Chase Manhattan Asia Ltd

Item II
From the Tate's Cairn Tunnel Co Ltd (TCTC)

Mr Edward NGAN: General Manager
Mr K L CHAN: Director
Mr John PORTER: Director
Mr Fred BROWN: Managing Director
MVA Asia Ltd

Clerk in attendance :

Mrs Vivian KAM: Chief Assistant Secretary (1)2

Staff in attendance :

Mr Jimmy MA: Legal Adviser
Miss Pauline NG: Assistant Secretary General 1
Miss Eva LIU: Head, Research and Library Services
Mr Jackie WU: Research Officer 1
Mr Joseph LEE: Research Officer 5
Mr Billy TAM: Senior Assistant Secretary (1)4
Mr Matthew LOO: Senior Assistant Secretary (1)4 (Des)

I Mass Transit Railway Corporation (Amendment) Bill 1996 and the Kowloon Canton Railway (Amendment) Bill 1996

Briefing by Hon SIN Chung-kai

Meeting with deputations

Meeting with the Administration

II Briefing by the Administration on the Toll Increase Application of the Tate's Cairn Tunnel Co Ltd

III Any Other Business

I Mass Transit Railway Corporation (Amendment) Bill 1996 and the Kowloon Canton Railway (Amendment) Bill 1996

Research report on Credit Ratings of Mass Transit Systems prepared by Research and Library Services Division of the LegCo Secretariat

(LegCo Paper No. CB(1) 2071/95-96(01))

The Chairman advised that the Research and Library Services Division of the LegCo Secretariat had conducted a research on the effects on credit ratings and cost of financing if the fare revision mechanism of mass transit railway operators were to be changed to that of approval by the Legislative Council (LegCo). Four credit rating agencies and 13 banking institutions, which were either leading corporations or had business relationships with mass transit operators in Hong Kong, had responded to the Division's request for information. The findings of the research were set out in the research report circulated vide LegCo Paper No. CB(1) 2071/95-96(01).

2. In response to the Chairman, Miss Eva LIU said that the credit agencies and banking institutions generally held the view that political interference on the fare revisions of mass transit operators would have negative impacts on their credit ratings and cost of financing. A bank pointed out that any external control on fare revision might affect the profitability and debt servicing capacity of the operators, and hence the cash flow and the cost of financing for these organizations. It was however not possible to quantify the precise effects without knowing the details of the new fare revision mechanism.

Briefing by Hon SIN Chung-kai

(LegCo Paper No. CB(1) 2071/95-96(02))

3. At the Chairman's invitation, Hon SIN Chung-kai briefed the Panel on the Mass Transit Railway Corporation (Amendment) Bill 1996 and the Kowloon-Canton Railway Corporation (Amendment) Bill 1996. The Bills were aimed at restraining the autonomy of the two railway corporations in fare determination by subjecting the fare increases to vetting by LegCo. As the two railway corporations were the only public transport companies in Hong Kong which had an autonomy in fare determination, Mr SIN said that the Bills would also help to standardise the Government's policy in the monitoring of public transport in general. LegCo's involvement in fare determination would enhance the transparency and accountability of railway corporations and this in turn might have a positive impact on their credit ratings. Furthermore, since both corporations were wholly owned by the Government, the public should have the right to monitor the fare setting process through LegCo. Mr SIN emphasized that enactment of the Bills did not imply that there would not be reasonable fare increases for the two railway operators.

4. A member expressed concern over the uncertainty which enactment of the Bills would create for the railway corporations in fare revisions. The corporations might be confronted by a reduction in earnings due to interest coverage and leverage ratios and might not be able to operate on commercially competitive principles. Mr SIN disagreed with this comment which he considered was based on a questionable assumption that the involvement of LegCo in the fare setting mechanisms of the two corporations would downgrade their credit ratings. In response to another member on whether the Bill would change the nature of railway services to a public service subsidized by the Administration, Mr SIN stressed that there was no intention to interfere with the existing operation nor to remove the prudent commercial principles of the two corporations.

Meeting with deputations

5. Mr Jack SO said that enactment of the Mass Transit Railway Corporation (Amendment) Bill 1996 would immediately create uncertainties for the revenue forecast of the Mass Transit Railway Corporation (MTRC). It would affect adversely MTRC's credit rating and weaken its borrowing ability. MTRC would have to pay higher borrowing costs and be handicapped in investing in long-term maintenance and improvement programmes; it would also affect other activities such as the Tsueng Kwan O Line extension. He also warned that with these uncertainties, the financial position of MTRC would deteriorate and the Corporation might need to seek Government subsidy.

6. Mr SO informed members that MTRC had commissioned the London University in conducting a research on this subject and the report was expected to be available in late October 1996. He also suggested that members should visit mass transit systems overseas to observe their operation and quality of service. With the Chairman's concurrence, he invited Ms Anne A. LeBourgeois and Mr Paul Coughlin to elaborate on the impact on the financial position of MTRC if the Bill were to be enacted.

MTRC

7. Ms LeBourgeois briefed the Panel on the position of the Chase Manhattan Bank on the Bill. She said that MTRC had scored highly and operated successfully since its inception on the basis of commercial principles, and had managed its finances in a strategic manner. If the Bill was enacted, the Bank would revise downwards its cash flow projections for MTRC in future years. Key financial measures, such as interest coverage and leverage ratios, would worsen with the reduction in certainty of earnings. The projections would also incorporate a negative outlook in such areas as operating efficiency and reliability, staff turnover and quality, market share of public transport in Hong Kong, etc. All these would further impact negatively the financial projection of MTRC by the Bank. Above all, the proposed legislation would interfere with the market forces in a manner which would be contrary to the principles of free market economy and might cast doubts on its continuation. It would also have wide-ranging consequences for many clients and Hong Kong as a whole.

8. Mr Coughlin briefed members on the Standard & Poor's comments on the Bill. He said that the stripping of MTRC's fare setting authority would reduce its financial flexibility and affect the certainty of its environment. This would increase its cost of finance and would have a significant impact on capital intensive utility businesses such as railways. He warned that the potential introduction of populist politics into the fare setting mechanism would create a negative impact from the credit perspective, and the application of price regulation would only increase the perception of risk.

9. At the Chairman's invitation, Mr Kevin Hyde commented on the Kowloon-Canton Railway Corporation (Amendment) Bill 1996. He pointed out that existing fare revisions were results of extensive consultation with District Boards, the Transport Advisory Committee (TAC), the LegCo and the Executive Council, etc, and proposed fare increase applications had been modified on several occasions as a result of these consultations. It followed therefore that this was not a completely autonomous fare revision mechanism for KCRC. He also highlighted the fact that KCRC was operating successfully in a commercially prudent way and fare increases had been below the rates of inflation without the need for taxpayers' subsidies. He cautioned that experiences in other countries showed that a political fare setting process would result in a slow and steady deterioration of railway service quality and ultimately financial assistance from Government.

10. In response to members, Mr SO and Mr Hyde emphasized that they had no doubts that LegCo Members would consider fare increase applications in a rational manner. However, it was difficult to predict the outcome and this uncertainty would hurt the Corporations' planning and credit standing.

11. Some members pointed out that uncertainties, such as that relating to the change in sovereignty in 1997, also existed under the existing arrangements, and questioned the view that the uncertainties would only arise if the two Bills were enacted. In reply, Mr SO emphasized that it was important to maintain the status quo. Mr Coughlin supplemented that the transition in 1997, the fare setting mechanism and the financial position of railway corporations, were all important factors for determining credit ratings. The requirement for fare revision applications to be vetted by LegCo would create uncertainties and upset existing agreements between the Administration and the corporations. He quoted examples in the United States which showed that such changes would impose a negative impact on the rationality of fare determination in the long run. Both Mr Coughlin and Ms LeBourgeois said that continuity was a key element in their determination of credit ratings for the corporations.

12. Concerning the two priorities of increase in passengers and external control on fare revisions for the determination of credit ratings, Ms LeBourgeois said that both factors were equally important in determining the total revenue of the corporations; she added that the maintenance of service quality was also of prime concern. Mr Coughlin held the view that it would depend on the nature of business involved and a general estimate on the priorities would be difficult. In response to a member on whether the costs of borrowing would be lower if the debt was shouldered by the Government, Ms LeBourgeois confirmed that the costs would be lower but highlighted the fact that it would alter the existing mechanism. There was also a hidden cost and Government would have to bear the responsibility for the debt.

Meeting with the Administration

(LegCo Paper No. CB(1)2071/95-96(03))

13. At the Chairman's invitation, Mr K C LAU briefed members on the Administration's response to the Bills circulated vide LegCo Paper No. CB(1)2071/95-96(03). The Administration considered that the provisions in the principal Ordinances had struck a fine balance between the autonomy and accountability of the two corporations. Enactment of the Bills would create uncertainty for the railway corporations in earning sufficient fare revenue to cover operating costs, and would have an adverse impact on the organizations' credit ratings and costs of borrowings and would also discourage long-term investments. The Administration was of the view that the requirement for the two corporations to operate in accordance with prudent commercial principles under their respective Ordinances could not be reasonably achieved without fare autonomy.

14. In response to members' comments that the two corporations could determine fares without any control by the Administration, Mr LAU said that the two corporations consulted the Panel and the Transport Advisory Committee before they decided on their fare revisions. In addition, views of District Boards and results of passenger surveys were also taken into account. The average rate of fare increase over the past decade had been kept below inflation, and the benefits of cost savings and improved productivity had been passed on to the passengers through improvements in facilities and services.

15. Mr Gordon SIU pointed out that Hong Kong was experiencing an important era in railway projects and that three major railways were being planned for Hong Kong, i.e., the Western Corridor Railway, the rail link between Ma On Shan and Tai Wai and the MTR Tsueng Kwan O Line, but the proposed legislation would have a long term adverse effect on the development of railways. To address members' concern on the transparency required of the two railway corporations, he affirmed that the Administration would offer every assistance in providing members with the requisite information. Mr SIU appealed to members to consider the Bills carefully.

16. Some members criticized the inconsistency of the Administration's policy in monitoring public transport. In response, Mr SIU explained that public transport companies other than the two railway corporations were privately-owned. The provision for the two corporations to exercise autonomy in fare revision were essential for ensuring that the fares would be kept at a level acceptable to the public on the one hand and that the operators would earn sufficient revenue to cover operating costs on the other.

17. In order to provide members with a full picture on the fare determination mechanism of railway services in overseas countries, Mr SIU offered to prepare for members' reference a report comparing practices in different countries. This would include mass transit systems which had features comparable to the Hong Kong situation. The question of whether enactment of the Bills would discourage long-term investments of the railway corporations would also be addressed in the report having regard to experiences in other countries. At a member's request, Mr SIU also undertook to elaborate in the report the basis of the Administration's viewpoints on the impact of the Bills as contained in the information paper circulated to members.

Admin
Admin

18. The Chairman concluded that another meeting should be scheduled to follow-up on the MTRC's report and the Administration's response. With a view to enhancing members' understanding of the operation and monitoring of overseas mass transit systems, the Panel agreed to form a working group to draw up proposals for an overseas tour for studying mass transit systems and other transport facilities.

II Briefing by the Administration on the Toll Increase Application of the Tate's Cairn Tunnel Co Ltd

(LegCo Papers No. CB(1) 2071/95-96(04) and CB(1) 2100/95-96)

19. At the invitation of the Chairman, Mr Jimmy MA briefed members on the legal position of LegCo in relation to the toll increase application of Tate's Cairn Tunnel Co Ltd (TCTC) as set out in his memorandum circulated vide LegCo Paper No. CB(1) 2100/95-96. He pointed out that in accordance with the relevant clause in the Tate's Cairn Tunnel Ordinance regarding toll determination, the Commissioner for Transport was required to give notice in the gazette on the toll schedule agreed between the Governor in Council and TCTC or awarded by arbitration. LegCo could not lawfully amend the notice in a manner which departed from the level of tolls so agreed or awarded. Mr MA confirmed, in response to a member, that there was no mechanism under the Ordinance to amend the terms and conditions of the franchise.

20. At members' request, Mr MA undertook to provide the Panel with further information on statutory provisions governing the variation of toll, fare and fees in respect of public transport and tunnels.

LSD

(Post-meeting note: An analysis provided by the Legal Adviser was circulated vide LegCo Paper No. CB(1) 50/96-97 (English) and CB(1) 85/96-97 (Chinese).)

21. The Chairman noted from the Administration's stand on the subject in its information paper circulated vide LegCo Paper No. CB(1) 2071/95-96(04) that it was in support of the application on the ground that the proposed increase would not be excessively remunerative, and TCTC would be in a critical financial position without the toll increase. She sought elaboration from the Administration on the schedule submitted by TCTC in its tender documents in 1987/88. In response, Miss Nancy LAW advised that TCTC had included in their bid in 1987/88 a schedule indicating the timing and the proposed rates of increase. The Administration was in support of the opening tolls but had given no undertaking for the subsequent proposed increases. The Administration would however made reference to this schedule in assessing subsequent toll increase proposals. Miss LAW also affirmed that the current increase application was in line with that in the bid proposal.

22. Commenting on the first toll increase in 1995, a member said that this was originally scheduled for July 1994, and enquired if the Administration would compensate TCTC for the delay in approving the application. In reply, Mr SIU said that the question of compensation did not arise. TCTC had to bear the risk for the operation of the Tunnel and the Administration had no responsibility for paying any compensation to TCTC under the existing franchise contract. Miss LAW supplemented that the Administration had no intention of delaying the toll increase in 1994 but there were a number of issues which had first to be resolved.

23. Hon CHEUNG Hon-chung, on behalf of the Democratic Alliance for the Betterment in Hong Kong, disagreed with the proposed toll increase which was higher than the rate of inflation. He was dissatisfied that TCTC had not drawn up plans to improve the service quality of the Tunnel, and was worried that the increase would divert traffic away to the Lion Rock Tunnel which would then become congested and would in turn seek an increase in toll. Hon CHOY Kan-pui supplemented that the Sha Tin District Board similarly disagreed with the proposed increase. In reply, Mr K L CHAN said that the company had endeavoured to make improvements and to this end had submitted improvement plans to the Administration. He further explained that according to the findings of a research conducted by TCTC, traffic flow for the Lion Rock Tunnel and the Tate's Cairn Tunnel were 90,000 and 75,000 vehicles per day respectively, and the Lion Rock Tunnel had almost been saturated. Therefore, even when traffic flow was estimated to decrease initially by 3% following the toll increase, which was around 4,000 vehicles, this would recover in about three months. Mr SIU said that the Tate's Cairn Tunnel and the Lion Rock Tunnel catered for different markets, and the Tai Po Road where improvement works would soon be completed would also relieve traffic in the region. The Administration would monitor closely the pattern of traffic flow in the three competing routes but no immediate action was deemed necessary as no massive change in traffic pattern was envisaged. In response to a member's comments that the Administration and TCTC were relying on the same consultant in the forecast for traffic flow, Dr Ernest LEE confirmed that the Administration would draw up its own forecast based on its own experience in tunnel management.

24. Concerning measures for increasing traffic and revenues, Mr CHAN said that the company's major income was from tunnel tolls and the company's scope of boosting income was restricted. Nevertheless, in addition to arrangements set out in paragraphs 10 and 11 of the information paper on this subject, TCTC was exploring other means such as organizing lucky draws to attract more users particularly during non-peak hours, undertaking consultancy work, and applying to the Administration for more advertising space within the tunnel area.

25. Hon John TSE Wing-ling suggested on behalf of the Democratic Party that the rate of toll increase should be lower. He was concerned also with the air pollution problem inside the Tunnel. In reply, Dr LEE said that the Administration also shared the concern for good air quality inside the Tunnel. Hence, although the statutory requirement only governed average carbon monoxide concentration level, the Administration would measure also the concentration level of nitrogen dioxide and visibility inside the Tunnel. Mr Edward NGAN revealed that the Environmental Protection Department (EPD) had conducted air quality measurements on three occasions since the opening of the Tunnel in 1991, and EPD had been making preparations for installing a station inside the Tunnel for one month to measure air quality. In addition, TCTC had appointed recently a specialist consultant firm on tunnel ventilation to conduct a study on further improvements to the air quality in the Tunnel, and improvement measures would be introduced upon release of the consultancy report in early November 1996.

26. A member queried the significant percentage increase in maintenance cost for the Tunnel from $10,250,000 in 1991/92 to $16,393,000 in 1992/93. In reply, Mr CHAN explained that the development contractor had provided TCTC with one-year's free maintenance for the Tunnel since its opening in 1991 and this had resulted in comparatively lower maintenance costs for 1991/92. He revealed that TCTC was working with the Transport Department on the feasibility for contracting out maintenance work in order to reduce staff costs in this respect in the future.

27. As a related issue, some members remarked that the autotoll payment system of the Tate's Cairn Tunnel, which was different from those used in other tunnels, was inconvenient for users. In response, Mrs Lily YAM advised that the Administration was keeping in touch with developing technology which would enable the use of a standard tag for different autotoll payment systems. She understood that it was hoped that this would be feasible within a year or two.

III Any Other Business

28. There being no other business, the meeting ended at 11:50 a.m.

Legislative Council Secretariat

20 November 1996

Last Updated on 21 Aug. 1998