LegCo Paper No. CB(1) 1537/96-97
(These minutes have been seen
by the MTRC)
Ref : CB1/PL/TP/1

LegCo Panel on Transport

Minutes of special meeting held on Wednesday, 19 March 1997, at 10:30 am in Conference Room A of the Legislative Council Building

Members present:

Members absent:

Public officers attending :

Mr Isaac CHOW, JP,: Deputy Secretary for Transport
Mr LAU Kwok-choi,: Principal Assistant Secretary for Transport

Attendance by Invitation:

Sir Wilfrid Newton,: Ex-Chairman and Chief Executive of MTRC, Ex-Chairman and Chief Executive of London Regional Transport
Mr Bill Donald,: Operations Director
Mr Clement KWOK,: Finance Director
Mrs Miranda LEUNG,: Corporate Relations Manager

Clerk in attendance :

Ms Estella CHAN,: Chief Assistant Secretary (1)4

Staff in attendance :

Mr Matthew LOO,: Senior Assistant Secretary (1)4 (Acting)

I.Mass transit railways - success or failure
- Briefing by Sir Wilfrid Newton, ex-chairman of Mass Transit Railway Corporation and London Regional Transport

II.Any other business

I.Mass transit railways - success or failure - Briefing by Sir Wilfrid Newton, ex-chairman of Mass Transit Railway Corporation and London Regional Transport

The Chairman on behalf of the Panel welcomed Sir Wilfrid Newton to the meeting to brief members on the success or failure of mass transit railways. Sir Wilfrid pointed out that the Government-control regime in London had impaired attempts of the London Underground (LU) to properly maintain its basic infrastructure of track, tunnels, station structures etc, and to replace and renew operating assets when their age and condition dictated replacement and renewal. This control regime had denied LU access to the financial resources it needed despite its good engineering and operating management. The railway system in New York had also suffered the adverse effects of inadequate access to finance. On the other hand, the Mass Transit Railway Corporation (MTRC) was able to fund the huge cost for maintenance and implementation of new projects from its cashflow and borrowing within sensible debt capacity, or appropriate injections of Government equity. If the ability to earn satisfactory profits and generate adequate cashflows was impaired by control over fares, MTRCs ability to handle maintenance, renewals, replacements and growth would be in jeopardy. Financial confidence in MTRC would also be damaged seriously if LegCo exercised explicit statutory power to veto fare changes. He therefore appealed to members not to damage the structure and control regime devised in Hong Kong for MTRC which had been demonstrably successful to date.

(Post-meeting note: A copy of Sir Wilfrids speech was circulated vide LegCo Paper No. CB(1) 1115/96-97 dated 20 March 1997.)

2. Some members were not convinced that the level of government control had overriding importance in dictating the performance of railway systems; they asked for examples of efficient railway services which were subject to high level of government control. Sir Wilfrid advised that the reputed railway system in Paris was one example but this system had to rely on government subsidy to cover two-thirds of its operating cost. The Paris Government had been considering ways to reduce this huge financial burden. Furthermore, some creditable railways in the United States also required government support of around 60% of their operating costs. He also recalled the findings of the benchmarking study conducted by Mr William R. Steinmetz that imposition of high level of regulation would have a long-term impact on operating efficiency of railway operators in many metropolitan cities.

3. A member pointed out that as MTRCs Board was appointed by the Governor, tax-payers were deprived of the rights to monitor the operation of this Government-funded corporation under this mechanism. He considered this arrangement unacceptable and enquired on overseas experiences in this respect. In response, Sir Wilfrid advised that the London Transport (LT) had a similar board structure as MTRC. The only executive in the board of LT was the Chief Executive and the remaining members were appointed by the Secretary of State. The railway operator in Paris also had a wholly appointed board. Although these models were not ideal, he opined that it was inappropriate to have an elected board for a railway operator and in view of its wide impact on the public, that the importance of public consultation and transparency measures to railway operation should be stressed instead. For MTRC, the management was fully aware of this and was responsive to public views through consultations and provision of adequate information to the public. As regards the Chairmans enquiry on whether overseas railway operators mentioned had full autonomy in fare setting, Sir Wilfrid advised that LT had been authorized theoretically to adjust fares of LU following enactment of the London Regional Transport Act in 1983. Notwithstanding this, extensive consultation had also been conducted for each fare increase application. He recalled that when he was the Chairman of the London Regional Transport, fare increase applications had been rejected by the Prime Minister on some occasions.

4. In response to the concern that the state of the railway systems in Hong Kong would deteriorate into those in London and New York if control over fares was imposed, Sir Wilfrid foresaw that fare control would have adverse impact on the financial markets perception of the operation. Although he had confidence in LegCo Members acting reasonably and responsibly in examining fare changes, the risk classification for MTRC might move from low to medium or even high. Hence, the Administration might need to use public funds to cover the financial loss of MTRC so as to keep up its service. It would result in a shortage of cash in the long run and undermine the development of other public services. A member did not agree with the view expressed. He pointed out that fare setting of the Kowloon Motor Bus Company (1933) Limited (KMB) was also controlled by the Administration. Despite the cutting back of levels of proposed fare increases by the Administration, KMB could still maintain a reasonable return in the past few years. The Mass Transit Railway Corporation (Amendment) Bill 1996 and the Kowloon-Canton Railway (Amendment) Bill 1996 being scrutinized were to propose a transfer of such regulatory role for railways from the Administration to LegCo.

5. Some members opined that the autonomy in fare setting was not the only factor contributing to the efficient railway services in Hong Kong; high population density, heavy utilization and good management of MTRC also accounted for the success. In response, Sir Wilfrid said that the operating environments in London and New York were comparable with that in Hong Kong: both were densely populated and railways were the citizens major means of transportation. Nevertheless, railway systems in the two cities were poorly maintained. For London, a £10 billion backlog for maintenance was estimated a few years ago. Following the government injection of funds, this backlog was reduced to £0.5 billion. Furthermore, passengers also supported annual fare increases since 1989, most of which were above inflation, in view of the service improvements. For New York, over US$12 billion was required for the operator ten years ago to catch up with the backlog despite its good engineering and operating management and the situation had just been improving. He further remarked that an efficient railway system should be designed and built to provide the services required by the public. The three major lines of the Mass Transit Railway built along principal transport corridors had fulfilled this basic requirement. However, as MTRC would be extending its services to other areas in Hong Kong, it was cardinal for the financial management of MTRC to carry out stern control to maintain the balance sheet and cashflow sensibly so as to maintain its debt capacity. He opined that any interference to the fare setting autonomy would be a disincentive for the management to maintain the system. It might result in the requirement of additional financial support from the Administration and a less responsible attitude in the management.

6. On credit ratings, Sir Wilfrid responded to a member that if control over fare setting was imposed, lending institutions would have less confidence in the revenue forecast of MTRC and this would affect adversely the terms of borrowing. As regards the suggestion for the Administration to act as the guarantor for MTRC so that a lower interest rate for borrowing could be obtained, Sir Wilfrid advised that the operating expenditures and the debts of MTRC were currently not included in the balance sheet of the Administration. The above suggestion would entail a change to this arrangement, which was inadvisable. On the other hand, he emphasized the importance of developing a sensible capital structure supported by the facts that the corporation was able to construct railways on time and within budget, operate the systems successfully, and achieve forecasts made, so that it could gain access to the international capital market with good credit ratings.

7. A member noted that while the ratio of equity to loan for the Airport Railway had been changed from 1:3 to 2:1, the estimated fare remained unchanged. He sought the professional opinion of Sir Wilfrid on whether this was reasonable. In response, Sir Wilfrid said that he was not involved in the planning and construction of the Airport Railway and thus was not in a position to answer this question. Mr Clement KWOK responded that similar to the arrangement of paying interests in the case of borrowing from the financial market, MTRC had to pay dividends to the Government for the equity injected. An adjustment in the ratio between equity and loan should not entail a significant change in the estimated fare level. Nevertheless, he expected that the fare level would be lower if MTRC could borrow at a lower interest rate from the financial market.

II.Any other business

8.There being no other business, the meeting ended at 11:30 a.m.

Legislative Council Secretariat

12 May 1997

Last Updated on 22 August 1998