LegCo Panel on Transport
Subcommittee on Western Corridor Railway

Clerk in attendance:

Mrs Vivian KAM

Chief Assistant Secretary (1)2

Staff in attendance :

Mr Matthew LOO

Senior Assistant Secretary (1)4

I Interim report by the Government’s consultants
II Concerns raised by members at the meeting on 24 January 1997
III Any other business

Before the meeting, the Secretary for Transport (S for T) introduced Mrs Agnes Allcock who had taken up the post of the Principal Assistant Secretary for Transport vice Mrs Jenny Wallis.

I Interim report by the Government’s consultants

(Paper No. CB(1) 731/96-97(01))

2. At the Chairman’s invitation, Mr Malcolm Taylor of the Mouchel Asia Limited briefed the Subcommittee on the interim report of the independent assessment on the full proposal of the Western Corridor Railway (WCR) submitted by the Kowloon-Canton Railway Corporation (KCRC). This included the domestic passenger service which would form Phase I of the project and the later addition of cross-border passenger and freight services which would come under Phase II. The scope of the consultancy was to develop independent patronage and revenue forecasts, to check whether the proposed railway system and mode of operation could meet the service demand, and to ensure that the operational system and route selection were reasonable and not excessive. He highlighted the following aspects on planning data input, review on KCRC’s proposal, and revenues and costs:

1. the independent transport forecasts were developed upon the Territorial Development Strategy Review (TDSR) population forecast of 7.52 million by 2011, which was slightly higher than KCRC’s assumption of 7.37 million. KCRC had also assumed a smaller population for Northwest New Territories in the early years of railway commissioning, and this had resulted in KCRC predicting lower patronage;
2. KCRC’s full proposal generally complied with the Administration’s requirements in terms of alignment, stations and multi-purpose railway function. The alignment for Phase I was still being developed and was expected to be finalized in mid-1997. The tight schedule for the WCR to commence operation would be met if construction work could proceed in parallel with land resumption. KCRC’s proposal was only based on a 5% level of design of the project and would require further evaluation; and
3. the revenue projected in the interim report, which was higher than the one estimated by KCRC, was the result of different population forecasts. The capital cost estimate, which was developed by a "bottom up" approach with the quantities of work taken from KCRC’s full proposal, while the "unit cost" which was the result of the average of the latest construction projects in Hong Kong, was 13% lower than that proposed by KCRC. This difference was also ascribed to variation in rolling stock cost estimates and interpretation of limited design work at this preliminary stage. Considerable reserve for contingencies would be allowed for in the early stage of the project.

Mr Taylor concluded that KCRC’s proposal was broadly in accordance with the Railway Development Strategy and the Administration’s requirements. The phased approach was feasible, and the cost estimated by KCRC was reasonable at this stage although it should be subject to refinement when more data became available. He also advised that the design of Phase II should be conducted in parallel with the schedule for Phase I to facilitate integration of services.

3. Mr Stephen Phillips of BZW Asia Limited (BZW) briefed the Subcommittee on the interim report of the independent financial evaluation which aimed to determine the commercial viability of the WCR project with minimal Government commitment. The evaluation was based on independent input assumptions provided by Mouchel Asia Limited and additional information provided by KCRC. The consultants focused on the three key areas of the Project Internal Rate of Return (IRR), the level of debt that KCRC could support, and the level of Government support (equity and/or subordinated debt) required by KCRC. Three different scenarios, taking into account estimates on property development revenues and land costs, had been used for comparison purposes. The results generated by BZW assumed lower capital costs, resulting in a higher level of debt and higher IRR estimates for the Phase I project than estimated by KCRC. The higher forecast level of debt was largely driven by higher revenues forecasted by the engineering consultant in the early years of commissioning. The financial evaluation also established that, on the basis of the financial criteria outlined by the Administration, the WCR project was commercially viable. Mr Phillips emphasized that the project was still at a preliminary stage and information currently available was still limited; more analysis including sensitivity tests on the robustness of the cashflow and reviews on the property development potential would be required to assess the financial position more accurately. He considered a need for the Administration to have closer dialogue with KCRC to clarify data and work out mutually agreeable targets.

4. The Secretary for Transport (S for T) advised that the two consultancy reports were based on a population forecast of 7.52 million by 2011 and the forecast would be updated in due course. Furthermore, the Administration would take into consideration increased traffic flow generated from new developments in She Kou and Northwest New Territories when refining the design of WCR.

5. Some members expressed reservations on the consultants’ conclusion of the commercial viability of the WCR in the light of the significant difference between the findings of the independent assessments and KCRC’s proposal. They also enquired about the Administration’s stance. In response, both the Government Engineer/Railway Development and the S for T emphasized the importance for the Administration to have an independent assessment to ensure that the proposed project was reasonable and not excessive. Furthermore, data used by the consultants were more up to date. S for T agreed with the consultants that the differences were acceptable at this preliminary stage but stressed that the gap would be narrowed when more details became available in November 1997. He and Mr Taylor affirmed that the Administration had requested the consultants to adopt a practical approach in conducting an independent assessment; no directive had been given to the consultants to reduce project costs in the light of the general climate for cost reduction. Mr Phillips also clarified that the consultants had not assessed WCR as a purely private sector commercial project.

6. As regards the capital costs assessed by the consultants, Mr Taylor reiterated that the 13% difference between the consultants’ estimates and that by the KCRC was acceptable at this preliminary stage as both proposals were based on limited information. On the level of IRR, Mr Phillips advised that the consultants had assumed lower capital costs, higher level of revenue and inclusion of WCR terminal value in the assessment and these had led to a higher IRR. He pointed out that whilst the estimated level of debt was higher than that proposed by KCRC, the total interest cost was lower than that proposed by KCRC as the consultants had assumed the injection of Government’s equity at the early stage of project commissioning. He added that the level of debt that could be raised would be restricted by market liquidity constraints for a single debt raising exercise of between HK$25 to HK$30 billion. It was too early to indicate the impact, if any, of raising a higher level of debt. On the different periods of operation adopted by the consultants and KCRC, Mr Taylor and Mr Phillips said that WCR would reach a steady state after 20 years of operation when the characteristics of the system would be stabilized. Further assessment beyond this period would therefore be unnecessary.

7. In response to members on the variation in population forecasts, Mr Nigel Pike explained that this was mainly an account of different estimates on the population forecasts in Northwest New Territories, especially in Yuen Long and Tin Shui Wai areas where the consultants’ estimate was 42% higher than KCRC’s in 2003. The revenue projection for WCR by KCRC had estimated a 15% growth in revenue in the early stage of commissioning of WCR; this reflected a tremendous growth in population in 2003 and was considered unreasonable. Furthermore, disparity in assumptions on bus networks and accessibility improvement to Northwest New Territories also contributed to the differences. Mr Pike advised that KCRC had recently come up with revised assumptions which the Administration had found agreeable, and the revenue projection would be further refined. He envisaged however that the new projection would not be lower than that estimated by KCRC. As regards members’ concerns about the impact of the land use planning in Northwest New Territories on the ridership rate of WCR, Mr Pike advised that both the consultants and KCRC were handicapped in this respect as the possibility of a more concentrated population and employment opportunities had yet to be worked out in the context of land use planning. He agreed with members on the need for a sensitivity study in due course.

8. In response to members on the high cost estimate for line segments, Mr Taylor clarified that this item referred not only to the tracks but all the related infrastructures such as viaducts for the system. He also affirmed that both at grade and underground stations would be air-conditioned and the cost had been included in the estimate. The KCRC had recently commissioned a technical study on air-conditioning facilities in WCR stations, and details such as power consumption and screen doors would be covered. The study was scheduled for completion in six months. As regards the capital cost earmarked for rolling stock, Mr Bill Morris explained that rolling stock should be specifically designed to suit different systems. The lack of concrete information about the design had undermined both the consultants’ and KCRC’s efforts in making an accurate estimate in this respect. Notwithstanding the 31% difference in the two sets of estimates, it only had a small impact on the overall estimate as the rolling stock only carried a comparative small weight in the total capital costs . As a related issue, S for T took note of a member’s suggestion to integrate railways systems in Hong Kong.

II Concerns raised by members at the meeting on 24 January 1997

(Paper No. CB(1) 804/96-97(01) -- Concerns raised by members at the meeting on 24 January 1997

(Paper No. CB(1) 804/96-97(02) -- Response of the Kowloon-Canton Railway Corporation and the Administration)

9. Mr K Y YEUNG advised in response to members that KCRC would appraise the performance of staff from the Pacific Betchel Corporation and retain competent ones to ensure a smooth transfer of technology to KCRC. As regards the 14 studies constituting Phase 2 of the Technical Studies Programme, he explained that the KCRC Management team would monitor closely the progress of these studies; the appointment of yet another consultant to further assess the findings would not be necessary. S for T added that the consultants would assist the Administration in assessing the results of these studies at no additional cost. Concerning the 51 vacant posts (Category 2) referred to in the Administration’s response, Mr Martin Brown confirmed that these would be filled following the current open recruitment exercise and Betchel staff were welcomed to apply for these as well as the 35 posts (Category 4) which they were currently occupying. Mr YEUNG also advised that he had recently commissioned a consultancy study to review the senior management structure of the KCRC with a view to strengthening the senior managerial level to meet future expansion programmes. The study would be completed in March 1997, and he undertook to report to the Subcommittee on the findings as well as the latest position of the staff recruitment.

(Post-meeting note : A Subcommittee meeting was scheduled for 25 April 1997 for KCRC to report on the above.)

10. Hon Zachary WONG Wai-yin on behalf of the Democratic Party urged the Administration to keep the IRR as low as possible and aim for low WCR fares. This concern was shared by Dr Hon LAW Cheung-kwok on behalf of the Hong Kong Association for Democracy and People’s Livelihood and some other members who pointed out that the income of residents in Northwest New Territories were comparatively low and some might not find the fare affordable. Some members also held the view that the WCR had a social responsibility towards residents in the area. They suggested lengthening the period for recovering the capital cost. In response, S for T and the Deputy Secretary for Transport (DS for T) advised that the Administration would consider IRR at a level comparable with those for other public utilities. An excessively low IRR might create the need for Government support and this would violate the objective for the operators to operate on prudent commercial principles. While agreeing with members that WCR was not purely a commercial project, they emphasized that the Administration would need to have regard to such factors as inflation and public affordability in determining the fare level. Mr YEUNG pointed out that KCRC had to face competition from other means of public transportation, and stressed that consultation with District Boards and local communities had been conducted in formulating the Corporation’s policy on fare determination. The IRR of 13.2% estimated by the Government’s consultants would be revised when more details became available. As regards Government’s equity for the WCR project, S for T advised that the Administration aimed to apply to the LegCo for the necessary funding in May 1998.

12. In response to members on Phase II of the project, S for T explained that the Administration would need to follow-up on two major aspects in the year. Firstly, the commissioning of the cross-boarder passenger service Lok Ma Chau would have to be assessed carefully to ensure the availability of public transport network connections in Mainland China. Secondly, the design of the freight services would also involve complicated issues and close co-ordination and liaison with relevant authorities in China would be required before the project could be taken forward. Meetings with the Chinese authorities had been scheduled later on in the year and the Subcommittee would be informed of progress in due course.

III Any other business

13. There being no other business, the meeting ended at 10:30 a.m.

Legislative Council Secretariat
23 April 1997