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Following is a speech (English only) delivered by the Financial Secretary, Mr Donald Tsang, at the Third Ministers' Forum on Infrastructure Development in the Asia-Pacific Region today (Thursday):

"The 'Win-win' of Public and Private Sector Partnerships"

Delegates, distinguished guests, ladies and gentlemen,

Welcome to Hong Kong. It is indeed a pleasure to be with you at this lunch. We had a very successful senior officials meeting in January and I am sure that discussions over these few days will be equally, if not more, fruitful and interesting. I know you are all enjoying a hard-earned lunch break, so I will bear in mind the words of Thomas Jefferson, who once said that: "Speeches measured by the hour, die with the hour." I certainly do not intend to prove him right. But I hope I can provide you with some food for thought, to supplement the food for lunch.

Today I would like to talk about how Hong Kong's public sector works with the private sector to help build and manage essential infrastructure.

In Hong Kong, good infrastructure is a matter of survival. We pride ourselves on being Asia's premier international city - and that means we must continually not only meet, but exceed, international expectations. This is especially so in terms of transport and communications infrastructure. But there is simply too much to do, and so much to build, in Hong Kong for the government to do it alone.

To achieve our goals we rely heavily on a mix of public and private sector participation. The private sector enjoys not only flexibility in raising capital but also advantages in operational efficiency that the public sector often cannot match. The Build, Operate and Transfer (BOT) model works very well in this regard. Since the mid-sixties, we have built five multi-lane vehicular tunnels in Hong Kong using the BOT method which we also apply suitably to roads and bridges. But there are some special features in our BOT projects worth noting. For two of the latest tunnels we have built under BOT there is a built-in formula to adjust tariffs written into legislation. This ensures maximum or minimum returns for investors. If returns exceed the maximum level, then excess net profits are paid into a Toll Stability Fund to meet future deficits. This in effect gives us the flexibility to defer toll increases. Investors also like this because it gives them a greater degree of certainty in terms of returns.

Another approach which has worked very well for us is to corporatise public transport infrastructure. Our railways and airport have been built by, and are run by, government-owned corporations. Our approach has been to kick-start these corporations with a government equity injection and then to let them get on with their business. The corporations have to raise their own financing in the international capital markets and their borrowings are not government guaranteed. They must not only provide the transport infrastructure we need, but also deliver a return on the government's equity investment by way of dividend. We are now actively looking at ways to corporatise other government services. This, in turn, may eventually lead to complete or partial privatisation.

Another option on which Hong Kong has relied is completely private sector-driven infrastructure. The facilities at our container port - one of the busiest in the world - are all privately owned and operated. Our electricity and gas infrastructure is built and delivered by companies listed on our Stock Exchange. Our telecommunications infrastructure has all been provided by the private sector. We are now working towards how the private sector can become involved in providing other government services in Hong Kong.

All of these approaches free up the government's financial resources and help keep the size of the public service to a minimum. And it allows us to devote more resources to areas such as education, health care, law and order and the environment.

With a population approaching 7 million, and an area of less than 1,100 square kilometres, Hong Kong has the highest urban population density on the planet. In built-up areas there are about 27,000 people per square kilometre; up to 50,000 in some older areas. This makes it absolutely vital to have in place adequate and appropriate transport infrastructure. According to The Economist, we have the world's most crowded and most used road networks. Yet, there is none of the gridlock that is common in other big Asian cities.

One reason we have escaped the two-hour transit through the central business district is our excellent public transport, in particular the very efficient, environmentally-friendly Mass Transit Railway (MTR) - Hong Kong's subway system - and the Kowloon-Canton Railway (KCR), which serves the New Territories. The MTR moves over 2 million people a day, which makes it the most densely utilised metro in the world. The KCR moves about 750,000 passengers a day.

Although the MTR Corporation and the KCR Corporation are wholly government owned, they operate as separate commercial entities. They both have excellent management reputations and have earned top-notch credit ratings. They both seek financing in the international capital market - and with a great degree of success. And they both have easily achieved their primary goal to provide Hong Kong with efficient, modern, affordable and profitable railway transport.

We do not often hear the two words 'profit' and 'railway' uttered in the same sentence. But in Hong Kong our railways not only make a profit, they also pay a dividend to the government. Last year the two corporations made a combined profit of just over US$570 million. It is really something of which we are quite proud.

Both the MTRC and the KCRC are now embarking upon a major expansion of Hong Kong's railway network, the likes of which has never been seen before in Hong Kong. Over the next five years or so we will increase the length of railways by about 40%, at a cost of some US$16 billion. These projects will alleviate congestion on some existing lines, open up new tracts of land for development and pave the way for a greater integration of our railway system into our economic hinterland adjoining Guangdong Province of the Mainland of China.

It is true that our high population density provides the two railway corporations with a 'captive audience' and, therefore, a steady and considerable income stream. Proximity to an MTR or KCR station is a big selling point in the property market. That is why both corporations are involved in integrated commercial / retail / residential developments above railway stations to generate revenue and finance the expansion of their networks.

In the MTRC's case, private property developers shoulder the construction costs and any land premium payable to government. In return, the MTRC receives a share of profits from property sales, or is given an asset such as a shopping centre from which considerable rental income is derived. The MTRC just last week announced its latest property development plans which are part of a new rail extension to Tseung Kwan O, a new town in eastern New Territories. This particular development will involve the building of about 28,000 apartments in phases over the next decade. The developments will be put out to tender and will be worth in the vicinity of about US$10 billion. There is no shortage of property developers interested in taking up these projects for the MTRC.

We have also used the corporate approach for our new airport. Like the MTRC and the KCRC, the Airport Authority received government equity injections to get the project rolling. And like the two railway corporations, we expect the Airport Authority to eventually repay that equity injection - and then be ready for privatisation. The Authority derives income from areas such as airport landing fees and charges, retail franchises, office rentals and advertising. It also has a valuable land bank on the airport island which it can utilise for commercial gain. The Authority has a great deal of flexibility in the use of its assets in order to maximise returns.

Privatisation is a natural progression from corporatisation. The success of the MTRC, for example, makes it a prime candidate. Within this fiscal year we will bring forward a bill to privatise a substantial minority share of the MTRC through a public offering. When successfully implemented this ground-breaking initiative will become the benchmark for privatisation of other government-owned commercial assets in future.

All of this is fine for railways, roads and airports. But as we approach the new century - some call it the Cyber Century - governments are turning their attention at how best to provide the infrastructure needed in the area of information technology.

In March this year, in the annual Budget, I announced plans to develop a high-tech Cyberport in Hong Kong. This is a strategic information technology infrastructure project. It forms part of Hong Kong's mission to develop a knowledge-based economy and to position ourselves as the pre-eminent centre of innovation and technology for East Asia and beyond.

Cyberport will be built on the western shores of Hong Kong Island. It is designed to attract a cluster of companies involved in leading-edge IT applications and services, including multi-media and content creation involving 3-D graphics and animation.

The development will include an ultra-modern intelligent building complex, a state-of-the-art broadband telecommunications and information 'backbone', and a wide range of shared facilities like high performance computers, a media laboratory, demonstration and exhibition facilities and a cyber library.

What distinguishes this project from others developed elsewhere is that we do not believe that the conventional mode of the government taking the lead is the appropriate way to proceed. For it to succeed we believe that the private sector must take the lead.

The reason for this is clear, a successful cyber-facility would require specialists in information technology who understand the IT industry, who know the needs of potential tenants, who are willing themselves to be anchor tenants, and who are able to apply IT creatively to produce new information services that meet modern day demand, or even create new demand. Civil servants simply cannot fit the bill.

For our Cyberport, the government will provide the land and supporting infrastructure such as road links and sewage systems. The technology company which came up with the idea will build the Cyberport and, on completion, hand it over to the government.

To finance the project, the founding company will develop property adjoining the site. However, profits from the sale of apartments, less the development costs of Cyberport, and after the setting up of a HK$200 million Development Fund, will be shared between the government and the company.

This way the founding company bears all the development costs and risks and is responsible for financing the entire project. The government bears no investment risk. It receives a share of profits from property sales and gets a Cyberport.

This is an uncommon approach, but we believe that it provides several advantages.

The first is time. The IT sector is advancing at such a great pace nowadays that we risk being left behind if we do not act quickly. By taking this approach, now, we know that the project can be delivered in a timely and cost-effective manner.

The second reason is fiscal resources. The government will not have to commit large amounts of capital to finance the project. This allows us to deploy resources in other areas such as education and training, which may eventually be put to better use at Cyberport or in other high-tech areas.

A third reason is expertise. We believe that a private sector investor with IT expertise is best placed to ensure that Cyberport fully meets the needs of tenants in terms of IT and ancillary facilities.

Before I finish I would like to mention several important factors which I believe are necessary for private sector investment to be successful. These include, among other things, a business friendly environment with a versatile workforce that promotes and rewards enterprise; an open and transparent system that safeguards the interests and rights of private investors; a well-established legal system;, a clean administration ; open markets and freedom of the press.

You will find all of these in Hong Kong. And that is why, over the past three decades or so, we have been able to work so successfully with the private sector. It has been a 'win-win' for both sides.

Thank you.

End/Thursday, May 27, 1999

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