S for T's speech at Legco panel on Transport

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Following is the speech by the Secretary for Transport, Mr Nicholas Ng, at the Joint LegCo Panels on Transport and Financial Affairs on the Privatisation of Mass Transit Railway Corporation today (Monday) :

Chairman,

Introduction

In his Budget Speech on March 3, 1999, the Financial Secretary announced a plan to privatise a substantial minority share of the Mass Transit Railway Corporation (MTRC). The Government has since worked closely with MTRC and our financial consultants to take the project forward.

The Mass Transit Railway Bill was gazetted on September 24, 1999. We will introduce the Bill into the Legislative Council on October 13,1999. Today, I am glad to have this opportunity to discuss with Members the details of the Bill and the privatisation plan.

I will first speak on the benefits that the privatisation exercise will bring to the community and public in general. I will also address some of the key concerns expressed by Members and the community about the privatisation of MTRC, including the fare determination mechanism and the length of the franchise period.

Secretary for the Treasury, Ms Denise Yue, will later explain to Members the impacts of privatisation of MTRC on Government finance and Hong Kong's financial market. Mr Jack So, Chairman of MTRC, will also explain the benefits of the privatisation from the Corporation's point of view.

Benefits of Privatisation of MTRC

The privatisation of MTRC will bring the following benefits to the community :

(a) Introduction of private ownership will bring strengthened market discipline to the Corporation, promoting even greater levels of efficiency.

(b) Privatisation will broaden MTRC's access to sources of capital and financing alternatives. This will help the expansion of railway network and the improvement of railway services.

(c) Privatisation of MTRC will also provide an attractive opportunity for the people of Hong Kong to invest in a solid, well-managed company with strong growth potential.

MTRC's Fare

(A) Fare Autonomy

After we published the MTRC privatisation proposal, both Members and the media expressed concern on the fare determination mechanism of the future privatised Corporation. Some suggested that the Government should change the existing mechanism and allow LegCo or other external authorities to approve MTRC's fare.

Firstly, we must point out that since the establishment of MTRC in 1975, the Corporation has been operating according to prudent commercial principles and enjoying fare autonomy. It is a matter of fact that MTRC's average fare increase has been 7.5% per annum since 1979, lower than the average increase in Consumer Price Index (A) of 8.2% during the same period.

Even though the average fare increase is lower than inflation, MTRC still manages to keep on improving its operational efficiency, expanding its network and enhancing its service quality. We believe that the present system has been working successfully and there is no need to change.

In fact, the Legislative Council also studied and discussed in detail on whether the existing MTRC fare determination mechanism should be changed. In February 1997, a delegation of LegCo Members was formed to study overseas metro systems. The report published by the delegation provides us a clear message. The report points out that :

(a) "direct involvement of legislature in the fare setting process and the right to endorse or veto fare adjustment is not common" (paragraph 3.10 of the Report); and

(b) "there is no evidence to suggest that a Government or Parliament-driven fare determination mechanism will necessarily result in lower subsidy with tax payers' money or lower fares for commuters" (paragraph 3.12 of the Report).

The Government believes that we should not change the present system which has been working well in the past 20 years.

(B) Market Force

MTRC is already subject to fierce competition from other public transport providers. We believe market competition provides the best form of fare regulation. Some critics suggested that MTRC's fare was generally higher than bus and this indicated that market competition did not function properly. I do not agree with such argument because :

(a) Roughly speaking, MTRC's fare is about 15% to 20% higher than bus fare. However, MTRC offers its customers faster, more reliable and more comfortable services. The difference in fare reflects the difference in the functions and efficiency of different transport modes.

(b) I can also use statistics to demonstrate the effects of market force on fare. In the past few years, with the opening of new roads and improvement of bus services, the overall market share of MTRC decreased from 26.7% in 1996 to 25.7% in 1998. Over the same period, its share of the cross harbour market has also experienced decline from 66.5% to 61.9%.

(c) Some critics pointed out that MTRC was operating in a monopolistic market and the use of market force to regulate its fare would not be effective. However, past statistics also indicate that the above argument is not true. In the past 20 years, MTRC, although operating an extensive railway network in Kowloon and Hong Kong, has not been able to surpass Kowloon Motor Bus in terms of passenger volumes. MTRC is, therefore, not operating in a monopolistic market.

After privatisation, MTRC will need to consult the LegCo Panel on Transport and the Transport Advisory Committee before adjusting its fares. Such arrangement will be stipulated in the Operating Agreement, which is a legally binding document signed by the Government and MTRC. This will ensure that when determining its fare, MTRC will be required to fully consider public acceptability.

50 years Franchise

Regarding the terms of the franchise, the Bill provides that :

(a) It will grant a 50 years franchise to the new company to operate and maintain the MTR system.

(b) In future, if MTRC is awarded to construct a new railway project, or implements projects which require the Corporation to invest over a certain level of capital, the Corporation will be eligible to apply to the Government for an extension of the franchise for a full 50 years term.

I read from the newspapers that some critics considered the 50 years franchise was too long when compared with the franchise periods of other franchise operations granted by the Government.

Firstly, I have to point out that the suggested franchise period is in line with the Government's practice in awarding railway projects to MTRC in the past 25 years.

Since the commencement of MTRC's operation, the Government has granted the Corporation 50 years land leases to build new lines. For example, the Tung Chung Line, the Airport Express Line and the Tseung Kwan O Extension are all granted 50 years land leases.

A 50 years franchise is considered appropriate. The base period the Corporation uses to calculate the Internal Rate of Return for MTR projects is 40 years from commissioning. In addition, design and construction of railway projects usually take 10 years.

The Government's proposal is also in line with overseas privatisation experience. As a general rule, the length of franchise in overseas privatisation exercises depends on whether the franchisees are required to provide both passenger services and railway infrastructures (e.g. rail tracks, stations, etc). If the franchisee is only required to operate passenger services, the franchise period is generally shorter than 10 years. But if the franchisee is also required to provide railway infrastructures, the franchisee will need to invest substantially into the railway system and a perpetual franchise period is usually granted. Since the MTRC is responsible to provide both passenger services and railway infrastructures, a longer pay-back period is therefore required. We believe that 50 years franchise, couple with a transparent franchise extension mechanism, is appropriate.

If the franchise period is to be shortened, fare must need to be raised in order for the Corporation to maintain the same level of internal rate of return. We believe that both the general public and Members do not wish to see a higher MTRC fare.

Regulatory Framework

Some members of the public worried that if MTRC was granted a 50 years franchise, the Corporation would have no incentive to improve its service quality. The Government has included in the Bill a number of measures to safeguard the interest of the public, including :

(a) Firstly, the Operating Agreement, which is the franchisee document to be signed by the Government and MTRC, will require the Corporation to meet a number of stringent, but objectively defined performance levels. If the Corporation fails to meet these performance levels, the Bill empowers the Government to introduce sanctions on the Corporation, including financial penalty, and suspension or even revocation of franchise. This new, transparent regulatory mechanism is certainly an improvement of the existing arrangement. It can effectively ensure that the public can continue to enjoy high quality MTR services.

(b) In addition, MTRC cannot solely rely on incurring new capital expenditures to automatically extend its franchise. When considering MTRC's franchise extension application, apart from the level of new investments the Corporation commits to make, the Bill also requires the Government to consider whether MTRC is capable of providing an appropriate and effective railway service.

(c) Thirdly, when Government considers MTRC's new capital investments, we will take into account not only the investments made in new railway projects, but also the medium to long term capital expenditures the Corporation incurred to improve its services. This will provide the Corporation enough incentive to invest in improving its services.

Conclusion

In conclusion, MTRC has performed well in the past 20 years because of :

(a) the Corporation operated according to prudent commercial principles;

(b) the Corporation enjoyed fare autonomy; and

(c) when determining its fares, the Corporation thoroughly considered public acceptability, and also consulted LegCo Panel on Transport and Transport Advisory Committee.

The above three principles are the keys to the success of the MTRC's operation. The Government believes that we should not depart from these principles which have served the Corporation and the community well.

End/Monday, October 4, 1999

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