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Following is the speech by the Secretary for Transport, Mr Nicholas Ng, in moving the second reading of the Mass Transit Railway Bill at the Legislative Council meeting today (Wednesday):
Madam President,
I move that the Mass Transit Railway Bill be read the second time.
Introduction
In his Budget Speech on 3 March 1999, the Financial Secretary announced a plan to privatise a substantial minority share of the Mass Transit Railway Corporation (MTRC).
The Mass Transit Railway Bill is introduced into the Legislative Council today. This is an important milestone in the privatisation of the MTRC.
The Bill provides for :
(i) a franchise to be granted to the MTR Corporation Limited (MTRCL) to operate and maintain the MTR System;
(ii) the regulatory framework for operation of the railway under the franchise; and
(iii) the vesting of all the property, rights and liabilities of MTRC in MTRCL, the new franchisee.
Benefits of Privatisation
The privatisation of MTRC will bring the following benefits to our community:
(a) MTRC is currently wholly owned by the Government and operates on prudent commercial principles. Introduction of private ownership will bring strengthened market discipline to the Corporation, promoting even greater levels of efficiency;
(b) The privatisation will broaden MTRC's access to sources of capital and financing alternatives. This will enable the Corporation to continue to play an important role in the future development of our railway network;
(c) Privatisation of MTRC will provide a prime opportunity for the people of Hong Kong to invest in a solid, well-managed company with strong growth potential;
(d) MTRC is a high quality, heavily capitalised company. Its listing will add stability to our stock market and help buttress Hong Kong's status as an international financial centre;
(e) The privatisation of MTRC affirms the Government's commitment to a free market economy. Its successful implementation will provide a template for the future privatisation of other government-owned assets; and
(f) Proceeds generated from the public offering will also provide a useful boost to Government finance in the medium term.
Fare Autonomy
Honourable Members and the public have expressed concern about the privatisation proposal. The most widely discussed subjects being the fare determination mechanism and the likely impacts on rail safety and passenger service.
As for the fare determination mechanism, there have been suggestions that the Government should alter the existing mechanism by allowing the Legislative Council or other external authorities to approve MTRC's fares.
Firstly, we must point out that MTRC has, since its establishment in 1975, been operating on prudent commercial principles and enjoying fare autonomy. As a matter of fact, the average fare increase of MTR has been 7.5 per cent per annum since the system came into operation in 1979. Such a rate is lower than the average growth of 8.2 per cent in Consumer Price Index (A) during the same period.
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 should not be altered.
In fact, the Legislative Council had already studied and discussed extensively whether the existing MTRC fare determination mechanism should be altered. In February 1997, a delegation of LegCo Members was formed to study overseas metro systems. The delegation's report clearly points out that:
"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
"there is no evidence to suggest that a Government or Parliament-driven fare determination mechanism will necessarily result in lower subsidy with taxpayers' 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.
Market Forces
MTRC is already subject to fierce competition from other public transport modes. We believe that market competition is the most effective form of fare regulation. Some people suggested that MTRC's fares were generally higher than bus fares and this indicated that market competition had no effect. I do not agree with such an argument for the following reasons:
Roughly speaking, MTRC's fares are about 15 per cent to 20 per cent higher than bus fares. However, MTRC passengers get faster, more reliable and more comfortable service in return. The difference in fares reflects difference in the functions and efficiency of different transport modes.
Let me quote statistics to demonstrate the effects of market force. At present, MTRC takes about only 25 per cent of the overall public transport services market. The allegation that MTRC is a monopoly is therefore ungrounded. In the foreseeable future, with the opening of new roads and improvement of bus services, MTRC will still have to improve their service in a bid to keep their patronage.
Honourable Members might recall that MTRC has widely consulted the public on the fare level of the Airport Express prior to its operation. Initially, MTRC proposed to set the fare for a single journey at $150, a rate which the LegCo Panel on Transport (Transport Panel), Transport Advisory Committee (TAC) as well as the public expressed reservations. MTRC was open-minded enough to accept their views and set the fare at a lower level, i.e. $100. In order to compete with other competing modes of MTR, the concessionary fare of $70 charged for taking the Airport Express is still in force. This is ample evidence that market mechanism and public consultation can hold MTRC's fares in check.
Consultation
MTRC always consults the Transport Panel and TAC before any fare adjustment, but such consultation is purely voluntary. The privatised Corporation will in future be contractually obliged by the Operating Agreement to consult the Transport Panel and TAC before adjusting its fares. This new and legally binding arrangement will be a great improvement to the present consultation mechanism. It can ensure that MTRC will fully consider the degree of public acceptability to its fares.
50-Year Franchise
I gathered that some critics considered the 50-year franchise too long when compared with the franchise periods of other franchise operations granted by the Government.
Firstly, I have to point out that the proposed franchise period is in line with the Government's practice in approving MTRC's railway projects in the past 25 years. Since the commencement of MTRC's operation, the Government has been granting the Corporation 50-year Running Line Lease for building new lines. For example, the Tung Chung Line, the Airport Railway and the Tseung Kwan O Extension are all granted 50-year land leases.
A 50-year franchise is considered appropriate. The base period the Corporation used to calculate the Internal Rate of Return (IRR) 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 franchise period is shorter than 10 years if the franchisee is only required to provide passenger service with a relatively small amount of capital investment. But if the franchisee is required to provide railway infrastructures as well, the franchisee will have to invest substantially in the railway system and a perpetual franchise period is not uncommon. Since MTRC is responsible for providing both passenger service and railway infrastructures, allowance must be made for a longer pay-back period. We believe that a 50-year franchise, coupled with a transparent franchise extension mechanism, is appropriate.
If the franchise period is to be shortened, fares will have to be set at higher levels so that the Corporation can keep its IRR intact. We believe that both the public and Honourable Members do not wish to see.
Regulatory Framework for Passenger Safety and Railway Service
Some members of the public worried that if MTRC was privatised, the Corporation would try to satisfy minority shareholders' demand for distribution of dividends at the expense of reducing its investment in the MTR system. As a result, the quality of passenger safety and railway service would deteriorate. These worries are unnecessary because the Government has included in the Bill a number of measures to safeguard the interests of the public:
(1) All the powers of the Hong Kong Railway Inspectorate prescribed in the existing Mass Transit Railway Corporation Ordinance (Cap. 270), which cover all aspects of monitoring of railway safety and investigation of railway incidents, will be preserved in the Bill.
(2) Secondly, the Operating Agreement, a franchise document to be signed by the Government and MTRC, will require the Corporation to meet a number of objective and stringent performance levels. If the Corporation fails to meet these performance levels, the new legislation will empower the Government to impose sanctions on the Corporation, including financial penalty, and suspension or even revocation of franchise. This new, transparent regulatory mechanism is certainly an improvement upon the existing arrangement, and will effectively ensure that the public can continue to enjoy high quality MTR services.
(3) Thirdly, MTRC cannot solely rely on increasing capital expenditure for an automatic extension of its franchise. When considering MTRC's application for franchise extension, apart from the level of new investments that the Corporation is committed to make, the Government will also be required by the new legislation to consider whether MTRC is capable of providing a proper and efficient railway service.
With these safeguard in place, MTRC would definitely not allow its safety standard and service quality to deteriorate. Rather, MTRC would spend more resources enhancing its service quality and operational efficiency in the interests of both the majority and minority shareholders, because this is the only way whereby the interests of all shareholders can be protected.
Conclusion
To sum up, MTRC owes its excellent performance over the past 20 years to three well tested principles, i.e. the prudent commercial principles on which the Corporation has been operating, autonomy in fare determination, and the practice of taking public acceptability fully into account when determining its fares. Privatisation of MTRC must be premised on the integrity of these principles which have served the Corporation and the community well.
Proceeds generated from the public offering will be an important boost to the Government finance in the medium term. Financial consultants of the Government and MTRC pointed out that valuation of the Corporation would inevitably be discounted if MTRC lost its fare autonomy. Taxpayers would suffer losses should the share price fail to reflect the actual market value of MTRC. In that case, the Government will have to consider whether the privatisation plan should proceed.
With these remarks, Madam President, I recommend the Bill to Honourable Members. Thank you.
End/Wednesday, October 13, 1999
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