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Following is a question by the Hon Bernard Chan and a written reply by the Secretary for the Treasury, Miss Denise Yue, in the Legislative Council today (February 7):

Question:

Regarding the financial analysis of proposed public works, will the Government inform this Council of:

(a) the respective discount rates used for cashflow analysis of large projects such as the Hong Kong Disneyland, Cyberport and railway projects; and

(b) the reasons for any discrepancies, if any, in the discount rates used among the above projects?

Reply:

Madam President,

(a) Before the Government decides whether to invest in a large project, we will assess its financial viability. We will work out the proposed project's internal rate of return (IRR) by comparing the revenue stream over the period of the project's operational life with the initial investment to be made. We will determine whether the derived IRR for the proposed project is acceptable. Apart from the financial viability of a project, we will also consider other factors, such as the project's economic costs and benefits. Each project has to be evaluated on a case by case basis after taking into account its financial viability and economic benefits. As a general rule, the Government tends to consider a financial IRR in the region of 8% to 10% as an acceptable minimum for investment. However, the private sector or statutory public corporations participating in a public works project will need to ensure that the IRR is commercially acceptable to them.

(b) The IRR of a project is determined by its own operating cashflow projection as determined by its estimated project cost, ongoing capital expenditure, operating cost and other revenues. Therefore, the IRR can vary from project to project. The Government will decide whether the IRR is acceptable or not based on the merits of individual projects after considering other factors, such as the economic costs and benefits.

End/Wednesday, February 7, 2001

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