*********************************************************
The Government today (December 4) released the Partial Final Award (the Award) and Reasons for Award in respect of the arbitration on the toll increase of the Eastern Harbour Crossing (EHC). The arbitrators determine that the New Hong Kong Tunnel Company Limited's (NHKTC) application for an upward variation in the tolls fails and is dismissed.
On October 30 this year, a Government spokesman confirmed the receipt of the Award and expressed that the Administration was pleased with the outcome.
In the Reasons for Award, the Arbitral Tribunal accepts the Government's submission that the band of reasonable but not excessive remuneration for NHKTC, which is 15 per cent to 17 per cent Internal Rate of Return on equity after tax (IRR), as determined in the 1997 Arbitration and adopted by the arbitrators in the 2005 Arbitration, is not immutable.
The Tribunal is of the view that although at the time of the arbitration in 1997, it may have been appropriate to fix the band of reasonableness of the IRR by reference to the expectations of the parties and in particular NHKTC and its investors at the time of its tender, and to take account of other comparable projects being entered into at around the same time, as the years have passed, what may be regarded as a reasonable rate of return over the lifetime of the franchise may change, and it is not only permissible but appropriate for such changes to be taken into account.
The Tribunal is also of the view that there is no good reason to exclude consideration of the real as opposed to the nominal IRR which will have been enjoyed by NHKTC over the lifetime of the franchisee, as doing so accords with commercial reality.
The Tribunal points out that if, in order to determine whether NHKTC has received and/or will continue to receive a reasonable but not excessive remuneration, it is appropriate to take account of the financial or economic changes such as that in the inflation rates prevailing in Hong Kong over the lifetime of franchise since the relevant assumptions were made in the documents upon which the would-be investors relied at the outset. It is of the view that NHKTC will have enjoyed a real IRR substantially in excess of that forecast, and that no further increase in tolls is necessary or appropriate.
In summary, the Tribunal is far from satisfied that, on the arguments advanced and the evidence adduced, NHKTC has made out even a prima facie case for an upward variation in the tolls. On this basis alone, the Tribunal would reject the NHKTC's application for an upward variation in the tolls payable from January 1, 2013.
The tolls of the EHC were last raised in 2005 when the tolls for private cars and taxis were increased by $10 from $15 to $25 with corresponding increases for other vehicles.
In August 2010, NHKTC submitted an application for a $10 (from $25 to $35) toll increase for private cars and taxis, with proportionate increases for other categories of vehicles to take effect from January 1, 2011.
In June 2011, the Chief Executive in Council rejected NHKTC's application. NHKTC commenced arbitration against the Government's decision in August 2011.
The EHC Ordinance provides that the tolls specified in the Schedule to the Ordinance may be varied by agreement between the Chief Executive in Council and the tunnel company. If an agreement cannot be reached, either party may submit the question of the variation of tolls to arbitration. The Ordinance stipulates that the arbitrators shall be guided by the need to ensure that the carrying out by the tunnel company of its obligations, or the exercise of its rights, under the Ordinance is reasonably but not excessively remunerative to the tunnel company, having regard to, inter alia, any material change in the economic conditions of Hong Kong since the enactment of the Ordinance or, as the case may be, since tolls were last determined.
Ends/Tuesday, December 4, 2012
Issued at HKT 17:12
NNNN
