LCQ2: Financial arrangement of three-runway system project at Hong Kong International Airport
******************************************************************************************
Question:
With an estimated cost as high as $141.5 billion, the project to expand the Hong Kong International Airport into a three-runway system (3RS project) is the ever most expensive single infrastructural project of Hong Kong. The construction works for the project are expected to commence in this financial year and be completed in 2023-2024. The Airport Authority (AA) plans to raise funds for the 3RS project through three means, namely having the Government forego its dividends and optimising revenues for 10 years (totalling about $47 billion as estimated), charging travellers an airport construction fee (ACF), and borrowing loans from the market. In this connection, will the Government inform this Council:
(1) as the study report published by the financial advisor of AA has revealed that the maximum debts estimated to be incurred by AA will be $84 billion, $104 billion and $141 billion respectively under three potential downside scenarios (i.e. a 2% increase in the cost of borrowing, a 15% decline in total revenues, and an overrun in project cost by 50%) upon completion of the 3RS project in 2023-2024, whether the Government knows the maximum amount of debt which AA may incur and the amount of interest payable in that year when the three potential downside scenarios occur concurrently; whether the Government will publicly make the pledges that it will make sure AA will not increase ACF, and that the Government will not apply to the Finance Committee of this Council for funding to cover the cost overruns of the 3RS project;
(2) as the Chief Executive Officer of AA has indicated that "AA undertakes to bear all relevant responsibilities" and "the Hong Kong Government is not required to provide any form of financial guarantees or undertaking to AA", but it is stated in the aforesaid study report that "as of September 2015, AA's debt rating as published by Standard and Poor's (S&P) is AAA which is equal to the rating of the Government, on the basis of S&P's expectation that 'AA will receive almost certain extraordinary support from the Government in the event of financial distress'", whether the Government will ultimately bear the cost of the 3RS project; and
(3) whether it knows how AA will repay the loans to be borrowed from the market to finance the 3RS project; whether the Government has any plan to continue foregoing its dividends from AA after the completion of the works in order to help AA repay the loans?
Reply:
President,
According to the Airport Authority Hong Kong (AA), the estimated capital cost for the three-runway system (3RS) will be approximately $141.5 billion in money-of-the-day prices. Having regard to its strong financial position and projected steady growth in revenue, the AA considered that it should finance the 3RS by itself as far as practicable, including:
(1) retaining the AA's operating surplus, making use of the internal sources of funds;
(2) implementing a robust approach in maximising revenue under the "joint contribution" principle, including introduction of the Airport Construction Fee (ACF) on passengers and upward adjustment of airport charges to be payable by airlines. The charging level of ACF would remain unchanged throughout the collection period; and
(3) raising funds from the market leveraging on the AA's financial capability and excellent credit rating.
My consolidated reply to the Hon Chu Hoi-dick's question is as follows:
The AA appointed The Hongkong and Shanghai Banking Corporation Limited as its financial advisor to conduct a feasibility study on the financial arrangement plan for the 3RS project. The relevant report has been uploaded onto the AA's webpage in December last year. The financial advisor has conducted a risk assessment of different scenarios and undertaken "what-if" analysis for five hypothetical downside scenarios (Note 1) for testing the financial robustness and prudence of the 3RS financial arrangement plan and evaluate whether the plan could manage the impacts under such scenarios. Hon Chu Hoi-dick has mentioned three of these downside scenarios in his question, namely, (1) a 2 per cent increase in the cost of borrowing; (2) a 15 percent decline in the AA's total revenue; and (3) a 50 per cent overspend on 3RS capital cost. The debts of the AA will increase under these downside scenarios. The debt levels quoted in the financial advisor's report have already included the interest expenses payable by the AA on its borrowings.
After prudent assessment, the financial advisor concluded that the AA is capable of raising debt to fund the 3RS, and the overall financial arrangement for the 3RS is practicable and viable. The financial advisor considered that, in the event that these downside scenarios were to occur, the AA would still be able to maintain an investment grade rating and raise further debt to fund the consequential funding shortfall for meeting the project expenditure.
The financial advisor also reiterated that these hypothetical downside scenarios were for sensitivity testing purpose only and did not reflect its expectation of possible outcomes. The AA stressed that the downside scenarios selected in the tests already represented very critical situations. The AA also considered that these risk tests were already sufficient and it was not necessary to conduct other additional tests or to assume simultaneous occurrence of different downside scenarios. The financial advisor recommended that in case the financial impact of the downside scenarios was more severe than assumed, the AA should revisit its financial plan. The AA may also develop other revenue streams or access alternative forms of financing other than senior debt.
In view of the immense investment of the 3RS project, its high capital cost and complexity, the Government has requested the AA to conduct proper planning and implement cost control mechanisms as early as possible. To ensure the delivery of the 3RS project within the expected time and budget, the AA has put in place comprehensive risk management measures, including:
(1) adopting a pragmatic design to ensure that it is fit-for-purpose and value-for-money, avoiding extravagant or unnecessary features;
(2) adopting a detailed design at the early stage to confirm the project scope, with a view to controlling and managing the risks of changes in design and works during construction;
(3) conducting comprehensive ground investigation (Note 2) for better understanding of ground conditions in order to minimise the risks during construction period;
(4) conducting thorough testing, including three rounds of technical trials on the deep cement mixing method, to ensure the feasibility of the reclamation technology; and
(5) prudent control of financial risks, including the appointment of an independent quantity surveying consultant to conduct an independent assessment on the cost computation and estimation.
President, the AA has repeatedly undertaken in public that in the event of cost overrun of the 3RS project, it will be solely responsible for such. The AA will seek further feasible financial arrangement, and will not require funding support nor guarantee from the Government. The Government also has no plan to bear any cost overrun of the 3RS project. As regards the credit rating of the AA accorded by financial rating agencies in the market, this is based on their independent professional judgment which should not be confused with whether or not the Government will bear the cost overrun of the 3RS project.
According to the AA's financial arrangement plan for the 3RS, the AA will retain all operating surplus from the financial year 2014-15 onwards until the commissioning of the 3RS (i.e. around 2024). This will amount to about $47 billion which will not be paid out as dividends (Note 3). Dividend payments will resume upon the completion of the 3RS project.
Note 1: The five hypothetical downside scenarios include: (1) a 15 per cent decline in the AA's total revenue; (2) a 20 per cent overspend on 3RS capital cost; (3) a 50 per cent overspend on 3RS capital cost; (4) single adverse event e.g. similar to the SARS outbreak in 2003, leading to a decline in passenger throughput and air traffic movements; or (5) a 2 per cent increase in the cost of borrowing.
Note 2: The comprehensive ground investigation was conducted at over 600 locations.
Note 3: Section 26 of the Airport Authority Ordinance (Cap. 483) states that the AA "may" declare and pay dividends to the Government. The AA Board will take into account the AA's operational and financial needs when deciding whether or not dividend will be declared and the amount to be declared (if any) in the respective financial year. The arrangement does not involve the Government's "waiver" or "exemption" of the AA's dividend. All decisions of the AA Board must be made in accordance with the Airport Authority Ordinance.
Ends/Wednesday, December 7, 2016
Issued at HKT 14:53
Issued at HKT 14:53
NNNN