The following is the English portion of the transcript of the press conference on the Hong Kong Disneyland project today (Wednesday):
Reporter : .....He said that just recently the returns for Hong Kong would be in infrastructure. However, in addition to the HK$14 billion infrastructure spending, the Government will also put up a considerable amount of the cost for the construction of theme park as well. What return is the Government expecting to get from that? And is that diminished in anyway of what you just said ?
Financial Secretary, Mr Donald Tsang: Well, it will not. Because I look at the project from the return to the community. I do not look at the return from the project itself. You are talking about the internal financial return of a project. This is not how we operate. Having regard to this as a tourism infrastructure programme, I would look at it with a much more macro view. But as regards internal figures, I think you'd better ask Mr Rowse and Mr Glass there. They're in a much better position to tell you in detail about the return of the project.
We must remember this too, we are now dealing with an infrastructure project. Why we are in it? Because this is a land intensive project, and it is also one which will not give you a very brilliant internal rate of return looking at a project on its own financially. But it, of course, is overwhelmed by economic benefits - the wider benefits to the economy as a whole which could be quantified. Never mind the unquantifiable part. This is how we look at the project. But even on the return rate, it is a much better investment, from our point of view, than some other infrastructure programmes for the trade. Look at the Convention Centre. We provided the infrastructure. We provided the superstructure. We paid for all the cost of internal decoration - everything. And then we hand it over to a private commercial firm for management on a profit sharing basis. And the level of return in that project is hardly going to meet the capital outlay of that project involved. But that is considered, and we all know, a very successful project. Because the economy as a whole gained. In this case with Walt Disney, we do the same thing. But we do believe we do deserve some return. And therefore even in the project investment, I think we get a reasonable return from it. At the same time, the economy gains in a big way.
Commissioner for Tourism, Mr Mike Rowse: Just this afternoon, the Financial Secretary's reply - the money going into the company, of course, the bigger share is loan, $5.6 billion, which will be repaid in full with interest. And the other portion, this portion is equity, on which we will earn dividends. So we're certainly getting a return on that money in addition to the infrastructure spending that the Financial Secretary referred to in the first part of his answers.
Reporter: There has been a variety of reports on the impact on Hong Kong's gross domestic product of the park. What will be the impact on Hong Kong's GDP before the opening and after the opening ?
Financial Secretary: I think I've seen from the screen Mr K Y Tang is there. I think he's in the best position to answer you on this question. Of course, there are estimates. The estimates I've heard so far, some by our own people, some by other people, ranges from half a percentage point right up to about one-and-a-half percentage point, some about point three, point two, right up to 1.5, 1.6. But I think the point here is, the amount of money, the amount of net capital benefit we derive from the project has been estimated. All you need is to use it as a basis and calculate on the basis of our GDP at the moment, then you get the rate of return. But the best person to answer you is right there at the floor, Mr Tang.
Reporter :.....why did you not put it up for open tendering? Why did you not let other companies who may be interested come and make bid for this project and perhaps get a better deal for the people of Hong Kong ?
Financial Secretary: What I explained before in Cantonese - we have looked at it very carefully, particularly the commercial return, the internal return, for the project itself, and we've made soundings. The return is not brilliant, but it is viable, but it is not brilliant. It will not match the risk that will be involved in an investment of this kind, if you look at it narrowly from a project point of view. But the economic benefit will be enormous. Even if you put up to tender, it will mean there will require a pledge by Government on land, a pledge by Government on profitability and other things. It will make things very complicated. And it may not be possible in the situation like this going through the tendering arrangements. For that reason, ... soul searching and internal discussion we believe the best way to proceed is initially at least, the Government should participate, because looking at it as an infrastructural unit. And having done that, then perhaps all the interests required should then be put back to the private sector, but we will tackle this after we have completed the construction. The most important thing we have to remember is, we must not look at the infrastructure investment Hong Kong Government is making on this occasion and compare that investment with Walt Disney. Because we are looking at different things. They are looking at internal project return. I am looking at economic return. From my point of view, it is a very good investment. From Walt Disney's point of view, I am quite sure it is a good investment. But from both sides' point of view, it is a fair deal. Thank you very much.
Commissioner for Tourism: I got about half a dozen questions left over from the first half. See if I can couple together an answer. Most of the time when we sell land, we go to auction or tender, as you know. And it's simply that the higher bidder wins. When we apply a treaty grant situation which this is, then you have to ask yourself how much is a fair price and there are two basis on which you can do it. One is what do we estimate would be the value of that piece of land if it were offered for sale for that purpose. And the second way of looking at it is what is the cost of producing that land. And then you choose the higher of the two figures. You choose the higher one. In this case, we estimate that the cost of land production is very much higher than the open market value of the site, if so for theme park purposes. That is why we are charging the company four billion dollars, because it's the bigger number. Now, of course, as the Financial Secretary referred to before, the project economics at base case do not support payment upfront of the land premium in cash. That is why we have taken subordinated equity instead for the land premium. But we have structured the rest of the financial arrangement so that if the base case is too conservative, if it's too cautious, then we will capture the upside by converting those subordinated shares to ordinary shares. That's why we structured the arrangement with the subordinated shares in the way that we have. In other words, if the base case is what happens, all right, and the project hasn't paid anything for the land. But if the base case is exceeded, then we will progressively convert our shares into ordinary shares and earn dividend on them. That's the way we calculated it.
The second one I got left over from the first half concerns whether the Government participation was too long term. Let me answer that in two ways. First of all, another government in Europe gave permanent tax concessions. Now those concessions will run forever for their particular project. We've not given any tax concessions. And as regards our share holding, we are free to sell down. We have to have a minimum number of shares by the end of the first year of operation. There is a restriction there. But after the first year of operation of the park, there are no restrictions on the Government. We can sell off all of our shares. So, no, this isn't too long an involvement at all. We can be out as soon as market circumstances suggest that is a sensible thing for us to do. A lady asked about Mainland visitors. We have a on-going programme of discussing with the Mainland Authorities ways to make it easier for Mainlanders to come to Hong Kong. The Secretary for Economic Services, Mr Ip, leads the delegation himself. He has another visit coming up soon. Gradually we increase the numbers under each of the scheme. But I think both sides are proceeding cautiously. We don't want to get the illegal immigration problem get out of control. So we are trying to ease up so that we can benefit from bigger number of tourists but without losing control of the situation. So I imagine in the next five years or so before the park opens, we'll have further progressive easing up under the different quota schemes. And I'm quite sure by the time the park is opened, the number coming per day will be higher than they are now. Have several questions on rate of return which I am going to let my good friend Mr Tang answer.
(Please refer to Mr Tang's answer in Chinese transcript.)
Commissioner for Tourism: ...very grateful to K Y for the economic lecture. Maybe I can just say a little bit about the base case and downside scenario from the financial perspective as distinct from economic perspective. First of all, we've been accused on radio today both ways. Some channels said we deliberately painted a rosy picture of the base case. Another channel said we had deliberately understated the project of financial prospects. So, what I can tell you is we haven't tried to do either. It is a genuine attempt to say what we think the project will achieve in financial term. I would think that it is set a little on the conservative side. It is prudent and that is entirely correct that we should be prudent after all we're thinking or spending taxpayers' money. So I would prefer to be prudent rather than rash. We've learnt several lessons both we and Disney from the Paris experience. Number one, Paris was over-leveraged. The debt-equity ratio was highly rated in favour of debt, with relatively small amount of equity. That is why we have gone for a much more prudent ratio of 40:60, which we think is appropriate for this kind of project. And the project finances are very robust. It can cope with a very considerable degree of downside, and still pay off the commercial loan, and still pay off the Government loan on time within the 25 years, including payment of all interest. So we have learnt a lot in response to the lady asking about Paris. We have, both of us, I think, learnt a lot from that experience and plan accordingly. We can handle it, the project, economics are robust.
Reporter: Can you just clarify the economic rate of return? What gives you 25 per cent? Can you give more details about that?
Government Economist, Mr K Y Tang: On that, I'm sorry, my answer will have to be very technical. But it is quite a common economic assessment device, actually it applies to financial assessments as well. So this is quite a popular technique among the analysts. Basically, what it means is that you have basically two streams. One is the benefit stream for the project, the other is the cost stream for the project. Both streams will stretch over a number of years, particularly for the benefit stream. You will stretch for 30, 40, 50 years. In our case, we just take a fair dividing line, which is 40. Actually, the length of the project, I believe, must be considerably longer than that. Even our land grant initially is already 50 years rather than 40 years. So, within this stretch of time, you have to bring the various numbers together because they relate to different periods. So that's why you have to apply so-called discount rate in order to bring the various numbers into a common basis of comparison which is the present day comparison, and that is what they call the present value.
Now, you do this for the benefit stream, you do the same for the cost stream. Ending up with two numbers, discounted by a certain discount rate or rate of return. This 25 per cent representing what we call the internal rate of return for economic projects. We'll be at such a level which equates, which just equates the discounted present value of the two streams exactly. In other words, if you use the 25 per cent discount rate to discount the benefit stream, you do the same for the cost stream, the discounted value of economic benefit so derived will be exactly equal to the discounted value of the economic cost. So, this is what it means.
Reporter: What do you ask ... using the base case scenario? What rate of return on investment do you expect from this part, what rate of return on revenues do you expect within this project?
Mr Tang: We always emphasise repeatedly that there is a difference between economic evaluation and financial evaluation. So, there're actually two sets of internal rate of return, one relating to economic evaluation in terms of all the benefits to the economy, not just the kind of benefit arising from on-site activities. But in the case of financial evaluation, of course, it relates to the company, HKITP, and it relates to the project itself on-site. Because anything off the site, it will not in the purview of the company, it will not in the purview of the project. So there is the difference and it must be recognized. I have been discussing, by way of this 25 per cent for the base case scenario, is in the context of the economic evaluation - 25 per cent. Now elsewhere, our colleagues in Finance Bureau have also explained in fair amount of detail about this financial evaluation and the corresponding financial internal rate of return. Mr Martin Glass will be able to explain more.
Deputy Secretary for the Treasury, Mr Martin Glass: The financial return for the project is actually included in somewhere in the economic rate of return that K Y has explained, that is part of a far wider picture of the economy as a whole. As regards the project itself, when the Government invested in major infrastructure projects in the past, it had used its benchmark return -10 per cent. For this project, our estimation is that our investment in the project, as far as equity shares are concerned, will exceed that benchmark figure. As regards the loan that the government is making to the project, which constitutes a major portion of the three investments, are coming from the capital investment fund into the project. The interest rate is repayable in three separate contra, starting on the low side in the early years as the project needs that support the most, and then climbing up to prime rate in the later years of the project. So the overall blended interest rate is around seven-and-a-half per cent, which is in excess of the Government's cost of capital. So that is a virtually guaranteed return that we are getting as Mr Rowse has explained.
Reporter: The Financial Secretary talked about this rate of return as being viable, commercial viability. He used the word 'soundings', 'the Government has made soundings'. Did the Government talk to people in the private sector and did they say this is not attractive?
Commissioner for Tourism: We're capable of evaluating Balance Sheets ourselves and also financial forecast. We also know what commercial investors would be looking for. It's an evaluation we have made ourselves in part based on what the project economics looks like. As I have explained earlier that's why we've structured the shareholdings so that if we're wrong, if we've been too cautious, and it is upside, then that upside, a good measure of that upside is captured by the conversion of the subordinated equity into ordinary shares. I know Martin want to add to that.
Deputy Secretary for the Treasury: I think we've stated that we've taken a fairly proven commercial view of the project finances. If it turns out that other investors consider us to be over-prudent, and as the project develops and starts to take on features, there may well be scope for third party investors coming in. We will be prepared, as would the Disney Company to certain extent, to sell those shares to such investors.
Reporter: Will the Financial Secretary become the chairman of the Board of Directors of the new company as the Hong Kong Government is the bigger shareholder? As the Government is not prepared to give any tax concessions, has the Government calculated the amount of tax revenues? Is there any escape clause in the agreement? Is there any penalty clause? (translation)
Commissioner for Tourism: The first point is that we haven't yet determined who should be the Chairman of HKITP. I imagine one of the directors will be the Secretary for the Treasury to look after the investment. Another one will probably be the Commissioner for Tourism to look after the progress of the project from that point of view. But now we haven't thought about who should be the Chairman yet, although we have more directors on the Board than Disney. So if we come to a vote, we will stand quite a good chance. As regards the fiscal benefits, no, we do not take the fiscal benefits into account when evaluating whether the project should go ahead, although the Disney Company urged us several times to do so during the course of negotiations. But, of course, we could have done something else with the money. We could have developed something else. So that will have fiscal benefits. So we have to compare one notional set of figures with another. We didn't. We just take those for granted.
As regards escape clauses, yes, there are escape clauses obviously. If we are seeking approval at the moment, for example, under the Re: Foreshore and Seabed Reclamation Ordinance and also under the town planning legislation. If in response to the objections under those ordinances, the Town Planning Board only permits the planning of that area to follow certain lines which preclude a theme park. Then, obviously, we couldn't have one. Similarly, if some of the other gazetting reached the conclusion with conditions imposed which ... it was impossible to have a theme park. Then, the project would come to a hold. We don't expect any of those things to happen. But there has to be, from a legal point of view, escape clauses on the off chance that they could. Similarly, we won't sign binding contracts until we have approval from the Executive Council for those things that needs ExCo's approval and from the Legislative Council's Finance Committee for those things that need the approval of the financial implications by LegCo. So, from where we are now to the end of November, of course, everyone has the biggest escape clause. We all have to get the approvals. And even after that time, there would be some other extreme scenario when the project couldn't go ahead. But we don't anticipate any of those actually happening.
Reporter: Is it possible to calculate the fiscal gains within a short time? Can you make public these figures before tabling them to the Finance Committee? (translation)
Deputy Secretary for the Treasury: I was about to supplement Mr Rowse on that point. I wouldn't discount the impact of fiscal benefits to Government revenue entirely. As you point out, there will be incremental revenues from the rents, the rates, the profits tax, salaries tax, although given our narrow tax bases, not expecting that these will be particularly huge. But, generally, economic increase in activities as a result of the theme park will result in more visitors arrivals and therefore departures. They will therefore pay more tax. There are other things, such as hotel taxes as well will also be increased. So, if there's positive impacts, although as he said in our negotiations, we have not really been terribly swayed by the sort of these.
Reporter: You've outlined ... in order that your subordinated shares become converted into ordinary shares so raising the Government stack to about 70 per cent.
Commissioner for Tourism: That depends on what sort of time frame you are working, I mean if the fastest ... can happen is 25 years after opening. Obviously that assumes certain rates of upside, if it wasn't as high as that figure. Twenty-five years is not a limit. The shares can carry on converting after 25 years as well. But we would be obviously hoping that they convert as soon as possible.
Commissioner for Tourism: Yes, I know what the question means. What we are wondering is what degree of commercial sensitivity and the answer. A reasonable degree of upside.
Reporter: Over what return? What's the base case over which you require reasonable degree of upside? Because when you are looking ahead, your actual business return, right? Not ... And you require reasonable degree of upside over what within 25 years ...?
Commissioner for Tourism: I think that's a number we are not revealing.
Government Economist: ... base case, isn't it? Including the base case, attendance, projections, the number of which is already disclosed. And then, all the revenues which is associated with that.
Reporter: Looking at the attendance rates that you're forecasting for this, obviously we've spoken before already today about the need for Mainland visitors so that the calculations include Mainland visitors but it also seems like that's not going to be sufficient and you will be expecting arrivals from elsewhere in Asia. To what extent do you see them as new visitors to Hong Kong, and to what extent do you see them as almost being poached from other tourist destinations around the region.
Commissioner for Tourism: If you look at the opening year 5.2 million visitors to the theme park, that assumes 1.8 million visitors from among local residents. First of all, that is a pretty cautious penetration rate, compared to, by which I mean, which share of the local population would go, compared to such other facilities as the Ocean Park when they open and so on and so forth. We think we have been fairly prudent there. And two million of our existing tourists, who would have come to Hong Kong anyway, we think, will go to the theme park. Again, on historic basis, is pretty cautious estimate there. Because we already got over 10 million visitors a year, which will be over 11 million or more by the time the Park opens, people coming here anyway. By assuming only two million of those will go is actually assuming that less than 20 per cent will stay a bit longer and visit the theme park. Again, we think that's very prudent. And we're assuming induced tourism of 1.4 million extra people who come purely, or mainly, to go to the Disneyland. So that's how you get your 5.2 million.
I am not sure that tourism is necessarily at someone else's expense. I think once people get into the mood for travelling and regarding a holiday in someone else's community as a way of relaxation, you just increased the viscosity, or whatever, of human beings. They start to move around more quickly. But to the extent that we are in a competitive situation, yes, we will be getting people in Hong Kong who might otherwise have chosen to go somewhere else. I think particularly, and particularly important to me as Commissioner, is presenting Hong Kong as a family destination for holidays, leisure tourists. At the moment, we're terrific destination for the business traveler. We got all the facilities, we got all the support, and so on. It's a financial capital. We got a lot of things for the adults to want to come here. The shopping, the wining, the dining, and all the rest of it, the entertainment.
We got things for children to do or families to do when they're here. But we haven't really got that many things that would make families planning their holiday to choose to come to Hong Kong first. The difference is that Disneyland would mean that families sitting down all over Asia, and all over the Mainland, planning their annual holiday will be thinking here is a place we can go and the whole family can have a good time. This will be the first such facility that we got. And once we get them in here, then they will do all the other things that families can already do. Which is why the Ocean Park people, as you probably saw in the newspaper today, the Ocean Park people say they are not worried about the competition, because although they would lose some customers going to Disneyland instead, they will gain more than they lose by the additional number of visitors coming in. So for me, that is a big gap in the Hong Kong tourism product that the Disneyland will fill and give us an all-rounded product that is much more robust.
Reporter: It really does help the competitive position of the tourist market vis-a-vis the other Asian destinations as well.
Commissioner for Tourism: It certainly does. But we're trying not to gloat.
End/Wednesday, November 3, 1999