Toll increase at Eastern Harbour Crossing rejected

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The Chief Executive-in-Council (CE-in-Council) rejected today (July 15) an application from the New Hong Kong Tunnel Company Limited (NHKTC) for a toll increase at the Eastern Harbour Crossing (EHC).

"The proposed toll increase was not approved because it could not be justified on either traffic management or financial grounds. The Government is very concerned about public affordability of any toll increase at the EHC having regard to both the strong financial position of NHKTC and the extant economic climate," a Government spokesman said.

NHKTC submitted an application to increase the tolls for private cars by $5 (or 33.3%) with proportionate increase for other categories of vehicles. NHKTC's main argument is that when its last toll increase was rejected in October 1995 and the Company went for arbitration, the Arbitrator in April 1997 ruled that a reasonable but not excessive remuneration to NHKTC fell within a range of 15% to 17% Internal Rate of Return (IRR). According to NHKTC, even after the current proposed toll increase, the IRR likely to be achieved over the life of its franchise would be 14.76% which falls short of the lower range of a "reasonable return" of 15% as ruled by the Arbitrator in 1997.

"NHKTC has consistently enjoyed a healthy financial position with all bank loans fully repaid in July 2001. The Company's cumulative profit up to end 2002 stood at $2,135 million. NHKTC started paying dividends from 1994 onwards and total dividends paid up to the end of 2002 amounted to $1,604 million," the spokesman said.

"From the traffic management point of view, the EHC is operating slightly above design capacity during the peak hours and about 80% of capacity during other hours. No undue congestion is observed at its approach roads. There is hence no justification either on traffic management or financial grounds to support the proposed toll increase," he added.

"We have urged the Company to reconsider the need and timing for any toll increase under the current economic situation. We have also reminded them of the importance of striking a balance between the interest of the community at large and commercial considerations in devising their tolling strategy but to no avail."

If NHKTC resorts to arbitration, the arbitration ruling in 1997 may be regarded as a reference of what constitutes a "reasonable but not excessive remuneration". The ruling however is not binding on subsequent cases and each case has to be considered on its own merit. Under the EHC Ordinance, the arbitrator shall have regard to 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.

The Transport Advisory Committee (TAC) and the Legislative Council Panel on Transport were consulted on NHKTC's application on 29 April 2003 and 27 June 2003 respectively. Both raised strong objection to the proposed toll increase. The TAC's detailed advice to the CE-in-Council is attached at Annex.

Annex

23 May 2003

Dr Sarah Liao, JP

Secretary for the Environment,

Transport and Works

10/F, Citibank Tower

3 Garden Road

Central

Hong Kong

Dear Dr Liao,

The New Hong Kong Tunnel Company Limited's Application for Toll Increase

The Transport Advisory Committee (TAC) discussed at its meeting on 29 April 2003 the New Hong Kong Tunnel Company Limited's (NHKTC) application for a $5 or 33.3% toll increase for private cars with proportionate increases for other categories of vehicles at the Eastern Harbour Crossing (EHC). This letter sets out the Committee's views and advice to the Chief Executive-in-Council.

In considering NHKTC's application, the Committee has taken into account all relevant factors including -

(a) the Company's financial position;

(b) the definition of a "reasonable return";

(d) public acceptability and affordability; and

(e) traffic management grounds for any toll increase.

Members noted that NHKTC had consistently enjoyed a healthy financial position with all bank loans fully repaid in July 2001. The Company started paying dividends from 1994 onwards. The amount of dividends paid in 2002 was $381 million and total dividends paid up to end 2002 amounted to $1,604 million. The Company's cumulative profit up to end 2002 stood at $2,135 million, a very satisfactory level, and particularly so when compared to other "Build-Operate-Transfer" tunnels currently in operation in Hong Kong.

NHKTC's justification for a toll increase was mainly premised on what constituted a "reasonable return" in the 1997 arbitration. At the time, the Arbitrator ruled that a reasonable but not excessive remuneration to NHKTC fell within a range of 15% to 17% Internal Rate of Return (IRR). The Company explained that even with the current proposed toll increase, the IRR likely to be achieved over the life of the franchise would be 14.76% which fell short of the lower range of a "reasonable return". Should there be no toll increase, the IRR over the whole franchise period would be 13.73% which was again less than the lower range of a "reasonable" IRR.

While taking note of the arbitration ruling in 1997, the TAC was aware that the ruling was not binding on subsequent cases and each case should be considered on its own merit. Given the significant economic downturn and the deflationary environment since the arbitration, Members unanimously agreed that it would be unrealistic for the Company to expect that the definition of a "reasonable return" made at a time when the economy in Hong Kong was thriving should continue to apply without reference to the changes in the economic environment since. Members further considered that an IRR of 13.73% appeared to be more than a "reasonable" return under the current economic conditions.

Members also discussed and expressed serious reservations over public acceptability and affordability of any toll increase at the EHC having regard to both the strong financial position of the Company and the present economic climate.

From the traffic management point of view, the Committee noted that the average daily traffic throughput of the EHC has been maintained at a level between 70,000 and 74,000 since the relocation of the airport. No undue congestion has been observed at the tunnel's approach roads. There is hence no justification on traffic management grounds for any toll increase.

Taking into account all the relevant factors, the TAC is of the view that NHKTC's current application for toll increase at the EHC should be rejected. I should be grateful if you would convey the Committee's views and advice to the Chief Executive-in-Council so that they would be taken into full account in the Council's deliberation on the application. The Committee's views and advice may be released for public information when the Council's decision is announced.

Yours sincerely,

[signed]

(Cheng Hon-kwan)

Chairman

Transport Advisory Committee

End/Tuesday, July 15, 2003

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