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Government has reached understanding with MTRCL on the terms for merging the MTR and KCR systems

    The Government announced today (April 11) that it has reached an understanding with the MTR Corporation Limited (MTRCL) on the structure and the terms for the merger of the MTR and the Kowloon-Canton Railway (KCR) systems.  The Government has signed a non-binding Memorandum of Understanding (MOU) with MTRCL on this basis.

     Under the merger proposal, KCRC will grant a Service Concession to MTRCL to operate the KCR system.  The initial period of the Service Concession is 50 years.  In return, KCRC will receive a one-time upfront payment of $4.25 billion and throughout the concession period, the post-merger corporation will pay KCRC a fixed annual payment of $750 million and a variable annual payment based on revenues generated from operation of the KCR system.  In addition, MTRCL will make a payment of $7.79 billion for the acquisition of property and other related commercial interests.

     The Secretary for the Environment, Transport and Works, Dr Sarah Liao, said, "The merger proposal is a fair and balanced deal.  It will bring overall benefits to the community as a whole and balance the interests of all stakeholders.

     "The merger will reduce duplication and enhance efficiency of rail network.  In addition, the respective strength of MTRCL and KCRC can supplement each other to bring us a stronger railway operator. Hong Kong will be much more competitive both in the China market and in the international arena.  This will help consolidate Hong Kongˇ¦s status as Asia's world city.   There will also be immediate benefits to the travelling public,"Dr Liao added.

     Overall, there will be fare reduction to 2.8 million daily passenger trips on the first day of the rail merger.  There will be a minimum of 10% fare reduction for all rail passengers travelling on journeys with fares at $12 or above, benefiting about 340,000 daily passenger trips.  There will also be a minimum of 5% fare reduction for all rail passengers traveling on journeys with fares between $8.50 and $11.90, benefiting about 1.16 million daily passenger trips.  Passengers will benefit from fare reduction for every trip they make on the railway network after the rail merger. The details are:

     -abolition of second boarding charge of $1 to $7;
     -global fare reduction of $0.20 for Octopus users paying full fares;
     -extra reduction of at least $1 for journeys at $12 or more; and
     -additional fare reduction for journeys with fares between $8.50 and $11.90.

     As a special measure, a concession scheme at a fare of $2 per trip would be introduced for senior citizens travelling on the MTR and KCR on Sundays and public holidays in the first year of the rail merger.

     The fare reduction will be applicable to MTR (except Airport Express Line), West Rail, East Rail (excluding Lo Wu trips) and Ma On Shan Rail.

     There is a further commitment by the two corporations not to increase their fares in the next 24 months starting from today.

     Upon the rail merger, an objective and transparent fare adjustment mechanism (FAM) will be introduced to replace fare autonomy.  Fares will be assessed annually based on a formula which is linked to the consumer price index, a wage index and a productivity factor.

     Change of Fare= 0.5 *Change of CCPI + 0.5 *Change of Wage Index - Productivity Factor

     where Change of CCPI is the change in the composite Consumer Price Index and Change of Wage Index is the change in Nominal Wage Index (Transport Sector).
     MTRCL and KCRC have agreed that fully integrated interchange stations will be provided in the proposed Shatin to Central Link (SCL) scheme in the rail merger context.  This will benefit passengers who have to interchange between the MTR and KCR systems when travelling on the SCL.

     Rail users will enjoy improved convenience through the integration of the MTR and KCR systems.  Within the first year of the rail merger, all interchanging passengers will experience seamless interchange at the three existing interchange stations (viz. Kowloon Tong, Nam Cheong and Mei Foo Stations).  In the long run, all new railway lines can be designed to provide seamless interchange arrangements for passengers.  

     Under the merger package, job security for frontline staff of the two corporations will not be affected as it relates to the merger.  The two corporations have agreed on the definition of frontline staff for the purpose of the rail merger.  They will convene a series of staff meetings to explain the details to their staff direct.  

     The two corporations estimated that due to business growth, there will be a net increase in staff vacancies available in the first three years of the rail merger after taking into account staff synergies.  Overall, there will be more career development opportunities to staff after the rail merger.

     Elaborating on the transaction structure and the financial terms for the merger proposal, the Secretary for Financial Services and the Treasury, Mr Frederick Ma, said the Government and MTRCL have agreed that it would be most appropriate to effect the rail merger by means of a service concession arrangement in order to realise the benefits for the community and to balance the interests of the different stakeholders, including the people of Hong Kong who own the assets of KCRC, the passengers of the railways, the staff of the two corporations, and shareholders of MTRCL.

     The major features of the transaction structure are:

*KCRC will grant a service concession to MTRCL to operate the existing and new railway lines and other transport-related businesses of KCRC for 50 years, coterminous with the franchise of the post-merger corporation;

*MTRCL will retain its listing status and the post merger franchise will be expanded to include provision of the KCRC services; and

*the post-merger corporation would be responsible for operating the two integrated railway networks.  This would include undertaking and funding maintenance, improvement, and replacement of assets of the KCR system.

     "Under the service concession arrangement, KCRC would retain the ownership of the KCR system and its own financial obligations. In other words, under the proposed rail merger, the Government is not disposing of the assets of the KCR system,"Mr Ma said.

     Upon the expiry or termination of the service concession, the post-merger corporation is obliged to deliver back to KCRC a railway system that meets the prevailing operating standards.  

     On this basis, the financial terms which have been agreed focus on the cash flow generating potential of the KCR system.

     The key financial terms and the property package of the proposal are:

*KCRC will receive from the post-merger corporation the following payments for the service concession -

         - An upfront payment of $4.25 billion on the Appointed Day of the merger;

         - Fixed annual payments of $750 million; and

         - Starting from the fourth year of the service concession, an annual share of the actual revenue generated from the KCR system based on a pre-agreed set of sharing ratios.  The sharing ratios are ˇV

           - 10% for revenue exceeding $2.5 billion and up to $5 billion;
           - 15% for revenue between $5 billion and $7.5 billion; and
           - 35% for revenue beyond $7.5 billion.

*As an integral part of the package, property interests will be sold to MTRCL for $7.79 billion.  These would include the property developments rights, investment properties and property management business, but not include the land premium to be paid by the developers to the Government.  

     "The revenue-sharing arrangement will ensure that the public, who owns KCRC, will enjoy the upside when the revenue from the KCR system increases.  At the same time, the post-merger corporation will be encouraged to operate the KCR system efficiently,"Mr Ma said.  

     "At the moment, many parts of the KCR system are newly commissioned or under construction, and these parts will see an increase in patronage and revenue some time after they are commissioned and in operation.  In that event KCRC will enjoy the upside under the revenue-sharing mechanism," he said.

     The proposed service concession arrangement will be subject to the approval of the minority shareholders of MTRCL. As the Government is both the sole shareholder of KCRC and the majority shareholder of MTRCL, it will not take part in the voting on this proposal.

     "The rail merger proposal is a package proposal.  It is a fair and balanced deal that will bring overall benefits to the community and balance the interests of all stakeholders," Dr Sarah Liao said. "If there is general support to the merger package, we will proceed with the necessary legislative exercise to implement the rail merger.  Thereafter, MTRCL will present the proposal to their minority shareholders for approval."

     Dr Liao also pointed out Government's next step would be to brief the Legislative Council Panel on Transport and the Panel on Financial Affairs on the details of the merger package.  Relevant paper has been submitted.  

Ends/Tuesday, April 11, 2006
Issued at HKT 20:16