CONFIDENTIAL
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(b) but, while we have used a higher fare structure, we have assumed that patronage would not be affected and have continued to used the "unadjusted traffic volume" estimates in the Consultants' Further Studies Final Report. We consider this to be a realistic assumption, having regard to our recent experience with public transport fares. However, we feel that a steeper increase in fares than 4% p.a. might well have an effect on patronage and lead, possibly, to consumer resistance to the H.T.R. (which, obviously, is something we should avoid on transport and financial grounds, at least in the earlier years of operation). It seems to us that it would be much more sensible if we jacked up the initial fare structure and increased it at a moderate rate (which is what we have done) than to start from a low base and apply a higher annual escalation factor;
(c) in any case, I doubt whether fare increases can ever keep pace with increases in the cost of living. There are political constraints on the frequency and extent to which fares can be increased. Given that fares cannot be increased to exactly 4% every year, an average 4% p.a. increase will mean an increase of about 13% once every three years. (On the other hand, a 6% annual increase would mean upping fares by 20% once every three years and this might be politically dangerous);
(d) finally, we think it would be wise to keep something up our sleeves to cover possible under- estimation of operating costs. (We have added various bits and pieces to the system, e.g. air- conditioning of stations, the inclusion of Chater Station, etc., but the full implications of these additions for operating costs have not been thoroughly assessed).
Paragraph 3
(a) The Government of Hong Kong is not prepared to
guarantee export credit finance which we consider is adequately secured by the project. Our objec- tion to a guarantee stems from our complete unwillingness to accept that the M.T.R. Corporation is unable to go bankrupt. That is to say, in certain circumstances, we would rather see the Corporation wound up and settlement of its debts a matter of judicial proceedings than put at risk our general fiscal stability. (We realise, of course, that the Government will have to guarantee loans raised by the Corporation on the international capital market).
Contd/...