CONFIDENTIAL
W/19927
HONG KONG MASS TRANSIT SYSTEM
DRAFT PARAGRAPHS
we
"I can easily see why, on the basis of the calculations you
have made, you think that a HK$5,000m ceiling price is essential
if viability is to be achieved, but are you quite sure that the
calculations are realistic, or at least consistent?
I see, For
example, that you have allowed for escalation in costs at a rate
of 8% per annum for capital expenditure and 6% for recurrent
expenditure, while you have built in only 4% per annum for
revenue. On any reckoning, this would be a prescription for
disaster over a period of 28 years, and I am not at all surprised
that three out of the four proposals show enormous deficits on
this basis. Looked at another way, a 4% escalation for fares
means that, in the economic conditions you are postula ting, you
are looking to a dramatic cheapening in real terms of the cost
of travelling. If you were to re-work your figures with a 6%
escalation factor for fares, I think you would find that the
97/98 British proposals, for example, would show a surplus by 1967/68.
Perhaps you would like to discuss this aspect further with
Lazards when you are in London.
"Secondly, I think that there are several things I ought to say
about the credit proposals put forward by the three non-British
consortia.
(a) The Japanese are still requiring a Government guarantee of
the borrowing, and you are resisting them. I know that
you realise that there is no question of meeting the
Japanese on this. (Incidentally, I wonder how far the
other two consortia have taken on board the distinction