3C
MASS TRANSIT
FAR EASTERN ECONOMIC REVIEW!!
17. DECEMBER '73
Business Revere
GAMBLING JAPANESE TAKE ALL
By taking a major risk on the course of inflation over the next five years, a con- sortium headed by Japan's Mitsubishi'
· has come close to winning the contract for one of the largest engineering pro- jects undertaken in Asia. The Hongkong Government announced last week that the Japanese group, which is represent- ed in the colony by Jardine Matheson, had been selected from three bidders to enter into detailed negotiations on the HK$5,000 million (US$983.28 million) contract. A letter of intent should be signed by the New Year, and the con- tract a few months later.
German-
The Anglo-Italian and French consortia left out in the cold still express hopes that when it comes to the details, the Government's stringent conditions will prove too much for Mit- subishi and the 56 other Japanese com- panies in the group. However, having come this far knowing the very strict financial terms laid down, it is impro- bable that the Japanese will change their minds..
The group has in effect made a pre- emptive bid by meeting the one critical condition laid down that there should be a contract ceiling price. None of the others felt able to take this risk in a world of rapid inflation and fluctuating currency rates (which have moved in the Japanese favour since their formal bid was made in October). In squeezing such a favourable contract out of Mit- subishi, the Hongkong Government has - scored a singular success. It has succeed3· ed in avoiding an open-ended commit- ment of its own finances to a project. which is colossal in relation to both Hongkong's population and government : revenue.
an
The only major worry the Govern- ment should now have is the interest. rates and terms of the contract price finarice (roughly 40%) which must be borrowed on the open market by the Mass Transit Railway Corporation authority which will be set up under government auspices to operate the system. Cash flow projections have been based on an interest rate of around 8%. This is probably optimistic in pre- sent circumstances and may require a revised estimate of fares.
Other than that, however, the Gov- ernment can congratulate itself on
DECEMBER 17, 1973
By Philip Bowring achieving what many thought impossi- ble a fixed price offer in line with its original estimates on a contract period of five years.
Although there was no absolute re- quirement for a ceiling price, the Mit- subishi offer appears to have been so superior that other considerations in the cash flow estimates, even where favour able to others, became relatively insigni- ficant.
Although no details are available, it seems that the escalation clauses asked for by the losers were such that their offers would only have been cheaper in the event of a rate of inflation unrealis- tically low by present standards. And if inflation topped the present level, the Government would be faced with pay- ing the difference. Given that repay- ment for the railway is to be over 20 years, the multiplying effect of interest burden over this long period could have subjected government finances to colos- sal strains. It is conceivable that without a ceiling price the Government would have dropped the project has its critics altogether.
which still-
Apart from meeting the Government's major financial requirements, the Mit- subishi offer appears to have had the
than its com-
advantage of a shorter contract period - a maximum of five years petitors. This factor alone will have had considerable impact on the cash flow projections.
Export credit finance terms offered by the three, which are to cover about 60% of the cost, appear to have worked out approximately similar, despite dif- ferences in composition.
There have been suggestions that the Japanese Government may have given Mitsubishi some kind of assurances of help should the cost escalate. Whether this is the case or not, the Hongkong Government can be sure that once the contract is signed there will be no going back. Not only is it insisting on strict performance guarantees, but so much. national as well as contractor's prestige is involved that default is almost incon- ceivable..
There can be no question that Mit- subishi was prepared to cut margins to the bone. With this project in the bag it would be in a strong position to win contracts for other mass transit systems planned for various cities throughout the world. But this fact shows that in contracts of this kind sheer size is criti- cal. The financial weight of the Japanese
THE $5.000million RAILWA
Tsuen Wan West
KEY:
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Tsuen Wan
Tai Wo Hau
Ana Chung
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La King
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Kowloon Bay
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Ho Man To
Pinang kami
Waste
Jordan
Taizu Spea
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North Phys
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Sev Ying Pun Weydłutamkos Whole
Kennedy
INITIAL SYSTEM
Fra S Stage 6
Stage 7
Sin A
Stage D
NumPy
Amyalty
Ngau Tau Kok
Wanchar
Happy Valley
Suc Wan Hot
Shaw Kina
Hongkong
Kwun Tum
Kwun Tony Twent
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Char Wait Quay Clan Centre"
group enabled it to take the ceiling price risk, something that could con- ceivably have bankrupt smaller concerns should any major snags develop as they tend to do with giant civil engineering pro- jects.
Meanwhile, the Hong- kong Government must be relieved that it has almost reached the contract sign- ing stage without be- coming embroiled in poli- tical influences. If the con-. test had been closer, the questions, of ties with Britain, the sterling re- serves problem,and Japan- esc restrictions (recently eased) on imports from the colony, might have become involved. As it is, Hongkong has preserved its open market, competi-
tive image.
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