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MODIFIED INITIAL SYSTEM: SUMMARY FINANCIAL APPRAISAL
Appendix B
This paper summarises the report from the Financial Advisers dated 6th January; the full report is available from the Secretary of the M.T.R.P.A.
The report was based on an analysis of the probable cash flows of the Modified Initial System up to the year 2003. This analysis in turn was based on the cost and revenue estimates of the consultant engineers and the Corpora- tion's directorate, and on the advisers' own estimates of terms of finance. The total capital cost figure at 1974 values was $4664 mn., and the revenue was based on a $1 minimum, 50¢ interval, 5 stage fare system; sources of funds included export credits, local HK$ sources, and various elements of the inter- national markets. Account was also taken of inflation at a mean rate of 7% p.a., changes in currency exchange rates, tax, etc.
Following a heavy cash flow deficit throughout the construction period, operating revenue builds up fast during the 1980's, surplus revenue - that portion not required to cover operating costs, debt servicing and tax- accumulates in reserves which are sufficient on average by 1992 to repay all outstanding loans. The "Residual" loan figures (medium term funds required from the international markets) are a reasonably sensitive indicator of the extent to which there might be any problem in raising the finance.
(The top line of the table overleaf shows some of the key features of the results.)
The Summary Conclusions of the report were that "on the basic assumptions that have been made concerning costs, revenue and conditions of finance for the Modified Initial System
the rates of return are at levels which could prove acceptable for a long term commercial investment,
a cash flow surplus should arise by the late 1980s, and all loans could probably be repaid by the middle of the following decade,
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the loan requirements will be heavy by any standards; the capacity of the various capital markets to meet these requirements cannot be fully assured, but does not at present give cause for undue concern,
revenue forecasts remain a matter for subjective judgement; the possibility of a substantial short-fall, which would seriously jeopardise the Corporation's profitability, is high enough to warrant consideration of additional sources of income."
The conclusions are only as valid as the underlying assumptions, and the sensitivity of the results to changes in some assumptions is shown overleaf. The effect of operating revenue being lower, or conversely of the Corporation receiving extra income from development of its property, are assessed; so are the successive possibilities of high inflation during the construction period dropping sharply thereafter, of the HK$ inflating at 10% p.a. and devaluing by an extra 3% p.a. against those currencies in which the Corporation's foreign liabilities are denominated, of less favourable export credit terms being available, and of the Corporation receiving the proceeds of a Premium Bond scheme. Revenue, and the availability and terms of export credits and market funds, are factors which are both crucial to the commercial and financial viability of the Corporation and are difficult to estimate with accuracy.
10th January 1975
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