required, is embodied in paragraph 2 of the Scheme of Control (Annex B). The provisions necessary for the consolidation of profits and all relevant inter-company transactions are set out within part B of the Scheme of Control. An addition to the brief, also embodied in paragraph 2 of the Scheme of Control, are provisions for any other companies considered necessary. This is to allow for maximum financial flexibility for future development.
(b) Permitted Return (paragraphs 20-26 of Annex A)
5
CLP originally proposed that the permitted return should be increased from 13.5% to 15% on the total of the average net fixed assets of the companies. This they argued was necessary, first because CLP expected an increase in the annual cost of capital in major world markets in the 1980s, and secondly because with the end of the lease of the New Territories in 1997 the risk for investors was now greater than in 1964 when the present Scheme of Control was drafted.
6
The Government side, in examining CLP's proposal, adopted a step by step approach to determine whether an increase in return was justified:
(a)
(b)
the Government side maintained that the arguments CLF put forward for an increase in the permitted return could not be applied in respect of assets already acquired within the framework of the present scheme or earlier. This was accepted by CLP:
the Government side then argued that there should be no increased return to CLP attracted by assets financed either by consumers through the Develop- ment Fund or through long-term loans, as the funds raised through these two sources of finance do not represent any risk to CLP shareholders in that their permitted return would not be eroded by higher levels of interest, since: first the interest on the Development Fund would be
fixed at 8% for the duration of the Scheme; second a similar safeguard could be applied to
long-term loans by limiting the interest element deductable from the permitted return also to 8%. (Such an arrangement would have the added
advantage of encouraging CLP to finance more of their development through long-term loans.) CLP accepted these two arguments also;
CONFIDENTIAL