CONFIDENTIAL
XCC(92)57
airport rail project. The PAA/AA, unlike the MTRC, is a new corporation with no financial track record. For the airport project, pre-completion risks are of greater significance than for the airport rail since during this period the PAA/AA would have no major revenues of its own to cushion adverse events (as opposed to the MTRC). On the other hand, post- completion, the AA would have a relatively secure (inheriting Kai Tak's traffic) unlike the airport rail (where patronage ievels and real estate revenues were more speculative). These differences would inevitably be reflected in the way in which the two sets of financial agreements were conceived.
revenue stream
Equity
20
In addition to a need for paid-up equity of $13.6 billion, our financial analysis indicates the need for additional Government funding to provide support for the AA in adverse circumstances. The outline Agreement agreed with the PAA provides for this support to be triggered in three sets of circumstances -
a)
b)
c)
Increase in Project Cost - an increase in the originally estimated project cost prior to completion of the airport. Project cost includes the cost of construction and the AA's management and financing costs;
+
Shortfall in Real Estate Revenues a shortfall in revenues from pre-completion real estate developments below the level forecast in the expected case;
Project Delay - support will be called only to the extent that the surplus from Kai Tak is insufficient to cover additional costs arising from delay. Current estimates show that, in the "low case", the Kai Tak surplus is likely to be adequate to cover almost all the additional costs involved.
21
It should be noted that, if the callable equity is drawn down at all, it would most probably be drawn down before completion of the airport. The contingent liability on the SAR Government after 1997 would then be much less than the total liability at the start of the project.