TNAG-0424-FCO40-470-Construction-of-an-underground-railway-system-in-Hong-Kong-1973 — Page 151

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