TNAG-0424-FCO40-470-Construction-of-an-underground-railway-system-in-Hong-Kong-1973 — Page 229

CONFIDENTIAL

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XCC(73)10

The total capital cost of the Full System is estimated

at approximately $9,800 million. Even assuming that export credits would be available to cover 70% of this, which is the maximum coverage indicated by the proposals, and even after taking into account the net revenue generated by that part of the system which would be in operation, a total of some $7,000 million (including accumulated interest and refinancing requirements) would still need to be obtained from non-export credit sources between now and the date of com- missioning of the last stage of the Full System. A financial require ment of this magnitude would almost certainly be much in excess of the system's ability to borrow from all the sources enumerated in paragraph 15 above put together. In addition, large-scale borrow- ings on the international or even local bond market at too early a stage could affect Hong Kong's ability to borrow the necessary money for the later stages.

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Thus, bearing in mind the requrements of the Full System, there would be serious difficulties in financing the MTR with purely borrowed capital. It would also be inadvisable to place too much reliance on market finance for the first four stages, mainly because repayments would need to be made before the system can generate sufficient reverue to meet them. It would appear that the injection of a significant element of equity capital in the early years would be necessary. An equity element of $1, 500 million in respect of the Full System would reduce the need for borrowed finance by more than $4,000 million, and would obviate the need to issue long- term bonds for the first four stages. In addition, it would improve the chances of obtaining bond finance for the last five stages, when it is most needed, because:

(a) the presence of a significant equity element

would engender confidence in the project;

(b)

(c)

there would be more time in which to complete the complicated and lengthy processes necessary to obtain World Bank or AD3 loans which, in themselves, would create added market

confidence;

the first four stages would have been con- structed, and part at least would have been in operation, by the time large-scale borrowings are made on the medium/long term market. The successful operation of the first four stages would engender additional confidence, and the net revenue then arising would be

available to help service later borrowings; and

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