TNAG-0635-FCO40-783-Supplies-of-electricity-for-Hong-Kong-1977 — Page 66

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XCS(77)2

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With regard to paragraph 35(a) above, a consumers' representative on the board would be appropriate when the Development Fund balance became significant in relation to shareholders'Funds, A further development, possibly worth considering at the first review of the revised Scheme of Control, might be for the Government to hold, on behalf of consumers, shares in the Company representing the extent of consumers' investment. In this way, consumers would receive the same benefits as shareholders, thus avoiding the difficulties involved in determing a fair rate of interest on the balance in the Development Fund. Dividends could be paid on consumers' equity in the form of a rebate.

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With respect to paragraph 35(b), a decision on the correct rate of interest to levy on such funds should be looked at from different angles in different situations. First, where the company has no other form of borrowings or deferred liabilities: If the company refused to borrow from any source other than the Development Fund, then there would be a good argument for raising the rate of interest to the extent that it became the least favourable source of finance (i,e, after bank borrowings, deferred creditors and rights issues). The reason for this is that there is no reason why shareholders (via the application of the permitted return to assets acquired through the Development Fund) should benefit from this form of loan from consumers. This would probably mean having to raise the rate by 1% or 2% per annum. While it could be argued that this would be self-defeating as Development Fund financing is actually the cheapest to consumers in the long run, in practice consumers would benefit only after a number of years and would probably prefer the company to pursue actively other available sources of finance first, in order to keep their tariff increases to the minimum.

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Secondly, where the company has loan and deferred creditors' balances at a commercially acceptable level (say a 70/30 ratio of loans to shareholders' funds): provided the company had made every effort to borrow or raise new capital, there would seem to be no good reason why shareholders should be penalised because of expansion they would not want the company to embark upon.

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This suggests that there is a need to examine with CLP the possibility of a variable interest rate related either to the return to shareholders or to market lending rates.

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Finally, as regards the question raised in paragraph 35(c), there is already a clause in the bus companies' Scheme of Control whereby, because the award of rebates to individual consumers is impracticable, the accrued interest on the Development Fund balance is simply added to the Development Fund.

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