CONFIDENTIAL
2
EKG Objectives
3.
I went on to explain that it was HKG's primary objective to maximise the financial benefits obtained by the Community from the operation of Kai Tak and associated facilities whilst observing any international obligations which applied, There were two perceived forms of such benefit:-
(a)
:. (b)
Extraction of a portion of profit or surplus generated in the form of a dividend i.e. a permanent transfer of funds from airport users to the Community in general.
*Borrowing" surplus cash generated by the Airport to temporarily finance a part of the HXG Budget deficit.
Earlier HHG advice had failed to address the question of whether it was. permissable to extract a "dividend" given the capital structure of the Airport and the likely contrary airline view that the Airport users had wholly paid for facilities and that surplus cash accumulated in the Accounts represented overpayment of charges by airlines rather than undistributed profits belonging to equity holders, i.e. the Community.
Extraction of Profit
A.
We discussed the permisability of extraction of profit/ surplus at some length without my obtaining any conclusive advice one way or the other from Department of Transport representatives.
It was not a question that they had ever had to address themselves and they were not aware of a precedent elsewhere in the world of profit extract- ion in such circumstances. Whilst on the one hand they accepted the comparison drawn between the privatisation of BAA affording an instant passive return to the Community on Airport assets and cur vish to extract a reasonabla. return on an annual basis they also appreciated that our. proposal might well produce Pan American pressure on the US Government to challenge such a step.
5.
Working upon the assumption that an extraction of profit is permissible we went on to consider what rata of retum to the Community could be justifiable, Their initial view was that it would be reasonable to price so as to obtain a current cost accounting based return on 233ats similar to that obtained on equivalent risk investment elsewhere in the farmitory and to limit extraction of surplus to that not required to finance future foreseeable capital expenditure on the Airport.
"Borrowing from the Airport/Replacement Aircort Reserve Strategy
6.
The ability of the Community to""borrow" monies from the Airport is dependent upon whether one could at this stage justify accumulating a sizeable reserve for a replacement airport project and I sought the views of the Department of Transport representatives on surplus cash being credited to such a reserve either from present or increased levels of charge. They registered considerable doubt that this was a realistic approach on the grounds that a capacity problem vas-purceived to be so fer into the future that commencing-to-build-up a reserve now was premature.--(I am not in the picture as to the current
CONFIDENTIA
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