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11. The other major financing issue is how much of the project can be packaged for private financing and implementation. This has of course been a matter of intensive study by various consultants. I had the impression that there is still quite a lot to pay for. Mr Allen wanted to include as many industrial sites within the airport as possible to improve the PAAS finances; but this might undermine receipts from land sales elsewhere. (This begs a larger question of whether the land sales policy of holding up prices is optimal in economic as opposed to financial terms.) A related issue is whether the PAA becomes responsible for Kai Tak and for receiving its massive increase in revenues as charges are raised to the much higher levels necessary to support the new airport.
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Another example is the financing of the LFC, which the government is committed to undertaking itself initially, believing that the risks would inevitably attract poor terms from the private sector. There might still be a case for being open to private financing offers when tenders are invited.
Phasing and implementation
13. The timetable for completing the project is extremely tight, with the LFC on the critical path. There are, nevertheless, still some choices over the pace at which some elements, such as the airport railway, are to be undertaken. Mr Allen wanted to see it up and running at the outset, to establish good habits then. Moreover, much of the cost would have to be incurred early in any case. Against this, the financial pressures argued for postponement where technically feasible. Another choice relates to airport layout, where long term expansion potential conflicts with short term costs.
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14. Most of these issues both of financing and phasing would benefit from economic as well as financial appraisal.
15. However, the major outstanding worries are that the project will turn out to be more expensive than expected and that the additional pressure on construction capacity in Hong Kong will lead to inflation; indeed, any of the latter will beget the former. The government clearly recognise this problem, and are relying on a liberal immigration policy to man the project, combined with some crowding out within their own public works programme will see them through. But it is a tricky problem, since it is far from clear now whether the ACP will be generating a boom or merely avoiding a slump. The PAA produced a useful graph of the history of HK construction prices and a model of future ones, suggesting a cyclical pattern with a constant long term trend with fluctuation of no more than 20% in real terms about twice the 2% relative price effect assumed in the HKG's expenditure projections.
16. The main project-specific hazard is unforeseen technical problems; the Osaka airport problem (sinking) was on many people's minds. The engineers argued vehemently that all the risks and techniques were well known and that problems of this sort were very unlikely. Officials put their faith in fixed price contracts (acknowledging, somewhat reluctantly, that this could push up bids). They emphasized the importance of fully competitive tendering in keeping down costs.
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