CONFIDENTIAL
Economic justificaton
17. Understandably, nobody was much interested in the economic justification for the project since the decision had been taken. It was self-evident that as Kai Tak reached saturation, a new one was required. Moreover, "the consultants" had appraised the project, hadn't they? It was interesting to note that Mrs Chan's presentation (I think correctly) regarded the ACP as the core project, with the port development an extra, whereas the consultants did it the other way around.
18.
of the concerns which had been expressed earlier, I am somewhat reassured over the dangers of serious cost over-run, although the first tenders will yield clearer evidence on this. The questions over traffic forecasts, their sensitivity to time and cost penalties, benefits to travellers of time savings and the detailed profile of cost and benefit streams remain unanswered, not to mention the justification for freezing these streams after 2006. Not all of these undermine the justification.
19.
I am, though, more concerned about the treatment of the biggest putative benefit of the project - avoiding the cost of frustrating demand for air travel. Until the "do nothing" alternative of rationing demand at Kai Tak through price, at least to the extent of increasing charges to the levels which will prevail at the new site, has been considered, it is a bit difficult to do any serious quantification. It is interesting to note that the appraisals did not appear to consider the effect on demand of these charge increases. Considering price-rationing is not a trivial academic exercise; it would allow lower taxes elsewhere in the economy, spending on other priorities and better resource allocation, even if its ultimate effect may be simply to delay the start of an expensive new project.
20. Without these details, it is hard to judge the economics of the project. I suspect that the returns might be rather unattractive at present, and may put rather a burden on the economy. Against that, if Hong Kong and Southern China grow as energetically as in recent years, all doubt will be banished; and the extent to which the airport unlocks such growth remains one of the main imponderables.
15 August 1991
CONFIDENTIAL
S.H. Broadbent
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