tim's experiment

Much anguish in railway watching circles this week over the fact that the new express rail station does not yet feature any arrangement for passengers to go through mainland customs and immigration before they get on the train. Clearly if extended this lack will be inconvenient. On the other hand it’s not rocket science, and the officials concerned have at least another two years to get their heads round the problem. Meanwhile the light at the end of the tunnel is beginning to look very much like the headlamp of an on-coming train. In this morning’s paper Gary Cheung warned that the new railway might be a white elephant” if the checkpoint problem was not solved. But this is an optimistic estimate. It is becoming increasingly clear that the rail link will not be a white elephant but a black hole, inexorably sucking in money from all directions.

Note that careless reporters, including Mr Cheung, often report that the original budgeted cost of the project was $65 billion. This is not the case. The original budgeted cost was $85 billion. Realising that this held out dim prospects of the line ever covering its costs, officials then massaged the figure down to $65 million. This was not done by cutting any expensive features from the design. It was done by shunting parts of the expenses into other sidings in the government budget on the specious grounds that they “would have to be done anyway.” For some time after that, interestingly, the price of the cultural district (which shares part of its site with the railway terminus) went up like a rocket while the publicised price of the railway remained the same.

Meanwhile I predicted that if the sums were done honestly the taxpayers would in the end see no change from $100 billion. This was not a particularly daring or cynical guess. The average budget over-run on big rail projects (not the maximum, the average) is 50 per cent. Projects involving long tunnels are particularly prone to bad financial news because although you can drill test holes, in the end you cannot really know what is down there until you build the tunnel itself. And your contractor will charge you extra for any nasty surprises. The express rail link, owing to an extravagant early inspiration, consists of one long tunnel.

It now appears that the $100 billion guess will need to be revised upwards. The official price is now $71.5 billion but Michael Tien, who has some experience in these matters, is now predicting a figure of $90 billion. And the corporation has not yet made the widely-expected announcement that the line will not open by “the end of 2017”. Many people now do not expect to see it open before 2018. Delays are themselves a cause of extra expense, as officials remind us every time one of their pet projects fails to get through the Finance Committee at the first time of asking.

So let us suppose for a moment that the MTR Corp ends up paying $100 billion in round numbers for the construction of the line. Assume also that the cost of borrowing has by then returned to the historic average of about 4 per cent. This means that the corporation will have to find $4 billion a year just to pay the interest on its debts. This compares with its profit from all other railway activities in Hong Kong last year of $7 billion. This is a big ask. How much can you charge people for taking them 27 kms?

Mr Cheung quotes Frederick Ma, chairman of the independent committee which looked at the project, as saying that without a joint checkpoint at West Kowloon the trip will only be marginally faster than the existing through train. On the through train passengers do their Hong Kong formalities in Hung Hom, and the China stuff in Guangzhou. I am not sure that I follow this. Even if there is a joint checkpoint this does not mean that one joint immigration person is going to do the passport part for both Hong Kong and the mainland. You will queue for the Hong Kong formalities and then you will queue for the mainland formalities. They will not be quicker; you will just get all your frustrations in one place. Mr Ma apparently supposes that in the absence of a joint checkpoint the train will have to stop in Shenzhen for the purpose. But by all accounts it is going to stop in Shenzhen anyway. The trains between Shenzhen and Guangzhou are losing money hand over fist, and amalgamation with the Hong Kong service is eagerly awaited. There will also be a stop in Dongguan. And then the “high speed” train will drop you in the outskirts of Guangzhou, instead of the middle. Some people might consider the existing through train better value even if there is no extra charge for the new-fangled express at all.

I conclude that the new link is never going to make money. This is not uncommon with new rail services and lines. They often only make a profit after the original builder has gone bankrupt and sold them off at a huge loss. But this is not an option for the HKSAR Government. It has placed the MTR in a tricky dilemma. If it charges too much for the new express trains then nobody will ride them. But in view of the mammoth costs of construction, if the trains are priced a level which fills them with customers they will lose money anyway. This is beginning to look like a financial catastrophe on the scale of the Sydney Opera House (original budget $7 million, final cost $102 million). Can we name it after Donald Tsang?