tim's experiment

Adistressing thought popped into my head while watching the Secretary for Transport and Housing commenting on the latest update on the Express Rail Link. Well actually there were two distressing thoughts: the first one was that two different and very important matters should not have been combined in one bureau, an arrangement which pretty effectively guarantees that everyone concerned will spend at least half his time considering matters he knows nothing about. But there is no point in pursuing this – it is merely a by-product of the Administrative Officer theory, which maintains that good decisions can be made by very bright people who do not know what they are doing.

The more immediately bothersome thing was that the Secretary concerned, Mr Anthony Cheung, did not seem to have grasped what was going on. The government would, he said, consider who was to blame for the extra spending now demanded and seek payment from the MTRC as appropriate. This shows a lamentable inability to comprehend the true seriousness of the situation. Big projects which go adrift do not just require minor adjustments. They commonly run totally out of control, adding a decade or two to the completion time and multiplying originally estimated costs by whole numbers. We are in the presence here, folks, not of some minor glitch in a kitchen improvement project, but of a major epic demonstration of the “sunk cost” fallacy. The sunk cost fallacy occurs when a project which is clearly not going to achieve the target originally projected for it continues because the perpetrators think that otherwise the cash already spent “will be wasted”. Even at the prices currently projected the express link is a hole in the ground waiting to soak up money. But there is no reason to suppose that the currently quoted cost will be the final cost, or indeed that the currently quoted completion date will be the final completion date. And if you look at comparable projects, like the Channel Tunnel or the Sydney Opera House, the prospect is for more expense and more delay, as far as the eyes can see.

It is instructive, at this stage, to look at the original justification for the project. The theory was that it would cost $39.5 billion, and generate economic benefits of $83 billion. By the time it came to Legco the cost had become $69.9 billion. But this had been vigorously massaged downwards, which should have sounded warning bells somewhere. It is now expected, unofficially, that the new line will cost $90 billion and many of us will find it surprising if it does not cost more.

The paper originally presented to Legco did consider the question of possible losses, and noted that high speed rail projects elsewhere had been financial catastrophes. However, it said, “A major reason for reporting net losses is the burden to make huge interestpayments arising from loansfor financing the construction costs.  The construction of the Hong Kong section of the XRL is proposed to be a public works project to be fundedby the Capital Works Reserved Fund, not by loans. There will not be huge interest expenses incurred during the operation phase; and hence recurrent cash subsidy from the Government will be very unlikely.” In other words, the railway can still make a profit, folks, because the taxpayers’ money is costless. This is an impeccable piece of accountancy but does not really answer the question which is now at issue, which is whether the whole project is still worth it. After all the billions of dollars being devoted to digging large holes in East Kowloon could have been spent on something else.

We must, however, wonder if the railway will make a profit, even on this congenial basis. The problem here is that no passenger will travel only on the link. In all cases the revenue will be shared with the mainland operators of the rest of the line, on a mileage basis, and the fare structure will be agreed between the two. The suggestion supplied to Legco was that the Hong Kong section would get $31 from a passenger who travelled to Shenzhen, or $45 for those who went to Dongguan or Guangzhou. This would produce an operating profit of $300 million or so in the first year, rising, it was hoped, with increasing use. But the fare income figures will be rather inflexible, because an increase will require the consent of the Chinese side, who will take most of the resulting money. Making the trip to Shenzhen much more expensive is not an attractive option because there are many other alternatives and the time saving will be nothing to write home about. So it seems the railway will have a lot riding on the prediction that 100,000 people a year will use it. Connoisseurs of irony will note that the projection also held out the prospect of the MTRC paying the government “service payments” totalling $23 billion over the first 30 years of the railway’s operation. Well they’ve already spent that.

I suspect that in a perfectly rational world this would be the time to pull the plug on the whole thing, or as one columnist suggested convert it into an underground shopping mall. Clearly the express rail link is not going to make a profit, and its costs will easily exceed the “economic benefit” held out to justify the original decision to go ahead. True we were offered intangible benefits as well. Unfortunately they have not done very well in the ensuing five years. Integration with the Pearl River Delta now seems a dubious benefit and bringing more mainland tourists to Hong Kong might be more of a threat than a promise.  But we do not live in a rational world so I suppose we shall continue for political reasons. It is difficult to stop projects in which two governments have an interest. That’s what they used to say about Concorde.