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1. LCQ8 : Govt criteria for procuring building materials used in public works projects

2. Speech by SEDL at Cathay Pacific Airways/DHL joint venture cocktail reception

3. Oil firm reveals plan for $60b HK refinery

4. Airport centre fails to lift developers

5. MTRC seeks rail subsidies

6. Lamma Island eyed as base for oil project

7. Housing Authority has run its course

1. LCQ8 : Govt criteria for procuring building materials used in public works projects
Hong Kong Government, 9 October 2002

Following is a question by the Hon LAU Kong-wah and a written reply by the Secretary for the Environment, Transport and Works, Dr Sarah Liao, at the Legislative Council meeting today (October 9) :

Question:

A member of the public has told me that, although locally-produced floor tiles are of a quality comparable to that of imported ones, imported floor tiles which more than double the price of locally-produced floor tiles have been selected for use in some government projects. Regarding the selection and procurement by the Administration of building materials for public works projects, will the Government inform this Council:

(a) of the criteria adopted by government departments for selecting and procuring building materials; and

(b) whether there are statistics showing the relative proportions of various types of imported and locally-produced building materials used in the past two years in public works projects awarded by government departments?

Reply:

Madam President,

(a) The criteria adopted by government departments for selecting and procuring building materials used in public works projects are as follows:

(i) Function - whether the material will perform the required functions;

(ii) Quality - how well the material will meet the functional requirements, i.e. strength, durability, resistance to abrasion, conductive capability, safety and environmental considerations;

(iii) Budget - whether the material will provide good value for money subject to the price not exceeding the budget; and

(iv) Compatibility with other materials - whether the selected material is compatible with the design and other materials in terms of consistency, style, aesthetics, etc.

(b) Acceptance of building materials for public works projects is not based on country of origin but on whether the material will comply with the contract specification. The Government has therefore not maintained specific statistical records showing the relative proportions of various types of imported and locally produced building materials used in public works projects.

2. Speech by SEDL at Cathay Pacific Airways/DHL joint venture cocktail reception
Hong Kong Government, 9 October 2002

Following is the speech by the Secretary for Economic Development and Labour, Mr Stephen Ip, at the Cathay Pacific Airways (CPA)/ DHL joint venture cocktail reception today (October 9) (English only):

James, Mr Dorken, Victor, ladies and gentlemen,

It is my pleasure to be here this morning to witness the joint venture between Cathay Pacific and DHL following DHL's franchise agreement with the Airport Authority last week to develop an Express Cargo Terminal at the Hong Kong International Airport. These important strategic decisions reflect DHL's confidence in Hong Kong. The joint venture will enhance Hong Kong's status as an express cargo and logistics hub. I am glad that at least 700 jobs will be created as a result of your investment.

It will also lead to the expansion of the operation of both Cathay Pacific and Air Hong Kong in terms of fleet size and number of destinations served. These expanded services will strengthen Hong Kong's air services network and facilitate the growth of the local express cargo industry.

I can assure you that the Government will give full support to your operation here. Together with the Airport Authority, we will ensure that our Airport has adequate facilities to handle the forecast increase in traffic demand. We will also support the Airport Authority's initiatives to enhance the connectivity of the Airport to extend its cargo catchment area.

Ladies and Gentlemen, I wish the joint venture of CPA and DHL every success. Thank you.

3. Oil firm reveals plan for $60b HK refinery
Matthew Lee and Keith Wallis, The Standard 10 October 2002

A Hong Kong-registered company claiming an international array of investors has promised to inject up to HK$60 billion over eight years to build the SAR's first oil refinery.

``Our company aims to develop Hong Kong as an energy hub which supplies energy and fuel for Asian markets,'' Hong Kong Oil and Petrochemical Company (OPC) chairman Yeo Kee Ping said yesterday.

He named three possible sites - Lung Kwu Chau near Tuen Mun, Lamma Island and Kau Yi Chau east of Peng Chau.

OPC adviser YC Lim said the company had received preliminary government support for the project that would create 20,000 jobs in construction and operation.

But doubts were raised immediately when the government said it had not received any proposals, and two mainland oil firms named as strategic partners said they had not signed any understanding for the project.

Critics also raised doubts about its viability, and there were protests on environmental grounds.

Lim said total investment was estimated at HK$40 billion to HK$60 billion, with HK$2 billion of initial investment expected from investors and strategic partners. He claimed that the company had signed memoranda of understanding with a number of partners - including Sinopec, Petro China, China National Petroleum Corporation, Leighton Contractors, Canadian consultant firm Stantec and the University of Calgary.

But both Sinopec and Petro China denied signing any memorandum. ``What's the point of building a refinery in Hong Kong when there's so much excess capacity in the region?'' Sinopec director Shao Jingyang asked.

Leighton Contractors (Asia) spokesman Chris Gordon said: ``It would appear they're jumping the gun a bit. I'm told we have had a very preliminary discussion with them to say that we would be interested in any opportunities they may have for us, but we are a long way from signing any agreements.''

Lim said the SAR government had expressed support, ``but we have not tendered bids for land yet. Hopefully the government approval process will conclude within a year''.

The Economic Development and Labour Bureau said last night it welcomed more players to enhance competition in the energy sector, but ``so far we have not received any project proposal''.

OPC spokeswoman Doris Nam said the company was formed nine months ago and was headed by Yeo, a Singapore businessman who had real estate and textile factories on the mainland and Indonesia. Backers included investors from Singapore, Malaysia and Canada, she said.

Adviser Lim refused to say whether the main shareholders were from Singapore or the mainland, but insisted OPC was a Hong Kong company.

``OPC is a subsidiary of the Universal Group,'' Lim said. ``The construction and management cost will be funded by private capital. We will not ask [the Hong Kong government] for any special treatment or funding.''

Despite naming three sites, the company elaborated only on the Tuen Mun site, which is near CLP Power's Black Point power station. Lim said Lung Kwu Chau was close to the Pearl River Delta and its 10-15 metre draught was ideal for oil tankers. He said the company would abide by environmental regulations.

The refinery, which would take around eight years to build, would supply petrol and liquid petroleum gas for market sales and electricity generation, Lim said.

``Hong Kong was chosen [instead of the Pearl River Delta] for its strategic location, transport infrastructure, professionals with expertise in management, telecommunication networks and transparent legal system,'' he said.

As well as oil refilling terminals, OPC would set up more than a dozen petrol stations throughout the SAR by 2004, he said.

``It is too early to say how much [petrol] prices could be adjusted at present. But [the presence of the oil refinery] would certainly be beneficial to the whole market, as more suppliers means more competition,'' Lim said.

Save Lamma Campaign spokeswoman Cecilia Chu described the possibility of the island being used as a refinery as shocking.

``Of course we do not want to see further industrial development given that we already have a electric power plant,'' Chu said.

Former legislator and chief executive of private think-tank Civic Exchange Christine Loh doubted whether the project would be viable. She questioned the financial returns from a refinery when similar facilities were planned across the border.

Yesterday's official launch of OPC was attended by the State Council's Economic Research Centre general secretary Li Lan, who praised the company for its bold approach.

Lim said the whole project depended on feasibility studies including land issues, environmental concerns and market demand.

4. Airport centre fails to lift developers
Eli Lau, The Standard 10 October 2002

Local developers have made a lukewarm response to the Hong Kong Airport Authority's invitation to help build and operate the International Exhibition Centre at Chek Lap Kok airport.

The authority is offering a 25-year build-and-operate contract at the exhibition centre - the key development in the first phase of the massive SkyCity project.

Apart from Sino Land, which has officially confirmed submission of an expression of interest (EOI), several developers said they had no intention of participating in the development of the exhibition centre.

A spokesman for Sino Land said yesterday the company would run for the tender without any partners.

Wharf Holdings assistant director Ricky Wong said the 25-year term for operating the facility was ``too short'', and the company was unlikely to submit an EOI.

Nan Fung Development project director Donald Choi said the company remained cautious of the project because it had no experience of managing an exhibition centre.

Swire Properties and Henderson Land Development earlier said they had no plans to take part in the project.

An authority spokesman said it was not surprised by the response of local developers because the project was an ``infrastructure development'' rather than a real estate scheme. However, international operators had made a good response.

In April, the government told the Legislative Council that Invest Hong Kong had met 25 exhibition companies and operators.

Of those, 19 companies from Germany, France, Italy, Switzerland, Belgium, Canada, the Netherlands, the United Kingdom and the United States had asked to be included in the EOI stage. Construction of the centre in the northeast corner of Chek Lap Kok should be completed by 2005.

The government will pay up to HK$2 billion of the construction costs and the winning bidder will meet the remaining HK$2 billion.

Under the terms, the private operator should be responsible for the development's design and some of its construction, along with infrastructure and transportation facilities.

The authority has estimated the exhibition facility will generate HK$10 billion in spin-offs and provide 3,500 jobs.

The government believes occupancy rates at the Hong Kong Conventional and Exhibition Centre in Wan Chai will reach saturation point by 2006.

It would short-list developers who had submitted EOI letters and parties would be required to submit proposals before February.

The tender result is scheduled to be released by March.

Construction of the 17-hectare SkyCity mega project, including a cross-border ferry service and an office-and-retail-entertainment complex, will start at the same time as the International Exhibition Centre.

5. MTRC seeks rail subsidies
DENISE TSANG, SCMP 10 October 2002

MTR Corp has pushed the government to consider direct subsidies for future rail projects, warning that three planned lines face a "funding gap" and it will not pursue them unless it can earn a viable return.

Project director Russell Black said the corporation faced a significant shortfall on the HK$10 billion South Island line, the HK$10 billion West Island line and the HK$7 billion North Island link.

MTRC would need government contributions to achieve a return of 1 per cent to 3 per cent above its cost of capital - the return promised to investors during its listing in 2000.

The corporation would not pursue any projects which failed to achieve this return, Mr Black said.

"We have an obligation to shareholders to achieve a return of [the weighted average cost of capital] plus 1 per cent to 3 per cent as the government gave an undertaking in the prospectus selling MTR shares," he said.

"We suggest there is a funding gap in these projects, but we did not suggest the form of the government support.

"It's up to them to decide and we are open to any suggestions from the government on how the problem is resolved."

MTRC's call for government support underlines the collapse of the property-based financing model that has underpinned the corporation's capital expenditure for the past 27 years.

Unlike other cities around the world, the Hong Kong government has not offered any direct funding or subsidy to mass transit rail projects. Instead, MTRC is given rights to develop land alongside the railway lines it builds, using the profits to finance its rail expenditure.

With shifting population densities, prolonged deflation and the fall in property prices, the sustainability of the existing funding model has been called into question.

The government's overhaul of its land and housing policies is adding further uncertainty to the existing model.

Mr Black said the proposed medium rail line in South Island, which would run in a loop from Belcher in Kennedy Town, via Cyberport, Aberdeen, Ocean Park, Happy Valley and Wan Chai, faced a funding gap of about HK$3 billion to HK$4 billion.

"One way to deal with it is the government contributes some money towards the capital cost. The easiest and most interesting comparison is with Singapore," he said.

The Singapore government treats construction of rail lines as public works and is responsible for the construction cost. Public company Singapore Mass Railway Transit operates and maintains the rail lines from fare and advertising revenue.

However, Mr Black did not think Hong Kong needed such a model as the operating environments and population densities were different in the two cities.

In arguing for government funding to the 7.5km South Island line, Mr Black said the government would end up paying less on a rail option than on a proposed HK$8 billion highway known as Route 7.

He pointed out that there was still a funding shortfall on the West Island line even after the corporation sought some property development at the police station in Kennedy Town.

He hoped construction of the West Island line, which runs from the existing Sheung Wan station, via Sai Ying Pun and Belcher to Kennedy Town, would start at the same time with the South Island line.

"If the government makes a decision now on South Island line, the rail line can be completed in 2009," Mr Black said.

He said government support, in whatever form, was crucial, with a prime example being the aborted cable rail project between Heng Fa Chuen and Siu Sai Wan. MTRC stopped pursuing the project two years ago after the government declined to back the corporation's proposal to cut some bus routes in order to achieve the return of 1 per cent and 3 per cent above the average capital cost.

Meanwhile, Mr Black said the corporation was awaiting the government's decision on a feasibility study into a merger between MTRC and the Kowloon-Canton Railway Corp.

"It's obvious, from my point of view, a merger can mobilise the best features from both corporations," he said. "We'll have a much better continuity on an on-going basis on building new rail projects if all rail projects are undertaken by one corporation."

He pointed out that there was overlap in the staffing of the two corporations.

6. Lamma Island eyed as base for oil project
ANNETTE CHIU, CHEUNG CHI-FAI and DENISE TSANG, SCMP 10 October 2002

Lamma Island could become a large-scale oil refinery base if a HK$60 billion project proposed by an unknown group of investors is confirmed.

A second option, Lung Kwu Tan in the western New Territories, was the preferred location for the project because of lower construction costs and its proximity to the Pearl River Delta, Hong Kong Oil and Petrochemical Co (OPC) said.

The company said it was talking to government authorities about a plan to build and operate liquefied petroleum gas (LPG) and petrol-filling stations, as well as a bulk storage terminal, oil refinery and power-generation facilities.

Total investment would come to between HK$40 billion and HK$60 billion and would offer 20,000 job opportunities in construction and infrastructure, management and operations, the company said.

The initial investment of HK$2 billion would be shouldered by OPC's private investors from Singapore, Malaysia, Hong Kong and the mainland. But the management refused to reveal details of the investors' background.

OPC adviser Y.C. Lim said it would not rule out raising capital in the market to help fund the project.

Company chairman Yeo Kee Ping said the firm had signed memoranda of understanding with a number of strategic partners, including Sinopec and PetroChina.

But PetroChina spokesman Mao Zefeng said yesterday: "We have not been notified of any memoranda of understanding with OPC for the proposed investment programme, but we cannot verify at the moment whether there is any technical support or co-operation on our third and fourth-tier business."

A company source from Sinopec also said he did not know of any co-operation plan on a corporate level with OPC, but said he would "try to find out what had happened".

The project, which would take three to seven years to complete, would be divided into two phases, OPC said.

In phase one, 10 to 15 LPG and petrol-filling stations would be opened in Hong Kong in a year's time. The second phase, to be completed by 2008, would see the construction of large centralised storage facilities, an oil refinery with a capacity of more than 100,000 barrels, power generation facilities and downstream industries.

"We are talking with the government. They are supportive to the project because it's good for Hong Kong," Mr Lim said.

The Economic Development and Labour Bureau said it welcomed more players to the energy sector to enhance the competitive environment, but it had yet to receive a proposal from the firm.

"We will study carefully any proposal that is put forward, in the light of existing policies and procedures," it said.

Invest Hong Kong also released a statement saying it was its practice not to comment on whether individual projects were under consideration.

Raymond Wong, a spokesman at ExxonMobil, one of Hong Kong's largest petrol station operators, said OPC had approached the firm about the project.

"We have no commitment in the project yet and would like to know the government's reaction," he said.

7. Housing Authority has run its course
ANDREW TAYLOR, SCMP 10 October 2002

It is time for Hong Kong's Housing Authority to go. Over the last 30 or more years, it has done a remarkable job, achieving the 1970s socialist ideal of housing half the population in subsidised flats. But now it has completed its mission. As of the end of 2001, only five per cent of the population is inadequately housed, based on officially accepted measures. We can applaud the Housing Authority's record. However, there is little need for Hong Kong to continue to spend as much as 14 per cent of its budget on public housing.

The concern is that despite this improvement in the public tenant's lot, the spending on public housing, post-1997, has expanded substantially. Over the same period, the programme changed from one of providing accommodation for a poorly housed population, to one of promoting home ownership. Now that the government is having trouble enticing the community to buy, the role of public housing is again open to question, especially since there are more units of accommodation than households that need them.

Historically, the Housing Authority has been self-funding. It has used sales under the Home Ownership Scheme (HOS) to keep the burden of public housing off the general revenue account, that is, the tax payer. Nevertheless, society has paid for the programme through land premiums forgone and inefficiencies due to higher construction costs in the public sector than exist in the private market. The private market is now successfully poaching potential HOS buyers, and particularly HOS owners who are within two years of the original purchase, which allows them to resell their properties to the Housing Authority at the original price. With the HOS appearing increasingly irrelevant in light of adequate supply and attractive affordability in the private market, the Housing Authority's self-financing ability will disappear and the government is in no position to pick up the tab.

Without the HOS subsidy, how is the government going to pay for the 30 per cent of the population in that rental housing and the subsidised mortgages it says it will use to replace HOS sales? The sums are not insignificant. The total budgeted expenditure of the Housing Authority for the 2002 to 2003 fiscal year is $43 billion, which is directly comparable to the government's budgeted fiscal deficit of $45 billion. Without the Housing Authority expenditure, the government might find the deficit more manageable.

Within the public housing budget, $15.8 billion will go into construction of some 30,000 new flats per year, at a hypothetical cost of $988 per sq ft. This is 15 per cent to 25 per cent more than private developers spend on a higher-quality residential development. It should be clear why the public sector should not be providing housing.

There is a cheaper way to do things. By giving public rental tenants a $10 per sq ft per month cash rental allowance, the Housing Authority may actually save money. Not counting the time value of money, maintenance, forgone rates and management fees, it would take 8.23 years to pay back the cost of constructing a unit with this allowance. Moreover, the policy would offer more choice to the consumer in terms of location and quality, make it easier to control income ceilings, shift management and construction into the domain of the private sector, develop a new source of premiums and rates to be paid to the government, and develop a new investment market (HK$10 per sq ft rental @ six per cent yield = HK$2,000 per sq ft).

Chief Secretary Donald Tsang Yam-kuen recently announced a trial run for cash rental allowances. This should be pushed through as quickly as possible. Replacing the production of new flats with rental allowances, the deficit could fall by as much as $2.4 billion, and individuals will also have access to a better quality of accommodation. Clearly, over time this policy will attract increasing numbers of public rental tenants, which in turn should reduce the requirement of maintaining the existing public rental housing. The older, disused properties can then be sold off with the proceeds going to fund the continuing provision of rental housing. Commercial property could also be securitised to provide additional capital, which could provide a one-off payment of up to $10 billion. There is also a mid-term potential benefit to the general revenue account in that the private sector will be paying premiums to produce units due to lower levels of crowding out.

The provision of interest-free mortgages is a far simpler problem. Currently, the value of outstanding mortgages is $650 billion ($545 billion in private mortgages and $105 billion in HOS mortgages), while the total reserves of the government are $1,090 billion (US$95 billion in foreign reserves and $350 billion in fiscal reserves). Allocating some of these reserves to back low-interest mortgages for first-time homebuyers would be the easy way of providing subsidised house purchase opportunities.

It would be foolish not to start moving the government out of the market now. The production schedule of the Housing Department will take at least three years to slow, which will provide a problem for the private sector. Purely based on current government population forecasts, there is implied demand for 90,677 units between now and the 2005 fiscal year. The private sector is due to produce 85,000 units over this period and has a further 60,400 units vacant.

Even without the forecast supply of public rental units in the market, the private vacancy rate could remain high, and with that, vacancies may rise to very high levels. If net new public rental accommodation is replaced by rental subsidises, the vacancy is manageable and unlikely to cause a bubble in the current low-inflation environment.

Hong Kong needs a large confidence boost. Economists have pointed to the budget deficit specifically and the government's perceived poor performance as reasons for low public confidence. Unfortunately, there is little doubt there is widespread dissatisfaction with the leadership and administration. The incidence of negative equity and its association with housing policy has linked the government's policy with poor domestic demand. To improve domestic demand, the government needs to make its policies more homeowner friendly. They are 55 per cent of the population after all.

A well-articulated and well-marketed strategy should provide a huge boost to domestic sector confidence in Hong Kong, which will translate to an improvement in the overall economy. There needs to be a massive slowdown in public housing construction so its influence on the private market is neutralised. The government should give out cash rental allowances, stop the HOS, and resume providing housing under the general account of the budget to increase transparency of the actual cost of public rental housing.

Andrew Taylor is an analyst with SG Securities. His commentary is adapted from a report by Civic Exchange; Curtain Call: Housing Authority, exit stage left. The full report can be viewed at www.civic-exchange.org.