Andrew returned to RTHK Radio 3’s Backchat programme on Friday. Hosted by Danny Gittings and Paul Zimmerman, Andrew joined shareholder activist David Webb, past President of the HK Institute of Surveyors Raymond Chan and Director, ACE Centre for Business and Economic Research Andy Kwan to debate whether the HK government’s infrastructure spending is creating white elephants.
Andrew’s view was that, yes, there is this tendency. There are at least six reasons why.
A disregard for the economic viability of the project. When planning any project, the government will recognize not just the cash flows captured by the project itself which go to calculating a Financial IRR but also the wider benefits (and costs) such as increases in real estate value, travel time saved, a cleaner environment and much more so as to calculate the Economic IRR which is the IRR that the government bases its decision on. However, attaching a value to these further benefits is highly subjective so there needs to be some discussion on these. As Andrew and many others have long argued, the biggest and palest pachyderm, the HK – Zhuhai – Macau bridge, never made economic sense. This week, its traffic forecasts were revised 26% lower from already inadequate to even more so. Adding up the three governments’ contributions plus the Bank of China loan gives an aggregate cost for the 55 km bridge / tunnel crossing and its connections of perhaps HK$200 billion (US$26 billion) so last year’s disclosure of a HK$12 billion (US$1.5 billion) cost overrun is not especially significant. This is more a function of the engineering challenges, building short-lived Boundary Crossing Facilities at either end and including the Tuen Mun to Chek Lap Kok link which would be useful even without the bridge.
A tendency to over-engineer. This week’s example is a footbridge planned for Yuen Long which was to cost an absurd HK$1.8 billion (US$230 million). How did this make its way through the planning process all the way to LegCo’s Finance Committee before being questioned? And how many smaller extravagances which were not required to be submitted to LegCo have been given the go-ahead?
We didn’t get to discuss the HK$85 billion (US$11 billion) Express Rail Link (XRL) which will run from the controversial co-location terminus in West Kowloon (which Andrew will visit later this week) via 26 km of tunnels to join up with the Mainland’s high speed rail network. That’s HK$3.3 billion (US$420 million) per km.
Poor strategic planning. In 2007, the Donald Tsang administration launched ten major infrastructure projects simultaneously. Unsurprisingly, appropriately skilled labour and raw materials were suddenly in short supply and their costs went through the roof. Why not stagger the projects?
Poor project design. Building a new cruise terminal out at Kai Tak ruined cruise passengers’ experience of visiting HK. Rather than stepping off their ship at Ocean Terminal straight into Tsim Sha Tsui with an iconic ferry trip across to HK island, they now spend perhaps half their precious few hours here travelling in from and back out to Kowloon Bay. The terminal is not a destination itself as the surrounding end of the runway has not yet been developed even though the government decided some 25 years ago that the old airport was to close. The terminal is managed by a consortium led by Worldwide Flight Services but Andrew has previously suggested that the consortium or the government add a fleet of glass-topped tenders to carry passengers straight to TST and Admiralty, extending the water-borne arrival.
Poor coordination across the Pearl River Delta. The PRD has been rebranded the Greater Bay Area. Certainly, greater cooperation is needed between the eleven cities involved. The Guangdong government decided to build the cheaper Zhongshan – Shenzhen bridge after it committed to the HZM bridge whose already inadequate traffic numbers will be cannibalized thereby. And why is HK pushing ahead building a third runway at a cost of HK$141 billion (US$18 billion) in the most expensive corner of the GBA when the likes of Zhuhai airport are barely used?
Feeble negotiating. The Tung Chee-hwa administration was taken for a ride by Disney Corp (and not on the roller coaster) when HK Disneyland opened in 2005. As Andrew wrote at the time, the CY Leung administration was equally supine when contributing a further HK$5.4 billion (US$690 million) last year. Disney gets its royalties and management fees, HK incurs a significant opportunity cost.
Infrastructure does need to be built ahead of demand and HK does this better than most. Even the original Cross Harbour Tunnel attracted some dissent back in 1972 – although the fact that the private sector bid enthusiastically for it suggested that they saw a reasonable Financial IRR (and the government an even more reasonable Economic IRR). But just because the government has plenty of money does not mean that it should throw it around recklessly. Since 1982, the enormous land premia received by the government have been allocated to the Capital Works Reserve Fund and earmarked for acquisition of land and public works. But the Financial Secretary may transfer surpluses to general revenue which would enable one of the richest places on Earth to, for example, look after its poor and elderly in a way that currently it patently does not.
Listen to the podcast. Andrew speaks at 15:44, 24:31, 26:41, 27:10, 41:08 and 48:07.
