Conference on Public Private Partnerships Conference on Public Private Partnerships ––Opportunities and ChallengesOpportunities and Challenges

Some Aspects of the PPP Approach to Some Aspects of the PPP Approach to

Transport Infrastructure Development in Hong KongTransport Infrastructure Development in Hong Kong

Chai-kwong Mak and Sau MoHighways Department22 February 2005

Transport Infrastructure Project Development

1) Conceptualization and strategic planning

2) Project definition and detailed planning

3) Project initiation, funding and authorization

4) Design, construction and commissioning

5) Operation, management and maintenance

PLANNING & ADMINISTRATION OF TRANSPORTATION INFRASTRCUTURE DEVELOPMENT

1) Conceptualization and strategic planning

2) Project definition and detailed planning

3) Project initiation, funding and authorization

4) Design, construction and commissioning

Conventional GovernmentProjects

5) Operation, management and maintenance

PLANNING & ADMINISTRATION OF TRANSPORTATION INFRASTRCUTURE DEVELOPMENT

Capital Works Reserve Fund

Average Annual Expenditure (2004-09) HK$29 billion

70. Over the next five years, capital expenditure will amount to $43 billion a year on average, of which around $29 billion will be allocated to works projects.

-- the Budget 2004-05

1) Conceptualization and strategic planning

2) Project definition and detailed planning

3) Project initiation, funding and authorization

4) Design, construction and commissioning

5) Operation, management and maintenance

PPP Projects -BOO, BOT, etc.

PLANNING & ADMINISTRATION OF TRANSPORTATION INFRASTRCUTURE DEVELOPMENT

Railway Development

Lantau Island

Kowloon

Hong Kong Island

New Territories

Shenzhen

Shekou

Lo Wu

Sheung Shui

Tai Po

Ma OnShan

TseungKwan O

Tuen Mun Sha Tin

Tsuen Wan

Tung Chung

Yuen Long

Lok Ma Chau

LOW

LMC

SHS

FAN

TWO

TAP

UNI

LEO

MOS

HEO

CHG

RAC

SHM

CIO

SKSSTT

KOT LOFWTS DIH

CHH

KOB

NTKKWT

LAT

YAT

QUBNOPFOH

TIHCABWACADM

CEN

SHWHOK

ETS

HUH

MKK

MOK

SKM

PRE

YMTJOR

TST

OLY

NAC

SSP

CSWLCKMEF

LAK

KWF

KWH

TWHTSW

TWW

TSY

CLK

TUC

TUM

TIS LOP

YUL KSR

SIH

WKPTKOW

TAK

SKW HFC

CHW

SWH

TIKTKO

TKS

HAH

POA

FOT

SHT

TAW

WEST RAIL (PHASE I)

SHEUNG SHUI to LOK MA CHAU

SPUR LINE

MA ON SHANRAILLINK

MTRTSEUNG KWAN O

EXTENSION

TSIM SHA TSUI EXTENSION

PENNY'S BAY RAIL LINK

YAO

PEB

TAW

HONG KONG’s NEW RAILWAY PROJECTS - ROUTE MAP

Financial Assessment Flow Chart

Population

Employment

Fare Structure

Property Profit

Capital Cost

Operating CostsAsset Replacement Costs

Other Costs- Pre-operating Cost- Land Cost

Financial Assumptions- Operating Life- Terminal Value- Financing Cost, Interest- Price Fluctuation- Depreciation- Taxation, etc

PatronageFare Revenue

Total Revenue

Total Cost

TransportModel

FinancialModel

NPVIRR

Commercial Revenue

Discounted Cash Flow Analysisn

NPV = ∑ Ri – Cii=1 (1+r)i

Ri = income in the ith year

Ci = expenditure in the ith year

r = discount rate

n = project life (years)

When NPV = 0, r is the FIRR

Result of Financial Appraisal

FIRR < Target FIRRor

NPV < 0

Funding Gap (support)Funding Gap (support)

Typical Evaluation of a Railway ProjectCost Net Income

Year Capital cars

AssetReplacem

ent

Operating cost

Fare BusinessIncome

Property excl.

PropertyProfit

Propertyincl.

1 10 0 0 0 0 0 -10 0 -102 100 0 0 0 0 0 -100 0 -1003 300 0 0 0 0 0 -300 0 -3004 800 0 0 0 0 0 -800 0 -8005 2,300 0 0 0 0 0 -2,300 0 -2,3006 3,700 0 0 0 0 0 -3,700 0 -3,7007 3,200 0 0 0 0 0 -3,200 0 -3,2008 1,500 180 0 130 290 20 -1,500 830 -6709 100 170 0 250 560 40 80 1,040 1,120

10 0 110 0 290 630 40 270 810 1,08011 0 0 0 320 700 50 430 560 99012 0 180 0 360 790 50 300 1,560 1,86013 0 170 0 390 890 50 380 0 38014 0 110 0 450 1,000 60 500 0 50015 0 0 0 500 1,120 60 680 0 680

22 0 0 130 920 2,060 100 1,110 0 1,11023 0 0 190 1,000 2,230 110 1,150 0 1,15024 0 0 190 1,070 2,410 110 1,260 0 1,26025 0 0 50 1,160 2,610 120 1,520 0 1,52026 0 0 40 1,250 2,820 130 1,660 0 1,66027 0 0 3,940 1,350 3,040 140 -2,110 0 -2,11028 0 0 5,660 1,450 3,290 150 -3,670 0 -3,67029 0 0 4,560 1,570 3,550 160 -2,420 0 -2,420

48 -2,590 0 0 6,630 15,530 580 12,070 0 12,070

FIRR = 7.0% 8.5%NPV @8.5% = $7,289 $386 $2,350 $5,780 $13,113 $619 -$2,073 $2,104 $31

Capital Cost $12,930 mInterest $2,100 m

$15,030 m

COMPLETION

Railway CorporationHKSAR Government

ProjectAgreement

Railway DevelopmentPlanning

Proposal

Project Initiation

Interface Coordination

CommissioningConstruction &

Contract Administration

Authorization

Project DefinitionDetailed Planning

&Design

PLANNING & IMPLEMENTATION OF RAILWAY PROJECTS

RDS 1994 Projects

ProjectWork Start

Work Complete

Cost($M)

(MOD)

Equity injection

($M)(MOD)

Property Rights

Airport Rwy 11-94 7-1998 35,100 23,700 Y

TseungKwan O Line

11-98 8-2002 16,000 0 Y

East Rail Extensions

11-003-0110-02

12-0410-04[2007]

26,700 8,000 Y

West Rail 9-98 12-03 46,400 29,000 0

Disneyland Resort Line

7-02 [9-05] 2,000 798 0

Railway Development Strategy 2000

Shekou

Shenzhen

New Territories

Hong KongIslandLantau Island

Lo Wu

Lok MaChau

Sheung Shui

Yuen Long

Tuen Mun

Tai Po

Sha Tin

Tsuen Wan

Ma OnShan

Tung Chung

TseungKwan O

KowloonSouthernLink

Shatin to Central Link

Express Rail Link

Port RailLine

Northern Link

Kowloon

North Island LineWest Island Line/ South Island Line

Highways Development

Route 3 Country Park Section

Route 3 Country Park Section

TING TING KAUKAU

Tate’s Cain TunnelTate’s Cain Tunnel

Eastern Harbourcrossing

Eastern Harbourcrossing

Cross HarbourTunnelCross HarbourTunnel

Western HarbourCrossing

Western HarbourCrossing

Five BOT Tunnel Projects in HKFive BOT Tunnel Projects in HK

Hong Kong BOT Tunnel Projects

ProjectsWork

commencedTime for

completion(month)

Actual time

Operation start

Fran-chise

period(years)

Expiry of franchise

Cross HarbourTunnel 9-1969 47 36 8-1972 30 9-1999

Eastern Cross Harbour Tunnel 8-1986 42 37.5 9-1989 30 8-2016

Tate’s Cairn Tunnel 7-1988 37 34 6-1991 30 7-2018

Western HarbourCrossing 8-1993 48 44 4-1997 30 8-2023

Route 3 (Country Park Section) 5-1995 38 36 5-1998 30 5-2025

Cross Harbour Tunnel

Cross Harbour Tunnel – launching tunnel units November 1971

Cross Harbour Tunnel – placing tunnel units November 1971

Cross Harbour Tunnel – portal construction

Five BOT Tunnel Projects

CHT

TCT WHC

EHCR3CPS

Highway Maintenance

Highway maintenance : the quest for cost-effectiveness

• Recent initiatives in enhancing cost-effectiveness in highway maintenance – a PPP approach

- outsourcing inspection and planning duties by adopting performance indicators in remuneration of contractors

- integration: combining different nature of works to one contract to achieve synergy and combining smaller contracts into bigger contracts to achieve economy of scale

Highway maintenance : Contractor’s Role

Conventional PPP

Role As a Works agent As an assets manager

Scope of duty

Carries out Works as ordered Planning, inspection, and programming

Workload Depends on Works Orders issued

Depends on road conditions

Works Quality

More reliant on Engineer’s supervision

More self-supervised

Payment Works based Based on performance achieved

Conventional PPP

Supervision/works inspection

Road condition inspection & programming

Replaced by audits

Issue Works Orders Reduced

Audit

Measurement Replaced by audits

Highway maintenance : Engineer’s Role

Highway maintenance : No. of work order issued

0-3 3-6 6-9 9-12 12-15 15-18 18-21 21-24 24-27 27-Above

Price Range of Works Order ($ K)

PPP contract

Conventional contract preceding trial contract

The Partnership

Government• Anticipates demand for the project with reference to needs

of the community and sustainable growth of society• Balances competing needs for resources• Sets priorities; promote project • Selects cost effective procurement strategy, including

considering if it is more cost effective for the private sector to provide the service (public sector comparator) --in line with the big market small government aspiration

• Ensures risks at acceptable levels

Project-promoter

• Business opportunities on a long-term basis with a steady flow of income at a reasonable rate of return (commercial viability)

• Business development opportunities• Risks taken are manageable

The Community

• Satisfactory service level• Projects to be affordable• Acceptable toll levels• Different interests be balanced • Transparent and accountable decision

process

Government

G

P C

ProjectPromoter

Community

The Partnership -

the Government, the Project Promoter and the Community

Government

C

G

P

A Sustainable Business Partnership

Project Promoter Community

• PPP - a tripartite partnership, a vehicle where the aspirations of the 3 parties may be satisfied

• Private participation can take the form of BOO, BOT projects, PPP approach in highway maintenance or indeed many other possibilities

THANK YOU