December 06, 2005

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Hong Kong's next white elephant

Slowly forming on the horizon is the next boondoggle, the HK-Zuhai-Macau "gamblers expressway". The latest estimate is the 29 kilometre bridge is going to cost more than HK$50 billion to construct, about $30 billion more than first thought. That's one hell of a jump in estimates. And you thought getting the home renovation quote was tricky. Only Hopewell's Gordon Wu has jumped at the chance to construct this bridge. That seems strange: under the Build-Operate-Transfer (BOT) model, the builder of the bridge is able to collect tolls for a set period of time before hadning it over to the government. This typically means the operator can charge whatever they like in order to achieve their desired return on investment. The contracts are typically iron-clad and often governments are forced into making additional concessions to the operators.

For example, both the Eastern and Western harbour tunnels were built under this model. There was a massive hue and cry when tolls were raised at the Eastern Tunnel, but there isn't anything the Government can do about it. Absurdly the cheapest cross-harbour tunnel is the government owned Central tunnel, which is the most convenient geographically. But due to political pressure, the government keeps tolls at the Central tunnel artificially low, resulting in traffic chaos and huge jams at all hours (try getting through at 1am on a Saturday) while the other two tunnels are deserted.

BOT seems a great way for governments to get the private sector to build infrastructure at little or no cost to the public purse. But it is not the same a private sector road. For the gamblers' expressway the SAR government estimates traffic volumes could reach as high as 80,000 vehicles a day. I'm preapred to wager that bridge will never see that volume of traffic until China turns into a liberal democracy. Sir Gordon will get his 10% (or whatever the guaranteed return is) plus the kudos and connections with the HK, Macau and Guandong governments.

And we end up with a bridge no-one needs.

posted by Simon on 12.06.05 at 08:49 AM in the Hong Kong category.


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a few questions, since i haven't followed this lately.

1. his 10% requires enough traffic, i suppose? if everyone continues to go by boats there is no way he can get his 10%, even by contract?
2. the bidding, do developers bid by the return % as well?
3. as i recall, in Wu's first proposal he talked abouta container terminal right in a bundled cross-subsidized deal (which attracted opposition from Canning Fok/Li KS). what is the new status?

posted by: sun bin on 12.06.05 at 09:18 AM [permalink]

Good questions:

1. Yes, so using the simple formula traffic x toll = revenue, if traffic is too low he jacks up tolls to compensate. While this reduces traffic, typically the toll increase more than outweighs the drop in traffic.
2. Depends how the government offers the tender. Usually it's judged on several criteria, one of which will be the required return.
3. Don't know, but that would be an interesting twist. It would certainly make the road more viable.

posted by: Simon on 12.06.05 at 10:31 AM [permalink]

The bridge is the next-but-one boondoggle. The next will be the East Asian Games in 2009.

posted by: quick silver on 12.07.05 at 05:10 PM [permalink]

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