Infrastructure investment to support sustainable development and long-term benefit
We conducted in March 2019 a financial analysis for the KYCAI reclamation and the associated infrastructures works (such as water supply, sewerage and drainage system) as well as strategic transport infrastructure. The result showed that the land sales revenue (about $974 billion to $1 143 billion according to the estimate of the Hong Kong Institute of Surveyors in February 2019) was higher than the construction cost (by making reference to construction cost of similar works, the ballpark construction cost estimate of the KYCAI reclamation and the associated infrastructure works together with the strategic transport infrastructure is in the order of $500 billion (in September 2018 price)). In view of the recent adjustment on property market and land value and for the sake of prudence, we have carried out a sensitivity test based on the latest information and parameters as follows:
In terms of land sale revenue, based on the transaction price of land and properties up to November 2022, and then introduce more conservative assumptions, the estimate of the land sales revenue from private residential and commercial sites on the KYCAI is about $750 billion
If the $500 billion previously calculated based on the September 2018 price is adjusted solely based on civil engineering related indexes, a rough estimate of the total construction cost of the project in the second quarter of 2022 will be about $580 billion
In fact, apart from the land sales revenue, investment in infrastructure works can also drive economic growth. Upon full development of the KYCAI, the associated economic activities would generate around $200 billion per annum (in 2021 price), amounting to about 7% of Gross Domestic Product (GDP)
Furthermore, there will be social and economic value for supplying land for public housing and strategic transport infrastructure. In conclusion, implementation of the KYCAI development is still considered to have social and economic benefits
In other words, with the consideration of the latest market condition together with conservative assumptions, the land sales revenue is still higher than the construction cost. In fact, apart from the land sales revenue, investment in infrastructure works can also drive economic growth.
The KYCAI development will span 20 years from end 2025. Roughly speaking, the ballpark estimate on the average annual expenditure will be about $30 billion assuming the construction volume is evenly spread over the years. The Government has stated earlier that the medium-term forecast of capital works expenditure will exceed $100 billion per year. This expenditure (plus the cash flow of this project) amounts to about 4% of GDP. For reference, at the peak of the Hong Kong Airport Core Program in the 1990s, government spending on capital works accounted for about 6% of GDP.
Since the entire development is a long-term investment with economic benefits, we consider it not necessary to rely solely on public expenditure to take forward the project. Apart from funding using Capital Works Reserve Fund, we have considered introducing one or more of the financing options, including bond issuance, Public-Private-Participation such as Build-Operate-Transfer Model to construct major road, Railway-plus-Property Model to construct railway, etc. to make appropriate use of market forces:
Possible Application: Construction works
Precedent: Green Bond Programme and Hong Kong International Airport Three-Runway System
Pros: Reduce Government spending at construction stage and promote the development of Hong Kong's bond market
Cons: Involve interest expenses
Possible Application: Major Road
Precedent: Cross Harbour Tunnel, Eastern Harbour Crossing, Tate’s Cairn Tunnel, Western Harbour Crossing and Tai Lam Tunnel
Pros: Reduce Government spending at construction stage, and provide incentive for private sector to complete the road works as early as possible by granting right for private sector to receive toll fee in specified operation period
Cons: Affect Government's control over the toll fee level during the operation stage
Possible Applicability: Railway
Precedents: Tseung Kwan O Line LOHAS Park Extension, South Island Line, Kwun Tong Line Extension, etc.
Pros: Reduce Government spending in construction stage by granting property development rights while allowing better connectivity between railway stations and residential developments
Cons: Need to provide property development rights of a certain area of land to bridge the funding gap for the development of large-scale railway projects
Possible Applicability: Reclamation, site formation and infrastructure works
Precedents: Reclaimed land of about 59 ha at Sha Tin City One and its surrounding area
Pros: Reduce Government spending in construction stage, and offer incentive for private sector to complete the concerned works as early as possible
Cons: Need to provide property development rights of a certain area of land to the private sector, and the scale of the works will be limited by the financial capacity of the private sector
The project is still at the preliminary planning stage where the Environmental Impact Assessment, ground investigation etc. are in progress. After the overall design work is completed, we will have the basis to develop the phased implementation of works and provide a cost estimate with reference to a more detailed engineering design.