Infrastructure financing in Hong Kong: project finance leads the way.

• Author: Tigue, Patricia

Over the past decade, governments throughout Asia (outside of Japan) have been faced with unprecedented levels of economic growth. Existing infrastructure in these countries has not been adequate to support economic expansion. As a result, many governments have moved forward aggressively to put in place the capital infrastructure needed to support this growth. In China, Taiwan, Thailand, Malaysia, and the Philippines, new highways, ports, airports, tunnels, power plants, waste treatment plants, and railways are being constructed at a cost of billions of dollars.

Nowhere is the boom in infrastructure development more evident than in Hong Kong, where several of the world's largest major infrastructure projects are underway. Over the next few years, Hong Kong will witness the opening of major transportation projects, including a new airport, transit lines, and regional highways. Recently, the GFOA's Government Finance Research Center (GFRC) worked as part of a team in Hong Kong to study various alignments for a new rail line to meet passenger, freight, and international passenger service to China. The detailed feasibility study of the project still is underway, and no decisions have been made yet as to whether or not to build the railway, the extent of the system, and how it might be financed. The outcome of the project, however, is likely to hinge, to a large extent, on financial issues; that is, who will pay for the project.

Paying for capital infrastructure has been a major challenge for Asian countries and cities, including Hong Kong. Local capital is demonstrably inadequate to meet the challenge alone and must be supplemented by offshore capital. In many Asian countries, governments have chosen to attract this capital through various innovative approaches. Among them has been reliance on private franchises or corporations to build and operate infrastructure projects, using the project revenue streams as security for project debt. This approach is known as "project finance."

A project finance structure has been well tested for infrastructure projects in Hong Kong and is one of a number of financing strategies that is likely to be considered for the Hong Kong railway project. The project and critical issues that would need to be addressed in a project financing are described below.

Hong Kong's Rail Development Strategy

Hong Kong is the center of finance and trade in Southeast Asia whose economic vitality depends on its transportation network. The city is the world's busiest container port, handling more than 11 million 20-foot equivalent units (TEUs) in 1994, an increase of 20 percent from the previous year. In 1994, more than 25 million passengers passed through Kai Tak Airport. Hong Kong's transportation network also includes commuter and freight rail service operated by the...