Six ways Hong Kong can finance the crucial Lantau Tomorrow Vision
This article appeared originally in CHINADAILY on 26 Oct 2020.
Authors: Ryan Ip, head of land and housing research and Jacqueline Hui, assistant researcher at Our Hong Kong Foundation
[Analysis on the Benefits and Possible Development Models of Lantau Tomorrow Vision - Presentation Slides (Chinese Only)]
The government, in launching large projects, has used various development models to ease the financial burden. Providing a clear direction will help win public confidence
Although Chief Executive Carrie Lam Cheng Yuet-ngor’s policy address has been postponed, discussions on how to increase Hong Kong’s land supply remain a hot topic, particularly on the Lantau Tomorrow Vision project. Given the concern over the project’s financial sustainability, it is important to analyse different development options.
One may ask whether the Lantau Tomorrow Vision is necessary. We believe it is. The project is crucial to resolving Hong Kong’s land shortage. If factors including the growth in households, the need to increase living space and supply economic and other infrastructure are considered, the city will need more than 9,000 hectares of land in the long term.
But only 5,000 hectares are accounted for in short- and long-term projects, including conceptual options, and these include the 1,700 hectares from the Lantau project.
Hong Kong needs more investments, given the economic downturn. The Lantau project can achieve a countercyclical effect, triggering further investment and creating jobs. Indeed, its financial benefits outweigh the cost.
The Hong Kong Institute of Surveyors has estimated that the Lantau project land sale could bring in up to HK$1.14 trillion (US$147 billion), exceeding the projected cost of HK$620 billion. In return, the project would create 180,000 public housing units, 200,000 jobs and a strategic transport network.
The government, in launching large projects, has used various development models to ease the financial burden. Let us look at six such models.
First, sell the development rights. The government can hold a public tender for the Lantau project, with private developers assuming the cost of reclamation and infrastructure such as roads and drainage. In return, they would be given a minor portion of the land. While the government would not have to pay the costs, it must alleviate concerns about possible collusion with business.
In the 1970s, the government tendered out the reclamation of 59 hectares of land in Sha Tin and the construction of supporting facilities. Four developers teamed up and won the bid. Later, 70 per cent of the reclaimed land was transferred to the government for public housing, while the rest became City One Sha Tin.
Second, sell land in advance. The government could tender for sale part of the land to be reclaimed, with the promise to deliver the sold land later. This would allow the government to obtain land sale proceeds earlier, but there would be pressure to deliver the land on time.
Third, establish a dedicated organisation. The government could consider setting up an organisation to manage the project, operated on commercial principles and reporting regularly to the government.
Initially, the government may need to inject funds or raise capital in the market for the organisation, which would go on to develop businesses or explore other means of becoming self-financing. Statutory bodies such as the Hong Kong Airport Authority are based on a similar concept. Fully owned by the government, it earns its income from operating Hong Kong International Airport. In the last financial year, the authority achieved a net profit of nearly HK$5.9 billion.
Fourth, use the build-operate-transfer model. The government could consider this model for transport infrastructure. It could sign a franchise agreement for an operator to shoulder the project cost in return for being allowed to operate within the franchise period.
Fifth, is the railway-plus-property model. For new railway lines, the government could award the railway and property development rights to the MTR Corporation. It could pay the land premium to the government, then build the railway and properties, with profits from the latter subsiding the former.
While both build-operate-transfer and railway-plus-property models have been used often, the key is to balance social responsibility and corporate profits, and public and private housing.
Finally, issue bonds, using the revenue generated by the railways, tunnels or land sale for repayment. This would also promote the growth of the local bond market, increasing financing channels. In 2004, the government issued bonds for five tunnels and the Lantau Link. This was welcomed by retail investors and oversubscribed by three times.
Clearly, there are many development models and each has special considerations. As the government is already experienced in using these models, it should be able to choose the right ones for specific projects. The next step is to start the preliminary study for the Lantau project as soon as possible, while exploring suitable development options. A clear direction for the project will help win public confidence.