MRT’s plan to borrow heavily to pay for a HK$25.76 billion special dividend comes with a catch
JAKE VAN DER KAMP
PUBLISHED : Wednesday, 02 December, 2015, 5:47pm
UPDATED : Wednesday, 02 December, 2015, 6:00pm
An enterprise representative receives materials about group tickets at the ticket office of Shanghai South Railway Station in Shanghai on November 26. Photo: Xinhua
A taxpayer bailout for MTR Corp’s long-delayed high-speed train line to the mainland was broadly welcomed yesterday by investment analysts who argued that stretched gearing ratios and added repayment costs were worth it to ensure the track will finally be finished.
Business, Dec. 2
Let’s get it straight right away that no-one in Hong Kong ever asked for or wanted this second railway to the border. It was foisted on us by Beijing bureaucrats who came around one day to ask us how we were getting along with our share of the national high-speed rail initiative.
“Ahh..., umm..., well, that is to say, umm..., ahh...,” we replied.
“Better get on with it then,” the mandarins responded. “It’s part of the five-year plan and Big Brother won’t be happy if you don’t do your part.”
So we quickly cobbled together a rah-rah public consultation for it, did an even quicker cobbling job of engineering studies that proved woefully deficient in their geotechnical details, and committed ourselves to building a superfluous rail link to a remote suburb of Guangzhou.
Thus when investment analysts now talk of how the inevitable cost overruns will be “worth it to ensure the track will finally be finished”, I have one immediate question for them. Who ever said that this track was worth anything to us at all?
But of course these investment analysts have a difficult time supporting a purely investment case for borrowing money to pay a HK$25.76 billion special dividend that will cover the government’s shortfall between the HK$65 billion original budget and the latest guess of HK$84.42 billion.
Here, for instance, is a gem from the MTR’s own attempts to make out that investment case in its submission to the stock exchange – “The Special Dividend provides an opportunity to improve the Company’s capital structure ...”
How does replacing shareholders’ reserves with borrowings constitute improving a company’s capital structure?
And why should people who bought MTR stock because they thought it a better idea than holding cash want the MTR to give them so much of it back in cash? Companies bereft of ideas do that sort of thing. Where away, MTR?
More brazen yet was a claim that if the deal had been done last year it would have increased the return on equity.
There are two ways getting a higher return on equity ratio. One is to increase earnings, the other is to decrease shareholders’ equity. If the second is truly a prescription for sounder finances then the surest way to wealth is bankruptcy. What a home for innovative financial thinkers we have here.
Let’s be plain. This special dividend is a bribe to minority shareholders because the deal requires shareholder approval and the government cannot vote its shares.
It is a bribe because the deal requires minorities to agree that any future cost-overruns must be covered by the MTR alone. The record of these public infrastructure projects suggests there will be more overruns to come.
This is not the first time that the government has made the MTR a dumping ground for costly transport projects of questionable financial viability. It is where the Airport Express went because officialdom did not want this rail link’s huge expense lumped in with that of the airport it solely serves.
Judging by the mainland’s experience of high-speed rail, it is also likely that passenger fares will cover little more than operating and maintenance costs. The capital cost will be sunk, in every meaning of the word. What a nice gift to the MTR.
The implied threat to the minorities (and I wonder how independent of government they all are) is that if they and the Legislative Council do not approve this deal, then all work on the project must stop and all the investment made in it so far will be a total loss.
To my way of thinking it won’t be much less of a total loss if completed, while a strong demonstration of the government’s displeasure with cost overruns would do wonders to keep greedy engineering companies honest in their future cost estimates on public projects.
My message to the MTR minorities is straightforward. Call the government’s bluff. Reject this deal unless your guarantee to cover future overruns is removed from it. The project’s failings are not yours.
http://m.scmp.com/business/companies/article/1885955/mtr-minority-shareholders-should-vote-against-bribe-special
