The third runway for the Hong Kong International Airport is expected to yield an 8 percent internal rate of return, far above the 3 percent IRR projected in 2011, Airport Authority chief executive Fred Lam Tin-fuk said, citing the latest report compiled by HSBC on the financial arrangements for the controversial project.
IRR is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. The revised estimate has taken into account the proposed airport construction levy and improved financial performance of the airport operator over the last few years.
The previous estimate was made during the financial crisis, when the market was pessimistic about the city’s economic outlook. The market view has since become more positive.
The Airport Authority believes the airport construction levy would help increase its revenue. Thus, the brighter IRR forecast.
However, an 8 percent IRR means the authority can afford the third runway project rather than explain the source of the investment.
We should not make a direct comparison between 3 and 8 percent IRR, since the construction levy can also improve the IRR of the two runways if the government chooses to improve the two existing runways.
Under the plan, the authority will stop paying annual dividends to the government, and draw money from the authority’s surpluses, user charges and external financing via bank loans and bonds to finance the expensive third runway project.
Likewise, the government’s pension plan faces the same issue. The government put forward two proposals. One is a universal scheme that lets everyone aged 65 or above to receive a pension of HK$3,000 a month without a means test. The other is a non-universal scheme with eligibility criteria including an asset limit of no more than HK$80,000 for an elderly person living alone.
The first proposal would cost an additional expenditure of HK$2.4 trillion for the government. By contrast, the non-universal plan would only cost the government around HK$255.5 billion.
The government may fall into a deficit and both proposals would require tax increases.
Infrastructure projects like the high-speed rail link, the Hong Kong–Zhuhai–Macau Bridge, and the third runway would cost a big fortune for the government, which has always underestimated the cost and ignored the possible financial burden.
Meanwhile, the government has overestimated the financing of the universal pension plan, without taking into account various revisions to the plan.
Infrastructure projects are believed to create direct and indirect economic benefits, such as creating jobs, stimulating consumption and improving productivity.
The government would make a bold projection to convince everyone that the project is “worthwhile”.
Meanwhile, it has been focusing on how expensive the pension plan is, apparently to encourage citizens to pick a less-expensive non-universal plan.
The asset limit of HK$80,000 under the non-universal plan may reduce the number of eligible applicants and cap costs.
However, such a low threshold may distort the people’s savings behavior or lead to a moral hazard.
Also, the government has to deploy even more resources to prevent abuse of the system.
By contrast, the universal pension plan is simpler, and allows elderly people to return to the labor market and contribute to the scheme.
It would also pave the way for the government to remove the old age living allowance and old age allowance.
This article appeared in the Hong Kong Economic Journal on Dec. 29.
Translation by Julie Zhu
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