We look at the governance and financial aspects of Hong Kong International Theme Parks Ltd, better known as Hong Kong Disneyland. We call on the Government to publish the company's accounts, the related agreements, and the identities of the independent directors it said would be appointed. And we ask, was this a good use of 280 hectares of land, and why was there no tender for the project?

Disneyland Through the Looking Glass
23 September 2005

Now that the hoopla, if not the air pollution, has cleared, how much does it cost you to enter Hong Kong Disneyland? No, we don't mean the HK$295 week-day ticket price. Before you could enter, you had to build it. The vast majority of funding was public money, over $25bn, or $3,600 per resident. And if you take into account the value of the land for other uses, the opportunity cost of Disney is around $290bn, or about $42,000 for every HK resident.

The History

In then Financial Secretary Donald Tsang's budget speech of 3-Mar-99, the most interventionist and anti-competitive budget in decades, three no-tender projects were announced. They were:

The problem with no-tender projects is that you seldom get the best terms that are available, because you automatically exclude anyone who might be willing to offer them. It goes against the fair trade and free market principles that the Government claims to cherish, and investment in such projects also contradicts their purported "big market, small government" principles.

The site

The 200ha first phase of Penny's Bay reclamation, plus about 20ha of the former Cheoy Lee Shipyard, can be seen in this satellite photo. Some of that land was used for a lake, transport and other infrastructure to support the project, while about 126ha was transferred to Hong Kong International Theme Parks Ltd (HKITP), the joint venture between the Government and Disney. That includes 70ha for the park itself, and land for three sea-front hotels, of which two have opened. Private hotel owners have to pay for their land, but HKITP did not, thereby distorting the hotel market.

HKITP has a 20-year option to purchase the 60ha Phase 2 (currently under reclamation) for the formation cost of $2.812bn, to be adjusted for inflation. It also has first refusal to buy any additional land reclaimed to the East of Phase 2, further eating up Lantau's natural coastline. The total land area of HK is about 1,104 sq km, but only about 15% of it is urban area, so the 2.8 sq km reclamation is equivalent to about 1.7% of our entire urban area. It is also as big as the Science Park, the three industrial estates in Tai Po, Yuen Long and Tseung Kwan O, and the Cyberport, all put together.

What could you do with 280ha? Assuming an overall saleable plot ratio of 5 times on the total 280ha site, then you will have enough land for about 150m sq ft of gross floor area. Allocating 80% of that to residential development, it would produce around 120,000 homes with an average size of 1,000 sq ft each, housing upwards of 250,000 people.

If you parcel up the site and auction it off gradually, you should easily get $2,000 per sq ft of GFA, valuing the site at HK$300bn. Allowing $10bn to reclaim the land from the sea and supply it with basic infrastructure, that would give the Government a net income of $290bn, excluding the tax on developers' profits. That would be enough to run our bloated Government for 18 months without any other income, or to scrap salaries tax for the next 8 years.

Of course, not every piece of land and sea-bed in Hong Kong should be used for residential development. We only need so much living space, although most residents would agree, from the privacy of their tiny apartments, that more, larger homes would be nice. And compared with our estimated $300bn land value, when the Disney project was launched, the Government claimed that it would produce "net economic benefit" to Hong Kong of $148 billion over 40 years, or about $3.7bn per year on average. A grand claim, but they never produced any proper calculations to back it up. We presume they meant the estimated increase in Gross Domestic Product. One thing's for sure - it was based on a huge surge in mass-market tourism, which is something that not all residents of this over-crowded city may wish to see.

Let's suppose though, for the sake of argument, that there was general public support for allocating 280ha of precious land to a theme park in Hong Kong. Then the correct action for the Government should have been to open it up to qualified bidders to achieve the highest price, not to go into a private joint venture with a single operator. Even worse, the budget-speech announcement came 8 months before there was any firm agreement with Disney. Politically the Government then either had to reach a deal or incur a huge loss of face, so it strengthened Disney's hand in the negotiations.

The Deal

The result was a deal for Phase 1 in which Disney invested just $2.45bn to own an initial 43% of the shares of HKITP. The Government put in $3.25bn of your money for 57%, and lent HKITP a further $6.1bn on favourable terms. It seems clear that in the event of financial trouble, the outside bankers, who lent $2.3 billion, would get their money back first. And if you are wondering why HKITP needed to borrow from the Government, it is because $2.3 billion is all that the market would bear. Or as the Government put it in a paper to LegCo:

"The reason for raising just over a quarter of the debt from the market is that in the early years the project cash flows can only prudently cover loan servicing of that amount."

On top of the $9.35bn invested in HKITP, Government spent $13.6bn on reclamation and construction of facilities outside of the park. It also had no choice but to buy the land-locked Cheoy Lee Shipyard for $1.51bn, and then found the yard was contaminated with dioxins, necessitating a $450m clean-up involving controversial incineration. Then, to enable MTRC to justify to its 400,000 shareholders its investment in the railway extension to Disney, the Government had to waive $798m of dividends on the stock. That takes the total to over $25bn of public money in the project, 10 times what Disney invested, or about $3,600 per resident. For Disney, its investment was small change, about 0.7% of Disney's current market value, and about half what its Chairman and CEO Michael Eisner earned in 1998, including stock option gains.

Secrecy, and missing INEDs

The accounts of HKITP have never been published. Such poor transparency sets a bad example for a government which claims to be keen on better corporate governance. Indeed, in Jul-01, the Government-appointed Standing Committee on Company Law Reform proposed to amend the law to require all private companies in Hong Kong to file their financial statements with the companies registry for public inspection, as is the case in other jurisdictions such as the UK and Singapore. If the proposal had not been abandoned, then the accounts of HKITP would now be public, as would the full Cyberport accounts, which Webb-site.com tried and failed to obtain under the Code on Access to Information, thereby demonstrating what a sham the code actually is.

Although the agreements between HKITP, Disney and Government have not been published, a source who was present confirms that a senior official briefed journalists just after the deal was signed. Reported figures, which Government has not denied, say that Disney gets a royalty of 10% of ticket sales just for being Disney, plus 5% on food, beverage and merchandise, an overall 2% management fee on gross revenue, plus incentive payments ranging from 2% to 8% of the operating profit. On top of that, you can bet that Disney still gets license fees from the manufacturers of all the Disney paraphernalia that are sold in the park.

In that LegCo paper, the Government said that two independent non-executive directors mutually agreed by the Government and Disney would be appointed to the board of HKITP, but the Government has never said who these people are. Webb-site.com searched the Companies Registry, and found that at least up to the annual return of 24-Sep-04, there were only 9 directors; 5 from Government and 4 from Disney. No INEDs.

We call on Government to publish the key agreements and the accounts of HKITP and all the other Government-controlled companies. It's the least that the taxpaying public can expect. It's your money.

Back to the Land

As for that land, the first 126ha was transferred into HKITP in return for 4 billion of what Government calls "subordinated shares". The notional $4bn value put on the land (at $1 per share) is equal to its reclamation and formation cost. In the event that the company outperforms an undisclosed "base case", then the Government would be allowed to gradually convert those shares into full-ranking ordinary shares, but subject to a cumulative conversion ceiling which rises at 5% per year, starting 5 years after the park opens and continuing for 20 years, with not more than 10% of the shares being converted in a single year, even if the profits are in Fantasyland.

That means that eventually, by 2030, and only if the park beats the forecast, then the Government could end up with 74.7% of HKITP, and Disney with 25.3%. The Government explained to LegCo:

"[Disney's] forecast of the financial performance of HKD (the "Base Case")...showed that the project could cover the cash cost of building and operating the theme park and related facilities, but could not cover the cost of the land."

Never mind the $300bn value of the land, by the time Disney had deducted all its fees from HKITP, and all the usual operating costs of the park and hotels, it expected that the project could not even cover the cost of dumping sand in the sea. No wonder Mickey Mouse was wearing such a big smile in this photo.

© Webb-site.com, 2005

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