Finally, Hong Kong's Airport Is Cleared For Takeoff

On Hong Kong's Lantau Island, earthmovers rumble at the site of the world's largest new airport. Squabbling between London and Beijing has slowed the $20 billion project--though some work has gone forward. But now, the pace of construction will soon pick up. On Nov. 4, the two governments agreed to a general financing plan, allowing billions of dollars to be awarded over the next three years. "A hell of a lot of projects will suddenly hit the market," says a top airport official.

After years of uncertainty, the prospects for the Chek Lap Kok airport have never been brighter. Under terms of the agreement, the Hong Kong government will provide $7.8 billion in equity and will borrow an additional $3 billion. The accord helps break a two-year deadlock over the airport. While the two sides must still hammer out acceptable borrowing terms, the Nov. 4 agreement shows there is a consensus to get the airport deal off the ground.

CONTENDERS. Moreover, the agreement will provide a boost to foreign contractors, including those bidding for the biggest prize: two contracts valued at $1.5 billion for the airport terminal and its building services. On the short list are eight multinational consortiums, stacked with heavyweights from Japan, Hong Kong, Britain, and China.

Notably absent from the list are Americans. U.S. corporations have garnered just 3% of the projects, vs. 27% for the Japanese. Most of the projects have involved civil engineering, dredging, and reclamation work, not areas of strength for U.S. companies overseas. But some projects that play to American strengths now are up for grabs. Federal Express Corp. has joined with a Singapore consortium for the air-cargo franchise, estimated to be worth $300 million, and Dobbs International Services Inc. is going for the $30 million catering franchise. Contenders for a $100 million communications system include AT&T, Electronic Data Systems, Hughes, IBM, and Unisys.

Underwriting the new financing could pay off for U.S. investment houses. Hong Kong's debt market is immature, but bankers hope the placement of billions in bonds to finance Chek Lap Kok will spur its growth. "If [this] is successful, it will be a benchmark for other bonds in the region," says Nicholas Bibby, an economist at Lehman Brothers Hong Kong.

Naturally, the biggest winners are Hong Kong companies. They have secured 21% of the contracts and have benefited from an abundance of subcontracting opportunities. Bids are also due on Nov. 18 for residential and commercial developments along the railway that links the airport to the rest of the territory. Since developers are barred from taking out a mortgage on the property in order to buy it, only those with strong balance sheets can afford the price tag. Ironically, the haggling over financing may have helped the Hong Kong government's bottom line: The value of land zoned for property development has jumped from $5.4 billion in 1991 to nearly $13 billion.

HURDLES. Some snags remain. China and Britain have yet to sign off on two financial-support agreements, which will stipulate such key points as how the debt is structured for the airport and railway projects. Moreover, until Hong Kong's airport authority is officially incorporated, it cannot get a bond rating. "There are still hurdles to cross before banks can lend money to either project," says one airport insider.

Some economists worry about the impact on Hong Kong's economy, expected to grow 5.7% this year. Kevin Chan, regional economist with Salomon Brothers Inc., expects the project to add half a percentage point to the inflation rate, now at 8.5%. With unemployment at just 1.9%, engineers, architects, and electricians will be in short supply. Most of the 20,000 construction workers will be imported from Asian neighbors, which has angered local labor unions.

Yet in business terms, the airport looks like a sure winner. There's no question about the need for it, and the government estimates that the facility will handily pay off its debt by 2001, assuming it opens in 1998. Hong Kong residents are hoping that this megaproject doesn't hit any more political crosswinds.

Before it's here, it's on the Bloomberg Terminal.