re: worry-wart Yes it is, and I quote the article below as...

re: worry-wart Yes it is, and I quote the article below as cofirmation of the same. Interview with CEO of MAP

Wednesday, 15th September 2004.

(9.25 am)

AMANDA TURNBULL: Moving on to our plenary speaker, I am

delighted to be able to welcome Kerrie Mather to join us

this morning. Kerrie is chief executive officer for

Macquarie Airports and she joins us straight from

Sydney, so we apologise that we are a little late this

morning. Ms Mather has been with Macquarie for the last

18 years, during which time she has been involved with

a wide variety of transactions, including corporate

structuring and financing, valuations and the raising of

debt and equity. I am sure that her depth of experience

will be of great value to broadening our own horizons

this morning, so please welcome and please join with me

to welcome Ms Kerrie Mather. (Applause.)

KERRIE MATHER: Good morning, ladies and gentlemen. I am

honoured to be here today, amongst such a distinguished

group of people. I have been given the very meaty task

to talk about our experience actually with privatising

Sydney Airport, and I feel very well qualified actually

to talk about this topic, because it is an opportunity

that I worked through from go to woe.

But, using Sydney Airport as a case study for

privatisation, I am going to outline the sale background

and objectives from the government's perspective, and


1







provide an overview of the sale process in the Macquarie

consortium that acquired the airport. Finally, I will

focus on the major initiatives that we have implemented

since we have acquired the airport to improve the

performance of the business.

Let me first tell you about Macquarie Airports.

MAp, as it is known -- this is Australian ticker -- is

listed on the Australian Stock Exchange. It is

an investment fund. It listed in April 2002, just over

two and a half years ago, and we have acquired

significant investments in four airports to date. Those

airports include Rome, Sydney, Bristol and Birmingham.

Both in terms of the annual passengers that they handle

and the enterprise value of those airports, it actually

makes us the second-largest airport owner in the world.

MAp is trading at around $2.48, giving us a market

cap of 3 billion and making us a top-60 ASX company, and

since we listed two and a half years ago we have

achieved an IRR for our investors of 21 per cent.

An ongoing focus for us has been to increase and

diversify our investor base. We have over 30 per cent

foreign ownership now, which is quite substantial for

an Australian company, and I am pleased to say that many

of the foreign investors actually come out of Hong Kong.

That demonstrates the attractiveness of airports to


2







international investors, who are looking for

high-quality economic assets whose growth is linked to

improving economic performance.

We can see our composition of the portfolio on the

bottom of the slide. Sydney and Rome are our major

assets, and together they account for 68 per cent of the

portfolio, and Birmingham and Bristol provide

diversification into the rapidly expanding UK market.

I would now like to talk about the privatisation of

Sydney Airport and the key issues around the sale. But

before I look at the sale I would like to provide some

context around Sydney Airport in terms of its importance

as a gateway to Australia and its contribution to both

the New South Wales and the Australian economy. As you

can see from the slide, Sydney Airport is the dominant

gateway to Australia. It roughly handles 50 per cent of

all international traffic and, as Australia's gateway,

is the key port for all major airlines, and we are the

first to benefit from any new services to the airport;

conversely, we are the last to lose any of our services

in times of shock.

Sydney is also the major airport in terms of

domestic passengers, with a 34 per cent market share,

and as well as passenger traffic Sydney is the dominant

Australian freight airport, with a 44 per cent market


3







share. That will be enhanced by the new DHL freight

terminal when it is built towards the end of this year,

ranking it one of the largest freight centres in the

southern hemisphere.

In terms of the importance to the Australian

economy, Sydney Airport contributes directly and

indirectly 2 per cent of the Australian and 6 per cent

of the New South Wales economy, and approximately

$6.6 billion per annum to the New South Wales Gross

State Product. While the airport employs about 300

staff directly, its operations supply around 8 per cent

of Sydney's labour market. Its contribution to the

economy is the equivalent of the impact of hosting 2.7

Olympics in Sydney each year, every year.

All of these factors confirm the vital importance of

Sydney Airport to Australia and therefore how essential

not only a successful sale process but also the ongoing

development of the airport was to the Australian

government as a major driver of economic growth.

In terms of the airport facilities, Sydney has three

runways and three passengers terminals. It currently

handles 26 million passengers, but the 20-year master

plan that was recently approved by the government

confirms that the airport can handle up to 68 million

passengers in the next 20 years without any major


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capital expenditure.

With regard to the quality of the facilities, it is

important to note that there was a significant

investment in upgrading all the facilities by both the

airports and the airlines for the Olympic games, so we

have a high-quality facility with plenty of capacity to

handle growth.

The quality of the facilities at Sydney is also

underlined by the recognition and awards that Sydney

receives both from passengers and industry commentators.

Sydney is recognised, along with Hong Kong, Dubai and

Singapore, as one of the world's leading airports. All

of this ensured that the government was selling perhaps

the most important piece of infrastructure in the

country, not only in terms of its value but because it

is a major engine of growth. Selecting a consortium

that would enhance and improve the airport was always

going to be one of the government's major objectives.

Before commencing the sale process for Sydney, the

Australian government had developed what was a very

significant track record for asset sales. That included

successfully privatising all of the capital city

airports in 1997 and 1998, and they were very successful

in substantially reducing government debt. History has

shown that they were successful in stimulating faster


5







economic growth, by improving the efficiency and

operational performance of the airports, as well as

accessing future capital.

The successful privatisation of a number of the

infrastructure assets and business had significantly

reduced the need for government to fund vital investment

that had been at the forefront of driving Australia's

record of strong economic growth. That was a critical

objective for the government.

The earlier sale of the capital city airports

generated substantial interest from both international

and domestic airport operators and investors, while at

the same time improving the quality and efficiency of

the airports.

The privatisation of airports in Australia was

actually managed in a three-stage process. The timing

and sale proceeds from the sales is outlined on the

slide. The phasing of the sale of the airports was

important in that it did not place excessive demands on

the capital markets which could potentially reduce the

proceeds from the total sale programme. An important

factor driving the privatisation process was the

decision by government to sell each airport by way of

a 100 per cent trade sale that transferred ownership of

the airport to the acquirer. Transfer of ownership did


6







not mean transfer of control, and I will discuss this

a little bit later.

A final point worthy of note from the slide is the

importance of Sydney Airport in the entire government

airport sale process. Of the $9.5 billion received by

the government from the airport sales, $5.6 billion, or

just under 60 per cent, came from Sydney Airport. The

size and complexity of the Sydney sale was always going

to create unique pressures and necessitate extensive

preparation by the government and its advisers.

The government then undertook an extensive

evaluation process to determine the most appropriate

sale method to maximise sale proceeds, while balancing

regulatory requirements. There was a recognition of the

need for a regulatory framework that would encourage

commercial agreements with key stakeholders, like the

airlines, and incentivise ongoing investment by the new

owners.

In terms of sale planning, the government conducted

a beauty parade for advisers, and in fact Citigroup was

selected. Sydney Airport was a large and complex sale,

and the activities and tasks to be undertaken by

Citigroup as the adviser for the preparation are

actually outlined on the slide -- so, you can see, very

detailed, very comprehensive.


7







But really the key tasks were to, firstly, establish

the preferred method of sale, to maximise the sale

proceeds and meet the other government objectives.

Secondly, they had to establish that there was available

equity, given that the government was looking to achieve

a 51 per cent Australian ownership. Thirdly, it was

essential that both the sale process and the privately

owned airport were consistent with stated government

policy objectives, and that it did not adversely impact

other key drivers of economic development.

So what was the most critical area for

consideration? Perhaps the most fundamental to the

success of the sale was the finalisation of an economic

regulatory framework that, whilst providing sufficient

protection for other stakeholders such as the airlines,

would give adequate certainty for potential investors.

The result of a regulatory review was a move to

a price monitoring regime by the government. Under

price monitoring, the government encourages interested

parties to reach commercial agreements to determine

airline charges, as opposed to the imposition of a form

of price control. The underlying concept behind this is

that the respective parties have sufficient

countervailing market power to ensure a reasonable

position is achieved that satisfies the objective of the


8







majority of airport users.

Having done the pre-sale preparation, let me outline

the sale process and timetable. The government

confirmed in December 2000 that it had appointed scoping

study advisers to review the sale options; that was

Citigroup. Then, following the government agreement to

a trade sale, the sale process commenced in March 2001

and indicative bids were invited. A binding bid process

then commenced, with three shortlisted bidders, which

was to be completed later in 2001.

However, just as the tender process was teaching its

final stages, the tragic events of September 11 had

a profound impact on air travel and the aviation

industry and, while it was not initially considered to

be fundamental by the government to the sale process, it

was compounded by the collapse of Ansett, which was one

of the major domestic airlines in Australia, on

September 14th. The collapse of Ansett created such

fundamental uncertainty for the shortlisted bidders that

the government postponed the sale process until the

industry climate had begun to stabilise.

In March 2002 the government announced that it had

reinstated the sale process with the objective of

finalising the process by their end of financial year,

which was 30th June 2002. One of the requirements of


9







the sale process was that the final bidders were

required to submit final binding bids capable of

acceptance and completion within a short timeframe. As

I have shown on the slide, on 25th June 2002, the

Macquarie consortium was confirmed by the government as

the preferred bidder, with completion of the sale

completed within three days.

I have talked about the preparation for sale and the

sale process. I wanted to look at the sale options and

the government's objectives. The principal options were

a trade sale and an IPO -- an initial public offering or

a float -- and, of that, either a majority or minority

of the airport's equity, or potentially a hybrid

combination of trade sale and IPO.

In evaluating between a trade sale and an IPO, the

government was mindful of its need to conduct

an efficient sale process that would maximise its

proceeds from a financially robust purchaser, and

importantly that purchaser would be able to not only

complete the acquisition but fund the ongoing

development of what was a vital piece of infrastructure.

Looking briefly at some of the critical factors in

the decision to select a trade sale as the preferred

method, it was clear from previous transactions that

trade sales had achieved the highest EBITDA multiples or


10







the highest earnings multiples and hence be the way to

maximise sales proceeds.

Drawing a comparison between EBITDA multiples

achieved for Australian airports with valuation

multiples of publicly listed airports for both Europe

and Australasia, it was clear that a trade sale of

a majority holding would give greater returns to the

government. For example, average listed airport

multiples are seven times. If we compare this with

trade sales of majority holdings, there is Rome at 11.5

times, Bristol 13 times, and most Australian airports at

between 13 and 15 times, a significant difference. The

key difference is the absence of a focused major

shareholder driving continued improvements in service

and performance.

In conducting a sale of such a major asset,

an efficient sale process was essential in delivering

a positive outcome. Again, the history of majority

trade sales had shown that the process could be

concluded within six months, and the need to conduct

an efficient sale process in a reasonable timeframe had

become increasingly important in an environment where

macro shocks to the aviation industry have become more

common, which could have huge impact on achieving the

desired outcome.


11







Lastly, it was essential that not only could the

bidder adequately fund the purchase but that they had

access to significant ongoing capital to ensure the

airport could meet the changing demands placed upon it

over time.

I have already discussed the importance of the sale

method and the sales process for achieving the optimal

outcome of maximising the sale proceeds, but the

concerns about what I call the after-sale marketplace

are also vitally important to the government, not only

in terms of financial terms, for ongoing investment, but

also in protecting the interests of various

stakeholders.

Airports are essential infrastructure, so it is

vital that governments can ensure that not only border

control is adequately enforced but also that travel to

and from the country is safe. In addition, from

a social policy perspective, for airports close to major

urban areas, such as Sydney, the ability for the

government to continue to regulate airport noise or

aircraft noise levels and pollution is of fundamental

importance. In the case of Sydney, the government has

been able to retain control over key areas, such as

noise and security, through legislation that provides

clear operational guidelines that the airport must


12







comply with and which meet the government's stated

policy objectives.

From the government's perspective, a transfer of

ownership has not meant a transfer or a loss of control.

Government and stakeholders are protected by regulating

flight paths and curfews to manage noise sharing,

legislating environmental requirements and master

planning, retaining responsibility for security, and

establishing an economic regulatory framework which

provides certainty for airlines and airports.

I would now like to turn specifically to Sydney

Airport and the Macquarie consortium that acquired the

airport. As this slide shows, a combination of airports

is an increasingly attractive asset class. The high

quality of Sydney Airport as an asset and Macquarie's

global infrastructure investment experience meant that

we were able to put together a consortium with

significant commitment from major global partners, such

as Ferrovial in Spain, Hochtief in Germany, financial

partners such as Ontario Teachers pensions plan in

Canada, and a major Australian pension fund investor in

the MTAA. Of course, Macquarie Airports is largely

funded by pension funds. That consortium combined

significant airport experience, which provided capital

providers with a high degree of comfort that the agreed


13







business plan could be delivered and airport performance

improved over time.

In looking at the airport, the consortium and other

capital providers had a number of areas of focus that

were key in terms of their evaluation. The importance

of these factors was weighted by their impact on the

airport's ability to deliver on the agreed business

plan. Let me outline some of the things that the

investors focused on.

It was of fundamental importance that the consortium

was able to exert influence over key commercial,

financial and strategic decisions of the airport; for

example, key business areas such as retail and property

development, which could be managed to drive increased

earnings over time.

Secondly, a regulatory environment that incentivised

continuing investment by allowing reasonable returns for

new investment was the key focus for investors, as it

provided comfort that returns would not be diminished as

new capital was invested in the airport.

Finally, the freedom to develop a capital structure

appropriate to certain stages of the airport's life

cycle. In any airport, the largest single cost is

capital, and, as such, the freedom to manage this is

fundamental. Capital expenditure at airports can be


14







very lumpy, and it is very long term. For example, if

an airport has significant surplus capacity and can

accommodate substantial growth in traffic volumes with

minimal investment, then a higher level of debt funding

is appropriate than if an airport is entering a period

of major development.

Having examined the sale of Sydney Airport by the

Australian government, I would now like to spend some

time looking at our focus then following the purchase --

I have talked about what we looked at at the time we

were investing -- and really how we have been able to

implement our business plan and grow the business

despite the impact of Bali, the war and Sars in that

time.

We initially conducted a comprehensive review of all

major areas of the business, to confirm and implement

strategic initiatives to drive increased earnings.

Firstly, we developed a comprehensive airline marketing

plan to build upon Sydney's under-served market

potential. Major areas of focus were Asia, the

Middle East and the trans-Tasman, all of which provided

significant growth potential in terms of passenger

numbers.

Secondly, retail benchmarking confirmed our initial

view that, far from being a mature retail business,


15







Sydney offered significant upside potential, and in fact

there was significant upside potential in all of the

commercial businesses.

Thirdly, confirmation of the airport's significant

surplus capacity was able to facilitate strong long-term

passenger growth without major capital expenditure.

Finally, we benchmarked operational efficiency, and

following this review we have been able to reduce

operating costs by over 20 per cent in the first year

and over 30 per cent in the second year, compared to our

initial investment case.

Let me provide some detail around some of the

specific initiatives that we have implemented following

our acquisition. Turning first to airline marketing, if

you look at Sydney's historic growth, it has achieved

a very strong compound annual growth rate in

international passengers of 7 per cent over the past

20 years, and it continues to offer strong growth

potential.

The slide outlines the additional services which

have or are commencing over the next 18 months. To put

the 91 additional weekly services into context, Sydney

currently has 500 weekly services, so that represents

an 18 per cent increase in capacity. As you can see,

the capacity increases are not just from existing


16







carriers, they are from a range of carriers and across

all major destinations. That is obviously going to be

a key factor driving earnings growth over the next

12 months.

Some of the highlights there include the expansion

of air rights between Hong Kong and Australia that was

announced in May this year, which could lead to up to 28

additional weekly flights, and the trans-Tasman route,

where we have seen the launch of Emirates and

Pacific Blue, and of course competitive responses from

Qantas and Air New Zealand.

As well as focusing on international services, we

have placed considerable emphasis on developing the

domestic market. Following the collapse of Ansett, the

purchase by Qantas of Impulse and the successful launch

of Virgin Blue, the domestic market has undergone

significant change. This evolution created a number of

challenges and opportunities for Australian airports,

notably the fact that the airlines had been granted

long-term leases over domestic terminals effectively

reinforced the duopoly that Qantas and Ansett enjoyed.

Indeed, when new entrants like Virgin Blue tried to

establish services in Australia, there was a need to

create specific facilities to accommodate them; they

could not be accommodated within the existing


17







facilities.

However, following the demise of Ansett, most of the

major airports acquired the domestic terminals, the

former Ansett terminals, and our key objective at Sydney

was to transform the terminal into a common-user

terminal that could properly support increased domestic

competition. Evidence of our commitment to increase

domestic competition has been the large number of

agreements that Sydney has completed with domestic and

regional airlines to use that terminal.

With that growth in passengers has come the

opportunity to develop and enhance the retail and

commercial businesses to match the changing passenger

profile and, in particular, the growth of leisure-based

travel from low-fare airlines such as Jetstar and

Virgin Blue.

In terms of commercial developments at Sydney, we

have implemented a range of initiatives across all of

the airport's businesses. These have included, on

international retail, a new walk-through Arrivals

duty-free store and a Departures duty-free megastore;

there is a picture of it on the slide. It is being

hailed as world-class in airport retailing. In domestic

we now have 31 outlets, which is more than twice the

number that existed under Ansett's ownership. We have


18







revamped the food and beverage areas to introduce new

branded outlets. We have renegotiated the currency

exchange concession to introduce more outlets.

In terms of other commercial initiatives, we have

expanded the car parking business with 700 new spaces in

domestic, and a new multistorey international car park

is being planned that will not only add a large number

of spaces but also free up a significant amount of land

for development.

A number of property developments have been

completed, including a new 10-storey office block, a new

freight centre, a new budget hotel, and the very popular

Krispy Kreme doughnuts factory. Significant scope for

property development still exists, with over 70 hectares

of land available for development.

I mentioned a moment ago that the airport completed

a master plan earlier this year, and that confirms that

the airport has significant capacity to accommodate

growth to over 68 million passengers by 2004. To

facilitate that growth we will be investing $2.3 billion

over the next 20 years. That is a significant

commitment that shows that a privatised airport is able

to meet the complex and increasing demands placed upon

its infrastructure while providing acceptable returns to

investors.


19







The two years since we have acquired Sydney Airport

have been the most turbulent ever seen in aviation

history, yet despite these shocks we have been able to

deliver on our business plan and significantly improve

the operational efficiency of the airport. In the eight

quarters since we have acquired the airport, EBITDA

growth has consistently been in double digits, despite

the major driver of growth, international passengers,

being well below the trend line. The improved earnings

yields of the airport obviously now position us well to

benefit from a return to more normal aviation conditions

and, specifically, growth in international passengers.

In concluding my presentation, I would like to draw

out some lessons from the sale of Sydney Airport and its

performance following privatisation. The decision by

the government to dispose of its interest in Sydney by

way of a 100 per cent trade sale was unquestionably key

in maximising the sale proceeds received by the

government. A sale EBITDA multiple of 14.3 times was

well above listed market comparables, whilst at the same

time leaving value to be created by the new investors.

The improvements in business efficiency implemented

following the acquisition have not only improved the

airport's quality of service levels but have enabled the

business to absorb the impact of major shocks, such as


20







the Iraq war and Sars, and yet still increase earnings

and commit to significant long-term investment.

That concludes the formal part of my presentation.

I would be happy to take questions during the course of

the morning. Thank you. (Applause.)

AMANDA TURNBULL: Kerrie, we would be grateful if you would

not mind to just stay up on the podium. We have time

for a couple of questions for you directly, and then

what we will do is go straight into the panel

discussion.

So please, members of the audience, are there any

questions directly for Kerrie? Yes, one over there.

Could you wait for the microphone, sir, please.

Q. My name is Peter Wong. I would like to ask the degree

of control which the government retains over the

operations, because I know in Hong Kong when legislators

come along to the airport, their word is almost God.

KERRIE MATHER: Well, the government maintains its control

by setting out a regulatory framework or a set of

operating restrictions within which the airport has to

operate. But in terms of the day-to-day of the

business, the government leaves the airport free to

actually operate within the scope of those restrictions.

So, in terms of all the commercial, financial and

strategic decisions of the airport, the government is


21







not involved.

AMANDA TURNBULL: A question here, please? The microphone

is just coming.

Q. Kerrie, my name is Allard Nooy, Leighton Contractors.

Within your consortium, who are the key players active

on a day-to-day basis in the operation and maintenance,

and how did you deal with the staff transfer when the

airport was sold?

KERRIE MATHER: Well, Macquarie actually has 61 per cent of

the airport, and we are obviously on the ground in

Sydney. So, while we have an active and important

shareholder base within the airport, at the end of the

day it is largely Macquarie. But as part of our

strategy we acquire airports that have capable

operational management, so management that can operate

the day-to-day of the airport, to the extent that with

our business plan we have ambitious plans for the

development of the commercial businesses.

You may need to actually supplement the management

with some new positions, and you will have seen that we

appointed a new managing director at the beginning of

last year. Max Wilton was formerly head and prime

minister of the cabinet in Australia, a very well-known

Australian personality. He was certainly the right

appointment for this point in the airport's life. There


22







are a number of issues that we needed to deal with that

needed an understanding of government, including working

through the master plan. We were looking to change some

of the regulatory limits in relation to duty-free,

dealing with some of the security issues that are very

topical at the moment. So he was an appointee with the

right level of experience.

But we are very actively involved in the business,

and we have obviously transitioned a number of

businesses so far. Obviously the first thing we do is

sit down with the management, explain our business plan,

try to get an alignment between the management and the

shareholders as quickly as you can.

AMANDA TURNBULL: One more question here, please.

Q. In terms of your revenue, can you tell us what

proportion comes from aeronautical charges and what

comes from commercial activities?

KERRIE MATHER: It is about 50/50, and that is pretty

typical across most of our airports. So it is 50

per cent aeronautical, 50 per cent non-aeronautical, and

then within that roughly 25 per cent retail, 10 per cent

car parking, and the balance property.

AMANDA TURNBULL: Thank you very much, Kerrie. Now, if you

would not mind to stay on stage, and perhaps our

panellists could join you as well. I will introduce our


23







moderators. But if everybody, please, gentlemen, if you

would like to go up on stage, and take your places

behind your name panels.

This is our first panel discussion. It is going to

be moderated this morning by Russell Barling and

Dr Stephen Ching. Russell is the South China Morning

Post's Transport and Logistics Correspondent, and he has

been in that role since 2001. He is our expert for

covering South China's booming logistics industry, and

before joining the Post he was previously with Cargo

News Asia, the region's oldest multi-modal trade

journal.

Dr Stephen Ching, from Hong Kong U, is the

specialist for economics, including industrial

organisation and international economics. He was the

first Hong Kong academic appointed as a research fellow

by the Hong Kong Monetary Authority and was also

appointed as a consultant by the Hong Kong Coalition of

Service Industries and the Pacific Basin Economic

Council.

What I would like to do, please, is ask Russell to

introduce the panel and then please go into the

discussion. Thank you.

RUSSELL BARLING: Thank you, Amanda. Thanks for coming,

everybody, and hopefully we can now live up to your


24







expectations for a lively discussion up here.

Seated to my left is Mr YK Leung. He is the Deputy

Director-General of Civil Aviation for the Civil

Aviation Department. Mr Leung is an aviation veteran.

Before joining the Civil Aviation Department he worked

for the Hong Kong Aircraft Engineering Company, which is

a subsidiary of the Swire Group. He has been involved

in a lot of projects in Mainland China relating to

technology transfer issues. During his time at the CAD

Mr Leung has spent most of his time as a regulator

overseeing the flight safety standards of Hong Kong

airlines.

Seated to his left, or to your right I guess, is

Kerrie Mather, of course who we just met, Chief

Executive of Macquarie Airports. Kerrie, you have

already been introduced so I will not go into your

lengthy and, I am sure, qualified bio.

To her left is Mr Wilson Fung who is the Deputy

Secretary of Economic Development and Labour for

Economic Development here in the Hong Kong government.

Mr Fung was the lead negotiator in the recently

completed Sino-Hong Kong air services agreement, and he

is also a member of the policy bureau in charge of

privatisation of the airport. He was the Principal

Assistant Secretary for Planning, Environment & Lands


25







Bureau from 1997 to 2000, and Deputy Director of

Corporate Services for the Housing Department from 2000

to 2003. He assumed the post of Deputy Secretary for

Economic Development and Labour in April of this year,

and is responsible largely for aviation policy matters.

To his left is Mr Sim Kok Chwee, the Director of the

Pacific Asia Travel Association, known by its acronym in

the industry as PATA. He has previous experience

working for the Singapore Airport Terminal Services,

which is sort of the equivalent of HACTL in Singapore.

He has also done stints with the Singapore Tourist

Promotion Board's Public Relations Department, and Air

Mandalay in Myanmar where he worked as marketing

manager.

In 2000 KC joined PATA as Director, South Asia, and

worked with PATA's members in the Indian subcontinent.

KC's work in PATA includes aviation-related development,

carrier relations, buyer programme for the PATA Travel

Mart and providing administrative support to the PATA

Honours Committee.

To his left is Colin Campbell, Director, Global

Transportation and Infrastructure Investment Banking for

Citigroup. Colin joined Citigroup in 2000 as the

Director of the Global Transportation and Infrastructure

Investment Banking team based in London. He is


26







currently responsible for transportation and

infrastructure investment banking, in particular

transportation advisory and airport privatisations.

He has extensive experience in assisting local and

national governments worldwide to structure and

implement asset sales as well as significant buy-side

and financing experience in that realm. In addition he

has advised in relation to the establishment of a number

of infrastructure funds. His airport transaction

experience includes engagements in respect of Sydney

Airport, the Schiphol Group, Aeroporti di Roma, the

Argentinian national airports system, London Luton,

Hannover Airport and the airports of Thailand.

To Colin's left, your right, is Gilbert Chow,

General Manager, Hong Kong, for Northwest Airlines

Incorporated. Gilbert has more than 37 years of

experience in the airline industry, and does not show

any of those years, I might add. Currently, he holds

the position of General Manager for Hong Kong for

Northwest Airlines, responsible for Northwest's online

services from/to Hong Kong. He also holds positions as

the Vice Chairman of the Board of Airline

Representatives, the Vice Chairman of the Joint Council

of Travel Industry, and is a member of the election

economy for the tourism functional constituency. Before


27







Mr Chow's career with Northwest, he spent three years

with Cathay Pacific, based here in Hong Kong.

Howard Eng joins us from the Airport Authority,

where he is the Airport Management Director. Mr Eng

joined the Authority in April 1995 and was appointed

Director in December 2000. Before joining the

Authority, Mr Eng was Vice President of Operations for

Edmonton International Airport, and has more than

20 years of experience in the airport business involving

project development, planning, retail and operations.

With that, I would like to kick off the discussion

here by letting Mr Fung, our representative from the

government, to perhaps give us a broad outline of what

the objectives behind listing the airport may be and

what kind of benefits the government sees in the

privatisation process.

WILSON FUNG: Thank you. Earlier on, from the presentation

from Kerrie, we heard about the Australian experience,

and one of the drivers of the privatisation initiative

is debt reduction from the government's point of view.

In the case of Hong Kong, I am pleased to say that money

is not the primary objective that we are after. We are

not doing this for the money.

Hong Kong has been very successful aviation hub up

to this moment, but we all know that we are facing


28







a highly competitive with lots of very, very good

airports coming up in the region. So we believe that by

privatisation we will be able to improve the corporate

structure of our Airport Authority, to enable it to

introduce much stricter market discipline in its

operation, and also to avail it to international

capital, to enable it to develop its commercial and

market initiatives to list. This is the major objective

behind the whole privatisation exercise.

Of course, the reason why we have at least up to

this stage decided on an IPO instead of a trade sale

route is because we believe that, through privatisation

through an IPO route, the people of Hong Kong would be

able to share the successful achievements of this very

valuable asset of Hong Kong; we would like to enable the

people of Hong Kong to take a good share of it. Of

course, by putting this valuable stock on our stock

market, it also has the secondary objective of improving

the choice of our stock market.

With all these objectives in mind, at the moment we

are planning to go through the second stage of

a consultation exercise, to talk more and discuss more

thoroughly within the community to see whether all these

objectives are also shared by our community, and if so,

we will take this exercise forward.


29







RUSSELL BARLING: Thank you, Wilson. I wonder if you could

perhaps address what you see the benefits from a user

perspective as being of a privatisation.

WILSON FUNG: "Users" meaning passengers?

RUSSELL BARLING: Passengers, airlines.

WILSON FUNG: I think, from a passenger point of view,

everybody is looking for an efficient airport. The

Hong Kong IA is already a very, very efficient and very

well-managed airport, but we always look for better

service all the time. By converting into a privatised

entity, we hope that the future management of this new

entity will be able to provide much better service to

our airport users, and to think of much more different

commercial initiatives, so that coming to Hong Kong is

not just using our airport as an airport; it will become

an experience for travellers, for consumers, and they

could use Hong Kong not just as an airport alone. So

I think from the user's point of view it will be a good

advantage for them.

RUSSELL BARLING: Wilson, you say that the objective is not

primarily financial, of the privatisation initiatives

that we are undertaking right now. Would you be able to

take a privatisation proposal back to LegCo that did not

fully recover the $37 billion investment that the

government has in the airport so far?


30







WILSON FUNG: Talking about the valuation, I think this is

a very complicated issue. Whether we will be able to

get the maximum valuation for this exercise depends on

a lot of factors, including, for example, the general

economy of Hong Kong, the market sentiment, et cetera,

et cetera. But what is important from the government's

point of view is that if we were to put a proposal back

to LegCo, we believe that the whole institutional set-up

that we are going to put back to LegCo is something that

we could be sure that it actually provides the

environment for a good operation to operate.

Also, the package must also be convincing to the

potential investor, that they are not going to put their

money into an investment which actually ultimately

either has too much government control, for example, or

too little control. So we must strike a good balance

before we can come up with a package that we can bring

back to LegCo.

Of course achieving the book value I would say is

the minimum that we are going to achieve, but of course

on the upside we hope that by the end of this whole

exercise we will be able to come up with a much higher

valuation than we are seeing here today.

RUSSELL BARLING: Thank you, Wilson. Mr Chow, Gilbert,

I wonder if you can perhaps shed a little light on these


31







issues from a user's perspective, from an airline's

perspective. What would your concerns be from a user's

point of view, being one of the bigger -- and also being

a representative member of the Board of Airline

Representatives which of course use the airport -- what

are the key issues for you in privatisation?

GILBERT CHOW: Our major concern remains that we have to

recognise that the airport is a de facto monopoly.

There is no other airport we can go to. So it is very

important, like Kerrie was saying just now, we must

reach consensus or agreement with the future Airport

Authority about charges, which remains one of the major

operating costs for the airlines; and also, in case

there is no agreement that airlines and the future

Airport Authority are able to reach at the end of the

day, there would be a regulatory regime that we can

appeal to. That is ultimately the government's

responsibility. And there must be a framework whereby

this final arbitration will be equitable, and we will be

able to strike a good balance with all the stakeholders.

RUSSELL BARLING: Have your members, in their experience

with airports that have been privatised, seen

a tendency, either up or down, in terms of pricing

pressure on user costs at the airports? Have you seen

a tendency for privatisations to raise the cost for your


32







members doing business, or is there a tendency, a trend,

there at all?

GILBERT CHOW: That is our major concern, and also I believe

that we should look at different airports with different

localities. No single territory will be the same as the

others. I think we will need Kerrie's help in sort of

telling us how the Macquarie Airports manage to strike

this fine balance between the users and the Airport

Authority because, at the end of the day the objective

of both organisations, both entities, would be a bit

different, one being on the Airport Authority side to

maximise the investor return, and on the other end of

the spectrum the airline would like to have a very

competitive cost structure.

So that is our major concern, that in future there

should be a good regulatory regime, that the users, not

just the airline but also vendors, will have a good sort

of channel or mechanism for discussing and negotiating

the final cost and price structure.

RUSSELL BARLING: Thank you, Gilbert. Now, Mr Sim, from

PATA's point of view, another I guess user angle?

SIM KOK CHWEE: I guess our concern is that air travel is

already one of the most regulated industries, together

with travel and tourism. Airports seem to be enjoying

a fairly high margin of profitability, whereas airlines


33







tend to have very thin margins, for quite a long time

already. Airlines and passengers have been taxed to

death for a long time. At the same time as the new

privatised Airport Authority delivers on promises to its

investors, it must balance that with its obligations to

the travelling public, to the airline community and to

the business community.

RUSSELL BARLING: Thank you, Mr Sim. Howard, if you could

give us a perspective from the management company's

point of view, I would appreciate it.

HOWARD ENG: I think, as the Airport Authority, as the

operating company for the airport, our first focus

obviously is safety. Safety is a key concern for

travellers, and especially now security, after 9/11. So

the focus of the airport, always we must keep in mind

that in order for a airport to be an international hub,

a gateway, first and foremost you must ensure that it is

safe, that it is secure. At the same time, we are

entrusted by the government of Hong Kong, who is our

major shareholder, which is indirectly the citizens of

Hong Kong, with a wonderful asset called an airport,

which they have invested $36 billion in. We must also

create value for the shareholders, for the amount of

money they have invested. So, as a company, we are

always looking at ways to enhance value to our


34







shareholders and ensure that whatever we are doing we

enhance safety and security at the airport.

How do you enhance value? I think a key way of

doing that is to ensure that users of the airport

receive value for whatever they pay for, and we

progressively, over the past six to seven years that we

have operated the Hong Kong International Airport, have

looked at ways to enhance value and enhance the

experience to the users of the airport, be it

passengers, shop owners or airlines. I think we have in

the main achieved that very well. We have been voted

the best airport four years in a row, in a Skytrax

survey. I think we have also been voted the best cargo

airport in the world by Cargo Magazine.

So I think, as an operating company, we have done

what we set out to achieve, which is to ensure that we

do not compromise on things like safety and security,

and at the same time generate a good experience for the

users of the facility, which will then allow us to

enhance value to our shareholders. Whether we are

a statutory body or a privatised company, I think the

management objective will remain the same.

RUSSELL BARLING: I guess the question would be, then,

Howard: do you believe that your ability to enhance the

value that you offer to your customers will be enhanced


35







itself in the post-privatisation environment?

HOWARD ENG: I think enhancing value to your customer I do

not think is completely dependent on whether you

privatise or not. I think you need to determine what

the customer wants, what the customer needs are. You

must deliver the type of service and product in a timely

manner to the customers.

What we see in a privatised AA, what we see will

help us, is to enhance and institutionalise the

commercialisation that we are carrying through today.

It will probably again help us enhance the transparency

of the company, and it also will actually allow the

Airport Authority probably to access a new source of

funds in the future, because I think as Kerrie

mentioned, airport infrastructures are huge capital

investments. They are also lumpy, they are not spread

evenly, so it is always welcome that we can access

different sources of funds so that we can improve the

facilities in order to meet the increase in demand

traffic there will be in the future.

RUSSELL BARLING: Thank you. YK, in moving forward -- this

is not just for you, YK, but I will direct a question to

you in a second -- moving forward, obviously security is

a very important constant, whether you are in a publicly

managed facility or a privately managed facility. Part


36







of the responsibility for security, both ground security

and security in the air, and safety issues in the air,

falls in the lap of the CAD, the Civil Aviation

Department. I wonder, YK, if you could give us some

thoughts on how you expect a privatisation process to

impact upon security and safety issues from your point

of view?

YK LEUNG: In order for Hong Kong to become an aviation hub,

we need safe and efficient air transport systems. In

fact, the role of the CAD is really to set up

a framework to make sure the airport is safe and

efficient.

In this area, basically we carry out a safety

oversight programme, which basically meets a few

objectives. The first one is the international

obligations which is in the international civil aviation

organisation set-up, the standard and recommended

practice, the framework for us to follow. The other is

our role -- we have to satisfy our role and that means

we have a Navigation Ordinance to follow and Aviation

Security Ordinance to follow, which really make sure the

airport is safe and secure.

The other objective is really to be accountable to

the travelling public, who think that the government

should play a major role to make sure the private


37







sectors behave themselves, to make sure it is safe for

those innocent third parties.

I think now, although they have not been privatised,

we have already set up this kind of framework already.

No matter in the future if the AA goes to privatisation,

the role of the CAD and the role of the government

basically remain the same. We will play a very active

role in making sure there are good checks and balances

and also there is a role to play in the future.

RUSSELL BARLING: How about in terms of -- you obviously

advise the government on user charges, when they

increase, or if a decision is taken to increase things

like fuel surcharges that the airlines apply. Do you

see your role diminishing in that regard once the

management company becomes private?

YK LEUNG: I think in the future most probably the

government will also play an active role in AA

management. We, as the CAD, the executive arm of the

bureau which Wilson is working for, we are the technical

adviser to the bureau, and of course our role will not

diminish; we will still play an active role in providing

technical advice to our colleagues in the bureau.

RUSSELL BARLING: Thank you. Colin, maybe we could bring

you into the conversation here a little bit, with your

vast experience in matters of privatising airports.


38







I wonder if you could maybe give us a brief synopsis of

what kind of lessons there are to be learned from the

experience you have had with privatisations.

COLIN CAMPBELL: I think a lot of these issues have come out

already, from the various people on the panel.

Fundamentally, the government needs to be clear about

why it is privatising, the priority that is being placed

on the proceeds against other public policy objectives.

Here we have heard pretty clearly that the promotion of

local capital markets, the various other non-financial,

non-proceed objectives are pretty prominent.

I think what is absolutely typical is that during

privatisation preparation there is the time when the

regulatory system and the level of user charges to

airlines is examined very closely. I think this is very

helpful. It does not necessarily mean that user charges

are going to rise. There are some very, very prominent

examples where user charges have risen with

privatisation. Just ahead of the Sydney sale, as Kerrie

will have implied, there was a substantial increase

there in user charges. That is not because the

Commonwealth of Australia was seeking to rape and

pillage amongst the user community, nor amongst

investors, but rather that it was trying to set a clear

basis going forwards for what the charge level should be


39







and how the charge level was going to evolve over time.

So I think this is therefore a very useful time to

be having the public debate about who pays for aviation

infrastructure. All too often, because there is maybe

an informal system in place or because it is buried

within a mixture of consultation and ultimately

government departmental decision-making, it is not

actually clear whether there is a subsidy amongst the

airport business from non-aviation businesses to the

aviation business; it is not clear whether there is

a subsidy from government to users and ultimately to

passengers. The process of taking a look at the level

of charges, the process of taking a look at who is going

to pay for installed aviation infrastructure, but also

future development, is very, very important and very

helpful.

I do not get the sense in Hong Kong that there is

an intention to change fundamentally the level of

charges. I think it would be a very positive thing if,

sooner rather than later, everybody were to understand

that charges are pretty much where they are going to

remain.

What I do think there is an opportunity to do is to

look at the structure of charges, and the flexibility

that exists for the Airport Authority to compete,


40







because, yes, sure, a lot of what the airport does is

monopolistic, but not all of what the airport does is

monopolistic. We see in particular low-cost carriers

placing, in my opinion at least, an undue emphasis on

the level of airport charges in their decision-making as

to where they will base themselves.

Now, if there were more flexibility to not

discriminate against the core customers but instead to

implement off-peak pricing and to incentivise new

routes, so therefore a package available to everybody,

I think that would be very helpful, in the competitive

positioning of Hong Kong going forwards, particularly

versus the competition it is seeing from certain newer

facilities in Greater China.

RUSSELL BARLING: Kerrie, any thoughts?

KERRIE MATHER: Yes. I think, just responding to a couple

of things that Colin mentioned there: from Sydney's

perspective, I suppose our focus in terms of airline

charges has been, or working with the airlines, is very

much to regard it as a partnership, to try to grow

traffic through the airport so that we are improving our

commercial businesses. We have not actually put up our

charges since we bought the airport. The only charges

that have increased are as a result of mandated security

costs.


41







I think there is a lot of focus on charges but, if

you think about it, Sydney's charges are actually not as

a passenger. The average ticket price out of Sydney is

$900. We are not actually talking about material

amounts here. And the airlines recently have imposed

$22 on a ticket price for the fuel charge. So I do not

think the charges actually make a material difference to

people's propensity to travel. What does actually drive

people's propensity to travel is actually the economy.

So we see GDP as a much bigger driver of growth in

passengers than airline charges per se.

Another interesting point that Colin makes is a role

for differentiated charges for low-cost airlines. If we

look at the Bristol and Birmingham examples, low-cost

airlines, particularly in Europe, lends itself -- it is

probably like Asia, where it lends itself very well to

the low-cost model, because most destinations are within

a three-hour flying time, so they can keep their planes

in the air as much as possible. They want it to be at

uncongested airports so the regional airports in the UK

are ideal for the low-cost airlines. It allows them to

actually turn their planes round within 20 minutes.

They look for frequencies throughout the day, their

check-in procedures are much simpler. Everything about

them is much more efficient than your normal scheduled


42







or full service carrier. So it does warrant having

a differentiated charge that reflects that.

Typically they are bringing leisure-based passengers

to tend to spend more at the airport, they are not

provided with food and beverage on the flight, they do

not have access to gate lounges. So they will buy a cup

of coffee before the flight, a magazine or whatever. So

those are the sorts of things that need to be taken into

account in looking at the total charges package.

RUSSELL BARLING: You mentioned earlier that Sydney of

course, in my understanding from people I have spoken to

about your pursuit of the airport is that you were

fairly aggressive about the pursuit of going after

Sydney Airport, obviously because it was an attractive

investment opportunity for you.

I wonder how Hong Kong stacks up against Sydney in

terms of attractiveness, from what you know, and also,

is it valued differently in terms of the trade sale, or

if you want to make it attractive for a listing, are

there different aspects, different things you have to

get in place for those two separate processes?

KERRIE MATHER: I think Hong Kong is a wonderful airport.

It really is a lovely airport, wonderful facility, great

service capacity. But a listing, difficult for me to

say because we would only invest in unlisted airports,


43







and the main reason for that is we are looking for

airports where we can have very strong commercial,

strategic, financial input into all the decisions, and

in a listed airport you cannot do that. You are

prepared to pay a price, actually implement the business

plan and therefore drive financial performance more

strongly. It is just very different.

You can see that -- there is a range of multiples

that actually apply to listed airports. Europe is

probably the best example, where you have Fraport at

four times multiple, through to BAA, which is the UK

airports, at eight and a half times multiple, and there

are a range of drive those multiples, so maybe that is

the best place to look at in terms of the relevance for

Hong Kong.

At one end of the spectrum you have BAA that has

an enormous capital programme ahead of it with Terminal

5 development and so perhaps that is what is driving the

eight and a half times multiple. At the other end of

the spectrum you have Fraport, with four times, which is

not free float, it is only 30 per cent free float. It

also has a large capital programme ahead of it. It has

an EBITDA margin of 25 per cent. I am not sure what

Hong Kong's is, but Sydney's is 80 per cent.

So there are a range of factors that would impact


44







the multiples that you would actually list at. But

efficiency, the capacity of the airport is important,

the capital structure of the airport, your traffic

growth projections. So an airport that has a stronger

ability to grow will attract a higher multiple.

RUSSELL BARLING: Thank you. Colin, if I can go back to you

for a second. I am interested -- you briefly touched on

it before -- but what, in your experience, happens to

user charges when the decision is taken to privatise?

You said that it does not necessarily have to be

an upward impact on user charges, an increase in user

chargers. But what is the environment that

a privatisation then creates on most things, like

landing fees and the rest?

COLIN CAMPBELL: The privatisation simply creates the

environment of the exercise for clarifying who is paying

for what and who will pay for what in the future. In

the case of a greenfield airport, something that is

being constructed, I cannot see worldwide examples of

how it is ever going to be possible to recover the full

construction and start-up costs of an airport facility

of the size of Hong Kong.

Just to throw in a couple of examples, the big

greenfield airports that have been built in Europe under

privatised conditions are the new international airport


45







in Athens, which opened 18 months ago, just ahead of the

Olympics there. There you have seen the Greek

government and various European supra-national bodies

putting in approximately 55 per cent of the costs of

getting that facility up and running, as subsidy, not as

loan but as subsidy.

The other prominent example in Europe is BAA's

London Stanstead, which although it had been around

since the war was substantially redeveloped in the late

1980s. Although one might argue it did not have any

obvious impact on the government in terms of a direct

government subsidy, the fact is that the regulatory

system in the UK for BAA allowed a enormous

cross-subsidy to flow around London from Heathrow and

Gatwick.

Ultimately, somebody's got to pay, and I think what

is very useful is this debate about, one, is there going

to be recovery or an attempt at recovery for the

installed base in this greenfield project? I am saying

personally I do not think that that is credible.

I think one will get a long way there, but precedents

elsewhere suggest that one will never get the full way

there.

But secondly, and I would say more importantly,

looking forwards, who is going to pay for incremental


46







development of those facilities? That is much more of

a question about regulatory structure, which perhaps we

can touch on later.

RUSSELL BARLING: Actually, let us touch on it fairly soon.

Wilson, before I open to questions from the floor,

I would like to direct this to you: Obviously there is

and will be a lot of focus on user costs and how they

are regulated in the post-privatisation environment.

Does the government believe that the present regulatory

model which is governing that for the airport is

suitable in a post-listing environment?

WILSON FUNG: First of all, very few people actually know

that under the existing regime, under the Airport

Authority Ordinance, our Airport Authority enjoys

virtually full autonomy in terms of price setting. What

they have to do is just submit their price proposals to

ExCo and as long as they are fair and do not infringe on

any international rights and obligations, ExCo has
an obligation it approve it. So currently, it enjoys

full autonomy.

Whether this same regime will be suitable for

a privatised environment is something we are looking

into. Throughout our first round of informal

consultation, we have had so far a lot of people

expressing concern that for a privatised organisation,


47







entity or company -- whatever you call it -- to allow it

to continue to enjoy full autonomy, in terms of price

setting, may not be so appropriate.

So what we are looking into, and actually we take

some advantage of borrowing experience from Australia

and from other countries where they have already

privatised their airports, we believe that a new

economic regulation regime is necessary. That regime

must be built upon the basis that there must be

a mechanism that allows the future airport company to

have a mechanism where they can discuss and finally have

a consensus with the airline community and airport users

on the level of charges.

That mechanism should also provide certainty over

a certain period. It cannot be an annual exercise where

you have to have a rough debate every year on what

source of percentage increase can happen in the

following year.

The mechanism should also include an appeal

mechanism, whereby, for example, if a consensus cannot

be established among all the key stakeholders, whether

there should be a panel chaired by independent personnel

who can make a final judgment on the level of charges.

Of course, within that mechanism, there are also

more elaborate and objective criteria, like, for


48







example, how Hong Kong's competitiveness can be

maintained, in terms of considering any changes in user

charges, et cetera.

So all these are being worked out at the moment.

I do not believe that by copying what we have now will

be suitable for a privatised environment in the future.

But exactly what that mechanism will be is something

that we are working on at the moment. We will be having

another round of consultation very soon.

RUSSELL BARLING: Thank you. With that, I would like to

open up to questions from the floor.

Q. Russell, my name is Anthony Teo. I am from Andersen &

Partners.

I direct the question to Kerrie Wilson and Colin.

In the regimes you deal with, and yours is a trade

sale, 100 per cent; his is going to be an IPO. At some

stage, an IPO is less than 50 per cent -- some more than

51 per cent. The issue of golden share on behalf of the

government, that has to deal with issues of national

interest.

Governments, as we see them, we know them, but then

they change. So when you have a conservative government

that is very pro-privatisation and later you get a very

liberal government which is very anti-privatisation, the

impact of how that is exercised will impact


49







shareholders' values. How would you address an issue

like that?

RUSSELL BARLING: Who do you direct that to?

Q. Kerrie, Wilson and Colin.

RUSSELL BARLING: Shall we let Kerrie go first?

KERRIE MATHER: From the investment perspective, I think

that has a significant negative impact on a golden

share, on the value. I suppose what that says is

a government retaining -- whether it is a minority or

a substantial stake in an airport, says that they have

not fully embraced a privatisation model.

So I think from an investor perspective, you have to

be happy being in there with a passive stake. In an

airport, you are very much at the mercy of a government

that might actually have an agenda of the government of

the day. So you are being driven by those agendas.

So I think it would be very difficult to extract any

sensible value out of the airport on that basis. And we

would not be attracted to a sale where that was the

case. That would not fit our model.

WILSON FUNG: I think we have to strike a balance between

achieving maximum valuation, as opposed to the final

set-up or final institutional arrangement that the whole

community would accept. I think Hong Kong is, in many

ways, quite different from other European or Australian


50







experiences in terms of privatisation.

Our airport, as pointed out by other speakers, is

a virtual monopoly. We do not have any other airports

for our users to choose. It is a virtual monopoly in

Hong Kong. It is also a very valuable asset to the

Hong Kong government.

Our airport is also a very young airport. At the

moment, our operating capacity is something like

45 million passengers that we could handle in the next

five to ten years. If we continue to invest, we would

be able to take our capacity up to 87 million. We still

have a long way to go in terms of developing this

airport into a mature airport. At the moment, we are

still a fairly young airport.

So I think the whole community are expecting the

government to continue to play a role in terms of taking

care of this valuable asset. So for us, at this stage

to put up a proposal of a trade sale or even an IPO of

100 per cent may not be easily accepted by our community

and also by LegCo, for example.

We have also some very useful and helpful

experiences of the MTRC, where we also did

a privatisation there. Also, the government retains the

majority shareholding for the time being. We were still

able to achieve a very good valuation and also the


51







response from the market was also very good. There was

an over 30-odd times over-subscription.

So there are good experiences in the Hong Kong local

stock markets to look into this type of stock, quality

infrastructure stock in Hong Kong, that we are not too

worried about, that we still continue the majority

shareholding, which will adversely or substantially

affect the valuation of this eventual IPO.

COLIN CAMPBELL: It is worth maybe explaining a little bit

about what these golden shares were and perhaps trying

to comment in particular on what Kerrie said about the

investor reaction to them.

Broadly, they were packages of reserved powers that

related to corporate governance and sometimes as well to

safety and security issues. They reflected both

an uncertainty on the part of government and, in that

sense, I absolutely agree with what Kerrie said about

perhaps not fully embracing the privatisation model.

But I think, at the same time, they reflected the

national strategic importance that government placed in

gateway aviation infrastructure. The time that the BAA

golden share was constructed, which was 1986, there had

not been an IPO of an airport before.

Looking around the world, the model of ownership of

airports is very different. In the US, you have


52







a not-for-profit structure. So the idea of creating

this privatised monopoly was not without concern.

The BAA golden share was never invoked by the

government, any of the rights that existed under it.

Earlier this year, the European Court of Justice, in

fact, made its invocation illegal and has required the

UK government and a number of other European governments

to actually unwind the various rights that exist.

I think, as Wilson said, the government here shares

that appreciation of Hong Kong Airport as being

centrally, strategically important. It is pretty clear

that there is a complex set of arrangements which are

evolving between the government as owner at the moment,

to the government stepping back and being in a position

of policy maker and regulator.

Whether that evolves through something that is going

to be called a golden share or whether we call it the

wider package, that is just, frankly, nomenclature. But

I think it is understandable that there is a certain

complexity of arrangement, as these changes take place.

Finally on the market point, I think that the

investor sentiment is a lot more mature now. I think

investors understand the airport business and the

differences between the attractiveness of different

airports and different models and different rules that


53







relate to them much better than they did, say, five or

ten years ago. I think there will be a pretty rousing

reception for Hong Kong from the stock market.

Obviously, one needs to avoid things that will be

seen as contentious and dangerous from an investor

perspective. But it is pretty clear that the

government's intention, even if it has some package of

reserve powers, and even if it retains a majority stake

at the time of IPO, its intention is to further sell

down and I think that will be clear to investors.

Therefore, I am not convinced, to be honest, that this

is anything other than pretty normal. I am not sure

that there will be a particular problem or there should

be any problem at all with impact on IPO pricing because

of these evolving relationships with the government.

RUSSELL BARLING: Thank you, Colin. Any more questions?

Q. Yes. I would like the idea of a very focused major

shareholder to drive any project or asset like this,

because when you have common ownership, everybody owns

it and everybody is responsible, so nobody is

responsible.

However, I think the reality is that such

a privatisation will not happen in Hong Kong and

something like an IPO will have to happen if the

government needs money. Surely it does need some money


54







to plug the very large structural deficit we have. So

I think that is reality.

Also the reality is that privatisation is a dirty,

dirty word as far as our Civil Service unions are

concerned. The government has tried many things to

privatise the Hospital Authority, but the moment the

word "privatisation" comes out, it is killed.

So my question really to members of the panel is:

Where do you think we stand as far as labour

relationships are concerned? Is privatisation a goer at

all in Hong Kong or do we have to find some other way,

like an IPO? Maybe you can give some pink forms to all

your staff to keep them quiet.

RUSSELL BARLING: Sir, with such a topical question, it

might be helpful if you were to direct that at one of

our specific panel members here, because I am sure

everybody else will just look away if you do not.

Q. Maybe Wilson should be the last one.

RUSSELL BARLING: Go ahead, Wilson.

WILSON FUNG: On the labour issue, I think, first of all, at

the moment, as you probably know, the Airport Authority

is already operating on prudent commercial principles.

The whole set-up of the Airport Authority, including

Mr Eng and Mr Barker in the audience, they are not civil

servants. Not one single staff member within the


55







Airport Authority is a civil servant. They are all

private-sector recruited. So at the moment, the Airport

Authority is already operating like a private company.

So in terms of privatisation, actually, as I see it,

as I explained to LegCo many times, very few labour

issues would arise because, at the moment, they are

contracting out most of their business and they are

operating on a very lean structure. They only have 900

staff. I do not believe that privatisation would have

any major impact on the number of staff they are going

to employ or the value of the contracts they are going

to let out because, at the moment, they are operating

like a private company already.

So to answer that labour issue -- on the deficit,

I am not going to argue with you, Peter. Of course,

privatisation will generate for the government some

revenue, but we could do so by many other means.

As you know, before we talked about IPO today in

this forum, a few months ago, we already embarked on

a capital restructuring exercise for the Airport

Authority. As a result, the government has already got

back HK$6 billion, even without doing anything. By

improving the capital structure of the AA, we already

have some money back, and it is quite a hefty sum of

money.


56







So we are not doing the rest of the privatisation

exercise, maybe selling 10 or 20 per cent, just for the

sake of another HK$6 billion or HK$7 billion. We are

doing it because we want to have a much better structure

for the AA to continue to develop.

RUSSELL BARLING: Thank you, Wilson.

We have to wrap things up for session 1. We will go

into session 2. I do encourage everybody that had

questions that we did not get to, please hold on to them

and we will try to address them at the end of the next

session. Enjoy your coffee.