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As Hong Kong emerged from the Asian recession in March 1999, the then financial secretary, Donald Tsang, announced a landmark real estate development in his annual budget speech pointing Hong Kong towards the 21st century.1 “Cyberport”, as the US$2 billion project was to be known, would create a strategic cluster of quality IT and IT-related companies that would help Hong Kong become the leading digital city of the region.

The day before this announcement, the Hong Kong government (the government) had signed a letter of intent with the Pacific Century Group (PCG) by which the latter was granted the exclusive right to design, develop, construct and market the Cyberport development (the development), which would be a combination of office space, retail space, a five-star hotel (Cyberport) and a residential development (Bel-Air). Under this agreement, the government would supply the necessary land and build the infrastructure while PCG would be responsible for all construction costs, and bear any financial risk associated with the project. In accordance with the contributions by the government and PCG, a profit-sharing scheme was set up to determine how the profits on the residential portion of the project were going to be split.

This public-private partnership (PPP) agreement was subjected to much criticism from both the private and public sector. Many see the development as an ordinary property development deal between the Hong Kong government and the influential Pacific Century Group, and one that infringes on the free market principles that are the standard in Hong Kong.

A group of ten major property developers suggested an alternative that would include a competitive bidding process in line with regular government land policy.2 Under this proposal, the government would put the land allocated for the residential portion up for public tender or auction, and use a share of the proceeds to fund the construction of the other parts of the development. This proposal stated that the government could realise a land value of up to US$2.37 billion by auctioning the residential part of the land allocated to the Cyberport development, as opposed to injecting the land into the PPP in exchange for a share of possible future returns. The government rejected the proposal. Was it right in doing so, or would this proposal have given the government the opportunity to realise the project without abandoning its policy of “positive non-interventionism” while at the same time giving it a larger, almost risk-free return? 3

In this research note we will work towards answering this question. First we will describe the Hong Kong real estate market. Next, there will be an introduction to the principals in the PPP. Lastly, we will take a closer look at the Cyberport development and its finances.
1 The ten developers were: Hang Lung Development Co. Ltd., Henderson Land Development Co. Ltd., HKR International Ltd., Hongkong Land Ltd., Hysan
2 Development Co. Ltd., New World Development Co. Ltd., Shun Tak Holdings Ltd., Sun Hung Kai Properties Ltd., Swire Properties Ltd. and the Warf Holdings Ltd.
3 An expression made famous by former Hong Kong financial secretary, Sir Phillip Haddon-Cave, which he defined as: “I have frequently described the government’s economic policy stance as being one of ‘positive non-interventionism’. Not surprisingly, perhaps, some have claimed that this is really just a fancy term for laissez-faire or, less kindly, that it covers up a ‘do-nothing’ approach. This is simply not so: positive non-interventionism involves taking the view that it is normally futile and damaging to the growth rate of an economy, particularly an open economy, for the government to attempt to plan the allocation of resources available to the private sector and to frustrate the operation of market forces, no matter how uncomfortable may be their short term consequences”.
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