26 Executive management’s report > International expansion Consultancy contracts in 22 cities Beijing Metro Line 4 public-private-partnership Shenzhen Metro System Line 4 BOT project MTR CORPORATION LIMITED ANNUAL REPORT 2004 27 New London office Pursuing operating franchises in Europe Joint-venture bids in UK international expansion bringing our expertise to overseas markets 28 Executive management’s report > International expansion > Major step forward for Beijing Line 4 with the initialling of Concession Agreement > Planning and seeking Government approval in progress for Shenzhen Line 4 > European strategy focuses on train operation franchises Mainland China for the construction of Phase 2 of Line 4 In the Mainland, our investment strategy of the proposed Shenzhen Metro System focuses on the major cities of Beijing, and the operation of the entire line for a Shanghai and Shenzhen. In these cities, term of 30 years. the demand for mass rapid transit Line 4 is a 21-kilometre double-track systems and hence potential for profit, is urban railway running from Huanggang, greatest due to expanding populations, at the boundary between Hong Kong heightened environmental concerns and and Shenzhen, to Longhua New Town in deteriorating traffic conditions. In Shenzhen, with a total of 14 stations. It executing this strategy, the Company has will form the major north-south railway adopted a gradual approach and is corridor linking Hong Kong SAR, through leveraging the experience and expertise Shenzhen Special Economic Zone with When completed, Beijing Metro gained from one project to others. Line 4 will be the main north- potential connections to other parts of south rail artery of Beijing MTR’s drive to invest in suitable projects the Mainland. Phase 1 of Line 4, an in the Mainland saw two landmark approximately 4.5 kilometre section developments during the year. between Huanggang and Shouniangong, is targeted for full completion before the In January, the Company entered into an end of 2008. Some sections of Phase 1 Agreement in Principle for a Build- are already complete and being operated Operate-Transfer (BOT) project with the by Shenzhen Metro Company Ltd. Upon Longbeicun Station Shenzhen Municipal People’s Government completion of Phase 2 by MTR’s project company in late 2008, both Phases 1 and 2 will be operated by MTR. Total investment Beigongmen Station in Phase 2 by the project company is estimated at RMB 6 billion (HK$5.7 billion), which will be financed by equity Yiheyuan Station Yuanmingyuan Station Chengfulu Station MTR CORPORATION LIMITED ANNUAL REPORT 2004 29 capital of RMB 2.4 billion (HK$2.3 billion), with BIIC and BCG to form a PPP company opportunities in Beijing, Shenzhen and with the balance by non-recourse bank for the investment, construction and Shanghai, in line with those cities planning loans in Renminbi. The project will be operation of the Beijing Metro Line 4. This future extensions to their metro networks. implemented based on our proven “rail line will form one of the core transport In addition to the three cities which are and property model”in Hong Kong, with infrastructure projects for China’s capital. our principal focus, MTR has explored associated property developments opportunities in cities such as Chengdu, The Agreement in Principle sets out the comprising 2.9 million square metres of Wuhan,Tianjin and Nanjing. framework of the partnership for the commercial and residential space along investment, construction and operation the railway. Europe of the line subject to a Concession Our growth strategy in Europe differs Since signing the Agreement in Principle, Agreement with the Beijing Municipal from that in the Mainland in that it MTR has set up a project office in Shenzhen People’s Government,for a term of 30 years. concentrates on train operation to undertake preliminary design of the In February 2005, together with our franchises, which do not require railway and property works. We have also partners, we initialled the Concession significant capital expenditure. MTR will entered into negotiations with the Agreement with the Beijing Municipal seek to enter into joint-venture Shenzhen Municipal People’s Government People’s Government and now await partnerships with experienced local firms on a Concession Agreement and other approval from the National Development to bid for operation and maintenance related agreements which would give and Reform Commission. The total franchises and contracts as the MTR’s project company the right to investment for the project is approximately deregulation of railway industries in construct Phase 2 and to operate the RMB 15.3 billion (HK$14.4 billion), 70% of Europe continues to unfold. The entire line, together with the right to use which, comprising mainly land acquisition Company will initially focus on the highly the Phase 1 facilities. These agreements and civil construction works, will be deregulated UK market, and build on this are subject to the approval of the funded by the Beijing Municipal People’s experience to explore other Central Government. Government. The partnership project opportunities in Continental Europe. Planning for property developments company will invest approximately RMB 5 In November, the Company signed a associated with the Shenzhen Line 4 billion (HK$4.7 billion) to finance the joint-venture agreement with the UK’s project achieved good progress, despite a provision of trains and related electrical Great North Eastern Railway Holdings delay in the approval process as a result and mechanical systems, and will be Limited to bid for a service contract to of the macroeconomic control measures responsible for the operation and operate and maintain the trains for the imposed by the Central Government. In management of the new line for a period Integrated Kent Franchise (IKF), with MTR October, a proposal for a sustainable of 30 years. owning 29% in the joint-venture planning concept for the Longhua MTR and BCG will each own 49% of the company. IKF is a suburban commuter Extension Area was submitted to and joint venture company, with BIIC owning network in Kent, southeast England received endorsement from the the remaining 2%. The joint venture operating through 179 stations, 1,600 rail Shenzhen Municipal People’s company will seek non-recourse bank cars and with annual revenue of about Government. A preliminary master plan loans to finance over 60% of the project £300 million. It will also include the high for the four development sites in this area with the remainder to be funded by speed railway service from the Kent Coast is currently under discussion with the equity capital. to London which will operate over the Shenzhen authorities, and we plan Channel Tunnel Rail Link. Since formally to submit this plan in early 2005, This new 29-kilometre underground December, MTR has been working to with target development completion metro line will run from Majialou Station pursue a similar opportunity for the from 2008 onwards. on the South Fourth Ring Road to the Thameslink / Great Northern Franchise, north west Haidian District and terminate In April, MTR signed a Memorandum of which serves London north and south of at Longbeicun Station, forming a main Understanding with Beijing Infrastructure the River Thames. north-south traffic artery of Beijing. The Investment Co. Ltd. (BIIC) and Beijing 24 stations along the line include major To support these initiatives, we opened Capital Group (BCG), both subsidiaries stops at Beijingnan, Xuanwumen, Xidan, an office in London in July 2004 as our of the Beijing Municipal People’s Xizhimen, Xueyuannanlu, Zhongguancun, first step towards building a permanent Government, with the intention of Yuanmingyuan and Yiheyuan. presence in Europe, where we aim to forming a public-private-partnership for partner with local companies to pursue the Beijing Metro Line 4 project. After in- The Company is carrying out railway similar new business opportunities. depth discussions, in December we assessments of other investment entered into an Agreement in Principle.