Mouse Droppings: Hong Kong ’s Fading Magic Kingdom

Hong Kong, which prides itself on being Asia’s foremost free enterprise haven, now has the dubious distinction of pioneering two unique forms of state intervention. It is home to the world’s first and only government-owned Disneyland theme park and it is set to become the only place in the world to tailor its immigration regime to admit visitors for one destination only – the Disney theme park.

The latest move involves issuing special permits to migrant workers living in the adjacent Chinese border area of Shenzhen that would allow them to enter Hong Kong for the sole purpose of visiting the theme park. As matters stand, visitors to Hong Kong from Mainland China need permits to enter the Special Administrative Region and these can only be obtained from their home provinces. Migrant workers, even those living next to Hong Kong, have to travel back to their place of origin to obtain these permits. However the new scheme, which could affect up to 12 million people, waives this necessity as long as the visitors to Hong Kong confine their travel to specially organized theme park tours.

No where else in the world is there an immigration regulation that permits entry to a territory exclusively for the purpose of visiting a single commercial tourist attraction.

It is becoming increasingly clear why such an extreme measure was introduced. The park has never met its attendance or revenue targets and is now embroiled in negotiations to reschedule the massive debt incurred by the park’s operating company. The bulk of this debt comes from a HK$5.6 billion ($718 million) loan granted by the Hong Kong government prior to the park’s opening. The US-based Walt Disney Company is meanwhile seeking to renegotiate commercial loans totaling HK$2.6 billion, which were acquired in addition to the government grant.

Although the Hong Kong government holds 57 percent of the theme park’s equity, with options to increase this holding through debt-for-equity swaps, the government refuses to disclose details about the financial status of what is effectively a state-controlled company. The only available information arises from its partner, the US Disney company, which needs to file periodic reports to the US Securities and Exchange Commission.

Its latest filing to the SEC, made last month, reveals that Disney has failed to make progress in debt refinancing talks with the government and that the park is continuing to operate at a loss and is failing to meet its attendance targets although details of these figures have not been disclosed.

It is not clear why agreement cannot be reached as the September 30 deadline for repayment of these loans looms. Disney says it has offered to assume responsibility for the debt but has not revealed what conditions are attached to this offer. It has, however, provided the park with a temporary respite from having to pay management fees and royalty payments.

Although both sides refuse to say why the refinancing talks are stalled, it is likely that the Hong Kong government is balking at Disney’s hardball negotiating tactics, which were highly successful in the run-up to the park’s establishment and resulted in Disney obtaining 43 percent of the operating company’s equity while only having to put up some 10 percent of the investment. The government’s contribution, including infrastructure investment, amounted to HK$27.7 ($3.5 billion). And Disney’s sweet deal included an upfront 5 percent royalty payment for all food and merchandise sold in the park and a 10 percent royalty on admission charges. On top of this it was paid 2 percent of revenues as a management fee and had provisions for incentive payments ranging from 2 to 8 percent of the operating profit.

Before concluding its Hong Kong deal the Walt Disney Company tried to secure a similar agreement with the Queensland government in Australia but this foundered. At the time, then Queensland Premier Peter Beattie said, “Only Goofy would have picked up such a deal.”

Goofy was, however, alive and well in Hong Kong in the person of Donald Tsang. Then the territory’s financial secretary and lead negotiator, he is now the SAR’s Chief Executive. Negotiations took place against the backdrop of the Asian financial crisis, SARS and desperate government attempts to revive the flagging economy. Hong Kong was dealing from weakness – and it showed.

When the deal was concluded, the government issued a long and breathless press release claiming that “Hong Kong Disneyland will attract millions of tourists a year, create thousands of jobs, enrich the quality of life, and enhance Hong Kong's international image.”

It said that the territory would receive a net economic benefit of up to HK$148 billion in the 40 years that followed the park’s opening in September 2005. It also estimated that 18,400 new jobs would initially be created, rising to 35,800 over a 20-year period. There has been a notable silence on the outcome of these predictions, but there was an embarrassing admission that the planned 5 million visitors in the park’s first year of operation fell short by 400,000 and since then no attendance figures have been released.

At the time of the park’s launch the government ridiculed suggestions that the venture’s Achilles’ heel was its small size – the smallest Disney theme park in the world – which could discourage visitors and kill off the kind of repeat business that has been the key to success for Disney elsewhere. It is now widely recognized that size does matter and that Hong Kong is suffering as a result.

Moreover, whereas Disney signed non-competition agreements with its joint venture theme park partners in both Paris and Tokyo, it appears that the Hong Kong government negotiators either forgot or were unsuccessful in obtaining such a pledge for the SAR version. As a result talks are well underway with the Shanghai municipal government for the establishment of a park that is likely to draw visitors from the Hong Kong park’s principal catchment area – mainland China.

It is not too soon to say that this venture has entered the realms of debacle and it still begs the question of why a government that prides itself on leaving businesspeople to get on with business should have thought it was smart enough to step in where real business feared to tread.