The Corporation was required to "perform its functions with a view to achieving a rate of return on the assets employed in its undertaking, and in accordance with ordinary commercial criteria, is satisfactory."

It accepted an invitation from the government to build and operate a light rail network in the north western New Territories serving the local public transport needs of the future residents of the Tuen Mun and Yuen Long new towns.

[13] The use of single deck trams was ruled out on the grounds of capital cost because of the need to purchase a larger number of vehicles to provide the same total passenger carrying capacity for the system.

As explained by the Secretary for Transport in the Legislative Council on 5 July 1978, the government had asked the then Mass Transit Railway Corporation (MTRC) to plan the construction of a mass transit light rail system on HK Island more or less along the alignment of Hong Kong Tramways' existing line, which had been in operation since 1904 and lacked the capacity to handle anticipated future public transport demands.

The main sticking points in the negotiations appear to have been the amount of profit that the company would have been allowed to earn from the Tuen Mun light rail network and the granting of property development rights.

Subsequent discussions with other possible interested parties also failed and in 1984 the government turned to the KCRC to invite it to take on the construction and operation of the light rail network.

The chairman of the KCRC, K Y Yeung, highlighted this in his statement made in the 2002 annual report, by pointing out that "our main source or revenue has always been and will continue to be fares.

In October 1998 KCR began work on the construction of an entirely new line of some 30.5 km in length, connecting the new towns of Yuen Long, Tin Shui Wai and Tuen Mun with urban Kowloon.

This was particularly important as it was recognised that the heavy capital investment in new railways would not enable the corporation to make a commercial return for a good number of years on what would become a far larger asset holding.

"The Corporation shall conduct its business according to prudent commercial principles and shall ensure as far as possible that, taking one year with another, its revenue is at least sufficient to meet its expenditure.

Known as the Kowloon Southern Link (KSL), the extension, with a new intermediate station at Austin Road, was completed and opened for passenger services on 16 August 2009.

Despite increasing passengers, heavy interest expenses on borrowings and depreciation charges on the new assets pushed net profits down to close to zero by the end of 2007.

On the one hand, in the current period of economic deflation, there is considerable pressure on public transport operators not to increase fares so as to share the burden of the community.

"[20] Of critical concern to the corporation was the gradual erosion of its cross-boundary market, where for many years it had enjoyed the majority share and was able charge a fare premium.

In the same announcement the government said that, as a separate issue, the chief executive in Council had also instructed the Administration to consider the feasibility of merging the MTRCL and the KCRC into a single rail company.

[22] Following five years of negotiations and the enactment of the Rail Merger Ordinance after its passage through the Legislative Council, the KCRC ceased to be a public transport operator on 2 December 2007, becoming thereafter primarily simply the holder of railway assets.

The Corporation's key responsibilities include overseeing and fulfilling its obligations with respect to its service concession with the MTRCL, raising new financing as needed to service its debts (over HK$10 billion was raised in 2009), ensuring compliance with its obligations under a number of cross-border leases covering its rolling stock and other assets, and being the majority shareholder for West Rail Property Development Limited, which is responsible for the development of some 13 residential property sites along West Rail.

[24] KCRC also retains a 22.1% shareholding in Octopus Holdings Limited (OHL), which was first established in 2005 and is owned by the major public transport operators in Hong Kong.

[25] Excluding non-cash depreciation charges, the corporation enjoys a cash operating profit, which should continue to increase over time as reflected in MTRCL's variable annual payments.

[26] [5][6][7][8][9][10] After the announcement in June 2002 that KCRC had won the bid to design, build and operate the SCL, the corporation proceeded with detailed planning for the project.

While expected to make a profit to comply with its mandate under the KCRC Ordinance, because the corporation remained 100% government owned, it faced at the same time strong public and political pressure not to increase fares.

Hyde forged new and productive working relationships with the KCRC's Mainland counterparts and Ministry Officials leading to a number of co-operative projects on both sides of the border.

Enacting legislation to separate the functions and duties of the chairman and the CEO was intended to put in place an effective governance structure to ensure transparency, accountability and responsibility.

[32] Unfortunately, as set out in a paper by the legal adviser to Hong Kong's Legislative Council, the amendments did not spell out in detail the duties and functions of the chairman and the CEO, or at least their responsibilities.

It rapidly became publicly evident, however, that there was personal tension between the two, exemplified by Michael Tien's denial that he was a good friend of K Y Yeung when the two briefed the media in 2002 on the findings of the investigation into the Siemens incident.

In Lai's letter he stated that little had changed since 2001, and that the necessary distinctions between the different but complementary roles of the executive and non-executive functions frequently became blurred, with the chairman interfering in how day-today matters should be handled.

The KCRC managing board convened a meeting on 14 March 2006 and decided on a set of measures to more clearly delineate the work of the chairman and CEO.

The reason given in the government's paper to the Legislative Council's Panel on Transport was because Lai, being the CEO, felt that he should be held responsible for the acts of his staff.

A civil engineer, James Blake, the former Secretary for Works in the Hong Kong Government and afterwards the Senior Director Projects of the corporation until the end of 2003, took over as the chief executive officer (not acting) at age 71.

Lai in his book states that at the board meeting held on 15 March 2006, the first item on the agenda was the appointment of Blake as the deputy CEO responsible for the proposed rail merger, which was raised by the then Secretary for Financial Services and the Treasury on behalf of the government as the sole shareholder of the corporation.