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POLICY ADDRESS 2002-03
BOOSTING CONFIDENCE AND ENHANCING GOVERNANCE

¡§A confident house is built on top of solid foundations using a bold plan¡¨

We are pleased to present our views on the key issues of concern to the business community ahead of your Policy Address to the Legislative Council and the people of Hong Kong on January 8 next year. We do so in the hope that they will be taken into consideration in preparing this Address. As it will be the first Policy Address of your second term in office and the first under the new system of accountability at the highest level of Government, we believe it is imperative that it delivers the right messages in terms of both content and tone.

Priority Concerns

This year, our key concerns (some large, some smaller, all important), which we believe should be comprehensively dealt with on January 8 and on some of which we give greater details later in this letter, include:

• Improving the Economic and Business Climate
• Enhancing Community Confidence
• Improving the Governance of Government
  • Achievements of the New ¡§Accountability System¡¨
• Fiscal Issues and the Budget Deficit Problem
  • Reducing the Size of Government
  • Speeding Up Civil Service Reform
  • Reducing Business Costs and Red Tape
  • Instituting Welfare (CSSA) Reform
• Reducing Unemployment and Enhancing Employment Prospects
• Enhancing Hong Kong¡¦s Role as a Financial Centre
• Better Strategic Planning and Cross-border arrangements
• Devising a Population Policy
• Improving Education, Training and Re-training
• Improving the Environment and Reducing Pollution
• Enhancing Hong Kong as an IT Centre
• Implementing the New Housing and Land Policy
• Raising the Arts and Cultural Level
• Begin the Process of Reforming Health Care

Although not all these priority issues are traditional Policy Address matters, and some perhaps might be more properly covered in the March Budget statement, we believe that in the current circumstances they should be the subject of comment in your January 8 address for the reasons explained below.

Opening Remarks

It is now more than twelve months since I last wrote to you as Chairman of the Chamber to make some suggestions on issues that might be useful for your Policy Address 2001. Re-examining that letter recently I realised how much has changed since then and how much, too, has remained the same. It was an odd feeling reading a letter penned not long before the events of September 11, 2001 in the United States and the subsequent onset of global concerns about of terrorism. It helped put into better perspective what is truly important and what is less so. This feeling was further heightened by the recent events on the Indonesian Island of Bali and direct impact they had on some Hong Kong citizens, their families and friends. It is clear that the world is a more uncertain place than it was just a little over twelve months ago. This heightened level of uncertainty globally will no doubt be taken into account in the drafting of your Policy Address for January 8, 2003.

On a more positive note, the past twelve months also brought with it some major changes that, although of an entirely different nature, should be beneficial to the Hong Kong SAR and its further development. The first of these was the Mainland of China¡¦s historic entry to the World Trade Organisation (WTO) in December of last year after 13 years of negotiations. The second was your own re-election for a second term as Chief Executive and your decision to establish, from July 1 this year a new system of accountability for principal officials in the Hong Kong SAR Government. We are strongly of the view that both WTO entry for the Mainland of China and the implementation of the accountability system for your second administration will be positive for Hong Kong¡¦s future.

These major events aside, there have been some lesser developments closer to home, which still need the attention of us all. Although many of these domestic issues were addressed in our letter last year, they remain concerns today. While having seemingly turned the corner from negative growth, the Hong Kong SAR remains sluggish and the confidence of Hong Kong people, especially in their government, needs to be restored. Unemployment is higher than it was even a year ago and individual and household incomes are under pressure. Domestic demand and investment remain weak. The property market, despite some tentative and sporadic signs of renewed interest, is still doing poorly, although it could improve now that the Government¡¦s new land supply and housing policy is in place. The Government¡¦s own financial position is still of great concern, with another large Budget deficit predicted for the current fiscal year. Our own view is that there is a very real need for an Address with the primary aim of restoring the confidence of the domestic Hong Kong consumer and investor. Without a return to confidence on the domestic scene we cannot expect a significant and sustainable recovery in the near term.

Despite the Government¡¦s best efforts, the Administration¡¦s vision for the future of the Hong Kong SAR in its own right, in its relations with the Mainland, and in its projected role as ¡§Asia¡¦s World City¡¨, do not appear to have captured the public¡¦s imagination. Nor do they appear to have inspired the community to greater efforts in making them a reality, although we suspect this may have more to do with Hong Kong residents¡¦ concentration on ensuring their own immediate economic welfare than to general disinterest in the SAR¡¦s longer term prospects and positioning. Worse yet, the community does not see tangible evidence that the SAR Government is doing enough, at a fast enough pace, to make the vision a reality. These attitudes do, however, serve to underline the importance of your forthcoming Policy Address in setting in context Hong Kong¡¦s prospects and delivering a strong and positive message on the SAR¡¦s future role, regionally and globally. Some specifics with illustrations on how you intend to lead Hong Kong from here to our goal are needed to build this confidence, including examples of what the Government has done so far. And your visit to Beijing just now with some concrete results go a long way towards boosting confidence in our mainland relations¡¦ impact on the economy here.

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Policy Address and the Budget

As your address will pre-date the Financial Secretary¡¦s Budget statement by less than eight weeks, we suspect that there will be greater overlap between the contents of the Address and the March Budget. It has always been the case that the broad policy framework set in the Policy Address has been, rightly, followed in the Budget. However, the larger time gap between the two in past usually meant some changes were included in the Budget to take account of intervening economic developments. This year, too, the implementation of your accountability system and the appointment of a new team of Policy Secretaries will doubtless mean a series of new policy initiatives for your address and these will necessarily have to be taken into account in the Budget.

It does seem to us, however, that the announcement and implementation of new policies by your Administration will have to be tempered by the constraints imposed by the overall economic situation and the adverse fiscal situation the Government needs to address. Indeed, we believe the need to urgently address the Budget situation is something that should be highlighted in both your Policy Address and, more obviously, in the Financial Secretary¡¦s Budget statement in March. It has been made all the more necessary by the blow-out in the Budget deficit in the opening months of the current (2002-03) fiscal year and the concerns this has caused in the financial markets. This has, in turn, led to warnings from such groups as Standard & Poors about the potential downgrading of the Hong Kong SAR¡¦s credit rating. Whilst we might disagree with their analysis, we cannot ignore their opinions and the potential market impact they may have. This applies locally, but perhaps most importantly, internationally.

Against this background, we have been somewhat re-assured by recent statements by Government officials, which seem to suggest that a more resolute approach is being taken by the Administration to the problems facing the Hong Kong SAR and the policies required to offset, or overcome, them. In particular, we welcome the recent statement from the Secretary for Housing, Planning and Lands, Mr Michael Suen, on future housing policy and land supply arrangements. We noted, too, the rather lengthy remarks made by the Financial Secretary, in answer to two Legislative Council questions in October. In one of these he appeared to set out quite succinctly the Government¡¦s immediate priorities for policy action. In the other, he indicated that the new Policy Secretaries are already being required to trim their expenditure plans for the next financial year (2003-04) and for the years through to 2006-07. We believe this sort of tougher approach to spending is long overdue, and much more needs to be done.

We will attempt to address the key issues for your January 8 Policy Address, as we see them, in the remainder of this letter. Some of the issues raised are quite clearly related more to the Government¡¦s annual Budget than to the Policy Address. However, we believe this is appropriate given that the two events are occurring within a few weeks of each other and there may be substantial policy linkages between the two, especially regarding the expenditure side of the Budget. (For the future, we recommend spacing out the two speeches as in previous years.) Revenue issues are probably dealt with more properly elsewhere. Where we have touched on Budget issues, however, they will be further fleshed out in our regular Budget submission to the Financial Secretary, which will be delivered to his office shortly.

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Given the continued weakness in economic and business conditions, especially domestic conditions, we would like to hear your views on when you expect a return to sustained growth in the local economy and what further can be done to restore community confidence in the future of the Hong Kong SAR. As part of this overview, we would welcome a clear and succinct step-by-step explanation of how we can achieve your vision of the future of the Hong Kong SAR economy. As noted above, the Financial Secretary gave some views on the Government¡¦s economic objectives in a lengthy answer to a question in the Legislative Council on October 9. In his answer, Mr Antony Leung outlined eight broad objectives of Government policy - that is, to:

• Maintain Hong Kong's institutional strengths
• Reduce the size and involvement of Government
• Promote closer economic ties with the Mainland of China
• Upgrade human resources
• Investment in infrastructure
• Promote developments in high-value-added sectors
• Develop relevant sectors to provide broad-based employment
• Stabilise the property market

Although many of the ideas presented in this agenda are not new, the presentation seemed to suggest that the Government's thinking on many of the issues has advanced significantly in recent months. Properly drafted in detail, it is the sort of agenda the business community could well support. We believe it would be a positive step if your Policy Address could elaborate on these objectives and how they might be quickly and specifically implemented to have positive impact on the local community.

You have yourself highlighted the need to continue to restructure the economy and to move up the value-added chain. At the same time you have stressed the need to concentrate on our core strengths, including four economic sectors as future engines of growth. They are:

• Financial Services,
• Logistics,
• Tourism, and
• Professional Services.

You have also emphasised the need for everaging on the synergy between Hong Kong and its hinterland, the Mainland of China, particularly the affluent Pearl River Delta area? We believe the Policy Address should update the community on the progress made in pursuing these aims and objectives, which has found resonance in the community in the past year or so but which may differ across the border. What the business community wants to hear now from you are some specific steps on how the Government will put the concept of Pearl River Delta integration into reality so that they can take advantage of this integration. Your recent visit should give you a fair number of things to announce to the public on this front.

Finally, the business community is very encouraged to hear that there is concerted effort on the part of both the SAR and the central government to conclude by June 2003 a phase of the Closer Economic Partnership Arrangement (CEPA) with the Mainland. This is welcome news, especially since after hearing that China had agreed to a framework with ASEAN to proceed with a Free Trade Agreement, there was further erosion in the confidence of the business community in the ability of the SAR Government to run with an issue in a timely manner. We now hope that the negotiations proceed swiftly and concludes with a content with includes zero tariff for Hong Kong goods and early service liberalization in a number of service sectors for Hong Kong companies, plus some investment facilitation measures. The business community applauds you for the progress you made in Beijing this time and now will support you to reach your stated timetable goal.

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After two recessions in five years and a modest recovery now underway, there remains a need to enhance confidence in the Hong Kong SAR economy, especially amongst domestic consumers and investors. The SAR Government must show leadership in restoring confidence. There is an overwhelming need for all of us to work together to restore confidence in the Hong Kong SAR ¡V to give us the confidence to move ahead with vision and purpose and to be able to make the tough decisions needed at a time of continuing economic difficulty. This task cannot be left to one section of the society, although our leaders have a special role to play in showing the way. For success, it really needs the commitment of government, business, and every individual citizen.

For Government, this means providing the vision and leadership to inspire the business sector and the broader community to greater heights. There must be sound policy initiatives and the Government must be resolute and determined in seeing them through. But if adjustments must be made because of changing time and circumstances, the Government should not shy away from making such adjustments. You have to convince the people that the Government knows how to be firm and be responsive at the same time.

For business, creating a new sense of community confidence means creating new business strategies, seeking out new business opportunities (especially on the Mainland, but globally as well) and providing new job prospects. It also means creating new opportunities for Hong Kong people, especially our talented and up-and-coming young people, through new investments, here and on the Mainland, through advances in research and development and through education, training and retraining programmes.

For the wider community, restoring confidence means showing a renewed faith in Hong Kong¡¦s future, through making the sacrifices now that will make for a better longer-term future, and through opening up to the world to make Hong Kong a truly international city.

We believe your Policy Address on January 8 should be an important step in this new process, this ¡§confidence-building partnership¡¨. The Address should call for a full commitment from all sectors of the community ¡V government, business and every citizen ¡V to do their utmost to lift confidence in Hong Kong.

Governance in Government

The Chamber strongly advocates good governance in all areas of endeavour. For the Hong Kong SAR Government, the new accountability system is a step in the right direction, but more needs to be done to enhance administrative efficiency and effectiveness in your Government¡¦s second term. One of the objectives of the new accountability system is to generally enhance the system of governance in the Hong Kong SAR. However, we are concerned that the present pressure for improved governance in the corporate sector may prove to be ineffectual unless material improvements are made by relevant government and regulatory authorities in their own governance. Good governance requires sound decision-making, effectiveness and efficiency in service provision and transparency. The setting of public performance targets gives every sign of itself improving performance. In the Policy Address on January 8 we would like some comments on the improvements that have been made, and are being made, in terms of overall governance within the public sector.

Accountability System

By the time your Policy Address is delivered to the Legislative Council, the new team of Policy Secretaries appointed on July 1 this year will have been in place for over six months, enough time to settle into their portfolios and to assess existing policies and produce new initiatives they deem desirable for the Hong Kong SAR. We hope that any changes to existing policies and any proposals for new policy directions will be fully spelled out in your January 8 address. Having had their expectations for the new accountability system built up to a certain degree, the Hong Kong people will be expecting tangible results from the Government. Some of these new policies, or changes to existing policies, may be related to the eight objectives outlined above and include some of the issues we comment on below, which we believe require urgent and immediate action from Government. In your Policy Address on January 8 we would like your assessment of the working of the accountability system to date, especially in terms of policy initiatives, reform of the civil service practices and better overall governance. One issue we do regard as a potentially important outcome of the new system is greater co-ordination between departments.

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The business community is extremely concerned about the worsening Budget deficit situation, the failure of the Government to cut costs and address the significant revenue shortfall. If these matters are not addressed, the SAR¡¦s reputation for fiscal integrity will be put at risk. In his Budget statement for the 2002-03 fiscal year, the Financial Secretary outlined a programme to bring the Budget back to balance by fiscal 2006-07. However, there was little detail on how the Government proposed to achieve this and little has been forthcoming since. Worse, in the intervening period, the projected Budget deficit has risen dramatically from the $45 billion deficit forecast in the 2002-03 Budget papers for this fiscal year. Spending has continued to increase and revenue collection has deteriorated. Left unchecked, rising expenditure could eventually result in a far heavier burden on taxpayers. Yet there has been little advance in terms of spending cuts beyond the modest civil service pay reductions that came into effect from October 1 this year. We note than in an answer to a Legislative Council question on October 9 this year, the Financial Secretary did announce that Directors of Bureaux are required to achieve a saving of 1.8 percent on operating expenditure on existing and new or improved services in 2003-04. In addition, they must achieve an additional saving of one per cent each year from 2004-05 to 2006-07. Good news, but the savings achieved in this process would be relatively modest and too little to help.

We have never been advocates of higher taxes, but if, after a genuine workable plan of spending reduction is put forward, there is still a structural deficit, then we will have an open mind toward increasing revenue. Currently, on the revenue side of the Budget, little has been done aside from the land departure tax due to be implemented from April next year. This would add a modest $1.8 billion to revenues. The Government is also looking at a further revenue shortfall, at least in the short-term, with the suspension of land sales under the new land and housing policy. But again, the priority should be on cutting expenses, not on reaching into the pockets of businessmen who are struggling in this difficult period. We will gladly help and share the burden, but only if the priority of spending cuts is devised first. As for the form of ¡§sharing¡¨, we will have an open mind, although I would like to give you the recommendation that even though a consumption tax is not appropriate to implement at this time, it may be prudent to begin to put a framework in place just in case the decision is made at a later date to implement a consumption tax.

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In short, we look to you to spearhead a plan which describes in specific terms how the expenditures can be brought down in time. Only then should there be any consideration of broadening and increasing revenue income--if there continues to be a demonstrable deficit.

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As part of the process of addressing the fiscal imbalances problem, the Government needs to rigorously re-assess its entire range of activities and step up its efforts in terms of outsourcing the supply of services, privatisation, corporatisation, and the use, where possible of public-private sector partnerships (PPP). A concerted programme of outsourcing, privatisation and public-private sector partnerships would not only produce efficiency gains in those enterprises ¡§set free¡¨, but also reduce the government¡¦s role in the economy and help balance the Budget over time by reducing government outlays.

As far as funding capital projects is concerned and better management of some recurrent spending, the use of public-private sector partnerships should be more often considered. The introduction of comprehensive legislation to require that all potential projects be tested for private sector participation might be too bold a step at this time, but the Government might consider a number of Pilot Schemes in areas such as Housing, Education, Infrastructure and Aged Care. Perhaps even Prisons and Hospitals might be considered. Similar schemes are now widespread and successful in other countries like Australia and UK, both of which have had deficit problems and found the need to stimulate their economies and capital markets. This might be seen as an alternative to privatisation in making Hong Kong as competitive as possible, with a leaner Government. Overseas experience suggests that a competitive and widespread structured market place for such partnerships would offer considerable benefits for Government, taxpayers, the public and the private sector. There are however significant barriers to creating this marketplace in Hong Kong. Overcoming them will require concerted joint effort from the public and private sectors and, of course, clear direction from the Administration.

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Civil Service Reform

The Government must continue to step up the pace of Civil Service reform, including restructuring the Service, reducing numbers and re-engineering internal practices. It must tackle remuneration issues, especially pay level differentials with the private sector and the overall pay review mechanism. With Budget spending now accounting to 23 percent of Gross Domestic Product (GDP) and the Government still employing 180,000 civil servants, there is an urgent need to tackle the size of the service, the scope of its activities and expenditures and total remuneration costs.

There is a need to change the civil service mindset to a service- and results-oriented one. This will require some tough decisions, with new thinking and new ideas at the top with the new principal officials providing the vision and political will. Fewer regulations and better work practices would lower costs and reduce the civil service. There would be improved productivity, greater efficiency and less tangled relations between different departments responsible for various aspects of the implementation of government policies. Ultimately, such changes would also result not just in a more efficient government, but a slimmed-down government, both in terms of its overall expenditures and the numbers of civil servants it employs and whose wages and benefits account for by far the largest share of overall spending. All this requires reviewing the Government's work processes, setting project priorities, re-organising government structures and re-engineering procedures, as well as outsourcing work and considering further corporatisation and privatisation, so as to raise efficiency and minimise wasteful resource use, and achieving the objective of ¡¦small Government¡¦.

We support the Financial Secretary¡¦s direction to Directors of Bureaux to cut spending 1.8 percent in 2003-04 and 1 percent each year for each of the next three years. But more needs to be done. There needs to be a system of continuous saving. Bureaux Directors must be encouraged to grasp the initiative themselves and take the sometimes politically difficult decisions to achieve these savings. The cuts suggested by the Financial Secretary should be seen as the minimum sought, not the maximum required. We also strongly support most of the recommendations of the Task Force on Review of Civil Service Pay Policy and System, include a benchmark study of pay levels between the public and the private sector, as well as careful consideration of the application of the present annual pay review mechanism. The staff appraisal system must also be upgraded to enable the adoption of pay for performance rather than annual increments and promotions based on length of service. In the longer term the government must also pursue decentralisation of pay administration and allow departments greater freedom to make employment and remuneration arrangements to suit their needs. Ultimately, we agree that there also needs to be a ¡§clean wage¡¨ policy with benefits incorporated into base pay.

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All existing regulations on the Government¡¦s books - and all new ones ¡V should be thoroughly assessed to determine if they are truly necessary and if they are not then they should be done away with. (Singapore now has a ¡§sunset clause¡¨ on all new regulations, which requires that if there is not a positive act of renewal of new regulations after a given period, they automatically lapse.) The Government also needs to address outdated work processes, ensure that individual government departments work together better, make work practices more flexible and aim for pay for performance. There must be a thorough and ongoing effort to help reduce business costs, including the elimination of red tape and excessive bureaucracy, and speeding up licensing and government approval processes. Maintaining the SAR¡¦s business competitiveness is vital. But this is not just a matter of cutting the costs to business. Unnecessary regulation and red tape also has a cost to government in terms of monitoring and enforcing its application to business and the broader community.

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There is a need to re-examine the increased costs of government-funded welfare payments, both in terms of the short-term (unemployment and single parent family claimants) and longer-term considerations (the size and ageing of the population). We support deflation adjustment for CSSA payments, but we strongly believe that old age allowance should be kept to preserve the dignity of the elderly who may not want to be subjected to a means test. We are pleased to see the government working on this aspect of its spending programme and would like to hear more of the Government¡¦s intentions in the Policy Address.

Population Policy

We welcome the Government¡¦s study of population matters, but believe the study needs to be completed more quickly than is currently planned. The issues of future population size and structure, workforce talents, education levels required, and availability and immigration policy should be urgently and comprehensively addressed. To be a world class city, we must take advantage of the vast human resources across the border. This is why we advocate investment Mainland immigrants, one-day shopping visas for Shenzhen residents, and aggressive recruiting all over China. Included in a comprehensive population policy must be the concept of portable social benefits, which might serve to delay right-of-abode requests by some.

Both the Government and private sector have reacted to record levels of unemployment with short-term programmes to ease the situation. New jobs continue to be created, however, sustained economic growth and better education and training are required to ensure long term unemployment does not become endemic.

Education, Training and Re-training

There needs to be a thorough and comprehensive assessment of the SAR¡¦s education (and labour force talent) needs in its rapidly restructuring economy, including the availability and skills of College graduates for the new business environment and the requirements of business. We have written at some length on these issues in previous submissions. Our concerns continue. Emphasis should be both on secondary schooling (are we teaching the right skills for a rapidly changing economy?) and tertiary (are standards slipping and do our graduates have the right skills for the high-tech world?). Concerns remain regarding the standards of English amongst the younger members of the community and whether enough emphasis is being placed on good business English skills. (The Chamber is doing its part with a Business Schools Partnership program which matches senior executives with local high schools to tell students how important English is.) Again, too, there was concern expressed about whether Hong Kong is doing enough in training and re-training programmes to upgrade the skills and knowledge of those already in the workforce, the process of life-long learning. The international community in Hong Kong is also concerned about the availability of places in international schools.

The key to higher education lies in the creation of centres of excellence, as prescribed in the Sutherland report. Only through excellence in our education system can we groom the meritocratic ¡§new elite¡¨ advocated by Mr Tung in his speech at the Hong Kong University¡¦s 90^th Anniversary Dinner. To be a world city, our top-tier universities must be made up of student bodies with an international mix, so as to attract the best students and nurture the brightest talents from all over the world, especially Mainland China.

The Government needs to move more rapidly on a whole of range of cross-border matters. At the broadest level this includes pushing ahead by June, as announced, with negotiating a Closer Economic Partnership Arrangement (CEPA) with the Beijing authorities. Closer to home, it includes the pursuit of greater economic integration within the Pearl River Delta, better infrastructure planning, enhancing border crossing facilities, including people (and talent) movements both ways, and the enhancement of cross-border logistics. The 24-hour crossing at Huanggang is welcome news, and it should be extended to Lowu as soon as feasible. As we have said in previous submissions, the Chamber is concerned with both the cross-border planning processes themselves and their co-ordination. This refers to co-ordination both among SAR Government departments and between the various arms of the SAR Administration and their counterparts in the Pearl River Delta and southern China generally. There needs to be a common vision for the whole region shared by all. At a practical strategic planning level, a region-wide council to look at a common vision and a rough discussion of complementary roles is necessary, though preserving healthy competition. And that council should include the business elements from both sides of the border.

Strategic plans for Hong Kong¡¦s development, but especially for infrastructure and town planning can no longer take place in a vacuum. Cross border issues need to be taken into account, just as you did in your visit to Beijing. A concept such as the proposed bridge to Macau and Zhuhai can only be dealt with at the central government level, with Guangdong and us all providing key input. As far as Hong Kong¡¦s domestic transport situation is concerned, we believe there is an urgent need for the government to get the balance between road and rail priorities correct. We believe the Government should re-examine the organization and planning work of the Transport Department and the historical imbalance of emphasis there is between road and rail. We understand the importance of both, but suggest the balance should be shifted somewhat, to put them on a more equal footing at a policy and planning level.

The state of the environment and the level of pollution remain matters of very real concern to the business community. Although there have been some improvements, much more needs to be done. This issue also, of course, has its cross-border co-operation and fiscal (both spending and potential revenue) aspects. We believe the Government should commit to the promotion of environmental industries, both to help the environment and also to create jobs. This is especially true for environmental technology, not just jobs like rubbish collection. Hong Kong has the technology and ability to develop solutions that fit its unique situation (including population density) and any technology developed might be exported, creating more value for the SAR. There are also concerns that while Government at the highest level is committed to environmental improvement, the responsible departments at the practical level have rules and procedures that operate against the adoption of some of the leading edge technologies that have become available. The Government might consider establishing a special section within the EPD to study new environmental technologies and give an initial opinion on their usefulness in relation to Hong Kong¡¦s environmental objectives. This might speed up the approval process and encourage companies to look for new and smart products.

The whole issue of environmental improvement is central to Hong Kong¡¦s campaign to be, and be seen internationally as, ¡§Asia¡¦s World City¡¨. Apart from the general health of the community and attractiveness of the city, there is a hard business edge to the need for a better environment ¡V the need to retain and attract the best international talent to the Hong Kong business sector. This is particularly apparent to international businesses operating in Hong Kong that need to offer an attractive ¡§total package¡¨ for their staff re-locating to the SAR. The physical environment, along with good education and recreation facilities, cultural environment and the like, are often as important as financial incentives in this ¡§total package¡¨.

Hong Kong as a Financial and Wealth Management Centre

There must be a continued commitment to the SAR as a financial centre, with particular attention being paid to its development as a fund management centre. The SAR must be well regulated, but not over-regulated. It must meet the competition within the region. While Hong Kong has done extremely well in promoting itself generally as a financial centre, especially a banking, insurance, asset management, equities market and company and trustee service provider centre, there are some improvements that could be made to meet regional challenges.

This is especially apparent in the fund management sector and in establishing Hong Kong as a key centre for wealth management. For example, Singapore is now directly competing for fund management and trustee business (especially for non-Singaporeans) by offering tax incentives and tax exemptions from both Income Tax and Estate Duty for funds and trusts managed in Singapore, providing they are approved funds or trustees. In this context, a complete review of the Hong Kong Estate Duty regime is necessary. In particular, the ¡§Controlled Companies¡¨ part of the Estate Duty Ordinance should be repealed, as it is out of line with Estate Duty practice in other developed economies, and indeed its application has been patchy and uncertain. The increase in use of overseas holding companies, which might be administered in Hong Kong, would boost funds managed here and services relating to management of those funds and companies. Whilst the Hong Kong tax treatment of discretionary trusts administered in Hong Kong has in practice been relaxed, confirmation that offshore companies administering investments from Hong Kong, and if owned by a trustee, would not be taxed would bring welcome certainty to the position. This would reinforce the international perception of Hong Kong as a reputable and capable base for managing family wealth; global families are increasingly basing their planning on common law rules and establishing trusts to hold their investment assets.

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The collapse of the so-called dot.com boom has made information technology (IT) and e-commerce issues unfashionable, especially as investments. Yet, they remain essential to future developments in business of all kinds. The SAR cannot afford to fall behind in any aspect or application of new technologies in business or in entertainment. The overall Digital 21 strategy, launched in 1998, has our support, but we believe the Government¡¦s initiatives should move in a new direction, especially by emphasising the practical application to business of all the tools of the new economy. It is of some concern that despite the best intentions, Hong Kong has not been able to make measurable progress with its intent to become an IT hub in the region. With a small domestic market, the SAR does not stand out as a natural home for high growth technology companies. However, to be able to deliver the transformation to a service and knowledge-based economy, and achieve the aims of the Digital 21 strategy, it is critical that the SAR is able to build a successful technology capability.

The Chamber is concerned that where the Government has sought a supporting role, the current funding of industry development does not seem to have worked. Funds in many schemes designed to help SMEs and the technology business remain unallocated and the schemes themselves consume unacceptable revels of administrative cost. It is also questionable whether the civil service can develop the skills necessary to evaluate commercial technology proposals. Furthermore, government spending directly on technology is being cut back. The Government needs to look at new ways to support the growth and development of the IT industry, perhaps by using the corporate tax system, project seeding and building partnerships domestically and between Hong Kong companies in the industry and overseas companies requiring the skills local companies can provide. As we said at the beginning, the technology industry is in something of a slump and there is a real danger of the industry in Hong Kong substantially diminishing if further action is not taken. Even if Hong Kong does not need to strive to excel in R&D, a critical mass of technology skills locally would help us to apply R&D to the vast international marketing expertise that we have.

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The Government must continue its support for small and medium enterprises (SMEs) and the development of the local community economy, as outlined in previous Policy Addresses and Budget announcements. Encouragement and support for SMEs continues to be an important issue with Chamber members. We know the Government is well aware of this and has in the past year received policy suggestions from the small and medium sector. It might give a further boost to confidence in the SME sector if the progress made in government support of it could be outlined briefly in the 2003 Policy Address. This could be especially important in relation to SME start-ups in the IT and e-commerce sectors. As you would be well aware, the issue of finance is an especially important one for SMEs, yet in the years since the Asian financial crisis, banks have been increasingly risk adverse, adversely affecting the SMEs. The SAR¡¦s financial sector should be encouraged to taking a more entrepreneurial approach towards financing promising SMEs, especially in the new knowledge-based, IT sector of the economy.

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With the Government¡¦s new land supply and housing policy now in place, there is less that needs to be said on this issue. The new policy is a step in the right direction, but more needs to be done, with the Government ultimately withdrawing entirely from the housing market, over time. If we have any difficulties with the new policies, they are: First, that it will take time for those involved in property at all levels (including private buyers) to re-assure themselves that Government policy will not change again (and thereby expose them to risk not of their making). Second, that all nine of the policy initiatives are supply-side orientated and ignore the demand side. Third, that the new policies fail to take account of the new reality of the Hong Kong market in relation to the opening up of the Mainland, the availability of competitively priced investment properties there and therefore the greater choice that is now available to Hong Kong buyers. The latest policy does, however, bring greater clarity to the government¡¦s land and housing policies. We recognise that property, particularly residential property, is important as an investment and store of wealth and is therefore an important factor in determining the overall level of community confidence. However, it is also a determinant in Hong Kong¡¦s attractiveness and competitiveness as a business centre. From a cost perspective, it is yet another issue in Hong Kong¡¦s desire to be seen as ¡§Asia¡¦s World City¡¨. For international companies located in the Hong Kong SAR this applies not only to the costs of commercial rents, but housing costs of their employees as well. For local residents already in or seeking to enter the residential property market, it is a matter of whether to commit to the local residential market or not. It is a measure of the continued weakness in sentiment in this sector of the market that not even successive interest rate cuts and highly competitive mortgage lending have been able to lift the level of transactions in the market all that much.

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Hong Kong¡¦s Arts and Cultural Scene and the Third Sector

To be an international city, Hong Kong must offer for residents and visitors a world class arts and cultural scene which reflects the heritage and the positioning of Hong Kong as a world city in Asia. The Government should facilitate more services of the community by harnessing the volunteerism of the ¡§third sector¡¨. This is useful in building up our social capital, without any draw on the public purse. Art development should not be entangled in administrative and bureaucratic processes. It is important, therefore, for the government to confine its role to education and provision of infrastructure, and leave the operation of art and cultural activities to the community. A practical way to boost business contribution to the arts is to double the current profits tax allowance for arts sponsorship. This will incentivise businesses into enhancing more corporate involvement in the arts.

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The Needed Health Care Reform

The HKGCC advocates the introduction of progressive and broad-ranging reforms to Hong Kong¡¦s health care system. The goals of these reforms are to offer greater patient choice and reduce the reliance on public sector financing. To achieve such goals, there needs to be (a) a review of hospital and other charges especially the discrepancy between public and private sectors; (b) the further development of private sector provision of services; (c) the introduction of private insurance; and (d) the promotion of each citizen¡¦s responsibility for his/her health needs. The foregoing notwithstanding, those less fortunate should still be able to rely on a publicly subsidized system that provides a quality health service at a cost the community can afford.

We urge government to bring in these reforms because in the medium to longer term the existing funding model for Hong Kong¡¦s public health care system is simply not viable for the following reasons: First, are the pressures on the government budget and the continued rise in public health care costs which now account for 14.8 percent of recurrent public spending. Second, is an ageing population that will result in an increase in demand for health care services. Third, technological advances are likely to continue to increase the demand for and cost of health care.

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Conclusion

On behalf of the Chamber membership, I thank you for the opportunity to express our views on your forthcoming Policy Address. We look forward to your January 8 Policy Address with great anticipation, especially given the events of the past year and three months since your 2001 address. We are also looking forward to hearing the new policy initiatives being proposed by your new team of principal officials.