Policy Statement & Submission

Policy Address 2001

“SHAPING ASIA'S WORLD CITY IN A DIFFICULT GLOBAL ENVIRONMENT”

All of us at the Chamber appreciate the achievements of your Administration in the four years since the return of sovereignty to China. Economically, it has not been an easy time for the Hong Kong SAR, with many challenges stemming from the impact of the Asian financial crisis and its aftermath and, now, a broader slow down in the global economy to contend with. Despite this, we remain confident in the future progress and prosperity of the SAR.

Our theme this year, Shaping Asia's World City in a Difficult Global Environment, picks up on the Government's “branding Hong Kong” initiative and refers to the need to advance the SAR's role as an international city in an increasingly difficult global economic environment. Our submission begins with three brief commentaries, then moves on to some specific issues.

OUR PURPOSE
A Voice for Business
As in previous years, the purpose of this letter is to update you on our views ahead of your Policy Address to the Legislative Council on October 10. We have consulted widely with our members in its preparation and met with your Central Policy Unit (CPU) to talk over some of the key issues. For the Chamber, this exercise is very much a “bottom-up” process, with contributions from both our “local” and “international” members.

Being the last Policy Address in your historic inaugural term as the SAR's first Chief Executive, we appreciate that it will need to outline the many achievements the past 50 months. This is as it should be, given the SAR's significant progress since the return of sovereignty to China on 1 July 1997.

Nevertheless, the clear message from our consultations with our members and others is that the broad thrust of your address this year should be, above all, forward-looking and confidence building. While the gains made, and the obstacles overcome by the SAR in the past 50 months are considerable, there are still many uncertainties ahead and many issues to be addressed. These should be the focus of attention in the 2001 Policy Address.

Recommendation: We would like to see a overwhelmingly forward-looking and confidence-building speech rather than a retrospective one.
　
OUR VIEWPOINT
A Snapshot of the Issues
Looking back over our previous submissions, one thing that is immediately apparent is simply the number of issues highlighted. Priorities have changed over time as old issues have been addressed, or new concerns have arisen. But some issues seem to be perennial - the prospects for the economy, better education and training, the state of the property market and improvements in the environment and quality of life. They also include such things as relations with southern China (and the Pearl River Delta), Budget matters, continuing Civil Service reform and greater accountability within the Administration.

Others, hardly mentioned at the time of our submission on the eve of your first Policy Address, are far more prominent today, such as the development of the information technology sector, including all aspects of e-business, and building Hong Kong as a World Class City – Asia's World City. Challenges and opportunities loom large in the emergence of the Mainland onto the world stage, including its accession to the World Trade Organization (WTO). The opening of the West and the 2008 Olympics are also in this category.
Recommendation: This year's Policy Address should highlight these developments, with all their local and international ramifications.
　
OUR MESSAGE
Communicating Success
Emerging very strongly from this year's consultation process is the enormous appreciation there is of the SAR's progress since its inception. Another is the confidence there is in its future, despite the short term economic problems now being experienced. What our members continue to believe to be necessary, however, is far better communication of the SAR's successes and its strengths in the regional context and in relation to the Mainland of China, particularly on the global stage.

The “Asia's World City” initiative is viewed positively and as useful tool in promoting Hong Kong's strengths to the rest of the World and thereby positively influencing global perceptions of the SAR. Hong Kong may have fallen down in this respect in the past and needs to move aggressively to “sell” its advantages in the future. The SAR also needs to be more consistent in delivering a more positive message to a global audience. Such an approach would not only produce benefits in selling Hong Kong abroad, but also help boost domestic community confidence in the SAR's immediate future.

Recommendation: The Policy Address should build on the “Asia's World City” theme to boost local confidence and exploit what is a positive initiative in “branding Hong Kong” for the world market.
　
FIVE CORE ISSUES
The Economic and Business Situation
Recent media reports have suggested this year's Policy Address could well contain some innovative measures aimed at boosting economic and business confidence. These would be welcome. The deterioration in the general economic and business outlook since the beginning of the year is of serious concern to the Chamber. The dramatic slowing in the United States' economy, Japan's struggle to emerge from its decade-long economic lethargy, and the renewed weakness in Europe have all been important in this. So, too, has the marked deterioration in conditions in most of East Asia, outside of Japan.
The Hong Kong SAR has been fortunate, to date, that the economy of the Mainland of China has held up reasonably well, but the recent emergence of weaknesses in even the Mainland's external trade may not bode well for the SAR's economic outlook in the immediate future. We recognize that the continued opening of the Mainland economy offers great opportunities for the SAR, but we are also aware of the prospects for greater competition as a result. WTO entry for China will be particularly important in this equation.
There is little the Hong Kong SAR Administration can do about the external factors adversely affecting the local economy. However, there may be opportunities in stimulating domestic demand, for both consumption and investment purposes, improving Hong Kong's competitive position and addressing the structural imbalances that appear to have emerged, partly as a result of the development of the “new economy” and partly due to developments on the Mainland itself.
With hindsight, it is apparent that the performance of the local economy has been decidedly mixed since the Asia financial crisis first hit in mid-to-late 1997. The year 2000 performance was an aberration caused by the dramatic increase in external trade and the dot.com bubble. Domestically, there has been a persistent deficiency of confidence. Deflation has continued. The residential property market has remained weak. Savings have risen sharply and bank-lending for domestic purposes has been lacklustre (both despite lower interest rates). Retail sales have continued to be weak in dollar value terms, although volumes have risen (a result of greater throughout of merchandise at deflated prices).

Tourism numbers have recovered to record levels, but spending by visitors has remained poor, with spending per capita continuing to decline. Furthermore, increasing numbers of visitors (more than 35 per cent in the first half of this year) are not even staying in Hong Kong for one night. They arrive and leave the same day. This may add to Hong Kong's role as air transport hub, but it does little else to stimulate the local economy.

A key aim of this year's address should be to boost community confidence in the local, domestic, economy, encouraging consumers and investors to look beyond the immediate economic reversal to the healthier longer-term outlook. Consumers should be urged to put aside some of their caution, investors to look to the future with more confidence. The responsible authorities in the travel and tourism sector should be encouraged to find new ways, not just to attract greater numbers of visitors, but to get them to stay in Hong Kong longer. It cannot be left to the opening of the Disney theme park in 2005 to provide a boost to arrivals and increase travel-related revenues. All these are areas where sound domestic policies and the right encouraging words can make a difference, especially when they come from the Chief Executive.

In addition, the Mainland's imminent entry to the World Trade Organization (WTO), the opening of the Western regions, and Beijing's Olympic success in securing the 2008 Games are all quite positive for Hong Kong and China. So too, are developments in southern China, particularly the further development of the Pearl River Delta region and the greater economic co-operation between the SAR and the South China region. These positive factors should be used to instill greater confidence in the local community about Hong Kong's future. At the same time, it should also be stressed there is a need to work harder and be more innovative to meet potential future competition, from across the border, or elsewhere. I might add here that we know of plenty of Hong Kong businesses that have been doing just this quietly in the last two years. But others need more direction and more prompting - something our Chamber is constantly working on with workshops and training courses.

The Government of Singapore has certainly shown no reluctance to step in to reduce the burden on consumers and businesses, announcing a wide ranging package of economic measures on July 25 this year to reduce business costs, maintain employment and encourage greater levels of domestic economic activity. The Hong Kong SAR may well need a similar encouragement from Government if economic conditions deteriorate.

Recommendations: At least some domestic concerns may be able to be marginally alleviated by this year's Policy Address. This could be achieved by taking or even merely foreshadowing future Government (particularly annual Budget) initiatives aimed at boosting confidence, improving competitiveness, restraining domestic cost increases and showing conclusively that the Government has a well-defined strategy to see us through the downturn.
The Policy Address should highlight measures to give economic relief during the current slowdown. The Government should play a lead role in reducing the burdens on business and, to some extent, consumers, especially in the short-term, by continuing to run a relaxed Budget (at least temporarily). The recent cuts in interest rates should be emphasized, as should the improvements in affordability in the residential property market.

Consideration could be given to further tax breaks and rebates, not increasing fees and charges, encouraging new businesses and reducing the regulatory burden. The Government might also consider revising its policy on the use of the fiscal reserves to help stimulate growth, although the Budget is now heavily reliant on earnings on these reserves to enhance revenue.

More thought can be put into how to point the way for SMEs to take advantage of the positive developments in the next ten years in China's economic development.
　
Government Accountability and Political Development
　
A short Government statement on July 30 and subsequent newspaper reports suggested this year's Policy Address will report on the review of the system of accountability of principal officials within the Government. We believe this is timely, given the continuing community discussion about the administration's structure and accountability, and the pace and shape of the SAR's political development. You can imagine the frustration of the broad community when even the business community is concerned about whether its voice is listened to on some of the key issues that have recently faced the SAR.
Examples include the whole process of the implementation of the Mandatory Provident Fund System (MPF), the details of the comprehensive Securities and Futures Ordinance, currently before the Legislative Council, and the present debate over whether there should be a deposit insurance scheme for the local banking sector. Similarly, we have recently expressed its concern about Civil Service pay, especially the award this year of substantial pay rises to civil servants at a time when the private sector was continuing to pursue a policy of wage restraint. We urgently need a review of the present system, as well as a move towards pay-for-performance and productivity in the Civil Service, particularly at its higher levels.

Civil Service reform has also been much talked about, but business has yet to see much by way of tangible results in its own dealings with Government. It has been suggested to us that this reform programme is ongoing, and that the results are simply not being publicised by Government. We believe that if this is the case, it should be remedied quickly. Many within the business community would also like to hear more on the Government's timetable for discussion of future political reform, as outlined in the Basic Law of the SAR.

Yet another example of how the business community sometimes finds it difficult to discuss issues of policy with Government is the present consultation on new broad-based taxes for Hong Kong. While the report of the Advisory Committee on new taxes is now publicly available, the findings of the Task Force on future revenue needs are not. This leaves open the question of how the business community - and other interested parties - are supposed to be able to assess the need or not for a range of new taxes when it is not known whether they may ever be needed to boost future revenues.

In a broader context, we are concerned about the overall standing of Government and the Civil Service, within the widen community. It is certainly not hard to discern a fairly substantial level of dissatisfaction and, indeed, this is reflected in many opinion polls, including the Government's own, conducted by the Home Affairs Bureau. We do not believe this to be a healthy state of affairs in Hong Kong SAR society and that some effort should be made to counter this deteriorating image of Government in this year's Policy Address. A lack of confidence can feed on itself, producing counter-productive results.

Recommendations: The Policy Address should outline plans for the greater accountability of senior officials and review Civil Service reform. It should pledge Government to further control of costs, especially civil service wages, and announce a review of the Civil Service pay review mechanism. It should confirm that there will be no tax increases, or new taxes, without first showing a clear need for them and than they will not be undertaken during any economic weakness.
　
Education, Training and Re-training
Once again this year, the issues of education and training and retraining emerged as a most important matter of concern to our members. We have written at some length on these issues in previous submissions to the Administration, but this year some changes of emphasis are discernible. Members continued to express dissatisfaction with some basic aspects of the education system and standards, from primary through to tertiary level. But there was particular emphasis 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.

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. There is also a question over whether the SAR is doing enough to help people adapt to the demands of the new economy, with its knowledge base and higher technology emphasis. What is the SAR government doing about the developing mismatch of vacancies and skills?

Two new issues stand out. The first of these are the concerns being expressed about whether enough was being done by the Government to encourage the growth and development of international schools. The second is whether enough is being done to equip our current and future workforce for the knowledge-based, information technology economy and the rapid changes it is bringing to the workplace and society.

If the Hong Kong SAR is to maintain and enhance its position as an “international” city – Asia's World City – there is a need to put greater emphasis on acquiring an “international” or more “worldly” education for all. This includes support for international schools catering to both the children of expatriate employees and local people seeking an “international” education for their children. Many young people also need to be trained to meet the demands of the new economy of information technology and e-business. This is not just a matter of education and training of the specific “experts” for the core industries of the so-called new economy. It is to ensure all young people are educated and trained well enough to cope with the “new economy” aspects of whatever business field they may enter in the future.
　
Recommendations: The Chamber believes Asia's World City needs to ensure the highest education standards at all levels. We need to encourage improvements in business English, and training and retraining at work, improve our system of international schools and ensure all students have the skills and expertise and tools the “new economy” will demand of them.
　
IT and e-Business Strategy
　
The business community strongly supports the efforts the SAR Administration to build awareness of, and provide practical assistance in, the development of the SAR's information technology and e-commerce capacity. This is particularly evident in its Digital 21 strategy, launched in 1998, and its overall emphasis on IT and e-business development. However, with the bursting of the dot.com bubble, there is a belief in the industry that there is now a need to “move from the dream to the reality” by emphasizing the practical application to business of all the tools of the new economy.

Of course, this is already happening across a wide cross-section of the business community, particularly for bigger and more internationally orientated businesses. However, there is a need to do more to promote practical application, especially amongst local SMEs in the Hong Kong SAR, and in encouraging and educating the young in these new forms of business.

To encourage greater efficiencies and competitiveness in local business, we believe there is a need to promote the business-to-business (b2b) applications of new technologies. This aspect of the “new economy” is often far from the glamour end of the business, in media, information provision and business-to-consumer (B2C) applications, but is vitally important to Hong Kong's future in trade and financial services.

Of course, the adoption and adaptation of e-business techniques cannot be an answer to all business problems, but can be a powerful tool in improving efficiency and competitiveness. Major barriers to wider adoption appear general awareness and a lack of urgency, especially amongst SMEs, as well as a lack of resources and overall direction from management. These barriers need to be addressed by Government, industry leaders and e-business product providers in terms of training, education and IT infrastructure.

Recommendation: The Policy Address should outline a strategy to overcome the barriers to e-business adoption. It should seek to encourage faster adoption of e-business tools and the training of staff, and the provision of IT infrastructure. It should emphasize the practical use of the tools of the “new “economy” to improve efficiencies in businesses throughout all economic sectors, with special emphasis on the needs of SMEs.
　
Land Supply and the Property Market
The related issues of land supply and the future of the property market, especially the residential property market, continue to be of concern to both the business and the wider community. Property, particularly residential property, as an investment and store of wealth, is as an important factor in determining the overall level of community confidence. It is also a determinant in Hong Kong's attractiveness and competitiveness.

More specifically, the request from all sectors of the business community is for greater clarity in two key areas of Government policy – the future supply of land and the future supply of residential property. There is no doubt that a broad cross-section of the business community supports the Government's aim of stability and certainty in the market. Nobody wants to again see the boom and bust scenario that characterized the market of the mid1990s – the boom through to 1997 and the collapse in prices and rents of all types of property thereafter.
The real issues for business are (a) that beyond the quest for “stability” they are not sure what the Government's policies are and (b) as a result, what the likely future market results will be, including possibly another “boom and bust” scenario. This is important to the local business community (property developers, construction companies and property owners, as well as banks, other lenders and property investors) and to international business sector as well. It may affect future decisions on their commitment to Hong Kong.
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 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.
　
Recommendations: The Policy Address should make a clear and unambiguous statement on (the Government's) housing policy and goals. It should foreshadow a re-examination of the functions of Housing Authority and related bodies, and consider the gradual termination of subsidized housing to ensure the healthy development of the housing market.
　
EIGHT ADDITIONAL COMMENTARIES
General Community Issues
This section contains issues of concern to the community generally and to the business community specifically.
Environment and the Quality of Life
For the most part, the Hong Kong SAR business community, both local and international, appreciates the initiatives undertaken by the Administration to improvement the environment and overall quality of life in the SAR. They are nevertheless of continuing concern, particularly the pace of improvement and periodic predictions from Government that things may get worse before they get better, especially in regard to air and water pollution. Until there is visible and measurable improvement, these complaints are likely to continue.
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 then need for a better environment – 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”.

Large, local companies seeking international talent are also becoming more aware for the need for this attractive “total package”, both in the SAR's established industries and its new and growing “knowledge-based” sector. We would welcome mention in the policy address of any new initiatives the Government has underway to improve the environment, or to speed up those initiatives already underway.
　
Recommendation: The Policy Address should pledge the Government to speed up environmental improvements.
　
SMEs
Encouragement and support for small and medium enterprises 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 2001 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 averse and this has adversely affected the availability of finance to SMEs. Since the bursting of the dot.com bubble, the availability of venture capital finance and other funds more willing to countenance risk, has also been restricted. 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.
　
Recommendation: The Policy Address should announce that SME policy will be conducted at a high level within in the Government, with greater cross-departmental co-ordination on SME policies and concerns. This would have great symbolic significance and utility.
　
The “Third' Sector
In your policy address last year, you canvassed the prospects for the so-called “third” sector, primarily non-government organizations (other than business ventures) taking a greater role in the community. The local business sector, of course, plays a key role, along with Government in supporting these organizations, usually through monetary and related support. This involvement apart, however, we cannot pretend to be experts in promoting the expansion and the relevance of the “third” sector. That said, however, we do agree there is probably a greater role that can be played locally by such community-based organizations.

One difficult matter is encouraging greater private sector funding and, perhaps, involvement of personnel on a private and personal basis. We believe that this requires a change in community mentality if broader support is to be forthcoming for welfare, charitable, cultural, social and artistic aims of these non-government organisations. There needs to be a greater sense of “involvement” engendered in the community. There also needs to be high-level encouragement given to the culture of philanthophy if private benefactors are to become more involved. This may require some incentive from Government (for example, some sort of additional tax incentives might be considered). We need to see a fundamental change in attitudes and the growth of a greater concept of community service.
Recommendation: A Policy Address outlining in greater detail the role of such organizations, encouraging greater “inclusiveness” and the involvement of more people would be a positive step. There should be emphasis given to the concept of community service and developing a “culture of philanthophy”, perhaps with Government incentives being offered.
　
Some Issues Specific to Government
The recommendations contained in this section fit broadly under the heading of promoting smaller, more effective and cost-efficient Government. We believe the adoption of a supplementary system of accrual accounting, as from next year, should assist in measuring the efficiency and cost-effectiveness of Government operations. But there also needs to be more extensive reform if the Government is to have the flexibility to change its practices and reduce its overall role. Overall, we would like to see a smaller Government sector and reduced civil service numbers, hence the concentration on such issues as overall outlays, deregulation and privatization, public/private sector partnerships and better strategic planning.
　
Government Spending
While we understand that Government spending as a proportion of Gross Domestic product (GDP) can be expected to rise in a weaker economy (slowing or negative GDP growth) our members have expressed concern at the rise of public spending to more than 20 per cent of GDP in recent years. Present trends suggest it will remain above this level for some time. At the same time, we recognize that even some of our policy suggestions require increased spending. Having recognized that, however, we do believe that in the medium term the Government should aim to reduce its share of GDP to something more in keeping with the objective of “small” Government.

Left unchecked, rising expenditure could eventually result in a far heavier burden on taxpayers. As we have mentioned earlier, the SAR now facing a difficult period of structural adjustment with problems in terms of economic integration with the Mainland and as to how it can transform itself successfully to a higher value added society. During the period of transition, both companies and employees could find this process somewhat painful. The government can play a more effective role to ease the pain of transition by reducing their financial burden. We would like to see the 2001 Policy Address give a definite commitment to smaller Government.
Recommendation: The Policy Address should commit to maintaining Government spending during the economic slowdown, but also to winding back Government once recovery is well established.
　
Deregulation and Privatization
As part of this process of smaller Government, we would like to again mention the issues of deregulation and privatization and see them again highlighted in the 2001 Policy Address. These are issues the Chamber has long championed. Deregulation should be aimed at improving the efficiency and effectiveness of Government and to lift the regulatory burden from the private sector. Privatization should be aimed at moving to the private sector those activities that can best be done by it, improving Government finances and freeing up resources to be better used elsewhere within the Government.
Recommendation: The Policy Address should commit Government to greater deregulation and privatization in line with the overall aim of smaller government.
　
Public/Private Partnerships (PPP)
In this context we would also like to raise the issue of Public/Private sector partnerships, or PPP. We are aware that the Government has identified these (PPPs) as one of three mechanisms for furthering private sector involvement in the delivery of public services, the others being purchaser/provider agreements and privatization (dealt with above). The SAR already has experience of PPPs (examples include bus franchises, waste management and tunnel concessions). However, Government has tended to treat each PPP as a one off without reference to a wider policy and thus a true marketplace for PPPs has yet to emerge. As a result, the public and private sectors are relatively inexperienced in implementing PPPs and their transaction costs remain high.

Overseas experience shows that a competitive and widespread structured market place for PPPs 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.

Recommend ation: The Policy Address should commit Government to the pursuit of PPPs and breaking down the barriers to their creation.
　
Strategic Planning
In their recent consultations with Government on various strategic planning initiatives, involving town planning, transport and other infrastructure projects, our members have become increasingly concerned not so much with the planning processes themselves, but in their co-ordination. This refers to co-ordination both between SAR Government departments and between the various arms of the SAR Administration and their counterparts in the Pearl River Delta and southern China generally.

At the highest levels of Government it seems clear that there are generally good cross-border relations and reasonably regular contact within the bilateral bodies establish to discuss these issues. However, at a practical strategic planning level, we are not sure that the same satisfactory state of affairs exists. 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.

Recommendation: The Policy Address should pledge Government to greater inter-department and cross-border consultation in strategic planning, including infrastructure and community development.
　
Transport Policy
Government has previously indicated that in its future transport policy it will give priority to rail over road as a solution to Hong Kong's transport problems. However, this is only slowly materialising, especially in the cargo sector. We believe the Government should re-examine the organization and planning work of the Transport Department in this respect. We understand the importance of both road and rail, but suggest the balance should be shifted somewhat, to put them on a more equal footing at a policy and planning level. With the further growth of cross-border trade, Hong Kong's roads seem destined to become even busier. Rail would be a positive alternative to cater for growth.
　
Recommendation: The Policy Address should commit Government to greater balance in future rail and road development, especially in the cargo sector.
　
Conclusion

In closing, I would like to thank you on behalf of the Chamber membership for giving us the opportunity once again put our views to you ahead of your 2001 Policy Address. We look forward with great anticipation to your address on October 10 and your subsequent remarks to the Chamber and the local business community soon thereafter.

As I mentioned in my opening comments, we believe the first SAR Administration has achieved much in the 50 months since the return of sovereignty and done much to ensure a more stable and prosperous community in what have been very difficult economic circumstances.
We at the Chamber look forward to working with the Government in the immediate future to see the Hong Kong SAR through the present economic slow down and in ensuring a prosperous SAR for all Hong Kong citizens. As usual, you have our strong support and very best regards.