Policy Statement & Submission

The Honourable Donald Tsang

Chief Executive

Hong Kong Special Administrative Region


HONG KONG GENERAL CHAMBER OF COMMERCE
POLICY ADDRESS SUBMISSION

In anticipation of your first Policy Address on October 12, the Hong Kong General Chamber of Commerce is pleased to present our thoughts on the challenges, opportunities and priorities we believe will shape your administration in the coming year. In preparing this submission, we have consulted our members through the relevant Chamber committees, and offer the views outlined below for your consideration.

A change in leadership offers an opportunity to revisit existing priorities and, where appropriate, better articulate them to the community. The role of government as a facilitator and an enabler has served us well, and we would wish to see that principle highlighted in your Policy Address. At the same time, we would strongly support a clear statement that the public sector should be the service provider of last resort. Drawing a line between those services that must be provided by government (for example, the disciplined services) and other services would allow the drafting of a plan for reducing the overall size of the public sector without sacrificing necessary services. We believe this would be a useful step in laying the foundation for greater public-private partnerships and privatisation.

Two specifics come to mind in this regard, both of which are topical. The West Kowloon Cultural District is quite rightly being conceived as a project in which the private sector would have a strong role to play. However, it has not been considered in the context of an integrated plan for the future of our harbour. Similarly, the partial privatisation of the airport has not been explained to the public as arising out of an overall framework for privatising other infrastructure. To move forward with these projects, we need to focus our efforts through broad, integrated and multi-year strategies – periodically updated and reviewed – that are well articulated to the community.

Chief Executive, your first Policy Address comes at a time when our economy is doing well, which thus provides a gateway through which to move forward on some of the more sensitive issues we face. The economies of the US and the Mainland of China are performing better than most forecasters anticipated, and this has helped strengthen our own recovery. The 6.5% real growth in the first half of the year was well above expectations, and should give us all confidence that our economy is strong enough to support the policy decisions that must be made to keep us on course. We expect private consumption to pick up speed in the second half of the year, and are encouraged by the good results already achieved in capital investment.

In this economic context, we see the opportunity to move forward on issues that were quite rightly postponed during the early part of this decade. We recognize that many of the issues, dealt with in more detail below, are politically sensitive and that not all of them can – or should – be addressed in a single year. Yet, we must face them, and soon, if we are not to be confronted with the same challenges – but fewer options – some years down the road.

The recent changes to management of the renminbi, while not unexpected, do remind us that flexibility in adapting to new situations is perhaps Hong Kong's greatest attribute. In the area of financial flows, this means ensuring that we offer a tax and regulatory environment second to none, while matching worldwide best practices in anti-money laundering regimes. The bill before LegCo to eliminate the Estate Duty – which we hope to see implemented this year – is a step in the right direction.

As we look forward to 2006, there is a growing consensus that the global business cycle is moving towards a slower pace. High oil prices, rising interest rates and slowing demand in major economies will dominate the near-term economic conditions in which we operate. As in the past, we will be able to adjust to the shifting environment, and better than many of our competitors, as long as we remain flexible and financially positive.

Other dangers are not likely to be short lived, and will require structural improvements. The terrorist attacks in London and violent demonstrations in cities holding global conferences are in our thoughts as Hong Kong prepares to host the World Trade Organization 6th Ministerial Conference in December. Presenting our city as safe yet tolerant of dissent will encourage the cautious and reassure those who might question our freedoms. Preparing to face another SARS-like epidemic demands far greater attention to public health and cross-border transparency, cooperation, coordination and strengthening communications between the SAR and the Mainland. The Forum on the Framework of the Government's Preparedness Plan for Influenza Pandemic is welcome as the start of what we hope will be a multi-pronged approach to ensuring we are ready for future medical challenges.

In the paragraphs below, we have identified specific priorities for the near- and medium-term. We offer suggestions where new initiatives need to be launched or barriers removed, and look forward to working with your administration to further improve our society and our competitive advantage.

Human resources
Hong Kong's human resources needs are of major concern to the business community and a key factor in Hong Kong's competitive offering. The Chamber's recent manpower conference highlighted the need to maintain the “flow” concept of talent for Hong Kong's economic development. The people we need to maintain the success of our economy and society will spend part of their careers in the SAR and part in the Mainland or overseas. In return, we should supplement our talent pool with the best people available worldwide, which means we must facilitate the movement of such people, and their families, provide an excellent international education infrastructure and ensure that our visa policies do not limit our potential.

Education is vital to our competitiveness. Our own people need to be equipped to compete in a rapidly globalizing world. This requires more, and more relevant training of employees entering the workforce or redeploying to new jobs. Business has a primary responsibility in this area, but is unlikely to invest enough, on its own, to drive our economy to the next level. Greater cooperation between government and business is needed in determining where skills shortages exist and how best to prepare our workforce for future opportunities.

It is unfortunate that we as an economy are globalized, but our education system is not. Providing sufficient space in international quality schools is a critical competitive factor, and shortages are making it difficult to bring top quality talent into the SAR. New companies wishing to set up in the SAR and those seeking to expand have difficulty finding sufficient space in English-language schools for executives' families, presenting an unnecessary competitive challenge. We are hurting ourselves.

Privatising public schools or expanding the ESF system may be stopgap measures, but they will not be sufficient by themselves. An important part of the solution lies in improving primary education to a level that will convince local language families to send their children to local language schools, making more space available for those from different linguistic backgrounds. While we do not advocate restrictions on who may attend certain schools, we do see the lack of appropriate primary education facilities for non-local students as a barrier to attracting international talent.

At the secondary and tertiary levels, students must be better prepared for working in a multi-cultural, multi-lingual social and business environment. Internationalising Hong Kong universities through exchanges of teachers and students and the elimination of quotas or ceilings on non-local students is necessary to ensure an adequate and qualified pool of talent in the coming years. While our public universities are making progress in expanding their non-local intake, private institutions are finding it impossible to attract international students, due to restrictions on student visa. Removing these barriers and facilitating student and teacher exchanges will prepare our graduates to spend their careers working with people from different backgrounds.

The cooperative efforts of business and government to develop the skills of the workforce have had some success in recent years, and must be strengthened and expanded. Training for school leavers, retraining for the unemployed and life long skills enhancement for all need to be emphasized. Additional funding for Workplace English Training is an excellent step forward. Self-employment support for youth, the work experience and training scheme, pre-employment training programs and job fairs are efforts we whole-heartedly support. These initiatives are not sufficient, however, to address the challenge of helping people earn the skills they need to work in our globalized world. We understand the structure and workings of the Vocational Training Council are under review, and welcome this effort to fine-tune and further develop its role.

Our migration policy needs to be proactive, seeking out the best talent in the world and attracting them to Hong Kong. Hong Kong is a small population in comparison to our economic size and our role in world trade, financing and business services. We can, and must grow talent to fulfil our needs. However, there are clear limits to how far we can progress with only our own manpower. One immediate step would be to remove disincentives such as work visa requirements for spouses and restrictive short-term education, training and project-related visas. Longer term, we need much more proactive immigration policies. We need to identify and attract the best in the world, and offer them an appealing living environment (a topic dealt with at length below) rather than hoping they will recognize the opportunities we offer.

Companies in the SAR with a presence in the Mainland of China repeatedly report difficulties with our immigration policies when bringing staff into Hong Kong for short-term assignments. Training programs, team building and the rapidly moving business environment dictate that talented employees be able to move to where their skills are required, often on short notice. For our city to remain the premier business centre in the region, we must be more flexible in our human resources management options.

Sustainable development and quality of living
Every consideration of the challenges facing Hong Kong, and every set of recommendations put forth by those concerned for our future, highlights the pressing need for a forward looking, proactive approach to restoring our environment to a healthy state. Ensuring sustainability in our development planning and implementation is a critical first step. We recognize that it is very difficult to achieve immediate and visible improvements, but government must be seen to be doing more. We cannot just talk about why pollution exists and why we cannot control all of it. We must do more, and we must do it now.

We strongly believe that the deterioration of our air quality in the past several years is unacceptable, and the Chamber has been working hard to make a difference. As with education, the physical environment is a strategic asset, a key reason why people are attracted to world class cities. Sadly, we are losing this race. People are choosing not to come to Hong Kong because of our poor air quality. What previously was a vital differentiator between us and other cities is no longer on the list of advantages we have to offer.

Through our leadership of and cooperation with other business organizations, particularly in the Business Coalition on the Environment, we are putting forth projects and concepts aimed at increasing awareness of what we in Hong Kong need to do. This year, we are gathering support among the business community for Project Clean Air, signing up companies to the Clean Air Charter and developing longer-range approaches to ensuring that we in Hong Kong are doing everything we can to reduce pollution.

The quality of the air we breathe is a vitally important factor within the overall concept of sustainable development and quality of life. We need to develop a mind set that takes a holistic view of policies related to land, air, water, population, energy generation and use and transportation at home and in the PRD. We need to think about the balance between development and green spaces, about preserving our heritage and restoring the beauty of our waterfront. We need to be clear on what is achievable over short, medium and long-term periods of time. There has been much talk on the subject, but it appears to the community that there has been little action to support the talk. If this is an incorrect perception, it reinforces the need to articulate our policies and our successes more clearly.

Public sector reform
High on the list of priorities for your Administration must be public sector reform and related issues including reducing the size of the civil service, public sector compensation policies, public-private partnerships, privatisation, the budget deficit and broadening the tax base.

We have noted your comments in the past about the civil service, and appreciate the quality of the job they do. However, our economy is one of the most globalized in the world, and as a result rides the tides of trade and capital flows, for better or worse. We cannot influence the global trade cycles that drive our economy, but we can – and must – ensure that we are as lean and efficient as possible. Only in this way will we have the resources to ameliorate the negative effects of the next downturn, as we did in the early part of this decade. A lean public sector is critical to our ability to cope with rapid changes in demand. Through visionary planning, and good luck, we accumulated sufficient fiscal reserves in the 1990s to ride out the prolonged depression. That foresight enabled us to weather the sharp drop in revenue that followed. Were the same situation to occur today, we would be much less able to respond successfully.

The consultant's report on public-private pay comparisons is due by year-end, and in combination with the July Court of Final Appeal ruling on past civil service salary reductions, we believe the time is right to move forward on broader management modernization. As you know, the Chamber commissioned its own study on the differences between public and private sector pay for the same job, a study that revealed large discrepancies in favour of the civil service. While we stand by our view that pay reductions alone are neither desirable nor sufficient to improve efficiency and curb the operating budget deficit, a view we believe you share, nevertheless we do believe that much greater flexibility in human resources management is needed in the public sector.

We need to move on to the next phases of public sector reform, and most particularly the establishment of a system of managerial responsibility for staffing and interdepartmental charges. Accounting for the true costs of services provided within an organization is a powerful tool for identifying unnecessary costs and potential synergies. When department heads have real responsibility for their budgets—including staffing and compensation matters—government will win important efficiencies. Understanding the full cost of providing public services, and comparing those costs to similar activities in the private sector will take us a long way toward alleviating concerns about privatisation.

Public-private partnerships, corporatization and privatisation are proven means for reducing the overall size of the public sector and creating economic efficiencies and opportunities. We see several cases where privatisation would be practical and useful such as the Post Office, Architectural Services, Electrical and Mechanical Services and Water Supplies agencies. However, the proposed partial IPO for the airport points to the need for a comprehensive framework within which partnerships, corporatization and privatisation may be considered. Such a framework would address the issues of what the money raised would be used for, why inefficiencies cannot be addressed under the current arrangement and the benchmarks for measuring success.

The reversal in the public sector fiscal deficit is a welcome side effect of our strong economy, but we remain concerned that the operating account is still firmly in the red. While the rapid economic recovery post-SARS helped fill the government's coffers, operating expenditure is set to rise this year. Two years into the recovery, neither the general public nor we have seen evidence that the operating shortfall will soon return to surplus. At the same time, changes to allowances for dependants have further narrowed the tax base. This cannot go on.

A critical component of preparation for adversity is to broaden the tax base. While business and high-income salaried employees pay their fair share, this source of revenue is highly mobile. Fewer than one in five residents pay salaries taxes, and we firmly believe that raising that tax rate would likely result in no new income. Business, of course, has some flexibility in determining where profits are recorded. Higher tax rates in one locale inevitably lead to efforts to side-step that jurisdiction. Again, an increase in the profits tax rate would have little positive effect on revenues. Moreover, the government's dependence on capital income – land revenues – to cover operating shortfalls is inadvisable. As we have seen in recent years, such income is too volatile to be considered a reliable funding base. And so, the long-delayed consultation on a Goods and Services Tax being a possible tax base-broadening measure must be a priority for 2006. The consultation will need to consider whether a GST should be implemented, how to implement it, the timing and the steps to reduce other taxes so as to make it revenue neutral.

Mainland economic integration
Hong Kong benefits greatly from the development of closer ties with the Mainland—especially with the Pearl River Delta, and we fully endorse your administration's continuing work toward reducing barriers to business and other forms of integration. Progress on building the necessary infrastructure has been good, and we support the long-term development of fully connected road and rail networks. We do believe, however, that more attention needs to be paid to the “soft” infrastructure.

The Pearl River Delta is critical to our future, and enhancing cooperation among the various jurisdictions is central to our own competitiveness. In business, integration is already very deep and increasingly broad and while we are encouraged that governmental relations have moved to a much more positive footing in recent years, there are regulatory issues that continue to hinder further progress. We are encouraged by the steps to further economic cooperation within the Pan-PRD region, which should help break down domestic trade barriers and enhance cross-regional cooperation in areas such as infrastructure, sustainable development and environmental protection. Consideration of an APEC-style immigration facilitation card for Pan-PRD residents might be an issue worth exploring. We also recognise that optimal results cannot be achieved overnight.

Expanding and fully implementing the Closer Economic Partnership Arrangement (CEPA) is an on-going priority, and one in which the Chamber has played a strong role since the beginning. While there are those who deride the opportunities created or see CEPA as a “big gift” to Hong Kong, we firmly believe the advantages arising from CEPA are – and must continue to be – clear to both sides. We believe in CEPA, and we believe it is working, albeit not well enough.

To date, the key concern about CEPA is its implementation in the Mainland. Local protectionism, complicated application procedures, various interpretations of the meaning of specific phrasing by different department and other such technical issues have become barriers to CEPA's effective implementation. We believe a stronger effort must be made under CEPA III to address these specific shortfalls, which are particularly important to SMEs. Establishment of a CEPA Business Advisory Committee, as we and three other large local chambers had been advocating, would bring real world examples to discussions on how to make CEPA work better, and provide an important degree of transparency. Separately, we have submitted to Government our views on the necessary steps for achieving full implementation and for expanding the mutual benefits, and areas where we would like to see goods and services trade liberalisation expanded We look forward to seeing the results of the SAR Government's discussions with the Central People's Government.

Political development
Hong Kong's political system is still not well-developed, and one of the most difficult tasks facing your administration is the development of a more participatory political environment. We strongly believe that political parties must be nurtured and encouraged to differentiate themselves on the basis of a broad platform of policy preferences. Political parties based on individual personalities or narrow issue advocacy are unlikely to provide the leadership Hong Kong needs in the next decade. We would encourage you to keep this in mind as you make appointments to public bodies and interact with the Legislative Council.

The working relationship between the administration and LegCo is central to the success of policy initiatives of all sizes, and here there are clear improvements to be made. Cases such as the REITs may be quite appropriate as policy, but face unnecessary challenges through incomplete political preparation. We do not necessarily believe Government intentionally avoids bringing controversial issues to LegCo. However, we do find it necessary to ensure that there is no reason for the public to be uncertain as to the willingness of Government to present its case.

Even before our political parties are fully developed, we will need to step up the momentum toward constitutional development. There is a clear timetable in the public mind, but not as yet a consensus as to what should be achieved and how to get there. We have long argued that dates are much less important than the time invested in preparation. What we need is a possible “milestone table”, rather than a “timetable”, on what Hong Kong needs to accomplish along the way towards broader political representation. At the same time, we totally appreciate that the Central Government must be fully comfortable with the progress we make here. But some progress must be seen to be made. For 2007/2008, the Chamber would like to refer you back to its submission of earlier this year, with special emphasis on not adding any more seats in the Legislative Council in either geographical or functional constituencies, as we transition to a more representative government.

We believe that a very intensive and wide-reaching civic education program is urgently needed, not only to prepare our society for greater direct say in who governs, but also to create an understanding that poorly planned but politically expedient steps are not in Hong Kong's best interest.

Competitiveness issues
One of the most important economic tasks of government is to create a competitive business environment, and historically Hong Kong has done very well in this regard. While we remain the premier business and financial centre in the Asian half of the world, we cannot afford to be complacent. Other jurisdictions such as Singapore, Shanghai and particularly Macau are rapidly either copying our model or, more dangerously for us, creating their own innovative image. Given enough time they will challenge our hard-earned status. We need to set the bar higher, year after year.

Competitiveness covers a wide range of issues, from employment regulations to taxes, education and corporate governance. We fully understand that regulations are necessary to create the right kind of opportunities, and that implementation needs to be fair and consistent. On that basis, we briefly address the following issues:

Legislation to define minimum wages and maximum working hours are being presented as a cure to poverty, and this we cannot support. Our economy is regularly singled out as one of the most competitive employment environments in the world, and we strongly believe that nothing should be done to jeopardize that standing. Linking an arbitrary minimum wage to poverty relief is inappropriate. We see skills, training, education and investment as the keys to reducing poverty. As for restricting working hours, we believe it makes sense where safety standards are paramount, as in the case of drivers and pilots. However, a broad-brush approach would not be in the best interests of Hong Kong.

Expanding opportunities to capitalise on Mainland financial liberalisation is vital to maintaining our position as the preferred intermediary for China's capital flows to the rest of the world. Onshore trade in renminbi forwards and sways are now permitted, and we believe it is time to petition the Central People's Government to allow similar instruments to be traded here. Over time, designing and trading renminbi-denominated derivatives is very likely to become an important new market, and we need to position ourselves as the leader in this area.

Reform of the Inland Revenue Ordinance has been conducted step by step for many years, and while there are areas we would wish to see modernized or clarified, we do not believe the best means to these ends is through a wholesale review by a statutory body. In the near term, improving certainty in the definition of what is taxable and what is not would go a long ways toward off-setting the drift of Hong Kong companies to other jurisdictions. Over time, an independent commission to review specific sections of the tax code, highlight areas in need of clarity and recommend structural changes is the right approach.

Aviation remains a central pillar to the development of Hong Kong's economy as a tourist destination and business and logistics centre. The industry's growth benefits every sector of our economy. The government should continue to pursue progressive liberalization with aviation partners, to bring in more competition, open up additional markets and strengthen Hong Kong as a global hub and gateway. An important step in this direction would be co-locating PRC customs, immigration and quarantine facilities at Hong Kong International Airport. This suggestion of course needs to be examined in the context of “one country, two systems” and any effect on that arrangement.

Tourism and related sectors such as conventions and exhibitions have played a critical role in Hong Kong's recovery. We are fortunate to have a new world-class theme park, and expect that visitor-arrivals will continue to expand in the medium term. However, there are newly emerging competitors – including some in the Mainland of China – that would like a greater share of our visitors. We need to make sure that they do not find it too easy to enter the market. Convention and exhibition centres are one area where we face new and expanded competition; the Las Vegas style casinos in Macau are another. Hong Kong's best advantage lies in offering an unbeatable package of services, variety, quality and price, and we would look to government to take the lead in promoting this industry.

Conclusion
Your administration has the opportunity to take a fresh look at the direction Hong Kong is heading, the challenges we face and the near, medium and longer-term steps to sharpening our competitive advantages. Continuing with business as usual will reassure some, but we cannot afford to rest on our laurels. The competition is real, it is studying our methods and it is getting better day-by-day. Raising the bar is the only way we can ensure that our future is a bright as our past, and that we continue to offer our people the best possible opportunities to grow, learn and prosper.

Chief Executive, through your long public service you have developed a keen understanding of the workings of government. You understand where the system works well, and where improvements are needed. The decisions you will be asked to make in the coming years are not going to be easy ones, but with courage and determination – and with our solid support – we can build a future that makes all of us proud to be members of this community.

When the Hong Kong General Chamber of Commerce meets with you in the not-too-distant future, we will elaborate further the contents of this letter.

Thank you,




David Eldon
Chairman