Policy Statement & Submission

Dear Chief Executive,

In preparation for your Policy Address to the Legislative Council and the people of Hong Kong on January 12 next year, we are pleased to present the Chamber's views on the top issues facing the Government and the business community in 2005 and beyond. We do so in the hope that you will take this opportunity to capitalize on our growing economy, rising confidence and less politically charged policy environment to address issues that have not been the priority in the past year or two.

The year 2004 has been a year of strong recovery. Our economy is back on the right track and following the September Legislative Council elections we anticipate a return to a more productive political debate. Yet, we remain concerned at the persistent high level of unemployment, and share your hope that economic growth will help gradually lower our unemployment rate.

In this atmosphere of rising confidence, slowly falling unemployment, price stability and improved government revenues, we believe it is time to tackle some of the more challenging issues we face as a society.

One of our principal concerns is public sector reform. The Chamber believes there is a real need for an Address that lays out a near, medium and longer-term plan for reducing public expenditure to well below 20 percent of GDP. We are fully aware that this endeavor will not be easy as a successful effort must challenge well-entrenched interests. Still, you may be assured that business will fully support further moves to restructure government and affiliated bodies, to expand public-private partnerships, to utilize alternative financing arrangements and to move forward on privatization.

As you know, we are among the first to point to the excellent work ethic and incomparable integrity of our fine public servants. While we welcome the pending review of public and private sector pay levels, we do not advocate, nor would we support, efforts to rebalance our public sector finances solely on the basis of reduced pay. Although it is too early to comment on the specific results or options that will arise, we anticipate that the compensation review will lead to an overhaul of the way in which pay adjustments are determined. Of course, any adjustment should take into consideration the excellent services and dedication provided by our disciplined services and front-line healthcare staff.

However, there are a range of measures that need to be taken to improve the results of our spending through reduced inefficiencies and closer cooperation between business and the public sector. As a first step, we see the opportunity to build on your accountability system initiative, taking it to the next level of managerial responsibility for staffing and interdepartmental charges. Such a move will facilitate the next step: to reduce the role of government in areas of the economy where top quality private sector expertise is widely available at a lower cost. Turning to efficient and reliable Hong Kong companies to supplement the services government provides will not only directly assist those businesses – many of which are SMEs – but also bring marketplace discipline to bear on a broader segment of the economy.

To take this necessary reform to its logical conclusion, we believe the private sector should be the first consideration in the implementation of new initiatives, while ensuring that the quality of our services remains high. Public projects above a certain size should be required to be analyzed for private sector participation. There is ample evidence from abroad of the real benefits of public-private sector partnerships, and we are encouraged by the initial steps that have been taken here in the SAR. It is time to go further, to require that all new public sector projects be tested for private sector participation. Drafting a consultation paper on this issue, prior to introducing comprehensive legislation, should not be difficult or time-consuming, provided expert opinion is tapped early in the process.

The third component to public sector reform, following on from decentralized departmental management and private sector leadership in managing new initiatives, falls under the broad category of privatization. We see numerous public bodies that would be more efficiently managed if they were but removed from government's control. As we have noted before, progress can be realized among subvented organizations where out-sourcing, corporatization or full privatization makes sense.

While the recent decision to merge the Environmental Branch of the Environmental, Transport and Works Bureau with the Environmental Protection Department (EPD) is a step in the right direction, there is more that needs to be done. The conflict between the EPD as a regulator and as an operator of waste disposal and sewage systems needs to be rectified. In too many parts of government, policy and execution are too often in the same hands, resulting in less than optimal results in both fields. We would also like to see a clearer interface between the EPD and departments such as Agricultural and Fisheries Conservation, Drainage Services and Leisure and Cultural Services.

We do not dismiss lightly the barrier to public sector reform. It is a process which will take several years, but we firmly believe that now is the time to start, while we have the resources and the time. Overcoming resistance to change will require a concerted joint effort from the public and private sectors, and clear direction from the Administration. In bringing to the public a comprehensive plan for reducing the overall size of our public sector, you may count on our support.

Our second area of concern is the persistently high level of expenditure. While we are reassured at the improved fiscal balance thus far in this fiscal year, we also are keenly aware that the improvement has come about through rising revenues – taking additional money from the economy – rather than through significant expenditure reduction. Government expenditure is forecast to rise by more than $10 billion in the current fiscal year, to an unprecedented $258.7 billion and above 22 percent of GDP for the third year in a row.

We wish to stress that our concern is focused on recurrent, rather than capital expenditure. The rapid rise in tourism – to be further fuelled by next year's opening of the Disney theme park – will require that our transport and waste disposal infrastructure investment remains a top priority. While we appreciate the value of 30-year master plans, we also urge your Government to work with the business community to develop three-to-five year plans for addressing these urgent needs.

As our population ages, we will face rising demand for healthcare services and for economic subsidies to the aged, infirmed and the less-well-off. In the current fiscal year, health and social welfare are budgeted at over 29 percent of recurrent public expenditure, and we see the health and elderly care sectors as critical examples of where the Government needs to turn to the private sector, and soon.

On the revenue side, we see an urgent need to address the narrowness of the tax base. The pending feasibility study of a goods and services tax (GST) is a step in the right direction. In our quest to remain competitive, we cannot continue to raise earnings and profits taxes without endangering our position as the best business and financial center in Asia. If government decides to go ahead with consultation on implementing a GST, we will study the details carefully and – in combination with spending cuts and reductions in direct taxes to render it revenue neutral – would look favorably on such a tax base-broadening measure.

We also are increasingly concerned about our deteriorating environment, and particularly the deteriorating air quality. Despite the laudable steps your administration has taken to encourage conversion of taxis to LPG fuel, our air quality is worse than ever. We understand that cross-boundary pollution is not directly under the SAR Government's control, but strongly believe more can be done.

It is encouraging that consultation between your administration and other Pearl River Delta jurisdictions, on a number of issues, is improving quite well. However, there does not appear to be any real sense of urgency – and often, a sense of denial – in addressing the root causes of our worsening air quality. The local governments in this region must make serious efforts on this matter, and the SAR Government may need to take a forceful role.

To illustrate, EPD data show that in the first three quarters of 2004, the number of hours of “low” air pollution readings in the Central/Western District fell 40.9 percent from the same 2003 period, and “medium” readings were down 3.2 percent. However, “high” readings were up 38.3 percent and “severe” readings up more than six-fold. Moreover, 2003 was even worse in comparison to 2002.

Chief Executive, we are hearing from our members that the air quality is causing some businesses executives to move their staff and families out of Hong Kong, and making it harder for companies to recruit people to move to our city. While some prefer Singapore, others are taking the position that if the environment in Hong Kong is no better than that in Shanghai, why not move there? This is unacceptable for a world-class city. It is already causing damage to our public image, and will soon begin to affect tourism, the conference and exhibition business and our public health.

We are encouraged by recent steps to better manage construction waste through a charging scheme. This is a key aspect of sustainable development. The Waste Disposal Facility amendment and Charges for Disposal of Construction Waste Regulation are a useful beginning, in that they reduce disincentives. As incremental steps are unlikely to be adequate over the medium term, we would further recommend a proactive approach, one that combines incentives with the elimination of disincentives.

In the context of restoring our fiscal health, we recognize there are areas where Government plays a useful role. In this regard, we urge the Government to continue its program in support of SMEs. In particular, the SME Loan Guarantee Scheme is rapidly drawing down, and needs to be replenished. Although the economic situation has improved significantly, commercial banks require SMEs to provide either collateral or a guarantee. This fund allows our smaller companies to continue to expand their operations and employment. To make it even more useful, we also would like to see guarantees approved in principle before SMEs approach banks, rather than only after the bank has made a decision. We also believe such guarantees may be geared at a higher than 1-1 ratio.

Even without additional capital injections, the SME Export Marketing Fund can be usefully broadened, to include support for companies going abroad to identify new customers at events such as industry exhibitions. Indeed, access to funds is becoming more difficult, and we would urge that the terms and practices of the approving authorities be reviews. Finally, the SME Training Fund's 70 percent reimbursement for approved courses allows individual employees to upgrade their skills, helping both their own companies and our economy as a whole. We believe these support mechanisms remain useful for Hong Kong, and in some cases, critical to SMEs' continued contribution to our internationally competitiveness.

On the issue of constitutional development, we have submitted our views to the Chief Secretary's Task Force and look forward to further progress on Hong Kong's most important long-term issue. In our submission, we highlighted the urgent need to build the institutions needed to ensure that Hong Kong is prepared for future developments, and in particular to strengthen our political parties, independent policy think tanks and civic education. This work can – indeed, it must – go forward without regard to specific dates or models of future governance. For our part, we will be commissioning a study to look at how the business community can maintain its influence as the political system moves gradually towards universal suffrage.

In looking to the future, we recognize that educating young people is our generation's responsibility. We need to prepare our children for a rapidly changing world, and ensure that they have the tools to build better lives for themselves and their families. We are encouraged by plans to extend training and education support to adults regardless of employment status. Expanding tertiary education to four years is another step in the right direction. Yet there is more that we can do.

In a business city, as a business chamber, we see the need to develop better links with the world's best business schools. London and New York City have world-class business schools, and we need to improve our own offering to better attract and train the people who will lead us in the decades to come.

Because of our unique circumstances, just about every student in Hong Kong may expect to spend his or her entire career interacting with people from different backgrounds. We need to provide our young people with a more internationalized education, through greater contact with people from a variety of cultures. This means expanding our tertiary institutions' intake of non-resident students, and encouraging our own students to study abroad. Language skills are critical in both endeavors. We look to your Policy Address for confirmation, and direction in taking our educational system to the next level

In cross-boundary economic integration, we are pleased with the progress thus far in implementing CEPA and on moving forward to expand and strengthen this landmark agreement. Hong Kong companies are working out how to capitalize on the opportunities available, although some difficulties remain. In particular, CEPA-qualified service sector companies still face slow, cumbersome national and local regulatory hurdles to establishing new businesses in the Mainland of China. While these challenges are not directly under your control, we would wish to see the SAR Government proactively working with Mainland jurisdictions to fully realize the promise of CEPA.

Hong Kong is the ideal testing ground for new ideas, and we strongly encourage you to continue working with the Central People's Government to initiate further experiments in deepening our integration with the rest of China. CEPA is an ideal WTO-compliant "basket" for Beijing, a vehicle into which further new capacity-building initiatives may be injected. The opening of Renminbi accounts in the SAR, CEPA and qualified foreign—and eventual domestic—institutional investors (QFII and QDII) schemes are examples of what can be achieved. These experiments bring real advantages to Hong Kong's positioning—keeping us always half a step ahead of the world, and also give the CPG an opportunity to test the waters. We look forward to working with your administration on further initiatives such as these.

We hope you agree that it would be useful for the Chamber to meet with you to discuss further our concerns and desires for improving the economic prospects for Hong Kong. We thank you for taking the time to consider our views.

Yours truly,




Anthony Nightingale,
Chairman