Asia's post-crisis fallout
It is understandable if the Beijing government, in transition
from socialism to something else, gets confused about the
relationship between public and private sectors. Hongkong has
The Disney project and the Tracker Fund both exhibit appaling
examples of public servants failing to comprehend the notion
of public trust, transparency and accountability when it comes
to the interface between public and private sectors.
Let us start with Disney, the least defensible of all major
tax-spending decisions in the past quarter century. It makes
Cyberport looks like an open tender deal. Even the $120 bn
stockmarket intervention could at least attempt to be
justified as a response to en emergency situation threatening
the territory's financial stability. No such claim can be made
for Disney, which has been under discussion for months and
whose many dangers to good administration were long evident.
Now the deed is done and looks even worse than those who were
always suspicious of it could have imagined. It demonstrates
that government of Tung Chee-hwa has no understanding that
public assets are in his trust to be put to social ends or be
disposed of by market forces.
What we have here is a gigantic subsidy to the Disney
corporation and an equally large disposal of what we are
always told is Hongkong's scarcest resource, land.
The government economists have come up with a few wild and
unsupported claims of the economic benefits of the scheme.
These will doubtless add to concerns that statistics are
increasingly subject to political manipulation -- but that is
another story. What is incredible about the government's
"economics" is that it:
* Fails to put a market value, or opportunity cost, on the the
258 hectares of Lantau (158 to Disney and the rest to related
developments) to be given over to this project. The cost is
given as $4 bn ie the reclamation cost plus a similar amount
in future shares as land premium. Yet even if used only for
medium density housing, the actual land value would be ten
times that amount. In other words, this is $40 bn in
opportunity cost to the taxpayer, or in opportunity to improve
housing standards by making available 7-10 years worth of
housing land supply.
* Fails to divulge estimates of Disney's upfront revenues from
management fees and the royalties which will be paid for use
of its trademark names.These more than the physical park
assets are what Disney most values. Under all circumstances it
gets the first cut of income, the joint venture company what
is left, if anything, after other expenses. Such a deal would
be fine if all parties were private companies. This is public
money we are talking about.
* Claims that this is an economically and financially viable
venture which will provide a return to its public sector
investor are absurd. If that is the case, why, despite the
huge equity investment -- direct and disguised -- is the
government is going to have to offer a huge, 16-year interest
rate subsidy on its debt? If a public corporation providing
needed public services, such as the MTRC, has to pay market
rates, why not Disney? And if it is such a good deal, why have
Hongkong's business savvy and politically influential property
giants declined to get involved?
* Is at odds with Donald Tsang's (correct) complaints about
his $30 bn deficit and the need to raise money and hold down
spending. So what's he doing giving a multi-billion subsidy to
a private company to provide a service which, self-evidently,
is neither socially necessary nor commercially viable?
It is sad to see most legislators taking a supine attitude.
Where are the Liberal party's principles of market economy,
keeping taxes low, government out of business? And what are
the Democrats doing to guard the public purse and press for
spending on social improvement not business subsidies?
This isn't a Mickey Nouse. It's a skunk.
The Tracker fund is a more agreeable if unsual animal.
Nonetheless, it demonstrates the dilemmas that guardians of
public trust face when meddling in private sector affairs. The
mission of saving the HK dollar has been accomplished, we are
told. So why not sell the shares as quickly as possible,
getting the government out of a business in which, by its own
admission, it does not belong? We have waited 15 months
already, and now likely to wait a decade.
The problem is the government wants both to claim that it is
offering a good deal to investors, while selling as little as
possible to keep up the price both to maximise its own profits
and demonstrate that there is "confidence" in Hongkong.
In fact TraHK is quite a good deal for residents who can
collect the discounts and loyalty bonuses. They will also find
it an agreeably cheap way of buying (and selling) a blue chip
portfolio compared with doing the same via Hongkong-dedicated
But after the handouts, the fat commissions, the advertising
binge, what next? The prospectus says little about the factors
which will most affect TraHK's long term value: the speed with
which the tap stock is to released and whether it will be
offered at a discount to existing holders. Note that only 5%
of the government's holding is now being sold. If there is no
demand for more stock at the net asset value, will the
government sit on its $190 bn remaining stakes for ever? Or
will it launch other funds at a tasty discount, shoving TraHK
into a siding?
Another question is whether the government will influence the
secondary market price of TraHK, buying shares to prevent the
price falling below net asset value. Without a more clearly
enunciated timetable for disposal, and full disclosure of its
interventions, it is (rightly) going to be accused of market
The Hongkong government is in rather than same kind of mess as
China when it comes to dealing with stockmarket forces.
Earlier this year Beijing attempted to stimulate a stockmarket
boom to improve investor and consumer confidence. But actually
A share prices were mostly far too high already for the
stockmarkets to carry about their proper function. They are
wildly out of line with costs of capital or earnings
prospects. The political need to keep prices high is
restricting the new issues which will help SOE reform by
reducing debt and making management more responsive to outside
But that, Messrs Tung and Tsang be reminded, is what happens
when you make spending decisions for political or friendship
reasons and don't admit it, even to yourself.
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