Is nice Mr Tang up to the job?

SCMP August 11, 2003

New Financial Secretary Henry Tang Ying-yen gives the impression of being an amiable and relaxed person who will be better at public relations than his predecessor - and most other members of Mr Tung's cabinet. But his appointment is a reminder of two notable issues.

First is the extraordinarily narrow circle of people on which Mr Tung is now relying. Whether borrowed from the British peerage system or the selection process in certain un-nameable Asian countries with neo-Confucian traditions, sons of tycoons, preferably of Shanghainese origin, are the first choice for top jobs. Noblesse oblige. That is not a commentary on Mr Tang personally but an observation drawn from many an appointment, particularly since 1997.

Secondly, it is a reminder that the textile quota system, which has existed in one form or another for 40 years, will end in December next year. With it, one assumes, will end the easy rents that have come to quota holders who have either been able to sell their quotas to other manufacturers or traders, or are able to manufacture cheaply on the mainland while pretending that their goods have sufficient Hong Kong value-added to gain access to import markets.

It was one of the early successes of trade negotiators that enabled Hong Kong to keep control of its quota allocation. Thus the profits accruing as a result of the artificial shortages created by the system were retained by Hong Kong businessmen, not those in the importing countries.

In time, quota ownership effectively became an inheritance for the sons of the founders of Hong Kong's textile and garment businesses, many of them refugees from Shanghai.

China's textile and garment exports will almost certainly increase once the quota system is ended, at the expense of other Asian and Latin American exporters now protected by quotas.

Some Hong Kong-based companies will benefit, but the business will be more competitive than ever and those who relied on the rent from quotas to keep them in the style to which they have become accustomed may need to find other employment.

Mr Tang was quick to get down to work. But it was surprising and a little disturbing that after two days in his job, the government announced its intention to sell off the new Hong Kong International Airport.

The mantra of privatisation appeals to investment banks, which can rake in huge profits from the process. But it is not self-evident that private ownership of such major infrastructure monopolies is desirable. It is improbable that, left to the private sector, the new airport would ever have been built.

So why the hurry to sell it off? If it is to be sold, some decisions about valuation and projected rates of return are needed. On what basis will they be made?

Decisions on landing and other fees are matters of public interest with macro-economic and social consequences, which are more complex than financial rates of return.

It is also difficult to separate the issue of landing fees from that of landing rights, which is a political question and involves international negotiations.

A rushed privatisation of the airport could easily result in a repeat of the public policy debacle involving the privatisation of the MTRC.

The company was sold to investors not on a multiple of earnings from railway operations, but of property development profits. Those, in turn, rested on the willingness of the government to provide it with concessionary development rights. Naturally, the MTRC wants this to continue and has no intention of handing the rights back to the government.

On the other hand the KCRC, being wholly owned by the government, has succumbed to its owner's desire to cut back the supply of new flats to prop up the market and the private developers. It has surrendered potentially valuable rights.

The contradictions in public policy flowing from ill-planned privatisations will multiply if the airport is sold off in haste. The notion that it must be sold to reduce the budget deficit is preposterous. It is just one of many assets that could be sold. Why sell an asset whose profits are likely to grow over the years, rather than the low-yielding, inflation-vulnerable US Treasury bonds in the fiscal reserves?

Excess fiscal reserves are not a sign of caution, they are an indication of waste. If the bridge to Zhuhai is such a great idea, why not invest in it rather than in George W. Bush's increasingly dodgy debt?

Equally, why are we using public money to invest in foreign showbiz, from Disney to Real Madrid, rather than developing local talent or providing sports facilities for schools? If InvestHK's best use of public money is to invite Mr Tung's favourite football team, it is time for it to be disbanded.

Hong Kong has severe budgetary problems, but they are defined almost entirely by the operating deficit, now running at more than HK$50 billion. Selling assets, either T-bonds or the airport, will not correct that.

Does nice Mr Tang have the determination to tackle the vested spending interests within the bureaucracy, and the commercial interests which limit competition? Does he have the guts to raise taxes and risk losing popularity?




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