Hongkong's Wasted Assets
SCMP September 7, 2014
Economist Richard Wong had an interesting article in the South China Morning Post last week suggesting that privatisation of public housing could provide huge revenues for the government, which would support welfare for an ageing population. The idea is unlikely to be implemented due to the vested interests in the status quo here.
Hong Kong singularly lacks a Margaret Thatcher, who privatised much of Britain's public housing. But the proposal focuses attention on the broader issue of government-owned infrastructure and trading assets, whose value is understated in official accounts, and which are making poor returns and providing hidden subsidies to users.
Wong estimates that the total market value of government subsidised housing is HK$3.36 trillion, of which HK$2.5 trillion is accounted for by the rental sector, the rest by the subsidised owners' schemes. He put the value per rental unit, of which there are 728,000, at HK$3.36 million.
That assumes, however, that current price levels would be sustained in the face of the huge increase in the supply of flats for sale that access to privatisation would provide. Indeed, a sharp fall in prices would be necessary to allow more than a small number of tenants to be able to buy, given that prices as a multiple of earnings are now close to record highs. However, there is clearly merit from a social justice and economic efficiency point of view in expanding the level of homeownership and reducing the gap between private and public rents.
In Britain, voluntary privatisation was mostly successful because tenants had a right but not an obligation to buy, and purchase prices were set at discounts of between 30 per cent and 50 per cent of the private sector. There needed to be restrictions on buying, such as length of tenancy, and ability to resell, but discounts were necessary to make purchases affordable and thus make this meaningful in spreading wealth and reducing reliance on the state.
In the Hong Kong case, even if one assumes that just one third of rental housing was sold at an average of HK$2.5 million per unit, it would still yield HK$600 billion which, at 3 per cent return, would add HK$18 billion a year to welfare budgets.
Hong Kong is, in theory, better placed than Britain for such a housing sale. In the UK, high levels of ownership have contributed to labour immobility - not a problem here due to our compact geography. But in Britain, the government is in no way reliant on land revenues and developers do not enjoy significant political influence.
Whichever way Hong Kong were to privatise, prices of mass housing would have to fall to a level which more could afford. That would lead to a drop in the value of land banks and in government capital revenue. It would be unpopular with some existing owners, particularly the upper-income groups owning investment properties.
Wong's good idea thus probably falls at the first and highest hurdle - the government/developer nexus. But that is no reason not to look at it and at other government assets that should be sold. In theory, the government's accrual accounts, which include assets and liabilities, should give a good overall picture. But they do not. They are assiduous in recording increases in liabilities, by far the biggest of which is future government pension liabilities. But assets are mostly included at cost, less accumulated depreciation, which may be technically correct but if applied to, for example, any local property company would show their net worth as a fraction of what is reported.
A glaring example of understatement is the Airport Authority, which was supposed to have been privatised years ago. Its net worth on its books is a mere HK$40 billion, although the replacement cost would be at least four times that. With profits at some HK$$7 billion (despite gross underpricing of landing fees), on a 15 times multiple, it should be worth over HK$100 billion. Failure to privatise the Airport Authority probably means the public purse will foot the bill for the new runway and subsidise the airline industry.
Highways and tunnels are other examples of undervalued and underpriced assets - the Cross-Harbour Tunnel in particular. Private vehicle users are getting a cheap ride at the expense of the rest. Then there is the missing elephant, the HK$672 billion of accumulated profits of the Monetary Authority, which is an arm of government but is kept out of government accounts. Even its trading subsidiary, the Mortgage Corporation, adds to the deception. It has a net worth of HK$9.5 billion but is probably worth double that on the market.
Then there are the various government-financed developments which have no function in a free economy - Cyberport, the Science Park and the like - and monopolies like Hong Kong Exchanges and Clearing. The government sector is continuing to expand. In 2016, it will regain control of the Eastern Harbour Tunnel and almost certainly subsidise the grossly over-budget, never economic high-speed rail.
So, legislators, take Wong's proposal seriously, and lean on the government to sell or at least get better returns from an asset hoard that is controlled by civil servants.