Inept government ensures Hong Kong gets a poor return on its riches

No apologies for returning to the budget, a microcosm of just how inadequate Hong Kong's top bureaucrats are in devising medium- and longer-term strategies, especially as it coincided with an advisory body's report on the Future Fund. Addressing the rising cost of an ageing society must go together with raising the rates of return on all government assets, be they the HK$1.5 trillion in reserves or the hundreds of billions in revenue-earning assets.

Yet Financial Secretary John Tsang Chun-wah announced that work on the yet-to-be- approved third runway will start next year, without uttering one syllable about the financing of the most expensive public works project ever proposed for Hong Kong, with a price tag equal to 60 per cent of the Future Fund.

Are we to conclude that this would be financed by the Airport Authority from its own and borrowed resources? That seems unlikely, given the unwillingness so far of the authority to provide a commercial rationale for its plans. But if the government is expected to provide most of the money, where is this included in future estimates?

Tsang also mentioned another upcoming project without a price tag next year - a desalination plant to provide 5-10 per cent of water needs. Indeed, if there is a need for such an expensive source of water, it derives from the other failures of government. Unlike Singapore, Hong Kong has no political reason for greater water self-reliance. Is a government so fixated on cross-border cooperation unable to get a long-term supply agreement with Guangdong?

And if there is a general shortage looming, how about following Singapore in two cheaper directions. First, reduce water usage per person which, at present, due to low cost, is 25 per cent higher than in a comparable city, and reduce leakage losses. Secondly, build water recycling plants, which are much cheaper than desalination and produce drinkable water.

I am no great admirer of Singapore. But a sensible water policy is clearly in the interest of the public purse which Tsang is supposed to safeguard. Instead, we are confronted with yet another project cooked up by bureaucrats, consultants and the construction industry. Like the giant incinerator, which is preferred over smaller, more modern plants, or an effective waste recycling system, the desalination project shows how bureaucrats, unrestrained by shortages of money, love costly solutions to smarter ones.

The advisory group, meanwhile, has drawn attention to the miserable rates of return from the likes of tunnel tolls, water and sewerage, not to mention Disneyland and the Airport Authority. The "user pays" principle is merely a slogan. If the government cannot improve returns, these assets should be sold.

As for the return on reserve assets, the Monetary Authority likes to maintain the fiction that these are mainly needed to defend the currency, hence the abysmal returns being achieved as a result of being largely invested in short-term debt securities. A real Future Fund - like Singapore's two, Temasek and GIC (formerly Government of Singapore Investment Corporation) - would command at least half the HK$1.5 trillion in total reserves and expect long-term inflation-adjusted returns of 3-5 per cent.

Unlike Hong Kong, Singapore's budget, unveiled in the same week, also recognised the implications of an ageing population on government spending, and the need to raise the rate of return to government of official assets. Hence, all Temasek's earnings, not just dividends, will be credited to revenue.

It also raised top tax rates and increased welfare spending in an effort to address rising inequality. Meanwhile, Tsang's giveaways, mainly income tax and rates relief, were focused on the top 30-40 per cent of households, further increasing income inequality.

These giveaways continue to undermine the recurrent tax base which, in turn, is leading the very same thickheads in government to again raise the idea of a goods and services tax. This would be a messy bureaucratic nightmare when the same result could be obtained by better use of rates and a tax on (polluting) power. These taxes would be fair, non-regressive and reflect usage and ownership, and easy to collect. Likewise, eliminating many tax deductions would broaden the tax base while enabling the top rate to remain stable. The goods and services tax is the pet of corporate and high-income earners, as they see it as a way of reducing income tax - hence further widening the income gap.

Despite, or because of, his presiding over so many budgets, Tsang seems incapable of thinking beyond the immediate issues other than endless "warnings" of some future welfare nightmare. Meanwhile, the purpose of the Future Fund remains so obscure that it is hard to tell why it is different from the existing reserves. Supposedly, it is to cope with future structural deficits. But unless it is directed to specific tasks, such as future pensions or health, why is it different? And why leave it in the hands of the unaccountable bureaucracy at the HKMA?

Meanwhile, the government can carry on using the vast part of its reserves for any fanciful concrete-pouring project that appeals. Hong Kong deserves better, much better, management of its public finances.

Philip Bowring is a Hong Kong-based journalist and commentator