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Policy Based on Consistent Principles

 (Letter to Hong Kong ¡V 2003.8.24)


The gates to Hong Kong opened wide last month for our friends from Southern China. We welcome this flood of new visitors and the much welcomed purchasing powers that they would undoubtedly unleash.

On this occasion, the Government has quickly risen to the challenges ahead. Potential problems were identified early and solutions proposed. The expected demands on the transportation systems; the overcrowded immigration counters; the likely increase in crime rates and then the tricky question of guests¡¦ accommodation all suddenly needed solving.

Whilst I am in full support of this bold and creative move, my serious and immediate concern on converting vacant HOS flats into guesthouses is the substandard quality they would unavoidably provide. Hong Kong people are frequent travellers for both business and pleasure purposes. We should know what it takes to welcome our valued visitors in way of accommodation. It is perhaps much more than a room with a bed and a toilet. There are stringent standards on safety and health to meet for which there are plenty of uncompromising regulations. The location of this accommodation should also be accessible to popular tourist destinations and well served by a reasonable choice of public transport. There must also be adequate amenities nearby like restaurants and retail outlets, sports and meeting facilities. Otherwise, for an advanced tourist destination like Hong Kong, anything short of these basic requirements will spell serious disappointment for a visitor and a loss of goodwill from our important guests across the border.

From the supply point of view, the heavy knock on effects this scheme may have on the hotel industry cannot be easily dismissed either. It should be remembered that hotel investors have to put considerable capital at risk in a highly uncertain business environment. Only recently, they have just weathered the serious losses caused by SARS and are therefore well entitled to earn a little super profit when the tide begins to turn their way. There is hardly a valid excuse for government¡¦s intervention when the free market mechanism is working well and there is a strong will to respond to the increased demands by further investments in developing proper hotel facilities. The clear role of a small government must be to facilitate the timely supply from the market place rather than to takes things over itself. When the government bends the rules to suit itself, and there is no telling how many of its 26,000 surplus HOS flats that it will put on stream to flood the hotel market and for a period of how long, the market overhang will be serious enough to put off any potential investors for a very long time to come. The damages this will inflict on the hotel and tourism industry in the medium and long term could be far greater than the quick fix that it is trying to make in dealing with the sudden shortages created in the near term.

Personally speaking, I am not against some form of temporary solution provided that the number of units to be made available and the time of their franchise are limited by specific legislation. As an alternative to converting guesthouses from vacant HOS flats the government could consider converting its many surplus staff quarters instead.

In any event, I suggest that the Government should make clear rules on how this type of accommodation can be described so as to avoid potential misrepresentation that they are fully fledged hotels. In addition, it must legislate clearly the basic requirements on all aspects of health and safety as a minimum protection to our unsuspecting visitors. There should also be a specified limited period of franchise, say three years, right from the start and a definitive plan for the winding up of any unsuitable or surplus facilities later. A board of inspection, consisting of representatives from the travel business, hotel owners and the consumer council, should also be set up to ensure that the experimental projects run according to plan. The long term interests of our visitors and the good name of the travel industry must be seen to be well served in order for the scheme not to be taken as a mere scam for solving the problem of a surplus supply of HOS flats for the Housing Authority.

On the related topic of how the government manages the huge property portfolios of the two government-owned railway companies, the market is still unclear on the fate of the 70,000 new units still on the supply map.  From a financial perspective, the MTRC and the KCRC are also two of the most significant investments that the Government has ever made. However, the way the bureaucrats have been handling these huge investments as an investor is far from professional.

In fact, as the major stakeholder of the railway companies, the government¡¦s recent attitude towards these important corporations has been incoherent, directionless and even at times irresponsible. For example, I find it incomprehensible why the Government wishes to list the MTRC but still tries to hold onto the KCRC. Worse still, it then placed the two corporations in an arbitrarily orchestrated competition which is neither fair nor productive. As the majority shareholder that also controls the Board of Directors of the MTRC, how can it try to coax the company into reducing its fares against the interests of its minority shareholders? How can it threaten to take away MTRC¡¦s future property development rights as pledged by the government on its listing prospectuses without a fair offer of compensation? What about the proper Corporate Governance matters that the Government preaches? What has happened to the promise that the Government will run these corporations on commercial principles? Where is the SFC when the Government as the majority shareholder is seen to be acting against the interests of the Company¡¦s minority shareholders?

Despite my consistent criticisms of the Government¡¦s handling of the railway companies, I firmly believe that the decision to list the MTRC and to vest in it an element of property interests is the correct way to go. In fact, the Government should also plan to list the KCRC if it is serious in listing the Airport Authority. This is the only way that the Government can show the investment community of its consistency in intentions. To shift into reverse gear in ¡¥privatising¡¦ the MTRC back into the Government¡¦s hands after its share price has significantly dropped will open lots of questions from the investment community when the Airport Authority goes ahead for listing. In the long term this is also the best way of hiving off these costly subsidised services on a users pay principle. However, I do believe that the timing of property sales by the railway companies would need to be coordinated. Following commercial principles in conducting businesses on an arm¡¦s length basis, if the government should take a share in the profits of the railway companies¡¦ property developments, it should also provide them with the bridging capital e.g. interest free loans, if it chooses to delay the sales of their property development projects for whatever reasons by imposing its political will and through administrative means.

I strongly urged the Government to properly set aside these important investments into an independent investment corporation. This corporation should then engage qualified professionals like investment bankers, lawyers and accountants with commercial experience to oversee its conduct and good corporate behaviour. The arrangement will help the Government to clearly distinguish its separate and conflicting roles as an investor and as the industries¡¦ regulators. This would also save the embarrassment of Policy Officials who sit on the boards of transport companies as directors and then have to act against the companies¡¦ interests e.g. coax the companies to reduce their fares. How it votes in general meetings, how they appoint their directors and react to Government policy should follow clearly spelt out guidelines consistent with that of large multi-national fund managers that do not seek to control the management of the investee companies. The Exchange Fund Investment Limited has done this with great success when it spun off the local shares owned by the government into the Trackers Fund. It is time that our Government learn from positive past experiences.


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