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The Urgent Task of Public Sector Reform

(Letter to Hong Kong - 2004.2.22)

The accrued accounts of the Government released recently have revealed some important assets and liabilities which were hidden in the past. This effort to enhance greater transparency in Government should unquestionably be commended though there is still a very long way for Hong Kong to go before committing ourselves to the kind of public Sector Reform embarked on by other developed democracies like the United Kingdom, Australia and Canada some twenty years ago!

It seems that the fate of growing democratization and budget deficits are invariably linked at first. But it does not have to be the case, if our politicians are far-sighted enough not to focus only on short term political gains. A civil service that is disciplined and committed to do the right thing for the community at large. And a leadership that holds a sense of mission to champion the long-drawn-out course of Public Sector Reforms.

It sounds almost too much to ask for in any Government. But in reality, it can be done with dramatically pleasing results in other nations. In a number of cases, the reforms helped to reduce income tax rates, downsized the Government and turned budget deficits into surpluses all at the same time. Unfortunately, history also taught us that these great nations have to wait until their fiscal deficits had grown persistently for years to crippling proportions before the community would throw their weight behind such reforms. I certainly hope that Hong Kong can learn from these past lessons and be able to take the plunge soon in order to avoid going down the same treacherous road.

To be fair to the HKSAR Government, some elements of Public Sector Reform have already been   tried out here. A narrow range of services have been outsourced. The two railways and our airport are being prepared for a restricted scope of privatization with the Government still keeping majority control.  Some private sector participation projects like the route 10 and the West Kowloon Development are being offered though both ended up in deep controversies. Their impact on the humongous budget deficit is hardly felt and taxes, fees and charges are still on the rise. These half hearted efforts can hardly be described as a shining record of success and obviously much more is needed urgently in order to reverse the inevitable course of a persistent structural budget deficit.

What is most disappointing is the seriously slow pace in the reform of our dinosaur civil service structure. It is already a widely known fact that the over 400 ranks and 1,200 grades of civil servants are ridiculously large in number for a small Government. The total remuneration of their services account for more than 60% of the total recurrent expenditure and the level of its pay is generally much higher than that of their private sector counterparts. On top of these, it has proven to be almost impossible to manage the force by simple and effective management measures such as hiring and firing, providing incentives and administering timely punishments. The scope for improvement and a case for urgent reform are so plainly obvious. However, the statement from our Secretary of Civil Service in saying that this year may not be the best time for reform because of upcoming elections further dashes any hope that any real progress could be made in the foreseeable future.

I can just imagine how helpless our heads of government departments now are. They are supposed to be able to control their departmental budgets. They have indeed been asked to cut their budgets time and time again in the last few years, and, possibly more are in the pipe line. However, in reality, they can neither control the size of their staff establishment nor the terms and condition of their pay. The accommodation costs for their offices and the services delivery centers. The amounts and level of the costly inter-departmental charges for services rendered. Privately, some department heads would grudgingly admit that they are only in control of barely 10% of their own budget without the help of central government agencies such as the Civil services Bureau.

The hapless heads of departments also lack proper management tools and information to assist them in their chores. Basic accrual accounting information such as pensions, unclaimed leave entitlements have only been made available recently. Important information such as time sheets and standard costs to value services provided and to decide on inter-departmental charges, and to compare with charges of private sector equivalence are totally lacking. Without this essential information, decision makers will miss out on many outsourcing opportunities and will not be able to objectively set financial targets for self improvement.

The legislative and political environment at present are also stacked against the heads of departments too. Under a model of executive-led Government, the legislature has no formal powers to initiate budget proposals. However, as a quip-pro-quo to the unsatisfactory system, our legislature has a lot of opportunities to take pot shots at the officials-in-charge. The Public Finance Ordinance would allow for a fairly detailed level of micro management down to each item of expenditure above $10 million for recurrent expenditure, and above $15 million in capital expenditure. The annual Budget exercise and the bi-annual value for money audit further provide opportunities to cause serious embarrassment to the official vote controllers with their hands tied to their backs. It should be apparent that the present system is very unfavorable to the management level of the Civil Service and will render the politically appointed Principle Officials easy preys for hawkish politicians and the unsympathetic media.

It is equally apparent to me what reforms are needed:

  • We need legislations to back up the devolution of control from central agencies which have proven to be ineffective e.g. the Public Service Act of Australia which has removed the central administration and control of the civil services at one go;

  • We need to empower the management with sharpened tools such as full accrual accounting, standard costs for services and information systems using interactive technology;

  • We need to corporatise or privatized services that present a high financial risks as soon as practicable e.g. water supplies and post services;

  • We need to provide greater ownership of resources to management and to provide incentives to reward success;

  • We need to conduct regular reality checks by comparing the costs of civil services with their private sector equivalence;

  • We should require more detailed disclosure requirements on Audit to identify idled or inefficient resources e.g. all surplus staff from departments to be transfer to the Civil Services Bureau as a separate cost center;

  • Unwarranted or Gross Neglect in causing wastages should be swiftly and proportionally penalized;

  • We should inculcate the notion that no government service is safe from outsourcing e.g. prison services;

  • As far as possible, treat expenditure as investments for future return;

  • We need to cultivate the third sector and treat business partners as friends who can contribute their business experience rather than as objects to derogate responsibilities e.g. school management committees;

  • Last but not the least, we need thinking Civil Servants who accept that one can still be wrong in blindly following laid down procedures.

Although I am strongly in favour of immediate reforms, I do recognize the following political realities and challenging circumstances for Hong Kong:

  1. Although the trend of structural deficit is already evident, it has not yet reached the same crisis proportion as other countries before the reforms got seriously underway;

  2. It is difficult to build consensus in Hong Kong and political support is never guaranteed;

  3. The reforms will involve a major culture change in the rank and files of the civil servants and therefore, communication, education, training and an incredible amount of patience must all be part of the solution;

Despite of the fact that a crisis is not imminent and that there will be rocky roads ahead, the problems of the existing civil services are clearly identifiable; the possible solutions are staring right into our eyes; the results of the reforms can be very exciting; and for the senior civil servants amongst us, they must be able to tell by experience, and know in their hearts, that it is the right thing to do for Hong Kong.

The remaining questions are: do our leaders have the political will? Will they feel a sense of responsibility to take the trouble in embarking on this challenging but also rewarding task that is the only correct solution to our long term budgetary problems?

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