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Can HK Afford an Expensive Infrastructure Plan?

The following letter, outlining the issue of cost control and business-like approaches, is an adaptation from ¡§A Letter to Hong Kong¡¨ for the RTHK radio programme that aired on 9 December 2001.

Dear Guy,

It is amazing how fast news travels these days. I can hardly believe that you have already heard in Montreal of the astonishing size of our fiscal deficits in the coming year. Hong Kong is going through some tough times, but as you quite rightly observed, we will eventually come out of it as a stronger economy, with better work ethics and a more business-like political culture.

As an experienced city administrator who knows Hong Kong very well, I, again, cannot possibly disagree with you that the people of Hong Kong are inexperienced in managing a sustained period of deflation and negative growth. It seems that not all of us have yet woken up to the fact that Hong Kong is no longer a fast growing economy. If we still continue to plan Government investments and public expenditure with that invalid assumption in mind, there will come a point where the rising costs of the public sector might become unacceptable. The strict disciplines of economics will always teach disbelieving politicians and Government officials how wrong they can be, if they persistently ignore basic fundamentals and trust only their self-interested political whims. The size of the present deficit is an early warning sign.

You asked if our massive dose of investments in our transport infrastructures would help. This, I believe, is a good place to start in order to express how skeptical I am.

The Chief Executive have announced in his recent Policy Address that we are to invest another HK$600 billion into our roads and railways despite the fact that many funds have already been sunk into similar projects. Hong Kong is a tiny place, with a reasonably well developed infrastructure systems so I think that there is a limit as to how much and how fast we can keep building without losing a sense of value for money. The marginal benefits of every new road and railway built will diminish as costs escalate while utilities decline. A cost and benefit analysis in every project is especially critical in times of deflation and economic downturn.

I have already forwarded a question to LegCo to ask the Administration how many miles of railroads we are planning to build with a price tag of over a HK$100 billion. I suspect the cost per mile is going to be a startling figure as Hong Kong is small and the longest railway, the West Rail, can only be twenty-odd miles long. With the budget size of some HK$100 billion, our mainland neighbours can easily build hundreds of miles more of railroads than we can. In light of the present economic sentiment, fast shrinking wages and, for that matter, the size of the Government's coffer, is our business plan for railways still realistic? Can the 'poorer' people of Hong Kong still afford the eventual high fares? Furthermore, are we still going to be competitive as a logistic centre when compared with our Mainland neighbours who can build at a fraction of our costs?

By the same token, I also question the Government's brave statements that we must invest another HK$500 billion onto roads and highways. A controversial case in point has already emerged that after luring private investors to build the Route 3, the Government is now intending to put another HK$20 billion or so into building the parallel route 10, well before Route 3 reaches its design capacity.

Again, any taxpayer with common sense should ask why we need two first class highways running almost parallel to each other. What could be the real marginal economic benefits of such an expensive fare at a time when the Government's own finances are already on shaky grounds? Why must we raise new taxes to build a new road where one will adequately serve the purpose for a long time to come?

For decades, Hong Kong has been a booming city and everything we touched seemed to turn to gold. The Government was content to keep to a small size and to leave as many resources as possible to the private sector where the real engine of growth is housed. We could afford expensive infrastructure investments because our inflation and fast growth rate would soon catch up and what seemed expensive today would become affordable in no time. This worked well in the past but the scenario today is drastically different.

After a sustained period of deflation and negative growth, what seems expensive now could become downright unaffordable in a few years. The Government is involuntarily taking up an inflated share of our economic resources leaving a smaller engine for growth in the private sector to power us out of a slow recovery. The operating income of the Government can barely pay for the basic salaries and wages of its civil servants on a year-to-year basis. New projects will have to be financed by new taxes if we are to maintain a sizeable reserve. Unless a good business case can be demonstrated, Hong Kong will risk misallocating its limited valuable resources into costly endeavours of low priority at a time when we need them most in the hands of the private sector.

The broader question is whether or not our Government has amassed substantial assets in state-owned enterprises. As in the case of railways, it is going to invest a lot more in the KCRC and MTRC with public funds in the future. However, it lacks a professional and business-like approach in its management of these highly valuable assets, which could be realised for cash by a future public listing. It is time to reflect on what management efforts the Government must make to keep costs down and their investment values up.

Personally, I think that the Exchange Fund Investment Limited (EFIL) experience has been a proven success. A dedicated, professional investment team engaging the services of commercial investment bankers will assist an appointed Board to act as impartial, passive shareholders in a business-like manner. This will support and strengthen the Corporate Governance structure of state-owned enterprises like the MTRC and KCRC and help to shelter them from excessive political influences, which they are currently exposed to. Another suggestion might be to consider asking the Director of Audit to become their ¡¥internal auditor¡¦ to supplement the commercial role of the private sector external auditor.

We are right to place high expectations on our visions of Hong Kong. However, we must maintain a sensible balance of vision and pragmatism. Otherwise, while Hong Kong is still embarking on a long and difficult road of trying to rid itself of its name as the land of the most ¡¥expensive properties,¡¦ we might unwittingly go down another slippery road to become the land of the ¡¥most expensive railroads and highways.¡¦

This letter was presented and aired on RTHK radio station on 9 December 2001.

Credit: Eric Li is the LegCo Accountancy Functional Constituency Representative. For more information, refer to his website at http://www.ericli.org.

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