Contracts rule over people's pockets

'Chief Executive Donald Tsang Yam-kuen, saying rising inflation had made these 'difficult times', told lawmakers the financial needs of people would outweigh the interests of shareholders when government considered a rise in fees for public services.'

SCMP, May 16

He didn't actually phrase it quite that way in his question and answer session with legislators on Thursday, and he hedged it by emphasising that the government must respect the free market, but, nonetheless, it is effectively what he said.

I have no objection if he was referring to such things as water usage charges. The government is the sole shareholder of the water business in Hong Kong and if it wishes to lose money on selling people water (which it does) and make up the loss through other revenues taken from these people, that's government's business.

It's a wasteful way of doing things, of course.

By undercharging for public services we invariably encourage waste in them or prop up industries that have no place here any longer.

Cheap water, for instance, delayed the migration across the border of the hugely thirsty and highly polluting printing and dyeing business.

If we raise water rates to cost recovery levels we will value fresh water as it should be valued, count on it.

That's an aside, however. It seems Donald and the legislators were actually referring to public services provided by private sector entities - buses, power, telecommunications and the like - and I think he was possibly on the wrong track here by reminding them that government must respect the free market.

It is not so much the free market that government must respect as its own contractual obligations.

We are not talking here of services that are sold like tomatoes in the fresh market - 'I'll take six today, the ones in that box on the left. How much do they cost again? Oh, that's a bit high. Do you have any cheaper ones?'

Try to put that into the context of the electric power business - 'I'll take six kilowatt hours today, the ones over on the left. What are they going for? Got any cheaper ones?'

The power business is obviously not quite so instant. When you turn on a light switch, you do something for which people made provision as much as 20 years earlier.

This is how long the lead time can be for construction of the power plant and the distribution system, particularly for plants fuelled by liquid natural gas, the suppliers of which want very long term contracts to justify their own big investments, and particularly when working with bureaucrats, such as ours, who can postpone urgently required decisions for years.

No one makes these sorts of investment commitments on the basis of the whims of the customer as to what sort of tariff would meet his or her notion of affordability at the time he or she turns on the light switch.

It's not done that way in power, it's not done in public transport and it's not done in telecommunications. A haircut is, in fact, about the only essential public service provided by the private sector, which I can think of as appropriate to the street stall pricing method.

When government makes arrangements with a private entity for the provision of essential services that require large sums of investment capital, there is always a long section in the contract that deals with the pricing of these services, I stress always.

Investors don't throw away their money by leaving the returns on their investment to the mercies of the consumer after the investment has been made. Does even the maaih choi poh say, 'I'll give you these tomatoes first and then you can decide what you want to pay for them'?

What happens in every case is that authorised bureaucrats sign contracts that commit both them and the private entities involved to a long term mechanism by which the fees and tariffs for the public service are determined.

Once the signatures are on the document, it is too late for any politician or bureaucrat, even for the chief executive to say that the needs of people will outweigh the interests of shareholders in pricing of these services.

The time for making the needs of the general public outweigh those of private shareholders is in contract negotiations.

If legislators at that time wish to say that the proposed contract terms cheat the general public then they can tell the bureaucrats not to sign and take the risk that public does not get power, buses or telephones.

I recognise how very unusual it is that such basic lessons on civic obligations should have to be delivered through a newspaper column rather than a Primary 4 textbook but you will excuse me, I hope, for taking the view that some of our legislators were badly educated.