Government gets creative with arts hub assumptions

'As museums are cultural and educational institutions, they are typically loss making and their value should not be measured purely on financial returns.'

Legco paper on West Kowloon Culture Bunker

This was actually a point made by a financial adviser appointed to review the government's assumptions on the project and an honest adviser it is indeed who advises that his advice is not particularly worth honouring.

But he obviously forgot that advice was not wanted from him anyway. He was actually hired to say, 'Yes, boss, you're brilliant' to every question put to him and, as he did not quite say it, the bureaucrats had to go to pains to emphasise that he was wrong when he questioned some of their assumptions.

This will have shut him up, which makes it my turn now as I also have some questions, similar ones, about the financial assumptions in the study papers snowed down on the heads of legislators.

A key assumption is that inflation over the next 50 years will average 2 per cent a year with both construction and staff cost escalation at 2 per cent.

The first thing that should strike you here is that 50 years is an awful long period for making financial assumptions. Leaving aside that such guesses are not really appropriate to the arts anyway, you can guarantee that they will be well off the mark at well short of 50 years. Imagine what you would have forecast in 1958 for the year 2008. Yet our bureaucrats even indulged in talk of financial performance after 50 years.

But it is the assumption of 2 per cent annual staff cost escalation that particularly interests me here. It implies, taken together with a general inflation rate of 2 per cent, that staff members will never see their wages go up. Inflation will rob them of every increase they get. They will be no better off in 50 years than they are now.

This can, of course, happen if our economic growth rate drops to zero for the next 50 years but it would be strange in other circumstances as real wage growth for personal service workers over the last 20 years has been in line with economic growth per employed person.

Could our bureaucrats explain this, please?

The construction cost assumption of 2 per cent also seems unusual. The average of the last 20 years is 5.4 per cent and the average of the last 40 years is 8.3 per cent. At present it is 11.7 per cent. How are we so certain of getting it down to 2 per cent for the next 50 years?

Could our bureaucrats explain this, please?

Likewise the assumption of a 2 per cent overall inflation rate. On the consumer price index (CPI) it is 5.4 per cent at present and this is about the average of the last 35 years, which is as far back as I can find numbers. I can go back 45 years on the GDP deflator, however, and then I get 5.5 per cent.

But the bureaucrats say, 'As an advanced economy and under a currency board system with the Hong Kong dollar linked to the US dollar, Hong Kong's inflation over the very longer run would tend to be more or less in line with those experienced by economies at a similar stage of development. The implicit or explicit inflation targets set by most major central banks in the advanced economies are around 2 per cent.'

Leaving aside, however, that these central banks do not make 50-year forecasts, even implicitly, my quibble is with the 'more or less in line ...' The chart shows you the Hong Kong CPI in red and the US CPI in blue, both rebased to an index value of 100 for the fourth quarter of 1983, when the peg to the US dollar was adopted.

I would call the subsequent wild gyrations 'less' in line, not 'more', and this is not just in comparison to any advanced economy but the one to which our currency is directly linked. How can anyone base inflation assumptions on this relationship?

Could our bureaucrats explain this, please?

And then we get the assumption of a real discount rate of 4 per cent. This, together with 2 per cent inflation, yields a nominal discount rate of 6.1 per cent, exactly what the bureaucrats forecast the project will earn annually on its endowment, which means it will break even. How convenient. What serendipity.

The 4 per cent turns out to be a 'social discount rate', a government invention left undefined and used previously only for the Hong Kong/Macau/Zhuhai bridge, when we were told that it should be 3 to 7 per cent for developed countries. How did we then refine it to 4?

Could our bureaucrats explain this, please?

Then again, I don't think they really need to. I think we can safely take it that these financial assumptions are a piece of tomfoolery cobbled together only because higher-ups in government weren't satisfied with art for art's sake but wanted it for money's sake too.