New competition law can't work without land reform

PUBLISHED : Wednesday, 19 November, 2008, 12:00am
UPDATED : Wednesday, 19 November, 2008, 12:00am

Some time next year, if everything goes to plan, the Legislative Council will pass Hong Kong's new competition law. For the first time ever, destructive practices like price-fixing, bid-rigging and predatory pricing will be banned across all sectors of the economy.

In theory the new law should be a shot in the arm for business activity, encouraging enterprise, inspiring innovation and enlarging choice just when Hong Kong needs it most.

That's the theory. In reality the new law is unlikely to make a blind bit of difference to Hong Kong's anti-competitive business environment, leaving the cartels that dominate our economy and collude to jack up prices and shut out newcomers largely untouched.

The problem is that the new law specifically excludes the city's biggest monopolist: the government, which owns, controls and parcels out the entire supply of the scarcest commodity - land.

According to Hans Mahncke, assistant professor of law at the City University of Hong Kong, 'there is a strong but rarely analysed argument that land ownership and property development are the true source of Hong Kong's competition problems'.

In an article in the latest edition of Hong Kong Lawyer, the journal of the Law Society of Hong Kong, Mr Mahncke contends that the new competition law will be meaningless without a complete overhaul of the city's land system.

His argument is straightforward. Because the government owns all the land and derives a large portion of its revenues from selling leases at auction (see the charts below), it is in the government's interest to keep property prices as high as possible.

As a result, the only people who can afford to bid at the government auctions are a handful of favoured tycoons and their families, 'who can afford to pay the high prices and who can collude by engaging in bid-rigging and apportioning available land among themselves'.

These developers pass on the government's high prices - plus a fat margin - to businesses and individuals through exorbitant rents and by selling tiny apartments at outrageous sums, 'effectively equating to an indirect tax on consumers'.

This in turn discourages investment and enterprise, shutting out newcomers.

Meanwhile, protected by their privileged position, the tycoons have grown enormously wealthy, allowing them to expand their empires across the full spectrum of Hong Kong's business sectors from ports and power generation to bus companies and supermarkets. The result is the comprehensively cartelised economy we see today.

Don't expect the competition law to change anything, warns Mr Mahncke. Far from having been drafted to take on the tycoons and their anti-competitive practices, the new legislation has been designed expressly to fail.

For example, the government's proposals exempt 'services of general economic interest' from the law while permitting anti-competitive arrangements which do not 'conflict with the other aims of society'. And just in case there is any doubt, they also give sweeping powers to the Chief Executive to grant any further exemptions that he sees fit.

'The proposed competition legislation is as perforated and soft as a piece of Swiss cheese - and it stinks too,' argues Mr Mahncke.

The irony is that although the competition law appears designed to protect Hong Kong's property barons, the government is unlikely to benefit much in the near future. With the economy in recession, revenues from land sales have completely dried up and the government is once again facing a budget deficit.

Instead of fudging the issue, the government would be better off drafting effective competition legislation and reforming the land system to support its revenues, perhaps by reducing the up-front premium on land sales while slapping a tax on completed property developments.

Unfortunately, as Mr Mahncke admits, 'structural reform of the land system is about as unlikely as universal suffrage'.