It's not heresy to expect grand projects to pay for themselves

The capital market provides a ready solution, and the extra scrutiny that comes with bond issues might just spare us some white elephants

PUBLISHED : Friday, 28 February, 2014, 1:01am
UPDATED : Friday, 28 February, 2014, 12:39pm

Thank you to the readers who wrote in to comment on yesterday's Monitor, which suggested that Hong Kong's fiscal problems, outlined in Wednesday's budget speech, are an illusion conjured up by the government itself.

As one reader noted: "Things aren't quite as simple as you make out."

He's right, of course. Things very seldom are as simple as an 800-word column is bound to depict them.

On the other hand, problems are often not nearly as complicated, nor as insurmountable, as government officials like to portray.

With the backing of the government, future projects would be able to borrow cheaply

Take Hong Kong's budget. In Wednesday's speech financial secretary John Tsang warned that on our current trajectory, rising health and welfare spending as the population ages will plunge the city into "a structural deficit" in seven to 15 years' time.

The answer, Tsang declared, is for the government to "broaden the revenue base", which is a euphemism for raising more tax.

In response, Monitor argued that the prospect of a deficit is the result of the government's stubborn insistence on segregating the 20 per cent of its total revenues derived from land premium payments and spending them only on new infrastructure projects, which Hong Kong will need less and less as the population ages.

Remove this artificial distinction between capital and recurrent revenue, Monitor suggested.

Collect land premium as regular income streams rather than lump sums, and the government will be free to spend the money where it is most needed: on health care and welfare for old folk.

To many inside government and out this is heresy. To others, it simply isn't workable - merely the glib fancy of a newspaper columnist who doesn't have to put his ideas into practice.

The second objection carries more weight, so let's deal with that first.

The scheme wouldn't work, say critics, because current lease-holders would oppose like fury any attempt to collect a regular land income from them.

And if the government got around the problem by applying the new rules only to future land sales and lease modifications, the income stream generated would be far too small to fill its revenue hole.

True enough; but the government sits atop an enormous pile of surplus reserves roughly HK$1.6 trillion high.

Let's assume public spending on health and welfare doubles in real terms over the next 30 years along with Hong Kong's population of over-60s.

If we also assume a very modest 3.3 per cent real investment return in line with the Exchange Fund's performance over the last 20 years, then that HK$1.6 trillion is enough to cover every cent of the government's extra health and welfare spending for the next 30 years.

This is where officials cry heresy. Where, they demand, will Hong Kong get the funds for badly needed infrastructure projects like the third runway.

The answer is the capital market. With the backing of the Hong Kong government, future projects would be able to borrow cheaply enough.

What's more, requiring them to issue bonds would expose the city's grand projects to the sort of hard scrutiny that until now they have escaped.

We might just end up with fewer white elephants, more milch cows.

If the government really wants to broaden its revenue base, there are ways to do it without further burdening Hong Kong's residents, who already pay a painfully steep hidden tax in the form of sky-high property costs.

For example, in line with the government's much-vaunted "user pays principle", we could charge visitors to the city a HK$100 arrival tax.

With the government looking to attract 70 million tourists a year, that would raise a handy HK$7 billion, or 1.6 per cent of total revenues.

When this suggestion was made a couple of weeks ago, the tourism lobby howled in protest, screaming that it would drive visitors away.

That's nonsense.

If tourists are prepared to pay HK$450 a pop to visit Disneyland - which I'm told is little more than a very expensive shopping mall (I confess, I've never been there myself) - then paying HK$100 to get into Hong Kong would represent excellent value.

If the government is determined to turn the city into a theme park, then we may as well charge an entry fee.