Why Carrie Lam’s Lantau reclamation project should be seen as an investment in Hong Kong, rather than wasteful expenditure
- James Tam says the project would cost less than 20 per cent of Hong Kong’s GDP and has the potential to deliver substantial long-term economic benefits in addition to alleviating the shortage of affordable housing
- While there are concerns over deviating from the city’s tradition of fiscal prudence, Singapore demonstrates how government debt can contribute to development
There has been plenty of controversy around the Lantau Tomorrow Vision since it was unveiled in Chief Executive Carrie Lam Cheng Yuet-ngor’s policy address. While constructive debate on such a huge undertaking is welcome, as a finance practitioner, I have found the opposition voices to be biased, with reasoning that does not reflect a careful evaluation of the financial facts.
The project is reported to cost around HK$500 billion, a seemingly astronomical sum. However, Hong Kong’s gross domestic product was HK$2.6 trillion in 2017. The project would cost less than 20 per cent of our GDP. Since the investment is spread over 15 years, this is less than 1.5 per cent of our GDP on an annual basis over this period.
Compare this to the “Rose Garden” project to construct the airport at Chek Lap Kok and related infrastructure. Hong Kong invested HK$155 billion in the project that was proposed in 1989 when our GDP was around HK$500 billion, equivalent to 31 per cent of annual GDP. Hence, the Lantau project is a very manageable undertaking relative to the size of our economy today. In fact, the project will add 1 to 1.5 per cent to our GDP every year during the construction phase.
The funding should be seen as an investment, not an expenditure. The project should not be compared to other welfare initiatives and government subsidies to the public since the funds invested in the project would not be immediately available for public consumption.
Watch: Why Carrie Lam’s Lantau reclamation plan is so controversial
Instead of “throwing money into the sea”, we should expect this project to “turn sand into money”. How would this happen? As with any investment, we should prioritise recovering our principal. Unlike infrastructure projects, this “land creation” exercise can be directly monetised in real cash.
Assume 30 per cent of the 1,700 hectares will be for residential use, of which 30 per cent will be for private housing and 70 per cent for public housing. The project thus creates around 66 million square feet of gross floor area (assuming a plot ratio of four times) for private residential use that can be monetised through land sales. A land sale price averaging HK$7,600 per square foot would cover the entire investment cost of HK$500 billion.
This compares to an average land sale price of nearly HK$8,700 per square foot in public land tenders over the past five years. The government could recover the entire project cost by selling just 9 per cent of the newly created land for private residential use. In other words, around 1,550 hectares will be our “investment upside.”
This upside would bring Hong Kong tremendous benefits. First, the 360 hectares or so of land earmarked for public housing could provide 200,000 to 300,000 units. This would address the shortage of affordable housing supply currently affecting multiple generations of Hongkongers.
Next, the project would make land available for a new central business district and the associated land premiums. If even 5 per cent of the 1,700 hectares is reserved for commercial use, it would create around 7.65 million square metres of floor space available for business and industrial purposes (assuming a plot ratio of nine times). In comparison, the total office floor space in Sheung Wan, Central, Wan Chai/Causeway Bay and Tsim Sha Tsui combined was around 8.5 million square metres in 2010.
Further, 20 per cent of the new land (340 hectares) could be used for new developmental purposes – education, health care, sports, creative industries, and technology and innovation centres. Hong Kong’s advantages in these areas has been chipped away in part by the lack of land to support sustainable development on a large scale.
The policy address estimates that 340,000 jobs will be created by the project. On the basis of Hong Kong’s current GDP per capita of HK$360,000, this translates into around HK$122 billion of incremental GDP per year. In reality, even more GDP could be created as more high-end jobs and better growth opportunities are made available by the new businesses and emerging industries.
One reason some oppose the Lantau Tomorrow Vision is that it will use up half of Hong Kong’s HK$1 trillion fiscal reserves and works against our long-standing fiscal discipline.
While the project can pretty much be “self-funded” through land sales, the land premium proceeds would not be realised until after the project is completed. So how could the project be funded during the construction phase?
Hong Kong has been running an average fiscal surplus of HK$92 billion per year (around US$12 billion) between 2007 and 2017. Meanwhile, Singapore has maintained an average annual fiscal surplus of S$3.2 billion (around US$2.5 billion) over the same period.
We have therefore been more fiscally conservative than Singapore by a margin of US$9.5 billion per year (HK$75 billion).
Adjusting ourselves to Singapore’s fiscal discipline standards for about seven years would allow Hong Kong to set aside enough money to fund the entire Lantau Tomorrow project. This doesn’t sound too aggressive or unreasonable.
In addition, Hong Kong has minimal government debt, compared to Singapore’s national debt of around US$400 billion, around 1.2 times its annual GDP. To match Singapore’s debt levels, Hong Kong has a theoretical “debt capacity” of HK$3.2 trillion.
This is not to suggest Hong Kong should raise debt to Singapore’s levels. However, Hong Kong does not need to be overly frugal and lose sight of opportunities to upgrade its economy for the long term.
Undoubtedly, the Lantau Tomorrow Vision is a major undertaking and the detailed execution plans must be vetted. I won’t pretend to understand the potential environmental implications.
However, I am strongly convinced of the investment merits of the project and that its potential economic benefits significantly outweigh the costs. A more detailed study based on facts and evidence would be worthwhile.
James Tam is managing director of a major global investment bank and an adviser to Our Hong Kong Foundation. The views in this article are the author’s own