In the end Hong Kong put its red-blooded capitalist instincts First, but for a long time it looked as if old friendships and the idea that nanny government really knows best might prevail. At issue was the award of licences for the new third generation (3G) mobile telephones. Sale of these has produced windfall gains for European governments, but for months the Hong Kong telecommunications regulator declared that it would run a “beauty contest” under which the government would assess bids and award licences for free, having decided which service suppliers would benefit the community best.
Then in October came the 180-degree turn.
Donald Tsang, Financial secretary, says the move will work three ways: “promoting development of the telecoms market, protecting consumers’ interest and ensuring the maximum benefit to the economy.” Another factor could be that the government, though sitting on foreign exchange reserves close to $90 billion, is feeling the pinch.
Hong Kong people have taken enthusiastically to mobile phones. There are more per head of population than anywhere except perhaps Nokia’s Finland.
So when Hong Kong prepared for the 3G mobiles, which will provide easy links to the internet and e-commerce, it seemed a good opportunity for the government to fill its coffers. In the light of the huge windfall gains in the UK and Germany, it seemed a steal for Hong Kong to stash away US$4 billion or US$5 billion from auctioning the new licences. But no, the idea initially met hostility, and even after the successes in the UK and Germany official were busy devising their beauty contest. The argument prevailed that the companies might spend money on the auction that should go towards investment and provision of the services.
The telecoms authority claimed that a conventional auction would have a dampening effect on the roll-out of 3G. Big players supported this argument, with the interesting exception of Li Ka-shing, one of Hong Kong’s richest men and the dominant telecoms player, who gave his support to the auction method. Those who wanted an auction said that the telecoms business was changing so fast that no civil servant had the omniscience to devise a fair system that would stay fair for long. In addition, they urged that the auction price would be an entry fee immediately written off.
Carrie Yau, secretary for information, technology and broadcasting, says Hong Kong will adopt a “hybrid system’. Bidders will still have to pre-qualify, but Yau admits it is a “basically straightforward auction” and “the fairest, most efficient and transparent way” of allocating the licences.
Even so, John Ure, director of the telecommunications project at Hong Kong University, reckons the auction will be anti-competitive. “If you have high auction prices and limited spectrum, you’re letting Li Ka-shing buy an oligopoly,” he says.
But behind the decision was the undoubted fact that the apparently cash-rich Hong Kong government is getting strapped for funds. Treasury secretary Denise Yue forecasts a budget deficit in the current Fiscal year to March of the order of HK$5 billion (US$641 million). In a sense Yue and her boss, Financial secretary Tsang, face the problem of the boy who cried “wolf” – they have frequently forecast a deficit that turns into a surplus.
However, the government is running out of windfalls that give its Finances a healthier look. There were hopes that this year the privatization of 20% of the Mass Transit Railway Corporation (MTRC) would pave the way for a yield of HK$30 billion for the government through an eventual two-tranche disposal totalling a 49% sale. But when the issue went to market in October, the fall in the local stock market played a part in reducing the government’s take.
There was immense and widespread popular interest and the oVer was oversubscribed 18 times. It was the biggest offering globally for an urban passenger railway system, worth six times more than the Mass Rapid Transit offering in Singapore. But even after an over-allotment of shares, the government will pick up just HK$1.33 billion. The market valuation of the MTRC turned out to be HK$47 billion, less than half the HK$110 billion Tsang had estimated when the privatization bill was proposed last February. The government still claimed to be delighted with the MTRC offering and said that its HK$30 billion Figure was “only for the purpose of making a budget”.
Nevertheless, Tsang and his colleagues have to face some hard facts of life about a narrow tax base. On paper Hong Kong is one of the world’s richest societies, with average income of more than $25,000, with more Rolls-Royces per kilometre of road than anywhere else, the biggest brandy consumption per head and billionaires galore who are busily taking over key chunks of the rest of the world from Panama to Harvey Nichols.
But the riches are unevenly distributed. Of the 6.5 million inhabitants, many pay no tax at all. Indeed, 80% of the income tax take comes from 6% of the population, and 80% of corporate taxes are paid by just 5% of businesses. Other regional economies, such as Taiwan and South Korea, have shown a narrowing of wealth and income differentials, but in Hong Kong they have widened. In his annual policy address on 11 October, the territory’s chief executive, Tung Chee-hwa, acknowledged the problem where the poorest 600,000 are making less than $600 a month, barely enough to survive on and a third of what they were getting four years ago.
For Tsang this adds up to a real budget headache and he must count his windfalls while he can. The property boom, which sustained the government with huge budget surpluses from the 1960s onward, is long over. Moreover, the government has a troublesome legislature to cope with. Its powers are limited, but it howls with anger any time fee or tax increases are proposed. The latest outcry came at the suggestion that water charges, currently subsidized by 50%, must be changed to a user pays principle.
