Hong Kong's Leaders Back Away from Their Own Pact

The moral bankruptcy of the mix of bureaucrats and tycoons’ kids who constitute Hong Kong’s ruling group has again been on display as ministers attempt to ward off public discontent about rising prices.

The Hong Kong government proclaims itself to be “business-friendly” and to provide companies and individuals with a stable legal and administrative environment in which to do business. So imagine the surprise when Henry Tang, the leading candidate for Chief Executive under the current warped selection system, attacked the major electricity provider, China Light & Power for announcing a 9.2 percent hike in power prices. Tang was naturally joined by other politicians claiming this was an outrage. China Light subsequently partly backed down, lowering the increase to an apparent 4.9 percent -- though that is not permanent and is conditional on other factors.

But China Light’s original proposal was entirely in accordance with its legally binding franchise agreed with the government in 2008 which permits it’s a return of 9.9 percent on fixed assets. That agreement was made when Tang himself was Chief Secretary for Administration and thus directly responsible for the agreement. Conceivably Tang, who is not known for either his brain power or workload, had forgotten about his own role in the 2008 deal. But to be complaining now and forcing the China Light to deny itself the return promised by the government is the sort of behavior to be expected in, for example, Chavez’s Venezuela.

But do not expect the official voice of business, the Hong Kong General Chamber of Commerce, to protect agreements. It has been captured by government appointees, with now a chief executive who until recently as a bureaucrat had a very close relationship with Tang and who was suddenly elevated to become General Chamber chief executive in a 2011 coup masterminded by Chairman, Anthony Wu, who among other government-linked positions is chairman of the government’s Hospital Authority, the Bauhinia Foundation, a quasi-government so-called think tank, and among Tang’s public supporters for chief executive. Wu is a quintessential all-purpose government stooge purporting to be a businessman despite the fact that a disciplinary complaint against him regarding a former role as head of accountants Ernst & Young has still be heard more than two years after it was lodged with the Hong Kong Institute of Public Accountants, the body by which accountants are supposed to regulate themselves.

Another official attacking China Light was none other than Edmund Yau, the Environment Secretary. Yau was also directly involved in the 2008 franchise agreement yet is now trying to weasel out of the issue by suggesting that China Light has somehow been fiddling the books to justify the increase. That is an interesting and unproven claim to come from a minister who has consistently fiddled with pollution data to make it appear that greater environmental strides have been made than is the case. Hong Kong’s air quality remains abysmal even judged by the out-of-date standards it is using. Failure to improve the environment is a direct consequence of the unwillingness of Yau and his colleagues to face down the major polluters. This is typical of leading bureaucrats who find decision-making always difficult but never more so than when it might effect their friends, and possible future employers, in the private sector.

Even current Chief Executive Donald Tsang, a lifelong bureaucrat who has never worked in business, joined in this chorus rebuking China Light for “irresponsible behavior” despite his role in the 2008 agreement – and in a 7.2 percent pay increase this year for senior bureaucrats already with large salaries and pensions and other perks.

The 2008 franchise agreement was much criticized at the time, not only allowing a much higher rate of return than on comparable schemes in developed countries – where 7 percent is about average. Such a level is certainly no disincentive to CLP Holdings and Power Assets, the holding companies of the two Hong Kong monopolies. They invest most of their excess profits in countries such as Australia and the UK where permitted returns are much lower.

Not only does the 2008 agreement give a high return on assets but provides for China Light and Hong Kong Electric to maintain complete control of distribution in their geographical areas. This makes it impossible for mainland power producers to compete in Hong Kong even though China Light gets some of its power from a partly-owned nuclear plant at Daya Bay across the border. Nor is there any inter-connectivity between China Light and Hong Kong Electric. This results in HK Electric being able to charge 30 percent more for its power than does China Light.

Quite what makes HK Electric such a relatively high cost producer is not clear – particularly as a high proportion of its output is from relatively cheap and highly polluting coal. But a system based on a guarantee of return and a local monopolies with no interconnections is destined to produce inefficiency and massive over-investment in excess capacity. The more investment, the higher the return to shareholders. The permitted rate of return amounts in the case of HK Electric to a monstrous 36 percent of sales, and 28 percent for China Light.

The focus of public anger and ministerial interest should, if anything, be on the reasons why prices for HK Electric consumers are so much higher. But that company is owned by Li Ka-shing, who got to being Hong Kong’s richest man through his understanding of the role of government in creating wealth for those in the land and public utility businesses.

The franchise agreement to which Tang, Yau and Tsang signed up are not just examples of excessive profits being made because of collusion between big business and the government for which users pay. They are also proving obstacles to innovation which would cut pollution, increase efficiency in production as well as usage and make a meaningful contribution to renewable. Their efforts now to deny culpability for high power costs and exorbitant profits is a stark indication of the rot at the heart of the government.