Hong Kong’s Overflowing Pork Barrel

Hong Kong is in grave danger of following the Japanese road to ruin: spending huge amounts of money on unwanted infrastructure and bridges to nowhere. Like the Japanese government in thrall to a construction industry that is a big supporter of the ruling party, Hong Kong is in the grip of massive developer interests used to dictating government policies.

Like Japan, the government insists that all this is good for the community because it creates jobs. Chief Executive Donald Tsang has had the nerve to use job creation to defend his multibillion dollar project to build a massive government headquarters on a prime harborside site.

Tsang can get away with this and other kinds of massive waste because of a funding mechanism created by the colonial government in the early 1980s. That was when Hong Kong had a young and fast growing population and economy – a very different situation than today when population growth is minimal and the average age has risen by more than a decade.

Back then the government was confronted with a huge rise in land sales and other capital income thanks to an asset boom. It wanted to disguise the size of its budget surplus while at the same time creating a cushion for continued financing of long-term capital projects should the economic situation deteriorate. So in 1982 it created the Capital Works Reserve Fund and decreed that land sales and some other capital revenues would go directly into this pot, which would be used to finance most capital spending. In the annual budget the government made estimates of income and expenditure, but actual spending out of the CWRF was often way below what was announced in the budget and its income much higher.

In due course this sleight of hand was to generate a useful cushion and, among other things, came in handy when the government built a new airport and associated roads, railways and bridges. It was also useful after 1997 when the government, though facing fiscal problems, was able to splurge a huge amount of public money on an essentially private project – Disneyland.

The problem now is that funneling land sales proceeds into the CWRF creates a huge pool of money to be spent on capital works regardless of need or economic rate of return. The new bridge to Stonecutters Island is perhaps the largest of these white elephants but will certainly not be the last. There is a huge corps of bureaucrats and engineers, not to mention the construction companies themselves, who have an interest in these projects continuing.

Only corrupt and vested interests could possibly believe that at a time when Hong Kong faces grave air pollution problems it wants to build yet more six-lane highways through urban areas, yet drags its feet on extending the mass transit railway and road pricing to reduce pollution and the need for more highways. Road pricing was originally proposed by the colonial government in the late 1980s, but it retreated in the face of business interests. The bus-using public of course would have benefited at the expense of high-income bureaucrats who get free parking at government offices.

So now instead of spending money on cleaning up the city, making users pay for polluting the air, improving hospital care for the elderly poor who built Hong Kong’s prosperity, etc. Donald Tsang rejoices in the role of king of vested interests.

The recovery in land prices has again swollen capital revenue and the government is more determined than ever to spend on pet construction projects. At a time when Tsang is pinching every penny of recurrent spending on health, education and welfare for an aging population (senior civil servants with their bloated and inflation-proof pensions excepted), the government intends to increase capital spending from a projected HK$24 bn in the current year to $42 billion three years later. Operating expenditure meanwhile is forecast to rise by only a cumulative 10 percent over the same period.

Even an economic downturn seems unlikely to stop this juggernaut. The government projects that even after this increased capital spending there will be a large surplus in the CWRF on top of an accumulated surplus probably now in excess of HK$50 billion!

For sure, Hong Kong people deserve more space, public amenities and facilities for the elderly. These involve large capital spending – as do railways. But instead of focusing on the quality of life for a service-oriented economy which hopes to attract the best and brightest from China and the world, the government is trapped in an earlier era in which pouring concrete meant progress – factories, roads, ports, new towns and ever higher development densities. It is trapped, also, in the interests of the idle rich for roads on which to run their fast cars.

Much of the blame rests on that little-understood mechanism, the CWRF, but also with government officials who like to believe that capital spending, however unproductive, is good and consumption is bad even if it raises living standards or encourage families to have children and end Hong Kong’s ignominious position at the bottom of the world fertility league.

It is not as though the CWRF funds have to be used for capital works. The financial secretary has the freedom to move them around as he wishes. He chooses not to do so because of developer interests and a profound ignorance by a cloistered, self-important bureaucracy of what has or is happening in more advanced cities, from San Francisco to Singapore to Stockholm, which are trying to preserve their character and create a better quality of life for residents. In Hong Kong, by contrast, we get concrete and more concrete.