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Following is a brief English translation of the reply by the Financial Secretary, Mr Donald Tsang, in the motion debate on "Rescuing the Service Industry" by the Hon Choy So-yuk in the Legislative Council today (Wednesday):

Madam President,

In the wake of the Asian financial turmoil, the community has focused its attention on the economic trends in the short term and the question of when the economy will recover. The Government has implemented resolute measures to relieve the difficulties brought by the economic downturn. The direction of Hong Kong's long-term economic development is a subject that merits our concern all the more during this period of adjustment. In last week's Motion Debate, I explained in detail the Government's work in implementing our long-term industrial policy. Today, I am delighted to have the opportunity to listen to Members' views on the other aspect concerning the various service industries. However, these views cover a wide range as well as many specific aspects of the public policy, including policy details concerning sub-contracting arrangements, legal fees, government fees and charges, the manufacturing industry, support for the SMEs, etc. We would record all these valuable views and carefully examine them with our colleagues.

It is not possible for me to respond to each and every point in this short reply but we will certainly report to Members later in small groups and on other occasions. Today I would like to discuss from a broad perspective the challenges faced by the service industries. The most crucial aspect of our work is how to ensure Hong Kong will emerge more competitive after recovering from the economic downturn and that the services sector will play a key role in furthering Hong Kong's economic growth.

Let me now reply to the motion moved by the Hon Choy So-yuk and the amendment proposed by the Hon Sin Chung-kai.

Government's Strengthening Support to the Service Industry

Driven by market forces, our economy has undergone a remarkable transformation over the past 20 years. In 1986 the services sector accounted for only 69% of the GDP. The share quickly rose to 84% in 1996. Over the same period, the share of the services sector in total employment has also increased from 55% to 79%.

In recent years, the Government has been strengthening its support for the service industries. I pay particular attention to the role played by the service industries in Hong Kong's long-term economic development and am committed to promoting Hong Kong as a world-class service centre:

* In August 1995, I spearheaded the establishment of the Government Task Force on Services Promotion. Comprising the relevant Policy Secretaries, the Task Force conducted a comprehensive review of the approach of their policy directions to the services sector, to ensure that the right policies and programmes are in place to facilitate its growth and development and to identify new approaches to help the services sector realise its full potential.

* In March 1997, the Final Report of the Task Force was published. It gave an account of the progress of work of the various Government bodies with respect to the 14 leading service industries and the 8-point framework, and provided a clear picture of the future policy directions. In December 1997, we updated the progress of work set out in the Final Report and this was published in a Provisional LegCo brief.

* Following the strategy set out in the Final Report, the respective Policy Bureaux have now shouldered the task of promoting individual service industries within their purview. The Business and Services Promotion Unit (BSPU) was established in May 1997 to perform a supporting, advisory and co-ordinating role. To ensure that the subject receives the attention and support it merits, the Unit is in my office and its head reports directly to me.

* As pointed out by the Hon Choy So-yuk, the Government should consult the industries and solicit their views in formulating policies. Hence, in April 1997 after the winding-up of the Task Force, I set up a permanent Services Promotion Strategy Group, comprising top businessmen, leading academics, and the relevant Policy Secretaries. I chair regular meetings of the Group to discuss ideas for services promotion and to consider proposals by the Government. The Group aims to spearhead services promotion initiatives from a broad perspective, and to strengthen Government's consultation efforts.

I share Members' view that the services sector is an important economic pillar for Hong Kong. To let Members have a more thorough understanding, I will describe our work in more specific terms.

Specific Services Promotion Initiatives

In formulating initiatives for services promotion, the Government understands very well that it is not its task to dictate business decisions or to second-guess markets. The Government's role is to keep bureaucratic interference to a minimum and to provide the maximum level of support for business consistent with Hong Kong's long-established and successful free market economic philosophy.

With this principle in mind, we have adopted a two-pronged approach. First of all, the relevant Government bodies take forward their policies and programmes with a view to promoting services and implement the 125 initiatives contained in the "Final Report" to the fullest. From time to time, they review their plans and legislation in the light of the current situation, gather views from the industries and the public through the various advisory committees and other channels, and develop and implement new initiatives as necessary. Such consultative work takes place every day.

Take tourism as an example. To counter the recent drop in the number of visitors to Hong Kong, the Economic Services Bureau (ESB), the Tourist Association and the industry formed a special task force on tourism last year to advise on the promotion of the long-term development of Hong Kong's tourism. We are adopting effective and targeted initiatives to boost the number of visitors to Hong Kong and to stimulate their spending. These include further facilitating the entry of visitors from the Mainland and Taiwan, setting up of a $100-million "International Events Fund", construction of a cable-car project in Lantau and leasing the former Tamer site as a temporary performance venue to the Tourist Association under a short term tenancy. The Tourist Association is also launching the "Be a Good Host" campaign to enhance the quality of service of our service providers. Most of these measures are implemented after we have considered carefully the views and suggestions of the industries.

Take the shipping industry as another example. In order to promote the development of this industry, the former Port Development Board was reconstituted into the Hong Kong Port and Maritime Board on 1 June this year. Members of the Board include people well known in the port and shipping community and experienced shipowners. The main function of the Board is to co-ordinate and bring together the resources of the Government and the maritime sector to promote Hong Kong as an international shipping centre. The Board provides a forum for the shipping industry to channel their views to the Government, which helps strengthening the liaison between the Government and the shipping sector. In response to suggestions from the industry, we are also implementing a series of measures to help local shipping companies to lower their operating costs and increase their international competitiveness. These include lowering the costs for shipowners for registering their vessels in Hong Kong, simplifying ship inspection procedures and reducing local shipping companies' overseas tax burden.

Apart from supporting individual service industries, Government bodies also implement other broader promotional strategies, such as promoting inward investment, enhancing productivity, providing an infrastructure of support, investing in education and training, etc. The following are some examples.

Regarding the promotion of inward investment in the services sector, the Investment Promotion Units attached to the seven overseas Economic and Trade Offices of the Industry Department actively identify new opportunities for inward investment. The staff of these units are also committed to promoting Hong Kong as the base for regional headquarters and offices of overseas companies.

As for enhancement of productivity, the government-funded Hong Kong Productivity Council set up the Service and Business Branch in May 1996 to coordinate the support services for the services sector. In order to enhance the productivity of local enterprises, the Council is developing a management information system and providing training and advisory services for the business sector. It has also set up the Business Enhancement Services Division, Small to Medium Size Enterprises Centre and Service Quality Centre.

The Government has all along been committed to providing infrastructural support to enterprises. The Services Support Fund administrated by the Industry Department provides financial assistance to projects that are beneficial to the development of Hong Kong's service industries. Since its establishment in July 1996, the Fund has received Government funding totalling $100 million and has committed funds for 27 projects, including projects for such service sectors as computer and related services, wholesale and retail business and other professional services. The Industry Department is now processing applications of 78 new projects.

As for education and training, the Education and Manpower Bureau provides the services sector with suitable human resources through their placement services, vocational training and employees retraining programmes. In fact, most of the vacancies offered by the Labour Department are from service industries. Many of the training programmes on practical skills provided by the Vocational Training Council are service-related and an overwhelming majority of the training programmes of the Employees Retraining Board cater for the needs of the services sector. This September the Vocational Training Council and the Employees Retraining Board will, in addition to their existing courses, offer a 9-month Certificate of Skills Training (Service Industries) Course. The course aims to help the unemployed increase their employment opportunities through training while upgrading the quality of human resources for the service industries. The organisers are now consulting the relevant chambers and industry practitioners on the course contents, to ensure the course meets the need of the industries.

The other aspect of our two-pronged approach is the Action Agenda for Services Promotion drawn up by the BSPU each year. The Action Agenda is first discussed by the business sector and the Government and then submitted to the Services Promotion Strategy Group for consideration. Its objective is to set a broad direction for the overall services promotion strategy and to support the on-going efforts of other Government bodies in this respect. I will give some examples of the work in progress under each of the four aims of the Action Agenda.

Aim No. 1: to spearhead strategic thinking about the future development of our service economy.

In January this year, the Government, in conjunction with the University of Hong Kong and the Hong Kong Coalition of Service Industries, organised the first tripartite forum, inviting members from the academic circle, the business sector and the Government to exchange views on the development of the services sector. Many of the views have facilitated our formulation of new action plans. In view of the good response, we will organise the second tripartite forum early next year. Also, we are now setting up an international advisory committee, inviting overseas academics, businessmen, researchers, etc., to advise on the promotion and internationalization of our service economy.

Aim No. 2: To strengthen the institutional support for the services sector.

Well-established institutions and infrastructure are particularly important to the development of the services sector in a free market. For example, we are studying the case for and the feasibility of a business park in order to meet the present and future land infrastructure needs of the service and other industries. We are also conducting a study on manpower and training requirements of the tourist industry. Another manpower study on the information technology industry will start shortly. We are also planning to conduct a review on Government's efforts to promote inward investment with recommendations on improvement measures. We implement these initiatives after taking into account the views and suggestions from the industries gathered through our daily contacts with them. In pressing ahead with these efforts, we will continue to consult the relevant parties, and to hold in-depth discussions with them as necessary. This will ensure our work is beneficial to the various industries.

Aim No. 3: To implement priority projects targeted at specific industries, supplementing and complementing the on-going work of various bureaux and departments.

To complement ESB's efforts in promoting the shipping industry, the BSPU will work with the Bureau to appoint consultants to examine the strengths and weaknesses of Hong Kong's shipping industry vis-a-vis its competitors and to recommend a strategy and action programme to promote Hong Kong as an international shipping centre.

In an effort to revive tourism, ESB is now assisting the tourist industry in moving towards high value-added development. This includes a study to examine the case for additional convention and exhibition facilities in Hong Kong in order to attract those overseas businessmen who spend more than ordinary visitors. In conducting the study, we frequently approach the concerned parties to solicit their views. The Information Services Department is considering setting up a special team within the Government to help bureaux and departments organise international conferences in Hong Kong.

On this point of international conferences, I wish to respond to the opinions put forward by the Hon Choy So-yuk and the Hon Howard Young with regard to the development of Hong Kong's exhibition industry. The Government has all along been highly supportive of the industry. In the early 1980s and in 1993, we provided the land and resources for the construction of the world-class Hong Kong Convention and Exhibition Centre (CEC). The extension to the CEC was constructed with Government funding of over $4.5 billion. The Government will continue to work with the Trade Development Council (TDC) in promoting Hong Kong as Asia's trade fair capital, while the TDC will keep working closely with various trade fair organisers. In fact, over three-quarters of the exhibitions held at the CEC each year are organised by our local trade fair organisers. On CEC's charges, I wish to point out that the Government does not look for a direct return on its capital, but must ensure that the CEC operates on prudent commercial principles and generate a reasonable level of income to provide sufficient resources for TDC's work.

Aim No. 4: to enhance international recognition and local understanding of Hong Kong's service economy and to foster public support for it.

To enhance international investors' understanding of and confidence in Hong Kong, we have developed a series of publicity programmes highlighting the business friendly environment of Hong Kong. At the same time, we will seek to explain to the general public the relationship between our services sector and our economy as a whole, especially the importance of providing quality services in strengthening competitiveness, so as to help them prepare themselves and rise up to the new challenges brought about by the services sector.

I agree a lot to the Hon James Tien's views that quality service is of critical importance to the promotion of high value-added economic activities. We have to rely on people to provide quality service. Our publicity programmes therefore focus on changing the mindset of people with a view to improving people's attitude in delivering services.

Looking forward to the future and developing new opportunities

Most of the above measures are very forward-looking and will ensure that the service industries in Hong Kong can keep abreast of time. However, we also understand that international business has entered an era of increasingly open, free and borderless competition, and therefore, we must be prepared to continuously consider new ideas in positioning Hong Kong in our future development. Meanwhile, the regional financial turmoil has exposed some of the weaknesses of our economy. We not only have to strengthen and reinforce our major economic pillars such as finance, property development, tourism, shipping, industry and trade, but also have to actively pursue new initiatives including:

* stimulating high value-added industries and businesses;

* promoting the application of information technology (IT); and

* strengthening economic cooperation with the Mainland.

First, in stimulating high value-added development in industries and businesses, the promotion of innovation and technological development is especially important. Therefore, the Chief Executive appointed in March this year 14 distinguished figures to the "Chief Executive's Commission on Innovation and Technology". The objectives of the Commission are to promote product and process innovation among manufacturing and service industries, as well as to encourage and support high value-added industries and businesses in Hong Kong. To pursue its work, the Commission has undertaken a consultation exercise to collect views of the industries and the public.

Second, as regards the promotion of the use of IT, the Government has set up the Information Technology and Broadcasting Bureau recently to coordinate IT and telecommunications policies and to encourage the development of IT and telecommunications services in the public and private sectors. In order to strengthen Hong Kong's competitiveness in the Information Age, we will:

* continue with our liberalisation process in telecommunication and remove obstacles in our regulatory framework, e.g. to facilitate interconnection between local fixed and mobile networks, and enhance Hong Kong's position as a regional communication hub;

* develop an open, common interface information infrastructure, accessible throughout Hong Kong, for the delivery of public services;

* promote the development of electronic commerce through commissioning pilot projects in the private sector that make innovative use of this developing infrastructure; and

* work in partnership with the private sector to promote awareness in, and the use of, IT in the community.

I very much agree to Hon Sin Chung-kai's views that the use of information technology is of paramount importance in future economic development. We have a good example on the financial services sector. The Financial Services Bureau pays particular attention to this aspect and is now studying a report and considering the development of a financial information infrastructure. This work will be of great importance to the further development of our financial services sector and we will carefully consider Hon Sin Chung-kai's views.

As for tax incentives, one of the various tax concessions we proposed in the 1998-99 Budget is to allow an immediate 100% write-off for new expenditure on computer hardware and software. This is an important item in our package of tax concessions which will encourage the business community to invest in information technology, thereby enhancing their efficiency and competitiveness.

Third, the Mainland's huge potential for economic growth together with our increasingly close relations with the Mainland after the reunification injects new energy into our economy. The Government understands that the local business community wishes to take full advantage of the growth of the Mainland's services sector. We are now supporting the Trade Development Council to conduct studies on a number of services sectors including infrastructure development, financial services, IT and telecommunications, advertising and market research, and entertainment industry.

Creation of a business friendly environment

Members have also mentioned the need to foster a business friendly environment. I fully agree with this. Hong Kong is renowned for its rule of law, clean Government, free flow of information, and level-playing field. Our taxation system is the most favourable in the world for doing business. Hong Kong is also the freest economy in the world. We do not exercise control over trade and there is no restraint on investment. Besides, we constantly introduce new initiatives. For example, in the 1998-99 Budget we have introduced a number of tax concessions to help business.

To further improve the business environment, I adopt "Helping Business" as the mainstay of Government's thinking, and charge the Business and Services Promotion Unit, which reports directly to me, with the responsibility for the Programme. The Unit works closely with the private sector to cut red tape, reduce cost of compliance, study the case for transferring certain services out of the public sector to the private sector and improve Government services. Many of the initiatives in the "Helping Business" Programme originated from opinions from the business sector.

Furthermore, we are committed to promoting Hong Kong's competitive edge so as to enhance economic efficiency and facilitate free trade. The Competition Policy Advisory Group, which is chaired by me, has promulgated a "Statement on Competition Policy" in May this year to provide a comprehensive, transparent and over-arching competition policy framework.

These initiatives are our reply to the great importance we attached to the existence of a level playing field and to the competition report released by the Consumer Council. Some Members have just raised queries about some alleged anti-competitive practices. The Competition Policy Advisory Group will look into the queries. Where necessary, we will take appropriate measures to rectify the situation.

A number of international organisations have ranked Hong Kong as one of the most competitive economies in the world. For instance, our economy is ranked second in the world by the World Economic Forum and third by the International Institute for Management Development in Switzerland. I am sure that, under the leadership of the business community and with Government support, Hong Kong will maintain its competitive edge.

Resolute Economic and Financial Policies

Now, I would like to respond to the comments by the Hon Sin Chung-kai and other Members on our recent economic and financial policies.

First of all, Hon Chim Pui-chung has raised various questions relating to the influence of the futures market on the normal operation of the cash market. In fact these questions have been answered in detail in the "Report on Financial Market Management" released by the Financial Services Bureau in response to the financial turmoil last October. Today I would not reply to these questions in detail one by one. I believe the Report has already responded to the views of Hon Chim Pui-chung. But if Hon Chim Pui-chung did have a different opinion, we would be happy to continue to examine the issues.

In order to relieve the plight brought about by the economic downturn, the Government has introduced a series of measures relating to taxation, finance and economy in the Budget in February, at the end of May and in late June. I wish to point out that the Hong Kong Special Administrative Region Government has all along acted firmly and consistently, and has been responsive to the needs of the community. As I reiterated in last week's Motion Debate, in drawing up every measure, we are guided by three principles. First, we must uphold the principle of prudent financial management which we have always adhered to; second, we need to maintain the interest and confidence of investors and international organisations in investing in Hong Kong as a means to secure and increase local employment opportunities; third, we need to ensure that the measures will not have any adverse effect on the linked exchange rate system.

Let me reiterate that our latest initiatives do not in any way depart from the Government's long-standing policy of non-interference with the operations of the market. We are just responding to market conditions. Our aim is to facilitate economic adjustment, not to tamper with normal market activities. Take the case of temporary suspension of our land sales programme. As the property market is undergoing a major correction rarely seen before in terms of both scale and speed and to forestall a collapse of the property market, the Government has made this decision which will have a stabilising effect on the market. Adjustment to the property market will continue to take its natural course. Adherence to the free market system is crucial to maintaining investors' confidence.

Inevitably, implementation of the relief package will result in a deficit of $21.4 billion in the Budget for the current financial year. But this does not signify the loosening of our established fiscal discipline. In fact, the deficit represents just 1.5% of the GDP for the year. Moreover, with last year's surplus of $80.9 billion, Hong Kong's overall financial position is still very strong.

I would like to take this opportunity to point out that an integral part of our prudent fiscal management policy is the "User Pays" principle. Implementation of this principle requires collection of sewage charges and trade effluent surcharge. Notwithstanding such charges, we are still heavily subsidising the polluters, up to 40% of the cost. In fact sewage charges and trade effluent surcharge only account for about 0.3% - 1.8% of the total operating cost.

I stress again that we will continue to staunchly stand by the linked exchange rate system.

Conclusion

Hong Kong has enjoyed economic growth for 36 consecutive years. In the face of the current rigorous challenge, I hope the community can on the one hand understand that the huge appreciation of certain assets in the past few years has led to some bubble elements in the economy which badly needs adjustment. The financial turmoil has accelerated and intensified this process of adjustment. This adjustment is, however, necessary in the long-term economic interests of Hong Kong. What we can do is to try our best to alleviate the pains during this period of adjustment. On the other hand, the community should remain adaptive and pragmatic and be confident that with our sound fundamental establishment in the past decades, Hong Kong will be the first to recover in the region and will regain a new life.

In dealing with the present urgencies, the Government has not interrupted its on-going work. We are proceeding with the permanent and systematic programmes of supporting the long term economic development of Hong Kong. And one of the important aspects of the programmes is services promotion.

Lastly, I am very glad to have listened to Members' valuable opinions today. I fully agree with the views that while the Government must strongly support the services sector, we should not neglect the manufacturing industries. Furthermore, in implementing economic and financial policies, we must abide by the important principles. With regard to the criticisms that Government officials are too rigid in sticking to established rules, I must respond by saying that as a responsible Government, we must have the courage to persevere in what is good and implement in a just manner the policies that are in the overall and long-term interests of Hong Kong.

Thank you, Madam President.

End/Wednesday, July 15, 1998

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