Following is the speech by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, at the British Chamber of Commerce luncheon today (June 27):
Public Finance and Financial Reform- A Year in Review
Distinguished guests, ladies and gentlemen,
Thank you for the opportunity and the honour to speak with you today. Today, I would like to talk about a topic that is very important: Public Finance and Financial Reform - A Year in Review. The reason I picked this topic is obvious because in a few days, I will have served in the SAR Government for one year, so it's time to review what happened in the two areas that I have responsibility for, that is, treasury and financial services. I took up office as the Secretary for Financial Services and the Treasury out of a sense of mission. I have never dared to under-estimate the weight of that mission. I knew that big challenges would be inevitable in a portfolio spanning both financial services and public finance.
Let me talk about public finance first, because a responsible government needs to manage its accounts well if it is to do well on other fronts. To this end, we have set a target of restoring fiscal balance in the medium term. We aim to achieve this target through a three-pronged approach -- by boosting the economy, by cutting our operating expenditure by a further $20 billion, and by raising additional recurrent revenue of $20 billion.
No easy tasks. Cutting expenditure is difficult whether in the public or private sector. I am fortunate, or unfortunate, to have some experience in both. I can assure you that the difficulties are doubled or even tripled for the public sector, for various reasons. First, size does matter. With a staff of just under 180,000, the Government is the largest employer in Hong Kong, and that's before counting another 150,000 employees in subvented organisations. And the Government's operating expenditure is over $210 billion. Re-engineering and re-structuring such a large set-up takes time.
Secondly, the Government is subject to procedural constraints and considerations that you don't find in the private sector. For example, we need the Legislative Council's approval not only to create a directorate post, but also to eliminate one. Many such procedures exist to subject the Executive to checks and balances. This is as it should be, but they do take time. The other difference is that the private sector is more 'single-minded' in pursuing changes. Its clear bottom line is profit. The Government is expected to achieve much more, and balance all relevant considerations. Our business is to serve the people. This year we are spending, in round numbers, $50 billion on education, $30 billion on health, $30 billion on welfare, and $20 billion on security. These four areas alone take up over 60 per cent of our operating expenditure. In cutting expenditure in these and other areas, we must take careful consideration of the impact on our services to the people.
We do not under-estimate the challenges facing Directors of Bureaux, which is why we have reformed our financial management system to give the bureaux as much incentive and flexibility as possible to economise. Starting from this financial year, we give each Director of Bureau, including myself, an operating expenditure envelope. All envelopes are 1.8 per cent less than the Bureau's forecast of what it needs, so immediately Directors must economise. The savings will increase in steps so that in the medium term, all the envelopes together will shrink to a level that balances our books. I can tell you from personal experience that this shrinking envelope is wonderfully incentivising. The sense of responsibility and ownership is much stronger than in the old days, when bureaux could always look to the main cashier for more.
The envelopes not only incentivise, but also empower. In the old system, funds were allocated to departments. While there was some flexibility, by and large moneys did not flow very freely across departments. Under the new system, moneys are allocated to envelopes, and a Director of Bureau can transfer funds within the envelope across departments under his or her purview. This gives Directors much greater room to economise and to deploy funds according to priorities. Taking my bureau as an example, the Government Land Transport Agency, the Government Supplies Department and the Printing Department under my purview will be merged into the new Government Logistics Department on 1 July. It represents a major step forward in our efforts to streamline government structure and demonstrates the Government's resolve and commitment to further improve the efficiency of government operation and cost-effectiveness of our services.
And we are not leaving it to Directors of Bureaux alone to cut expenditure. We have, for example, agreed to a pay cut package with the civil service unions that would deliver $7 billion of our target of $20 billion.
The change in our resource allocation system does not mean that the main cashier won't help when extra money is really needed. Far from it. Prudent financial management means that the Government will be better equipped when funds are needed to handle unexpected scenarios.
There was SARS, for example, which took Hong Kong by surprise and battered our economy. The Government announced a package of measures in April amounting to $11.8 billion to help tide the community over the difficulties and revive the economy. Of this amount, $1 billion was set aside to re-launch Hong Kong through large-scale promotion campaigns internationally and locally. As you know, this promotion has been started by the Financial Secretary this week. Another $3.5 billion takes the form of Government loan guarantees for the hardest hit industries. Over $400 million was allocated to create some 20,000 short-term jobs and training places. To provide further relief, we recently announced another $715 million for an additional 32,000 short-term training and job opportunities. Taken together, the package is worth $12.5 billion, which is expected to cushion the impact of SARS on our GDP growth by slightly more than 0.2 of a percentage point.
We can afford the package because we have the fiscal reserves. But of course we could not rely on these reserves indefinitely without implementing the necessary measures to increase recurrent and capital revenues. In our original budget for the 2003-04 financial year, there is already a projected consolidated deficit of $67.9 billion and operating deficit of $53.4 billion. The relief measures mentioned above will further increase this year's budget deficit. So will the decline in revenue receipts as a result of checked economic growth. Besides, we have also adjusted downwards the proposed motor vehicle first registration tax after considering the views of the motor trade and Legislative Council members and the impact of SARS. On capital revenue, we budgeted for $21 billion revenue in 2003-04 through the sale of our assets. To date we have got about $5 billion through the sale of civil service housing loans. The progress of the asset disposal programme is also to some extent related to the market situation. But the impact of SARS is one-off and short-term, and will not distract us from our goal of returning to fiscal health in the medium term.
As I said at the outset, a responsible government must manage its accounts well if it is to do well on other fronts. This is not only a virtue. In our current economic circumstances, it is a necessity. We believe in small government and leaving as much of society's resources as possible to the community. Controlling government expenditure is crucial to maximising the efficiency and competitiveness of our economy. Also, the state of our public finance has presented an uncertainty for some local and international investors, and uncertainties are bad for business. We must, therefore, clear up the uncertainty so that it doesn't hinder our recovery. In the past year or so our economy has shown signs of recovery. SARS set us back, but it would not derail us.
The Government has identified four core industries that will spearhead our economic recovery - financial services, logistics, tourism and professional and producer services. There is no time to elaborate on all of them, so I'll focus on the one that's most relevant to me -- financial services.
Let me start by saying that, despite the SARS crisis, our financial systems remain fundamentally sound -- a point on which the IMF is in complete agreement -- and that we remain on course to achieve our policy objectives across a broad front in this area.
Nowadays, few would question the status of Hong Kong as an international financial centre. The statistics speak for themselves. As at the end of April, Hong Kong's stock market ranked 10th in the world and third in Asia, with almost 1 000 companies listed. Hong Kong is the world's seventh largest centre for foreign exchange trading, capturing some 4 per cent of the world's total foreign exchange transactions. Virtually all major banks in the world have some sort of operations in Hong Kong. We are also a regional insurance centre, with Asia's highest concentration of insurers and one of the most open insurance markets in the world.
These are the hard-earned achievements of the Hong Kong people, and we are committed to building on our success. To this end, we will spare no effort in upgrading the quality of our financial market and maintaining our competitiveness. "How" will depend in part on our traditional strengths, but we cannot simply stand still. A world-class regulatory regime, strong corporate governance and comprehensive financial market services are essential ingredients for Hong Kong's success. Let me highlight for you some of our achievements and initiatives over the past year.
On the first of April we implemented the new Securities and Futures Ordinance (SFO). It consolidates and modernises 10 pieces of existing legislation and ushers in a fair, efficient and transparent regulatory regime, which will both inspire investor confidence and facilitate market innovation and development. In a nutshell, it puts us on par with the best prevailing international standards, and provides a solid foundation for further development of Hong Kong's securities and futures markets. It is not an overstatement that many overseas regulators are envious of Hong Kong having accomplished this milestone.
With the enactment of the Securities and Futures Ordinance, the SFC and the HKEx introduced the dual filing system to ensure quality corporate disclosure by listed companies. The SFC is now also empowered to investigate and take enforcement action under the Ordinance against the dissemination of false or misleading corporate information. These moves have enhanced the protection of investors and helped safeguard the quality of our securities market.
Several recent corporate failures in the United States reminded the financial world of the importance of good corporate governance. Following these incidents, we acted promptly by taking a range of initiatives to upgrade the corporate governance of listed companies and the quality of our equity market. We did all this, not because our systems were seriously lacking - indeed, Hong Kong consistently wins praise from both the IMF and the OECD as a regional leader in corporate governance - but because we know that there is no room for complacency.
Hong Kong has always been an open economy. We know fully well that business, which is free to come, is also free to go. So we recognize that good corporate governance is vital to attracting high-quality companies to list in Hong Kong and prudent investors to participate in our market. Specifically, together with the SFC and HKEx, we have drawn up a Corporate Governance Action Plan 2003. Consultations are being conducted on a number of proposals, notably the tightening of the regulation of IPO intermediaries, and empowering the SFC to conduct derivative actions on behalf of minority shareholders of listed companies. And earlier this month, the Standing Committee on Company Law Reform published its Corporate Governance Review Phase II Consultation Paper, with a menu of further measures for the community to consider.
Together with other initiatives, such as the regulation of accountants, which I will mention in a moment, the Action Plan is our road map to keeping Hong Kong's corporate governance requirements on par with the best international standards and practice.
Experience elsewhere has amply demonstrated that no regulatory regime can work without the participation of practitioners with the required qualifications and integrity. In the world of financial services, professional accountants play a central role. Who among you would invest in a company if there were any doubt on whether the auditor had given a true and fair view on the state of the company? With this in mind, and one eye on international developments, I initiated discussions with the accounting profession on enhancements to their regulatory regime.
To its credit, the Hong Kong Society of Accountants responded positively by putting forward four proposals. The first three relate to opening up the Society's Council, Investigation Committee and Disciplinary Committee. The Society is now working on the necessary amendments to the Professional Accountants Ordinance, with a view to effecting early implementation. The fourth proposal relates to setting up an Independent Investigation Board. We will consult the public and the market before proceeding.
In tandem with our efforts to enhance the market quality, we are also placing much emphasis on the enhancement of the business environment of the market participants, including the small and medium sized stockbrokers. We have all along recognized the valuable contributions of the stockbroking industry, including small and large brokers, to the development of Hong Kong's economy. I have therefore asked the Bureau to work with the SFC and HKEx to study the business environment of the stockbroking industry in January 2003. Through the concerted efforts of the Administration, the regulators and the industry, the Working Group on the Business Environment of the Stockbroking Industry has put forward specific recommendations that are targeted to improve the business environment of the stockbroking industry in general and enhance the competitiveness of the small and medium sized stockbrokers in particular through providing a level playing field for all market participants.
There are many other initiatives, such as the proposed Deposit Protection Scheme, a raft of amendments to the Companies Ordinance, a review of the regulation of insurance intermediaries, attracting offshore funds to invest in Hong Kong, and so on, but I do not wish to overload you, or give the impression that there's nothing left to do.
As you know, one of the curious weaknesses of our market is the under-developed bond market. Traditionally, companies in Hong Kong have relied perhaps a bit too much on the equity market and bank loans for financing. A well-developed bond market would increase the depth of our financial market and offer opportunities to debt issuers and investors alike. To catch up, we need to move quickly in bond market development, particularly in providing appropriate market infrastructure, simplifying procedures and offering tax concessions.
On the taxation side, we would grant a 100 percent concession on profits tax for qualified debt instruments with a maturity period of seven years or more, and to exempt 50 percent profits tax for such instruments with a maturity period of three years or more, down from the existing threshold of five years. We have also encouraged well-established public corporations to issue bonds to promote the bond market. There were the issue of HKD$452 million retail bond with a tenor of seven years in March by the Airport Authority, the issue of HK$1.1 billion 10-year bonds to institutional investors in April/May by the Mass Transit Railway Corporation; the issue of HKD$800 million 10-year bond to institutional investors and the issue of HKD$1 billion 5-year and 10-year retail bonds in May by the Kowloon-Canton Railway Corporation. It is also encouraging to note that MTRC has recently issued a 15-year Hong Kong dollar bond which laid a new milestone in the development of the Hong Kong dollar bond market. The issuance has provided more choices to investors and helped make our bond market, particularly at the retail level, more mature.
All this is by no means exhaustive, and more still needs to be done. As you know, competitiveness is important, but relative competitiveness is critical. We should be mindful that many other cities are also making strides in developing their financial services. To stay ahead of our competitors, the Government and the private sector must continue to join hands and strive to enhance our regulatory regime, corporate governance and market development.
Ladies and gentlemen, I'm very proud to be given the opportunity to serve Hong Kong. This sense of mission gives me confidence that, by the time my term as a Principal Official ends, I'll be able to declare aloud and proud that Hong Kong is, and will remain, the region's premier international financial centre. Let us re-launch Hong Kong together.
Thank you very much.
End/Friday, June 27, 2003