Session A: Competition Policy

Moderator: Mr David Dodwell Panelists: Mr Mike Rowse, Director, Business and Services Promotion Unit, Financial Secretary’s Office Mr John Chan, Managing Director, The Kowloon Motor Bus Co (1933) Ltd Prof Leonard Cheng, Hong Kong University of Science & Technology Themes: Privatisation/Commercialisation of Government Services Regulation vs. Market Mechanism Liberalization of Domestic Sectors

"Actionable ideas suited to Hong Kong" was the appropriate rallying cry of Financial Secretary Donald Tsang at the opening of the 1999 Symposium on developing the service sector. Ideas there were but it remains to be seen which if any of these are going to translate into action either by government, private sector or the universities.

The tripartite natture of the symposium did not entirely bridge the degree of mutual suspicion that exists. Business is wary of government intervention, government is wary of anything which involves spending money or changing long-established procedures. The academics were heavily represented and as a result their educational interests dominated many discussions, particularly Session D on Making the Non-traded Sectors Tradeable. They were long on analysis but the other parties were dubious of their entrepreneurial talents.

However, it was generally viewed as a valuable event which could perhaps be improved in the future both by having a more business - especially small business - representation and including political figures who would speak for broader public and sectional interests. The word “Quadripartite” was mentioned several times, initially by Eden Woon of the Hong Kong General Chamber of Commerce.

The name Adam Smith came up on several occasions as the oracle of the invisible hand and the need for the market rather than government to determine economic and business development. John Strickland, immediate past Chairman of Hongkong Bank, was especially warm to the merits of the this hidden hand and warned of the damage done by intrusive regulatory regimes particularly to small business and the proliferation of “worthy schemes” such as technology parks sponsored by the government.

However, none of those who cited Adam Smith thought to mention his warning about the tendency of businessmen, given half a chance, to conspire against the public interest through monopolies and cartels. Government had a duty to guard against these.

This omission gave poignancy to some of the discussion in Session A on Competition policy. The government is committed to ensuring a level playing field for business in general but has rejected the idea of a pro-active policy via a Competition Commissioner or such post, to promote competition directly by attacking diverse restraints on trade. The hands-off policy was defended as in keeping with Hong Kong’s laissez-faire philosophy and criticised as enabling cartels to flourish and keep prices high to the detriment of other businesses as well as consumers.

The government meanwhile however was, according to civil servant Mike Rowse, now doing more to promote competition. The Trade and Industry Bureau had published a booklet on the subject. And a government advisory group was looking at a number of situations ranging from rice importation to land disposal to driving schools to see if policy changes were needed to promote competition.

As for the government itself, it was continuing to move to towards outsourcing of services and to privatise some activities such as IT and printing. It was looking to move from subvention to buying services on a competitive basis for care of the elderly. However, it would not privatise on a monopoly basis.

All this was welcomed but there were also calls from business for there to be more interchange of personnel between the government and private sectors, and more emphasis placed on hiring experts rather than relying on civil service generalists.

Norman Leung of the Broadcasting Authority defended the government’s record in encouraging competitive development of satellite and cable TV. Terrestrial channels would be opened up following the switch to digital and it would be up to business to decide whether to invest.

Mr Leung’s record of progress in broadcasting was not challenged. Nor was there any discussion of why various international broadcast and news media had shifted their regional base to Singapore. Was it cost, policy issues or tax and other lures?

Two government monopolies came in for specific criticism: water and mail. The water department was said to have a very high leakage rate. The government however was looking at ways of bringing the private sector into the water business. The postal service ought to be looking for opportunities to invest overseas.

Indeed, Albert Lai of China Water thought that the government could be doing a lot more to sell its expertise into the mainland, especially Guangdong, in some cases in partnership with private business. He mentioned physical planning, hospital management and other areas where Hong Kong expertise and reputation for efficiency and fairness would be valued.

However, former Amcham (American Chamber of Commerce) Chairman Mark Michelson thought privatisation was the best step towards both increased competition and export of services. There was however only one specific call for a private sector cartel to be demolished. Professor Leonard Cheng of the Hong Kong University of Science and Technology said the Hong Kong Association of Banks (HKAB) formal price fixing of some deposit rates and informal lending rate cartel should be abolished and price collusion outlawed. John Strickland, defending the HKAB, denied there was a lending cartel and warned of high costs for small depositors if the interest rate agreement was ended.

There was general discussion of the need to eliminate cartels and monopolies in the private sector. However, Richard Wong of Hong Kong University said that cartels and monopolies that had to compete in the global market were subject to market discipline so that their harmful effects were limited. He also argued that if monopolies were to be forcibly abolished, compensation should be given to protect contractual rights as had happened with Hong Kong Telecom’s surrender of its international phone monopoly.

Management consultant K.K. Yeung did not specifically urge monopolies but was a fan of size. Mergers led to economies of scale and enhanced competitiveness. This argument was directly challenged thus, arguing that Hong Kong’s strength was its small business sector able to innovate and adapt. Size might matter in large economies but not in Hong Kong and especially in services.

From the Trade and Industry Bureau, Yvonne Choi mentioned the high marks for competitiveness that Hong Kong received in international surveys such as that by the Heritage Foundation, and its close adhesion to WTO (world Trade Organisation) rules on level playing fields.

However, as David Dodwell, moderator of the Session on competition policy, pointed out on several occasions Hong Kong was characterised by a gulf between the manufacturing sector on the one hand and domestically oriented services on the other. The first had to meet the full blast of international competition head on. While local service providers mostly did not. But this did not apply to internationally oriented services such as Po Chung’s DHL which was a prime example of an international service business in which Hong Kong has flourished. Dodwell himself mentioned HAECO, the aircraft servicing company with links via Swire to Cathay Pacific.

This discussion stopped short of whether Hong Kong should have an "open skies" policy to develop tourism and its business hub status to compete better with rivals and before new airports opened in Shanghai, Seoul and Bangkok. (One delegate opined privately and without wishing to be quoted that omissions of this sort tended to devalue the exercise). However, Michelson noted in a subsequent submission that "onward rights" for foreign carriers was high on the Amcham agenda and the high landing fees at Chep Lap Kok also got a mention - though not explicitly from the Hong Kong Tourist Association (HKTA).

It was mentioned over the dinner table that open discussion of the broad interests of business could be hindered by the fact that the business groups best represented at the Symposium were those - banks and a bus company - subject not to open competition but to government-regulated quasi-competition.

Areas of alleged restraint of trade were touched on but not elaborated. The ban on parallel imports was criticised by some but defended by others such as to protect the interests of those who had invested in product distribution networks, advertising, etc.

It was however generally agreed that the Consumer Council should be allowed to have a broader definition of the consumer. Businesses as well as households were consumers - of power, telecommunications, office space, etc. While some speakers implied that the Consumer Council was a lobby which would undermine profits and therefore business interests, others wanted closer attention to the needs of all consumers, including business. It was regretted that the Consumer Council remit was retail trade and household consumer oriented.

Generally there was only lukewarm support for anti-monopoly legislation or a body charged with promoting competition and fair trade, even though such were the norm in OECD countries, including Korea.

For Yeung Yue-man of Chinese University there could be too much emphasis on micro and sectoral issues and not enough examination of the macro-economy. The situation was, he maintained, critical. He noted that, for example, cost differentials were causing a migration of Hong Kong shoppers to Shenzhen where land and labour costs were one fifth of those locally so retail prices were significantly lower. At the other end of the social scale, Dr Yeung noted that academic salaries in Hong Kong were significantly higher even than at Harvard. Graduate students got paid more than Harvard PhDs. Even the process of paying salaries in Hong Kong cost twice as much as in the US, according to Joseph Lai of the HKSAR Efficiency Unit.

Michelson agreed that costs were Hong Kong’s main problem. Telecommunications charges had come down but generally Hong Kong was not offering enough in return for its cost level. However, there was only passing reference to land cost, which fed through to all aspects of the economy including salaries, and none at all to the exchange rate. The omission of significant discussion of these topics may have been a relief to the government (and big property developers) but did not contribute to the weight of the event. Similarly the scant references during the Symposium to financial services evaded the issue of government intervention in financial markets and attacks on foreign “manipulators”. This is a live topic among practitioners in Hong Kong’s highest value-added service sector.

The labour cost issue did come up and there was concern from some quarters, including Eden Woon, that populist political pressures were making it more difficult for businesses to become more competitive by cutting wages.

The cost issue links to that of integration with China. There was, naturally, much emphasis on Hong Kong’s future emphasising the development of relations and business with the motherland. Applause over dinner for these sentiments was notable. However, no distinction was made between developing China business - preferably of the high value added variety – and closer ties with Shenzhen and Guangdong. The latter imply a gradual equalisation of land and labour costs which, given the current differentials and the mobility of Guangdong people, could have very negative implications for salaries and asset prices in Hong Kong.

There may, it was observed, also be some conflict between policies (for example on transport and migration) designed to facilitate integration, build mainland links and make the SAR useful to the rest of China and those designed to maximise Hong Kong’s position as an international city like New York or London - one of the key policy goals of Tung Chee-hwa. An international service centre attracting people from all over the world can prosper long after its original manufacturing base has migrated elsewhere, and the country itself declined in significance.