Nicole Alpert. Observer: When Privatisation Offers the Best Value. Sep 05, 2009. A11, SCMP.
When tax revenues decline, privatisation provides better opportunities for improving growth and lessening the government's burden than raising fees and tax rates, as many jurisdictions are doing. Governments privatise with the aim to generate revenue and cut costs by eliminating unnecessary spending, all the while keeping the social costs low.
Microeconomic theory explains the incentive problems that cause inefficiency in public ownership versus that in private firms. That is why, in unfettered markets, private firms - not government enterprises - get a reputation for spurring growth.
The Hong Kong Housing Authority's divesture and privatisation of its shopping centres and car parks in 2004-05 is one example where incentive problems and wasteful spending in publicly owned facilities have been removed by privatisation.
With subsidised rents and mismanagement, the authority-owned centres and car parks lost prospective revenue and multiplied inefficiency. Under Housing Authority management, about 30 per cent of car park spaces (some 30,000) were left empty, as those spaces would only be leased to residents from a particular estate, not to outsiders from which there was a demand.
The Director of Audit's 2008 report stated that some government rents were subsidised at levels of only 1 per cent to 5 per cent of the market rate. This left room for sub- lessees to pocket the difference. These systems, wrought with inefficiency, are not capable of surviving at a private level. This is not the type of government system of which Hong Kong wants to boast, which is why the authority changed direction.
When The Link Management took control, the 30 per cent of car park spaces previously off limits were opened to the public and the rent was adjusted to market rates. Privatisation increased profitability and efficiency - the public is now better off, but the previous tenants might not be. Because of the move away from subsidised rent, numerous tenants and their legislators are protesting. Recently, lawmakers have called for parties across the board to force The Link to give special treatment to small tenants.
Rental subsidies helped some tenants, but to the detriment of taxpayers. Some worry that small shops will become a thing of the past and larger stores will drive up prices, but consumers' actions prove otherwise. It is consumers, making choices out of self-interest, not tenant associations or legislators, that dictate which shops survive.
To support their constituency's tenants, legislators are calling for government control or a takeover of The Link, but this is not constructive. The calls are merely political manoeuvring, but they are dangerous because they propose infringing upon property rights and squandering public money. Exerting political pressure, threatening force or suggesting a buy-back of The Link harm Hong Kong's reputation and rip the seams of its respect for property rights and rule of law. Legislators must be careful - "wasting public money" is not a motto any politician wants to inherit.
The privatisation of the Housing Authority's facilities has provided profit to the government and reduced inefficiency with low social costs. The authority has benefited from the sale of the divested Link Reit, with the revenue giving it an improved position to manage its deficit. The Link is symbolic in that, if the government can refrain from intervention, we can anticipate better services in perhaps the Airport Authority, the Post Office or the Mortgage Corporation.
Other jurisdictions with low tax revenues should consider what privatisation could do for them instead of ratcheting up taxes and fees. Privatisation gives taxpayers a break, earns revenue and fills the gaping hole from low tax revenues. It is hard to think of any other policy that produces such profits for the government and benefits for the public.
Nicole Alpert is a research associate at The Lion Rock Institute. www.lionrockinstitute.org
Showing posts with label Other. Show all posts
Showing posts with label Other. Show all posts
Monday, September 7, 2009
Friday, January 2, 2009
Weak link between shop rents and prices
Wong Kin-ming is an associate scholar at The Lion Rock Institute , SCMP(Insight~A9, Other Voice 2009.1.2)
Hong Kong's retail sector has been hard hit by the economic slowdown. Property agents anticipate rents will continue to fall, and some individual landlords have acted quickly, slashing charges by more than 20 per cent.
Meanwhile, The Link Reit bucked the market trend by raising rents in its markets and malls, drawing criticism from politicians. Although the Legislative Council voted down the motion on a government buy-back of The Link's units, calls to use public money to re-nationalise The Link are unlikely to subside.
Politicians believe such rent rises will hurt tenants' interests and, more importantly, lead to increases in the price of goods, adversely affecting people's livelihood.
The notion that tenants will transfer the cost of a rent increase to the customers sounds reasonable. But let's not overlook what the recent Director of Audit's report said about the management of public markets. It said that, for various reasons including filling long-term vacancies, some rents of public wet market stalls are now only 1 per cent to 5 per cent of the going rate. Thus, there could be a huge difference in rent between stalls selling similar goods in the same market.
However, there is no big price difference for the same goods in those markets. If price is determined by the rent level, why don't stallholders enjoying concessions sell their goods cheaper?
Such a phenomenon has been explained by David Ricardo (1772-1823) in his Principles of Political Economy and Taxation, when he said: Corn is not high because a rent is paid, but a rent is paid because corn is high.
Apply that to The Link or public markets and it means that the price of goods determines rent, instead of the reverse. Rents are determined by demand for those properties, and is an income derived from them. Charging rent below market rates will not affect the price of goods.
The Director of Audit's report also talks about the provision of recreation and sports services, in particular the three-month free-admission scheme to leisure facilities launched by the government to support the Beijing Olympics. The report pointed out that bookings increased significantly under the scheme, but 40 per cent of the booked sessions were not used.
Did the scheme benefit users? People who successfully made a booking did benefit, as they had nothing to lose by not showing up. But those willing to pay to use the facilities, who were unable to book due to increased demand, lost out.
The logic that low rents benefit shop tenants is the same principle. Only certain tenants will benefit from low rents created by political pressure, such as those who enjoy priority in lease renewal; are familiar with the complicated application procedures; have special connections; or are simply lucky enough to secure a tenancy.
Do not be mistaken, I am not defending The Link's decision to raise rents in a faltering economy. We should just think hard about whether it would be right to use public money to buy back or subsidise malls and markets.
Hong Kong's retail sector has been hard hit by the economic slowdown. Property agents anticipate rents will continue to fall, and some individual landlords have acted quickly, slashing charges by more than 20 per cent.
Meanwhile, The Link Reit bucked the market trend by raising rents in its markets and malls, drawing criticism from politicians. Although the Legislative Council voted down the motion on a government buy-back of The Link's units, calls to use public money to re-nationalise The Link are unlikely to subside.
Politicians believe such rent rises will hurt tenants' interests and, more importantly, lead to increases in the price of goods, adversely affecting people's livelihood.
The notion that tenants will transfer the cost of a rent increase to the customers sounds reasonable. But let's not overlook what the recent Director of Audit's report said about the management of public markets. It said that, for various reasons including filling long-term vacancies, some rents of public wet market stalls are now only 1 per cent to 5 per cent of the going rate. Thus, there could be a huge difference in rent between stalls selling similar goods in the same market.
However, there is no big price difference for the same goods in those markets. If price is determined by the rent level, why don't stallholders enjoying concessions sell their goods cheaper?
Such a phenomenon has been explained by David Ricardo (1772-1823) in his Principles of Political Economy and Taxation, when he said: Corn is not high because a rent is paid, but a rent is paid because corn is high.
Apply that to The Link or public markets and it means that the price of goods determines rent, instead of the reverse. Rents are determined by demand for those properties, and is an income derived from them. Charging rent below market rates will not affect the price of goods.
The Director of Audit's report also talks about the provision of recreation and sports services, in particular the three-month free-admission scheme to leisure facilities launched by the government to support the Beijing Olympics. The report pointed out that bookings increased significantly under the scheme, but 40 per cent of the booked sessions were not used.
Did the scheme benefit users? People who successfully made a booking did benefit, as they had nothing to lose by not showing up. But those willing to pay to use the facilities, who were unable to book due to increased demand, lost out.
The logic that low rents benefit shop tenants is the same principle. Only certain tenants will benefit from low rents created by political pressure, such as those who enjoy priority in lease renewal; are familiar with the complicated application procedures; have special connections; or are simply lucky enough to secure a tenancy.
Do not be mistaken, I am not defending The Link's decision to raise rents in a faltering economy. We should just think hard about whether it would be right to use public money to buy back or subsidise malls and markets.
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