Out of Control Policy Blog

Hong Kong's New Privatization Plan and It's Lessons

An Oct. 16 article in the Wall Street Journal "Hong Kong Plans Another Handover" describes Hong Kong's new privatization plans. . .

To help reduce a record budget deficit, the government plans to sell partial stakes or securitize revenues from major assets over the next 18 months, from its airport to its tunnels and even its housing department.

The program could raise anywhere from $14 billion to $40 billion in coming years, depending on what goes on the block, and would put Hong Kong at the forefront of privatization efforts globally.

First up are sales of stakes in the Hong Kong Airport Authority, which runs the Chek Lap Kok International Airport, and the Housing Authority, which manages many of the government's real-estate holdings. The deals are expected to be two of Asia's biggest next year.

Government officials say they plan to sell 49% stakes in most assets and retain 51% for 20 years, after which more of each asset could be sold.

The plan is being floated to deal with a crunching $13 billion current year deficit, equal to about 6% of the city's gross domestic product. Not surprising, plenty of folks criticize the privatization plan and say tax increases would be more responsible. The article doesn't mention anyone proposing spending cuts, so I guess that is not an option on the table. I guess state government leaders here in the U.S. and in communist Hong Kong think have the same attitude about spending cuts.

But the closing paragraph of the article stirred my ire. . .

Some also question whether the privatizations will resolve the budget deficit in the long term, because it doesn't provide a continuous income stream as do taxes, land leases and property rents. "This is not a solution to the budget deficit," says Tony Latter, a visiting professor in the Faculty of Business and Economics at the University of Hong Kong. "Selling assets is a one-off."

There are a number of things wrong with that. First off, it ignores that assets are almost always more productive after privatization and the positive effect that has on GDP, tax revenue, etc. Second, deficits tend to be cyclical, so there is a role for one-off funds in helping cope with them. Third, he is just like the political leaders, and frames it as a choice between privatization and "taxes, land leases and property rents." Again, what about spending cuts?

Adrian Moore is Vice President, Policy


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