Chief Executive’s Interactive Exchange Question And Answer Session
Part 2: development and happiness
MR CHAN CHUN-YING:
Thank you, President. Chief Executive, President XI has stated clearly in the report to the 20th National Congress that “[w]e will support Hong Kong and Macao in growing their economies, improving their people’s lives, and resolving deep-seated issues and problems in economic and social development”. Land supply has always been a pain point for Hong Kong, and both the housing production and the rental levels of commercial properties are directly affected by land supply. To address this issue, the Chief Executive has mentioned that the Northern Metropolis and the Kau Yi Chau Artificial Islands (“KYCAI”) are equally important and should be taken forward concurrently. However, our society is most concerned that these two projects, if launched simultaneously, are estimated to involve trillions of dollars, which can hardly be covered by the current fiscal reserves and tax revenue alone.
The Financial Secretary has just written in his blog that a relatively large portion of the funds required for KYCAI will be raised through the market, including public-private partnerships (“PPPs”) and bond issuance. I strongly agree with this, as the revenue model for the artificial island project is primarily based on land sales to recover the costs, which provides a higher degree of certainty in the timing of capital recovery. However, the revenue model for the Northern Metropolis is based on the long-term tax revenue and long-term socio-economic benefits generated by the innovation and technology (“I&T”) industry. Simply adopting such traditional financing options as PPPs and bond issuance may not be able to fully address the shortfall, and so it may also be necessary to adopt such non-traditional financing schemes as land bond issuance, infrastructure securitization, or the use of Mandatory Provident Fund contributions in order to address the shortfall.
I hope that the Chief Executive will consider undertaking that in implementing such major infrastructure projects as the Northern Metropolis and even the future “three railways and three roads”, the Government will also raise a relatively large portion of funds through the market rather than relying solely on government finances, so as to allay the public concerns about the pressure on public finances, while adopting more diversified and innovative methods to raise funds from the market. Thank you.
CHIEF EXECUTIVE:
President, I thank Mr CHAN for his views and question just now. I am very concerned about the financial burden that such a large number of major developments have placed on the Government. This is also why I am very grateful to the President for allowing me to seek Members’ views. One of the solutions is market financing, which lets us give full play to the integration of an effective market and government policies. So, I believe that our position is clear. If market financing can reduce our financial pressure, we will definitely consider it and look at it in a very positive way. Different methods have just been mentioned, such as bond issuance, PPPs with which we have past experience, and some infrastructure projects that allow the benefits of land development to be used to drive the entire projects. For example, the reclamation and the development of the surrounding areas of City One Shatin in the past has enabled us to successfully develop such a great real estate environment plan. As we attract talents and investment, some leading enterprises have expressed interest in coming to Hong Kong. In their discussions with us, they have enquired whether it is feasible to given them land for their own development, so as to speed up the entire progress … I think that all the options are worth considering
However, I would like to ask Mr CHAN about securitization, which he mentioned earlier as a possible financing option, because there are two factors or two features of securitization in our discussion and I hope Mr CHAN can give me some advice. First, what are the considerations for the first and future issuance of securities? Since large-scale development projects may take many years, perhaps 5, 10 or 15 years, after the first issuance of securities, what are the considerations for reissuing securities and how feasible is it? This is the first point.
The second point is that since Mr CHAN has just mentioned that the funds for KYCAI may be easier to calculate, but the Northern Metropolis is such a large and multifaceted project, what financing methods can we adopt to get a better response from the market? I have once thought about, among other things, whether separate financing approaches should be considered for different development priorities in the Northern Metropolis, such as the I&T industry mentioned earlier and the logistics centre that I believe is very likely to be established there. What is the relationship between this industrialization and the financing for the Northern Metropolis? I would like to hear the views. Thank you, President.
MR CHAN CHUN-YING:
Thank you, Chief Executive, for testing my financial knowledge. Let me start with securitization. The prerequisite for securitization is stable revenue, which will be “packaged” into securities for investor subscription. If securities are issued for the first time and the underlying infrastructure projects have not yet generated any revenue, it will be very difficult to sell them. Therefore, I suggest that the first securitization should be for infrastructure projects that have already generated stable revenue, such as the existing tunnels, or the MTR shares held by the Government, which provide annual dividend income. As for future securitization, it should be done when these projects can already generate some stable revenue, say, 10 or 15 years later. When a tranche of bonds from the first securitization has matured and the project that it originally financed has already become capable of generating stable revenue, I believe that the project concerned can be securitized again to raise funds. For example, there is probably a railway project in the Northern Metropolis. If the first securitization is to take place, the railway project has not yet been built or generated any revenue. However, the MTR extension to Tuen Mun, that is, the West Rail project, has already generated stable revenue. I believe that by then, the infrastructure projects in the Northern Metropolis can be securitized to generate cash flow. These are my views on securitization.
In addition, as far as the Northern Metropolis is concerned, since there are various development projects―such as the possible construction of an Innovation and Technology Park―and I believe that such projects will take quite a long time to generate revenue, I suggest that a method similar to the issuance of land bonds should be adopted because land bonds, for example, allow us to resume the lands and Tso/Tong lands of some indigenous villagers of the New Territories. If we resume these lands with cash, it may put pressure on government finances. I have also done some research and found that Ireland, Brazil, Korea, etc. all resume land by issuing land bonds, after which bondholders may use these government land bonds in the future to buy government properties, bid for land, or even trade in the secondary market.
I believe that with these diversified financing methods, the Government does not have to rely on just one or two forms of financing. Then, I believe, the target of a “relatively large portion” can be achieved. Thank you, President. Thank you, Chief Executive.