The Political Influence Over the Adjustment of Utility Fees

Under the shadow of the wage freeze in the period of unimproved unemployment rate, ordinary citizen are suffering high living pressure with low consumption. To raise utility fees will definitely provokes them. Tseng Yen Kun, the Financial Secretary, suddenly announce to freeze the upward adjustment of utility fees which include water fees, sewerage fees, school fees and medical fees. Also, he extends the period of granting favorable tax on low sulphur XXX oil by six months. Definitely what he has done not only help appease the outrageous but suffering citizen, but also forestall the fees increases in the public utility sector. As a result, he wins a political stake.

However, the decision on the freeze of utility fees is swayed by "political outcomes" from the struggles between the government and the legislative council, instead of "economic factors". When the government is under the immense pressure from public outcry, she can sacrifice the treasury revenue by freezing the fees adjustment. No doubt under the current tense political situation, the decision made by the financial secretary can relieve the government of a big burden and entice the public support, otherwise the government would have been seriously criticized in the fees-raising debate. Despite this, the mechanism which has been adopted to monitor the public utility sector for several decades would be changed as the government gradually intervenes into the public utility sector. In the long run, such act is not good.

In Hong Kong public utility sector where a majority of utility enterprises are private, the government only plays a role to monitor their operations and maintain "Reasonable Profit" for them. Not only is this mechanism lagging behind, but it is also ridiculed as a way to ensure the profitability for those large enterprises. However Hong Kong has ever become a business model for western countries in launching the privatization of public sector enterprises. Under the privatization, western governments sell those stagnant and low-efficient businesses to private companies and let market forces to revitalize them. What sort of force can revitalize such large public enterprises such as the British Airline, Telecommunication, Water supply, Railway and the like? The answer is profit! Without profit, how can public enterprises accumulate capital to renew facilities, advance technology and improve services? How can the management have an incentive to improve services? As Hong Kong public utility enterprises are subjected to market forces, the government does not need to bear any financial burden over those enterprises. On the other hand, due to the official guarantee of Reasonable Profit, they can have sufficient capital for further development. Without official subsidy, the public utility enterprises can still provide a high-class service, which is a successful but rare example among big cities. During a period of capital shortage in the past 50 years, no doubt the scheme of profit guarantee is necessary for public utility companies to obtain profit and accumulate capital for development. Nowadays, as capital flow is strong in the market, without the scheme, public utility enterprises can and must make profit by raising up efficiency and competitiveness in accumulating capital for further development. So the scheme is so outdated that it should be reviewed and modified gradually. No matter how the scheme is amended, the fees adjustment is the only way for those enterprises to increase profit. The government and the legislative council cannot always reject the request of adjusting fees by those enterprises.

Since the establishment of the direct election for the legislative council, the opposition against the upward adjustment of utility fees becomes a means for the councilors to win the public support. Until now the government has since played mediating and adjudicating roles in balancing the requests of utility enterprises, the public and legislative councilors. In recent years, as the accountability of the government towards the public is increasing, public opinion becomes a more important factor than enterprises needs in influencing her decision. Under this situation, in the case of the utility fees adjustment, the government take a more active role to forestall the uprising of the fees, thus disrupting the balanced market situation; in the case of oil market which does not belong to the sector of public utility, the high officials takes a role of a regulator instead of a monitor in directing the change of oil price. Now the Financial Secretary takes a lead in freezing the uprising of utility fees, the signal which indirectly discourage public utility enterprises from proposing the increase of fees. Obviously, this is one of administrative means to tackle economic problems. Although this means is effective to win public applause, it destroys the business negotiation mechanism for the government, public utility enterprises and the legislative council.

From our point of view, under the political atmosphere which disfavors the upward adjustment of utility fees, the government and the legislative councilors should cooperate to set up a new mechanism for an adjustment of utility fees, under which the enterprises can follow clear criteria to adjust their fees. This suggestion not only can provide a well-structured economic environment for public utility enterprises, but can also restrain the abuse of conciliatory power by the government and thus stop the penetration of the official influence into economic activities.

The original source of article is from Hong Kong Economic Journal.