MESSAGE

         The Hong Kong Special Administrative Region started on an excellent financial footing, thanks to our prudent financial management practices. These will continue, as stipulated in the Basic Law, and we in the Finance Bureau are committed to maintaining this recipe for our success.

         We will ensure that, under the prudent management of our public finances, we allocate resources to best meet the community's needs and aspirations. We will invest judiciously to build up a society which is ready to take on the challenges of the new millennium.

         We are committed to improving further the efficiency and effectiveness in the use of our resources to deliver public services. In particular, we will enhance the efficient delivery of Government's central support services, including the development of Government's estate and the application of information technology.

         These commitments will help us ensure that we will continue to be one of the most modern and efficient governments as we enter the 21st Century. We welcome any comments which you may have and shall continue to report on progress.

(K C Kwong)
Secretary for the Treasury

INTRODUCTION

         The Hong Kong Special Administrative Region (HKSAR) Government is committed to ensuring that it is open and fully accountable to the people of Hong Kong. Policies, aims and programmes must be clear to all so that the Government can be accountable for their delivery. With greater clarity of purpose and accessibility, the public can better assess our performance and help us improve our quality of service.

         The Policy Programmes, which underpin the Policy Address delivered by the Chief Executive in October 1997, explain the objectives and ongoing work of each Policy Bureau and its supporting departments, as well as Department of Justice, Office of the Judiciary Administrator, Independent Commission Against Corruption and the Administration Wing of the Chief Secretary for Administration's Office, and their proposed new commitments for the coming year. They are set out in three sections:

• Objectives state the overall objectives of the Government according to each programme area, in particular, responsibilities in relation to implementing the Basic Law are spelt out.

• Major Programme Areas list the aims and the important features of each programme area. An overview of the current situation and key performance indicators are given. This section also sets out the Government's new commitments for the coming year.

• Into the 21st Century describes the vision of the Government for a better Hong Kong as we enter the 21st Century and the plans we are making to meet our long-term needs.

Objectives

         The Bureau's objective is to maintain the policy of sound and stable public finances which underpins Hong Kong's economic success. We meet this objective through prudent management of public finances. This ensures that resources are left, as far as possible, in the private sector where they can be most productively employed. Specifically, we seek to achieve these goals by:

• ensuring that government expenditure grows over time at a rate no faster than that of the economy and that resources available to Government, generated by our continuing economic growth, are used in a cost-effective manner to the greatest benefit of the community;

• maintaining a low, simple and predictable tax system while raising sufficient revenue to meet known commitments and ensuring adequate reserves against future uncertainties;

• improving Hong Kong's competitiveness and living environment by investing in major infrastructure projects; and

• helping government departments to improve the efficiency, quality and cost-effectiveness of the services they provide to the public and providing efficient central services to support their efforts.

Implementing the Basic Law

         The Basic Law stipulates government by financial prudence. The requirements of the relevant articles, as listed in the Annex, are a reflection of the well-proven philosophy, policies and practices in our management of public finances. The Bureau is fully committed to following the principles of keeping expenditure within the limits of revenues, striving to achieve a fiscal balance, avoiding deficits and keeping expenditure commensurate with the growth rate of the economy as a whole, when drawing up the annual budgets of the HKSAR Government.

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Major Programme Areas

         The Finance Bureau is responsible for five major programme areas:

1. Revenue Protection and Collection;

2. Budgetary Planning and Financial Management;

3. Management of Government's Investments;

4. Development of Government's Estate; and

5. Application of Information Technology within Government.

A. Revenue Protection and Collection

Aims

         The aims of the Bureau are:

• to maintain a low, simple and predictable tax system which promotes investment and enterprise;

• to raise sufficient revenue to cover our spending commitments and to ensure adequate fiscal reserves as a cushion against future uncertainties;

• to apply the "user-pays" principle to the setting of fees and charges for government services; and

• to combat tax evasion and minimise opportunities for tax avoidance.

Overview

The Tax System

         Our profits tax level is amongst the lowest in the region. We have nevertheless pledged to conduct a comprehensive review of profits tax in the year to maintain the competitiveness of our business environment. In 1997-98, we introduced legislation to clarify the legal position in respect of foreign withholding tax deduction in the assessment of profits.

         We maintain a low salaries tax regime and provide reasonable levels of tax concessions commensurate with the strength of our finances and the state of the economy. In 1997-98, we increased in real terms personal salaries tax allowances and those for children, dependent parents, grandparents, and brothers/sisters. We also substantially increased the allowances for single parents and families with disabled dependants, and the deduction allowed for training expenses.

         We combat tax evasion and minimise opportunities for tax avoidance. In particular, we will continue strict enforcement of the legislation against the use of service companies to avoid or reduce salaries tax liabilities, and on the keeping of proper business records for tax purposes.

Rates

         In 1997-98, we reduced the overall rates percentage charge from 5.5% to an all-time low of 5.0%. We also capped rates increases resulting from revaluation to 20% in 1997-98 and 1998-99.

Fees and Charges

         We maintain the real value of fees and charges for government services through regular revisions in line with inflation. At the same time, we avoid, as far as possible, measures which may add to inflationary pressures. Therefore, where major increases are necessary, we try to introduce them gradually.

         Wherever possible, we simplify our revenue collection system to improve its administration and to make it more user-friendly. In 1997-98, we began to issue driving licences valid for 10 years.

Key Indicators

• Total government revenue collected in 1996-97 amounted to $208.4 billion. The estimate for 1997-98 is $234.7 billion.

• Our fiscal reserves stood at $174 billion as at 31 March 1997. After taking account of the transfer of the Land Fund on 1 July 1997, we expect the reserves to increase to over $400 billion by 31 March 1998.

• We received $2 billion in back taxes and penalties in 1996-97. We expect to receive the same level of back taxes and penalties in 1997-98.

• We have completed all the legislative and administrative work for the collection of government rent in accordance with Annex III to the Joint Declaration and Article 121 of the Basic Law. The amount we expect to collect in 1997-98 is $3.2 billion.

New Commitments

         In 1998,

1. We will implement proposals arising from the profits tax review with a view to making our business environment more competitive.

2. We will improve the collection of air passenger departure tax in order to facilitate passenger processing at the new airport by extending the tax coupon scheme.

3. We will streamline the Inland Revenue Department's business registration procedures and shorten processing time in order to help business.

4. We will provide additional staff to improve the investigation capability of the Customs and Excise Department to enable it to tackle more effectively cases of suspected revenue fraud and non-compliance with the Dutiable Commodities Ordinance.

B. Budgetary Planning and Financial Management

Aims

         The aims of the Bureau are to ensure that:

• the growth of government expenditure over time is in line with the trend growth rate of the economy;

• resources available to Government are directed towards those areas where they will be of most benefit to the community; and

• resources allocated to government departments are used in the most cost-effective manner to deliver quality and value for money services to the public.

Overview

         For many years, the cardinal principle in the Government's budgetary strategy has been to ensure that the growth of expenditure over time does not exceed the overall growth in the economy. This discipline has been reinforced following the introduction of the Medium Range Forecast planning in the mid 1980's.

         As a result of our effective control, public expenditure remains low as a percentage of Gross Domestic Product (GDP) (at around 18%) compared with other advanced economies.

         In recent years, the growth in public expenditure, particularly recurrent expenditure, has focused increasingly on improving social services and the environment.

         We are developing our financial information systems and providing our managers with appropriate financial management training.

Key Indicators

• In the past five years, total government spending (capital plus recurrent) has grown by 28% in real terms compared with a real growth in GDP of 30%.

• While recurrent public expenditure has increased by 33% overall in real terms over the past five years (up to 1997-98 Estimates), the growth in a number of key policy areas has been significantly higher:

• In 1997-98, we will provide training to 1 240 officers and equip 30 bureaux and departments with the Ledger Accounting and Financial Information System (LAFIS) Departmental Reporting System which will improve financial reporting and control in departments.

New Commitments

1. In 1998-99, we will introduce an improved management process to enhance the measurement of the output of government services. This will be achieved through better definition of policy objectives so as to relate them to resource inputs.

2. In 1998-99, we expect total recurrent government expenditure to grow by about $7.7 billion or 5% in real terms over 1997-98. This will provide sufficient resources for implementing strategic policy objectives in the areas of housing, education, care for the elderly and economic development.

3. We will expedite the Public Works Programme to meet the needs for land supply for housing and related infrastructure. From 1997 to 2002, we expect to spend $135 billion on capital works projects already in the programme. This represents an increase of 55% in real terms over total spending on non-Airport Core Programme projects in the preceding five-year period. The main areas of spending will be :

	Education	$24.6 billion
	Land formation and flood control	$16.9 billion
	Transport	$17.2 billion
	Port works	$12.8 billion
	Health and welfare (excluding capital spending on welfare under the Lotteries Fund)	$11.1 billion
	Environment	$11.7 billion
	Waterworks	$8.9 billion



4. We will identify more suitable projects, government and subvented, to be injected into the capital works programme.

C. Management of Government's Investment

Aims

         The aims of the Bureau are:

• to make strategic investments in statutory bodies by equity, loans or other means of financing to help finance infrastructural development;

• to establish, as appropriate, trading funds for business-oriented government activities in order to provide better services and better response to customer demand;

• to monitor the performance of government investments to ensure an appropriate rate of return to the community as shareholder; and

• to strike a balance between the prudent investment of the fiscal reserves and the aim to preserve their value in real terms.

Overview

         Government has made major investments* in statutory bodies such as the Housing Authority ($211.5 billion), the Mass Transit Railway Corporation ($32.2 billion), and the Airport Authority ($36.6 billion) to enable them to achieve their social and business objectives. Similarly Government has also granted loans to the Industrial Estates Corporation ($1.2 billion) and non-profit-making organisations such as the Housing Society ($9.6 billion) to assist with their development programmes. In so doing, Government complements rather than competes with the private sector as a source of finance for public organisations in their infrastructural development projects.

         The Secretary for the Treasury is a member of the Housing Authority and the Airport Authority, and sits on the boards of the Mass Transit Railway Corporation, the Kowloon Canton Railway Corporation, the Industrial Estates Corporation and Tradelink, as representative of the interests of the shareholder.

         Since 1993, six trading funds have been established within the Government: the Companies Registry, Land Registry, Office of the Telecommunications Authority, Post Office, Sewage Services and Electrical and Mechanical Services. A government review of their financial performance at the end of 1996 concluded that the trading funds had been achieving their service improvement objectives and, with the exception of the Sewage Services Trading Fund, their financial objectives. Regarding the Sewage Services Trading Fund, we have concluded that it will not be financially viable in the long term as a trading fund as it is unlikely to generate sufficient revenue for sewage services to cover expenditure on new or improved facilities. We will seek the Provisional Legislative Council's approval in late 1997 to wind up the Fund at the end of the current financial year.

         The assets of the Hong Kong Special Administrative Region Government Land Fund became part of the fiscal reserves on 1 July 1997. We estimate that the total fiscal reserves will exceed $400 billion by end March 1998.

* figures at historical costs

Key Indicators

         In 1996-97,

• Government invested $1.1 billion in the Airport Authority and $8 billion in the Mass Transit Railway Corporation, bringing its total investment in the new airport and airport railway projects respectively to $36.6 billion and $23.7 billion.

• Government lent $2.6 billion to the Housing Society to help finance the Sandwich Class Housing Scheme, $2.5 billion to assist civil servants to purchase their own homes, and $900 million to tertiary students.

• Electrical and Mechanical Services became the sixth trading fund to be established, with assets of over $1 billion.

• The Kowloon Canton Railway Corporation and the Mass Transit Railway Corporation declared shareholder's dividends of $300 million and $647 million respectively.

• The Housing Authority paid $1,151 million in shareholder's dividend.

• Four of the five established trading funds declared shareholder's dividends totalling $111 million.

• The fiscal reserves, which are placed with the Hong Kong Monetary Authority's Exchange Fund in effectively risk-free investments, achieved a return of 5.7%.

New Commitments

1. From 1998-2001, we expect to contribute approximately $50 billion as capital investment in the High Priority Projects under the Railway Development Strategy and further amounts to high-tech projects such as the Science Park.

2. In 1998-99, we will consider further enhancing the operational flexibility of trading funds so as to improve services, promote productivity and increase cost-effectiveness.

3. In 1998-99, we will review the investment strategy for the fiscal reserves in order to secure a higher overall return.

D. Development of Government's Estate

Aims

         The aims of the Bureau are:

• to meet Government's accommodation needs (including those for office space and quarters) in an economical and cost-effective manner;

• to manage Government's estate efficiently and cost-effectively; and

• to optimise the full potential of Government's estate and release under-utilised sites for development.

Overview

         Currently, Government occupies some 1 150 000 m2 of office space. 77% of this is in owned premises. The remainder is leased. In line with our policy to reduce dependence on leasing, we are building two new government office buildings at North Point and Cheung Sha Wan for completion in 1998 and 1999 respectively. These will produce an additional 92 000 m2 of office space, and will increase the proportion of government-owned premises to about 80%.

         Government has a stock of 26 148 quarters, 98% of which are owned. With regard to Non-Departmental Quarters, Government has, in response to changes in the demand for these quarters, reduced the stock by 35% over the past five years, from about 2 500 units to 1 600.

         We will continue to dispose of quarters surplus to our requirements. This involves the sale of individual units as well as release of sites for redevelopment. In 1997-98, we plan to put out some 400 quarters to the market, including those on three residential sites to be released for disposal through the land sales programme. The disposal of these quarters will increase the supply of large flats in the residential property market and put to economic use accommodation surplus to Government's own requirements.

         In parallel, we are reprovisioning substandard departmental quarters in order to release valuable urban sites they occupy for private development.

         We have also pursued the objective of maximising commercialisation opportunities within existing government properties without affecting the normal operation of the occupants. In 1997-98, we are granting advertising leases for 14 government multi-storey carparks. We are exploring the advertising opportunities in the Tsing Ma Control Area and North Lantau Expressway. We will continue to rent out accommodation not immediately required for occupation on a temporary basis.

Key Indicators

        In 1996-97,

• the occupancy rate of government office accommodation was 99.8%;

• the ratio between owned and leased government office space was 77 : 23;

• the number of government premises identified for commercialisation opportunities was 15; and

• the rental income from commercial and temporary letting of accommodation was $487 million.

New Commitments

Disposal of Government Quarters and Sites

1. We will release three quarter sites for disposal in 1998-99.

2. We will arrange for the release of two government office sites at Canton Road and Tung Lo Wan Hill Road for sale in 2001.

New and Refurbished Government Offices

3. We will build three new government office complexes at Smithfield Road, Sha Tin and Sai Wan Ho scheduled for completion in 2000, 2001 and 2002 respectively.

4. We will undertake refurbishment of government buildings with an annual expenditure of $1,100 million to preserve their value and to improve the environment for staff and the public visiting these government offices.

5. We will draw up a programme in 1998-99 to replace old style furniture by new ones in existing government offices to improve the working environment and to achieve a more modern office outlook.

Optimisation of Site Utilisation

6. We will adopt a more proactive and systematic approach to the planning of government building projects to optimise utilisation of sites.

7. We will review existing and planned use of sites by Government through setting up and effectively utilising a comprehensive database of Government, Institution and Community (GIC) sites in 1998.

8. We will enhance support to government departments in their review of site requirements and co-ordinate action to bring about the maximum degree of joint user development, including accommodation needed for social welfare and community purposes, so as to achieve optimum utilisation of sites.

9. We will map out a strategy and a prioritised programme for redeveloping existing under-utilised government sites. We will draw up redevelopment options for five such sites in 1998. We will roll forward the programme annually.

Commercialisation Initiatives

10. We will take on responsibility for the management and commercialisation of the decommissioned Kai Tak Airport from 1998, pending its eventual redevelopment. The anticipated revenue from the commercialisation opportunities, including letting out of commercial space, will be in excess of $200 million a year.

E. Application of Information Technology within Government

Aims

         The aims of the Bureau are:

• to ensure that departments' information technology needs are met in the most efficient and cost-effective manner; and

• to encourage the efficient use of information technology in government offices to upgrade the quality of the services which they provide to the public.

Overview

         We completed the first phase of the Government Office Automation (GOA) Programme covering all Bureaux in the Government Secretariat in early 1996. Since then, 17 government departments have also joined the Programme and implementation work for another five departments is in progress. Based on the current plan, the remaining government departments will be provided with an interim connection to the Government Communications Network by end 1997.

         With the rapid development of information technology and its widespread application in Government, we plan to develop an integrated government-wide information technology infrastructure with uniform design principles, standard models, common information technology facilities and proper measures to safeguard information integrity and security. Such infrastructure will enable information to be shared across departments, support policy formulation and decision making, accelerate system development, ensure optimum use of modern information technology and enable Information Technology Services Department (ITSD) to cope with clients' demands on a unified and integrated platform.

         To promote the use of Chinese word processing in Government, we have launched a project to equip general grade staff with computers. Moreover, all workstations to be installed under the GOA Programme will be Chinese enabled. So far, some 4 100 general grade staff have received training on Chinese word processing.

Key Indicators

         In 1996-97:

• we spent $294 million on implementing departmental Information System Strategy Plans (ISSPs) for eight departments and another $376 million on other computer applications/projects;

• the number of workstations, including micro-computers and word processors per 1 000 civil servants was 320;

• the number of person-days of training and seminars organised by ITSD for users was 2 500; and

• the number of mainframe, mid-range and micro- computers in operation were ten, 484 and 41 000 respectively.

New Commitments

Internet Technology

1. We have embarked on five pilot projects in selected departments to promote the use of Internet in Government and to examine the legal, security and technical issues involved in the wider use of Internet for the delivery of government services. In the light of the results of these studies, we will strengthen the use of Internet technology for improving communication within Government and for providing better services to the public.

GOA Programme

2. We plan to extend the GOA Programme to cover the whole Government by 2000. By the end of 1998, seven more government departments will be joining the Programme.

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Into the 21st Century

         Our main long-term challenge into the 21st Century is to meet the rising expectations and changing needs of the community while maintaining a firm commitment to the budgetary principles and fiscal policies which have underpinned Hong Kong's past economic success. We must respond to the community's demands for more and better public services while standing firm on our commitment to small government and low taxes.

         To meet this challenge, we must strike the right balance in allocating the available new resources generated by continuing economic growth to different policy areas. Above all, we must maintain a vigorous campaign to promote greater efficiency and value-for-money in the public sector.

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Chapter I: General Principles

Article 7

         The land and natural resources within the Hong Kong Special Administrative Region shall be State property. The Government of the Hong Kong Special Administrative Region shall be responsible for their management, use and development and for their lease or grant to individuals, legal persons or organisations for use or development. The revenues derived therefrom shall be exclusively at the disposal of the government of the Region.

Chapter IV: Political Structure

Section 1: The Chief Executive

Article 48

         The Chief Executive of the Hong Kong Special Administrative Region shall exercise the following powers and functions:

         ......

         (3)    ......

         ......

Article 51

         If the Legislative Council of the Hong Kong Special Administrative Region refuses to pass the budget introduced by the government, the Chief Executive may apply to the Legislative Council for provisional appropriations. If appropriation of public funds cannot be approved because the Legislative Council has already been dissolved, the Chief Executive may, prior to the election of the new Legislative Council, approve provisional short-term appropriations according to the level of expenditure of the previous fiscal year.

Article 58

         A Commission of Audit shall be established in the Hong Kong Special Administrative Region. It shall function independently and be accountable to the Chief Executive.

Article 62

         The Government of the Hong Kong Special Administrative Region shall exercise the following powers and functions:

         ......

         (4)    To draw up and introduce budgets and final accounts;

         ......

Article 73

         The Legislative Council of the Hong Kong Special Administrative Region shall exercise the following powers and functions:

         ......

         (2)    To examine and approve budgets introduced by the government;

         (3)    To approve taxation and public expenditure;

         ......

Chapter V: Economy

Section 1: Public Finance, Monetary Affairs, Trade, Industry and Commerce

Article 106

         The Hong Kong Special Administrative Region shall have independent finances.

         The Hong Kong Special Administrative Region shall use its financial revenues exclusively for its own purposes, and they shall not be handed over to the Central People's Government.

         The Central People's Government shall not levy taxes in the Hong Kong Special Administrative Region.

Article 107

         The Hong Kong Special Administrative Region shall follow the principle of keeping expenditure within the limits of revenues in drawing up its budget, and strive to achieve a fiscal balance, avoid deficits and keep the budget commensurate with the growth rate of its gross domestic product.

Article 108

         The Hong Kong Special Administrative Region shall practise an independent taxation system.

         The Hong Kong Special Administrative Region shall, taking the low tax policy previously pursued in Hong Kong as reference, enact laws on its own concerning types of taxes, tax rates, tax reductions, allowances and exemptions, and other matters of taxation.

Section 2: Land Leases

Article 121

         As regards all leases of land granted or renewed where the original leases contain no right of renewal, during the period from 27 May 1985 to 30 June 1997, which extend beyond 30 June 1997 and expire not later than 30 June 2047, the lessee is not required to pay an additional premium as from 1 July 1997, but an annual rent equivalent to 3 per cent of the rateable value of the property at that date, adjusted in step with any changes in the rateable value thereafter, shall be charged.

Note

         In addition, all Bureaux/Departments as well as Department of Justice, Office of the Judiciary Administrator, Independent Commission Against Corruption and the Administration Wing of the Chief Secretary for Administration's Office, have joint responsibility for the implementation of the following articles:

Articles 11 (first paragraph), 16, 56 (second paragraph), 62(1) and (2), 64, 142, 148, 149, 150, 151, 152 and 153.

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Policy Programme