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Review of Government Financial Reporting Policy

30 June 2001

The Treasury
(Attn: Financial Management Services Division)
31^st Floor, Immigration Tower
7 Gloucester Road
Wanchai

Via Fax & By Mail
Hong Kong (Fax: 2802-4052)

Dear Sirs,

We are writing with our comments on the above consultation paper.

Overall, we very much welcome the initiative to adopt accrual accounting for the Hong Kong Government. The Foundation has in fact advocated such an initiative for some years (see, for example, our submission to the Financial Secretary dated 12 August 1996 http://www.hkdf.org/papers/961208accountg.htm), and we are very pleased to see that it has now come about. The consultation paper appears researched and professionally argued. The proposals in it represent a major step forward.

Our main concern is that the document is pitched mainly at a technical level. It lacks a higher level vision of the potential of accrual accounting; this in turn leads to some sub-optimal choices being made at the technical level.

In technical terms, as we state above, the proposal generally appears well considered. However, the transformation of Government accounting from a cash basis to an accruals basis is not merely a technical step but carries inherent within it a transformation of accountability of the Government to the people, and ultimately a transformation of Government itself. The paper notes in passing, correctly, that accrual accounting in some form was adopted by overseas governments as part of a broad process of governmental reform, often (as in New Zealand’s case) in response to a crisis of government finances. Thus, accrual accounting became the mechanism, not merely for improving government efficiency, and strengthening government finances, but beyond that for helping to define the role and scope of government – by facilitating privatization, contracting out and the establishment of specialized agencies to replace large scale departments. Ultimately, accrual accounting was instrumental in helping to forge a new contract between the government and the people.

Such higher-level vision is lacking from the present consultation paper. It might be thought that because the Hong Kong Government is in a position of substantial accumulated surplus rather than an accumulated deficit, there is no "problem" of government that accrual accounting could help to resolve. However, this is far from the case. The great "problem" of the Hong Kong Government is precisely that it has gathered to itself an excessive share of society’s resources. Until now, the full extent of this excess has been hidden in footnotes and off-balance sheet items, if indeed, it was recorded at all. Accrual accounting offers the prospect of revealing Government’s share of society’s resources, which in turn will empower the people of Hong Kong to decide whether that share is appropriate, or whether it should be reduced by privatization, contracting out of services, or simply the return of a large portion of the unneeded reserves to the people of Hong Kong.

Since the paper lacks such appreciation of the potential power of accrual accounting, it makes some proposals that in our view are suboptimal. For example, while the paper does propose to recognize the Government’s pension liabilities – a most welcome and overdue step – it does not propose to recognize the Government’s land holdings as an asset (with the exception of land held for investment purposes). Yet the Government is the biggest landlord in Hong Kong! In fact, it owns all the land in Hong Kong, and historically has derived a large share of its revenue from this asset. This has deleterious social and economic effects as we have argued elsewhere http://www.hkdf.org/papers/9601landtax.htm. Not to include the most important and controversial asset in the Government’s accounts appears wrong.

We also do not agree with the assertion (in 4.21) that the concept of return has limited significance in Government reporting. It is a fact that the Government has a vast share of society’s resources, including land, buildings, infrastructure, manpower, enterprises and financial assets. The key question is whether a sufficient social and economic return is being earned on those assets, or whether Hong Kong people would collectively earn a better return if a portion of the assets were returned to them via privatization, etc. It is admittedly difficult to account for many of these assets. However, other governments such as New Zealand have done so. It is unfortunate that the consultation paper interprets its remit in narrow technical terms.

We would therefore like to see a deepening of the accrual accounting philosophy, perhaps in a future review exercise after some experience has been gathered from implementing the present proposals. We believe that ultimately, Hong Kong should move towards the concept of accounting for Government as an enterprise, i.e. an entity with a collection of purposes for which it requires an asset-liability balance and income-expenditure balance that is to be optimized in accordance with the will of the people. Accrual accounting enables such vision of government to be realized. We hope that the present initiative will move in this direction.

We hope that the above comments are helpful.

Yours sincerely,

Alan Lung
Chairman