PAPER FOR BRIEFING OF FINANCE COMMITTEE

One-Off Grants to the Municipal Councils

Introduction

This paper informs Members of the Administration's proposal to seek the Legislative Council Finance Committee's approval of funding of $2,613 million for making one-off grants of $1,526 million and $1,087 million to the Provisional Urban Council (PUC) and the Provisional Regional Council (ProRC) respectively to meet their shortfall in rates revenue as a result of the rebate to ratepayers of the first quarter of rates paid in 1998-99.

The Rates Financing Arrangement

2. Rates provide a stable source of revenue to the two Municipal Councils. At present, about 80% and 85% of the revenue of PUC and ProRC respectively come from rates. Under the Rating Ordinance, rates include both general rates and the PUC rates in relation to the PUC area; and general rates and the ProRC rates in relation to the ProRC area. General rates collected become general revenue while the revenue from the PUC rates and ProRC rates go to the two Councils directly (though the Rating and Valuation Department acts as the collection agent). The overall rates percentage charge for any given year is prescribed by resolution of the Legislative Council which also prescribes the percentage split between general rates and the two respective Municipal Council rates.

3. The Government reviews the rates revenue requirement of the two Councils once every three years to tie in with the rates revaluation cycle. In considering the two Councils' funding requirements from rates revenue, the Government takes account of all relevant factors such as the Councils' past and projected expenditure and non-rates revenue, their accumulated reserves, the overall state of the economy and the Government's overall budgetary policy and guidelines. The Government's overall aim is to ensure that the two Councils will be given a reasonable level of rates revenue to enable them to provide their services to the community. The two Councils' rates revenue requirement are then translated into specified rates percentages for the PUC and ProRC areas which are subsequently approved by LegCo. For the triennium 1997-98 to 1999-2000, the PUC rate is 2.6% and the ProRC rate is 4.2%.

4. Rates are collected quarterly. During the triennium, the Councils receive their rates revenue every three months in arrears. Within the rates revenue provided, the two Councils have full financial autonomy; they are free to determine their expenditure priorities and to manage their finances in the manner they choose.

Rebate of Rates Paid in First Quarter of 1998-99

5. On 22 June 1998, the Chief Executive announced a package of measures to provide relief to the community in the current economic situation. One of the measures to ease the costs of families and business is to provide a rebate of one quarter rates payment to all ratepayers. The rebate will be credited against the 1998-99 third quarter rates bill of those who had paid rates in respect of a tenement in the first quarter of 1998-99. This measure benefits over two million ratepayers but was estimated at the time of the announcement to result in revenue loss of about $1.5 billion to the PUC and about $1.1 billion to the ProRC, in addition to a reduction in general rates revenue of $1.28 billion.

6. Prior to the Chief Executive's announcement of the relief measures on 22 June 1998, we met with the Chairmen of the two Councils and received clear feedback that the Councils would not be able to live within the reduced rates revenue. In light of this reaction, the Financial Secretary said at the time that in order to effect this relief measure, the Administration has agreed to apply to Finance Committee of the Legislative Council for additional funds to make up for the Councils' loss in rates revenue. According to the latest estimate from the Commissioner for Rating and Valuation, the PUC will receive $1,526 million less in revenue in its quarterly rates receipts in January 1999 as a result of the rates rebate. The corresponding figure for the ProRC is $1,087 million. The Administration therefore plans to seek Finance Committee's approval at its meeting on 18 December 1998 of total funds of $2,613 million for making one-off grants to the two Councils in January 1999 to make up for their losses.

7. In preparing for this funding submission, the two Councils have re-affirmed that while they will continue to exercise prudence and economy in managing their finances, they cannot absorb the sizeable shortfalls. They have advised that without extra funding injections of equivalent amounts from the central Government, their financial plans will be upset, services disrupted and provision of municipal facilities delayed. Details of the two Councils' assessment and justifications in support of the Administration's application for funding are at Annexes Aand Brespectively.

Finance Bureau
November 1998

Annex A

The Provisional Urban Council (PUC) is a financially autonomous body with its major source of revenue (around 80%) coming from its share of the rates revenue. Under the Rating Ordinance (Chapter 116), the prevailing overall PUC area rates of 4.5% includes both general rates of 1.9% and PUC rates of 2.6%. The PUC rates percentage is determined having regard to the rates revenue requirements of the Council which is estimated by Government in the course of rates negotiations conducted once every three years. The current percentage of 2.6% was determined in early 1997 when rates negotiations for the current triennium (1997-98 to 1999-2000) took place.

2. Under the PUC's current financial plan, together with the reserve at the beginning of the triennium and revenue expected to be generated, e.g. market rental, admission fees of venues etc., the PUC rates of 2.6%, or $18.7 billion in dollar terms estimated at the time of the triennial discussions, is required to finance the Council's expenditure requirement of the current triennium, as follows -

	1997-98 Actual $'bn	1998-99 Budget $'bn	1999-2000 Forecast $'bn	Total $'bn
Expenditure
Personal Emolument	4.13	4.42	4.76	13.31
Operational Expenditure	1.96	2.49	2.75	7.20
Special Expenditure	0.25	0.44	0.47	1.16
Capital Expenditure	0.80	1.32	1.38	3.50
	____	____	____	____
	7.14	8.67	9.36	25.17
	____	____	____
Less: Revenue - Rates (latest estimate before taking account of rebate)	(18.31)
Other income	(3.76)
Less: Opening Reserves	(3.12)
____
Closing Reserves	Surplus			0.02
____

3. The rebate of one quarter rates payment to all ratepayers will result in a loss of $1,526 million rates revenue due to be received by the Council in January 1999. It will not be appropriate nor practicable for the Council to absorb this amount for the following reasons -

1. the Provisional Urban Council is a financial autonomous body and under the established funding mechanism between Government and the Council, rates revenue of the Council is agreed at the beginning of the three-year period. Once the grant (expressed in terms of rate percentage) is agreed, it will be up to the Council to manage its finance as it considers appropriate. The rebate of one quarter rates payment to all ratepayers to alleviate burden on them in the prevailing economic climate is a move of Government and it will not be appropriate for the consequence to be transferred to the Council;

2. from the practical point of view, it will be most difficult for the Council to absorb this amount. A reduction in rates receipts of $1.5 billion represents 25% of the Council's rates revenue in 1998-99 or 8% of the entire amount that the Council is expected to receive from rates over the three-year period. It will be impossible to absorb this amount without significantly affecting services to the public (in particular the three-year period is already more than half way through). Furthermore, the Council might have to suffer a loss of $0.4 billion in rates revenue as a result of the projection that there will be fewer new buildings coming on stream; and

3. the budget of the Council comprises three main components, namely Personal Emoluments, Operational and Special Expenditure and Capital Works. As regards Personal Emoluments, while much effort is being made to achieve savings, over 95% of the Council's posts are filled by Permanent and Pensionable civil servants. It will be difficult to make significant cut other than by natural wastage. As regards Operational and Special Expenditure, this is essential expenditure such as electricity, repair and maintenance, cleansing and security contracts etc. in which it will be difficult to make significant reduction. In any case, Operational and Special Expenditure constitutes only a quarter of the budget. As for Capital Works, given the lead time for planning, most projects have already been committed. Whilst it is possible to delay planning of some projects which are still uncommitted, this will defer the provision of much needed municipal facilities to the public. A list of capital works projects to be implemented in the current triennium is at the Enclosure.

4. Full reimbursement by Government of the shortfall in rates revenue of $1,526 million due to the rates rebate is therefore necessary.

Urban Services Department
November 1998

Annex B

The Provisional Regional Council (ProRC) is a financially autonomous body with its major source of revenue (around 85%) coming from its share of the rates revenue. Under the Rating Ordinance (Chapter 116), the prevailing overall ProRC area rates of 4.5% includes both general rates of 0.3% and ProRC rates of 4.2%. The ProRC rates percentage is determined having regard to the rates revenue requirements of the Council which is estimated by Government in the course of rates negotiations conducted once every three years. The current percentage of 4.2%, or an estimated $14 billion in dollar terms at the time of the triennial discussions, was determined in early 1997 when rates negotiations for the current triennium (1997-98 to 1999-2000) took place.

2. The Government's rebate of the 1998-99 first quarter rates will lead to a loss of $1,087 million in the ProRC's rates revenue. A reduction of this magnitude represents 25% of the Council's rates revenue in 1998-99 or 8% of the entire amount that the Council is expected to receive from rates over the three-year period.

3. The Council has carefully assessed the impact of the rates revenue loss on its finances. Its conclusion is that additional funds from the Government of an equivalent amount are necessary for it to meet its funding needs in the current triennium.

4 At present, a large share of the Council's expenditure is on providing municipal services and is recurrent in nature. The Council has identified very limited scope for trimming this part of the expenditure even with re-adjustment of priorities and greater economy.

5. The Council has also reviewed its capital works programme to see if any projects can be cancelled, delayed or scaled down, so as to save capital works expenditure and the additional recurrent costs of operating new facilities. It has found little leeway for revising its capital works programme (Enclosure 1) as most of the projects are committed. Fifty-six have been completed but with outstanding residual payments (Group A), 23 are in progress (Group B) and two have been contracted to start (Group C). There are only three projects on the programme for which the Council has not entered into any contractual commitment (Group D). The total value of the contractual payments arising from the Group A to C projects that have to be settled amounts to some $1,140 million in 1998-99 and $780 million in 1999-2000. (A summary of the projected cashflow requirements of these projects is at Enclosure 2.) Failure to discharge these payments would damage the Council's reputation, lead to legal claims from contractors and seriously delay the completion of some of its projects.

6. Full reimbursement by Government of the shortfall in rates revenue of $1,087 million due to the rates rebate is therefore required to enable the Council to fulfil its contractual commitments arising from the projects in Groups A to C of its capital works programme within this triennium.

Regional Services Department
November 1998

Enclosure 2

Group	Item	Total Number of Projects	Estimated Expenditure for 1998/1999 ($ million)	Estimated Expenditure for 1999/2000 ($ million)
A	Projects already completed but with some residual payment outstanding	56	65.77	45.18
B	Projects under construction	23	1,034.75	700.77
C	Projects contracted to start (including projects pending signing of contracts)	2	39.00	33.00
D	Projects yet to commence and with no contractual commitment	3	27.40	407.47
		___	_______	_______
	TOTAL:	84	1,166.92	1,186.42
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