Short Term Phase of the Enhanced Productivity Programme


To brief Members on the implementation of the short term phase of the Enhanced Productivity Programme (EPP).


2. The objective of the short term phase of EPP, as driven by the Finance Bureau across Government, is to require departments and agencies to undertake new or improved services without additional financial resources in 1999-2000 and thereafter to deliver productivity gains or savings amounting to 5% of their operating expenditure by the year 2002-03.


3. All bureaux, departments, agencies and non-government bodies financed by Government expenditure are subject to the above EPP targets. Total recurrent Government expenditure for 1998-99 is $172 billion. We estimate that about $110 billion are susceptible to productivity gains. Of the remaining $62 billion exempted from the tangible 5% savings target, about two-thirds are statutory or quasi-statutory expenditure such as payments under the various social security schemes, financial assistance schemes for students, legal aid, etc. The remaining one-third belong to school expenditure which we do not intend to impose a 5% reduction by 2002 in view of the many demands placed on schools under the Quality Education initiatives.

4. In the case of the Urban Services Department, the Regional Services Department and the Housing Department which are executive arms of the Provisional Urban Council, the Provisional Regional Council and the Housing Authority and are not operating on Government expenditure, we understand that they would support the EPP initiative and seek to achieve the 5% or higher productivity targets. As regards the five Trading Fund departments which are also not operating on Government expenditure, they have undertaken to support EPP with the aim of reflecting the productivity gains in the pricing of their services.


5. Our target is to achieve savings in recurrent baseline expenditure by 5% by 2002-03. As a norm, we will make deductions of 1%, 3% and 5% (on a cumulative basis) from the baseline expenditure of bureaux, departments and subvented organisations for the years 2000-01, 2001-02 and 2002-03 respectively. We will consider individual departments' request to adopt alternative scales of deductions for individual years where there are justifiable circumstances provided that the ultimate objective of 5% by 2002 is secured.

6. We now turn to address a few concerns and observations, both general and specific, expressed by Members of this Council and the community on the EPP initiative since the Chief Executive's announcement. We are happy to answer any further queries from Members at the meeting of the LegCo Panel on Public Service.


The Administration's Response

(a) EPP is cutting back Government expenditure in disguise. Government is retracting its commitment to improve services to the community, particularly those in need.

Definitely not. EPP is not about overall expenditure cuts or reduction in service or deterioration in standards or quality of the public service.

Regarding the former, government expenditure will increase over time in line with the growth in the economy as a whole but when new money is tight, we must look for opportunities in existing resources for reinvesting in priority areas. To illustrate, for the year 1999-2000, we are planning government expenditure to increase by 4% in real terms and we expect welfare spending to increase by 12.5%.

Regarding the latter, the Chief Executive and the Chief Secretary for Administration have made it clear to Heads of Bureaux and Departments that we will not accept the delivery of the 5% target productivity savings by cutting back services other than those no longer justified in present day circumstances.

(b) The 5% target by 2002 is too modest when the private sector is undergoing major cost cutting in a more expedient manner.

Public sector has a foremost duty to ensure that there should be no diminution or deterioration in the services we are providing to the public. Unlike private sector which has the flexibility to close down less profitable business functions to achieve drastic savings, we have to ensure that there are adequate resources to meet the public's demand for services which tends to grow against an economic downturn. For example, we have to step up employment services to help those looking for jobs, we have to strengthen law and order to guard against mishaps, etc.

That said, the 5% target is a service-wide minimum requirement. We will pursue vigorously areas where higher level of productivity gains can be achieved. The Fundamental Expenditure Reviews under the longer term phase of EPP is one of the means to achieve greater and more lasting improvement in public sector use of resources.

(c) There have been criticisms that the 5% productivity gains is taken away from departments instead of being kept in the departments’ budget for service improvements.

In global terms, we will re-invest every dollar saved in EPP to improve services. But we have to ensure that Government resources are directed towards those areas where they will be of most benefit to the community. The beneficial value of public services vary from department to department. By requiring all departments to return their productivity savings to the centre for re-allocation to new or improved services on a competitive basis would enable Government to best meet the community's aspirations.

(d) How can the public ensure that the service quality has not deteriorated as a result of EPP.

Departments’ performance is reported and monitored through targets and indicators in the Controlling Officers’ Reports. LegCo and the community can monitor whether there is any diminution in service quantity or deterioration in quality through those performance targets and indicators. We have an ongoing exercise to sharpen and improve those indicators.

(e) While 5% by 2002 is very achievable in the case of "inefficient" departments, it may pose real problems to those departments or agencies which have been undertaking efficiency drive well before EPP. This is seen as penalising the efficient departments.

We do not dispute that some departments are more efficient than others and a uniform 5% target across the board may be seen as "rough justice". However, we believe that a 5% reduction is achievable in all departments through process re-engineering, outsourcing, use of technology and service rationalisation. We would no doubt look for bigger cost savings in those departments with greater scope for efficiency. This applies to both government departments and government-subvented organisations.

(f) The target is 5% by 2002. Doubt if we would see any short term improvements to the public sector.

In the coming financial year from April 1999, departments are required to deliver new or improved services using existing resources. We have asked them to come up with a "menu" of new initiatives that they will implement in 1999-2000. This "menu" of initiatives will comprise new/improved services funded by redeployment savings/productivity gains. Alternatively, departments may decide to return to the centre the redeployment savings/productivity gains identified in 1999-2000. We would be in a position to say more about these initiatives at the time of the 1999 Budget.

Enabling Environment

7. To facilitate bureaux and departments to accomplish the 5% target and to achieve sustainable and long-term improvement, we are committed to providing a suitable enabling environment. We are now examining the extent to which we can provide Controlling Officers with greater flexibility in the use of financial and human resources. For example, on financial resources side, we have introduced incentives for greater efficiency and are considering streamlining procedures for seeking changes to the approved Estimates, liberalising the procurement regulation and introducing one-line vote for a few selected departments, etc. We have briefed the Finance Committee at its meeting on 4 December 1998 on one-line vote and will provide a further paper to address Members' concern as expressed at the meeting. On human resources side, the Civil Service Bureau is working on a scheme which will give Heads of Departments the authority to employ non-civil service short-term contract or temporary staff for service needs which do not require retaining staff on a long-term basis.

Finance Bureau
December 1998