FCR(98-99)81

For discussion
on 12 March 1999

HEAD 46 - GENERAL EXPENSES OF THE CIVIL SERVICE
Subhead 014 Home purchase allowance
Subhead 033 Home Financing Scheme
HEAD 190 - UNIVERSITY GRANTS COMMITTEE
Subhead 529 Home Financing Scheme

Members are invited -

1. to approve supplementary provision of $111 million under Subhead 033 Home Financing Scheme;

2. to approve a reduction in the rates of Home Financing Allowance and Home Purchase Allowance by 13.7% with effect from 1 April 1999; and

3. to note the new formula for determining interest rates for government housing loans.

PROBLEM

The approved provision for the Home Financing Scheme (HFS) under Head 46 Subhead 033 Home Financing Scheme is insufficient to meet increased expenditure in 1998-99.

2. Under the established mechanism for annual adjustments, increases in Home Financing Allowance (HFA) and Home Purchase Allowance (HPA) are capped by movements in the Consumer Price Index (A) (CPI(A)) in times of an increase in property price indices. We need to consider the appropriate level of downward adjustment to the allowances from 1 April 1999 given the adjustment in the property market last year.

PROPOSAL

3. The Director of Accounting Services (DAS) requests supplementary provision of $111 million under Subhead 033 Home Financing Scheme.

4. The Secretary for the Civil Service proposes to reduce the rates of HFA and HPA by 13.7% with effect from 1 April 1999. The revised rates will also apply to the HFS for eligible staff in institutions funded by the University Grants Committee (UGC).

JUSTIFICATION

Supplementary Provision

5. On the basis of the actual expenditure for ten months from April 1998 to January 1999, DAS estimates that expenditure for payments of HFA in 1998-99 will exceed the approved provision by about $111 million, calculated as follows -

		$ million
(a)	Actual expenditure from 1 April 1998 to 31 January 1999	1,857.02
(b)	Estimated expenditure from 1 February 1999 to 31 March 1999	412.00
_________
(c)	Estimated total expenditure for 1998-99 [(a) + (b)]	2,269.02
Less
(d)	Approved provision for 1998-99	2,158.00
_________
(e)	Shortfall [(c) - (d)]	111.02
Say $111 million
_____________

6. The supplementary provision required is mainly due to -

1. a higher than anticipated number of new joinees during 1998-99 which accounts for $47 million of the supplementary provision sought. In compiling the 1998-99 Estimates, DAS estimated an average of 8 730 HFS participants throughout the year. However, due to the greater than expected number of new joinees, DAS now estimates an average of 8 920 HFS participants for the fiscal year on the basis of the actual position in the first ten months of the year; and

2. a higher than estimated payment per HFS participant which accounts for about $64 million of the supplementary provision sought. In compiling the 1998-99 Estimates, DAS assumed $20,600 as the average monthly payment for each participant throughout the year. On the basis of the actual position in the first ten months of the year, DAS now estimates $21,200 as the average monthly payment per participant. This is mainly attributed to the receipt of higher rates of allowance due to the profile of participants such as promotion and the increase of 5.7% in HFA rates from 1 April 1998 in accordance with the established adjustment mechanism applicable to first-time HFS participants.

Downward Adjustment of HFA and HPA Rates

7. At present, the rates of HFA and HPA are adjusted annually on 1 April according to the property price movements over the past 12 months ending 31 December, as indicated by the property price indices compiled by the Rating and Valuation Department, but capped by the increase in CPI(A) in the corresponding period to contain cost to public funds. This mechanism was approved by the Finance Committee and has been used since 1994 (see details in paragraphs 18 to 21). Finance Committee has also delegated the authority to the Secretary for the Treasury to revise the rates on the above basis.

8. The Rating and Valuation Department has advised that for the 12-month period 1 January to 31 December 1998, the average quarterly Property Price Index has decreased by 29% as compared to the average quarterly Property Price Index for the 12-month period 1 January to 31 December 1997. Based on this analysis, average property prices in 1998 have fallen to almost identical levels to those in 1994, when Finance Committee approved revised rates of HFA and the annual adjustment mechanism.

9. In view of the significant adjustment in the property market, we have to make corresponding reductions to the HFA and HPA rates. As increases in the rates are capped by movements in the CPI(A) in a rising property market, we do not consider it appropriate to reflect the full extent of the fall in property prices in the prevailing HFA and HPA rates . In view of the analysis in paragraph 8 above, we propose instead to adjust the rates downwards with the aim of maintaining roughly the same buying power in the property market. Thus, in the case of HFA, the rates will be revised to those introduced in 1994 following the review. This represents a decrease of 13.7% from the prevailing HFA. Given that HPA rates are adjusted annually on 1 April using the same methodology, we propose that the rates of HPA should also be reduced by 13.7%. The proposed rates of HFA and HPA with effect from 1 April 1999 are set out in the Enclosure. The new rates will be applicable to officers who start to draw the HFA or HPA, and those who opt to trade up their properties on or after 1 April 1999. The same reduced HFA rates will also apply to new participants in the HFS for eligible staff in UGC-funded institutions.

FINANCIAL IMPLICATIONS

Supplementary Provision

10. If Members approve the proposal, we shall offset supplementary provision of $23 million from Subhead 013 Personal allowances, $5 million from Subhead 022 Passages and $5 million from Subhead 023 Quartering under the same Head in light of the lower than expected level of expenditure in these areas. We shall offset the remaining amount of $78 million by deleting an equivalent amount under Head 106 Miscellaneous Services Subhead 251 Additional commitments.

Downward Adjustment of HFA and HPA Rates

11. There would be savings in the region of $25 million and $14 million respectively in 1999-2000 if the proposed downward adjustment of 13.7% in the rates of HFA and HPA is approved. As regards the UGC sector, the proposed downward adjustment of 13.7% would result in savings of about $14 million based on the same assumptions on the take-up rate adopted when we sought Finance Committee's approval of the scheme last September.

Staff Consultation

12. We have consulted the four central staff consultative councils on the proposed downward adjustment of HFA and HPA rates. As the HFS for UGC staff follows the civil service HFS insofar as the rates of allowances are concerned, we have also informed UGC and the institutions the proposed revisions.

Interest Rates on Government Housing Loans

13. Government housing loans (downpayment loans under HFS and HPS and housing loans under the Housing Loan Scheme) granted to eligible civil servants bear interest calculated on the basis of "no-gain-no-loss" to the Government. At present, the interest rate is determined on the basis of an 18-month time-weighted average return of the Exchange Fund and is updated every six months. The next adjustment is due on 1 April 1999. Given that the interest rate determined by the existing formula may fluctuate widely and could produce an interest rate which is out of line with rate movements in the lending market, we consider it appropriate, as a long term solution, to revert from the existing formula to a market lending-based one. Having consulted the central staff consultative councils in January 1999, and the Legislative Council Panel on Financial Affairs on 1 February 1999, we will set the interest rates for these loans at 2% below the average best lending rate of the note-issuing banks with effect from 1 April 1999, the 2% being the average differential between the best lending rate and the interest rate for the Government housing loan schemes over the ten-year period from 1989 to 1998. The new formula helps to ensure that the interest rate will move in tandem with the market lending rate. Interest rate under the new formula is reasonable, transparent and fair to both the Government and the borrowers. Under the new formula, the interest rate for government housing loans will be 6.75% per annum with effect from 1 April 1999. The interest rate will be reviewed monthly and adjusted when the updated rate differs from the prevailing rate by one percentage point or more, or when the prevailing rate has remained stationary for six months.

BACKGROUND INFORMATION

Home Financing Scheme

14. The HFS was introduced on 1 October 1990 for officers on Master Pay Scale (MPS) point 34 or above (or equivalent) to promote home ownership among civil servants and to achieve long-term savings in Government expenditure on the provision of housing benefits to civil servants. Participants are eligible for a monthly HFA for a maximum period of 120 months and a downpayment loan to help them acquire residential properties in Hong Kong. Eligible officers appointed before 1 October 1990 who are entitled to the Private Tenancy Allowance (PTA) or Non-departmental Quarters (NDQs) can opt to join the Scheme by forfeiting their entitlement to PTA and NDQs before the option deadline. Their entitlement period under the HFS will be reduced if they opt to join the Scheme after the deadline. Local officers appointed on or after 1 October 1990 are eligible for the HFS as a condition of service but are not eligible for PTA or NDQs.

15. Throughout their entitlement period, participants in the HFS are locked into the scale of rates prevailing at the time they joined it. They may progress to higher rates appropriate to their salary points on the same scale through salary progression or promotion. Notwithstanding this, those who joined the Scheme before 1 November 1994 and subsequently trade up their properties, may opt to draw the allowance at the special rates prevailing at the time of trading up.

Home Purchase Scheme

16. The HPS was introduced in 1981 to help civil servants below MPS 34 buy a permanent home in Hong Kong. It is a discretionary benefit which is subject to an annual quota of 1 800 and the availability of funds. Participants may receive a monthly allowance for up to 120 months and a downpayment loan to help them acquire residential properties in Hong Kong.

17. As with the HFS, HPS participants remain throughout their entitlement period on the scale of rates of HPA prevailing at the time they join the Scheme. They may progress to higher rates appropriate to their salary points on the same scale through salary progression or promotion. Notwithstanding this, if they subsequently trade up their properties, they may opt to draw HPA at the rates prevailing at the time they change properties.

Annual Adjustment

18. In November 1993, Finance Committee approved vide FCR(93-94)98 a mechanism to revise the rates of HPA annually on 1 January according to the movements of property prices in the past 12 months ending September, but capped by the increase in the CPI(A) in the corresponding period.

19. In October 1994, Finance Committee approved vide FCR(94-95)58 an increase of 35% in the rates of HFA for new joinees and an increase of 8.5% in the special rates of HFA for officers who joined the scheme before 1 November 1994 and subsequently opt to trade up their properties, following a major review of the HFA. Finance Committee also approved the mechanism to adjust the rates annually according to the property price movements over the past 12 months ending December, capped by CPI(A) as in the case of HPA.

20. In December 1997, Finance Committee further approved vide FCR(97-98)78 to synchronize the annual adjustment for both HPA and HFA to 1 April each year and by the same rate of adjustment.

21. In line with the delegated authority from the Finance Committee according to the mechanism as approved and revised since 1994, the Secretary for the Treasury has approved adjustments to the rates of HFA and HPA annually.

22. Given the volatility of the market situation, we do not propose any new annual adjustment mechanism for the time being. We will continue to deal with an increase in property prices under the mechanism already approved by Finance Committee in the next annual adjustment in 2000. We will seek Finance Committee approval in the event of any further reduction in rates.

23. On 18 September 1998, Members accepted vide FCR(98-99)30 the financial implications of introducing an HFS, similar to the civil service HFS, for eligible staff of the UGC-funded institutions with effect from 1 October 1998.

Civil Service Bureau
March 1999

Enclosure to FCR(98-99)81
(P.1 of 4)

DPS - Directorate Pay Scale
MPS - Master Pay Scale

Enclosure to FCR(98-99)81
(P.2 of 4)

Notes -

Officers who have joined the Home Financing Scheme before 1 November 1994 and subsequently trade up their properties may draw allowance at the special rates prevailing at the time of their trading up. The proposed special rates with effect from 1 April 1999 are similarly restored to those introduced in 1994 following the review.

DPS - Directorate Pay Scale
MPS - Master Pay Scale

Enclosure to FCR(98-99)81
(P.3 of 4)

DPS - Directorate Pay Scale
MPS - Master Pay Scale