As the
battle for some 9,000 items of funding approval raged on between the
establishment and pan-Democrat legislators during the past month, it is perhaps
a fitting time for us to take a look at how the authorities have been
presenting their planning visions over the years in such a way as to reduce
public objections and lower legislative scrutiny.
Population growth – the mother of all infrastructure
drivers
To build
new grand projects, the authorities need to justify to the public the necessity
of spending the money, and one of the most important rationales for
infrastructure building is population growth – with more people we need to
build more homes, more roads, more facilities, and so on.
It is
therefore not surprising to expect that population projections have been the
most frequent victim of exaggerated projections by the government. Looking at
just the population forecasts since the handover, almost every projection has
had to be revised down barely a year or two after their publication. Perhaps these
often wildly off-the-mark forecasts of Hong Kong’s population are the fuel that
propels all near term infrastructure funding approvals!
Chart 1: Population projections almost always too optimistic 
Of the
eight population forecasts between 1997 and 2015 (Chart 1 above), only two had upward revisions, and then
subsequently lowered; the fact that the upward revisions happened in 2004 and 2007
are also telling – coinciding a need to spend our way out of the worst
recession in living memory, as well as a change of Chief Executive, suggesting new
grand spending plans for the new term of office, and therefore highly bullish
population forecasts?
Further in the future, more wide of
the mark
To quantify the proportional variance between the first forecast
available for each year and the latest new forecast for the same period, we
have plotted Chart 2 below. This shows that the ‘error’ in forecast grows
gradually by the year – for example, for year 2016, the first forecast done in
1997 projected a population of 8.21m, compared to the latest forecast done in
2015 (much closer to reality) projecting 7.35million; the magnitude of errors
had grown to 10% over the years. It seems the margin of error is set to
increase to 12% by 2029 before diminishing.
Chart 2: Without the latest round projecting a fall in population, the margin of error could grow further
The chart demonstrates
just how each year’s population projection has gone from high early estimates
to much reduced latest subsequent attempts. But what about accuracy of individual
forecasts? The answer is also one of general optimism bias, as shown in Chart 3 below:
Chart 3: Optimism bias in all forecasts?
The track
record above suggests that almost all population forecasts have been one-sidedly
optimistic, that is, the actual or latest revised figures would be anything up
to 12%+ away from the correct number, often less than 20 years in the future.
One exception…
This
phenomenon of optimism bias in population forecasts could be due to the
mandarins being conservative, setting aside some buffer in their work to allow
for flexibility in other planning initiatives. In this way, no one will blame
the government for a bit of empty road where traffic flows smoothly but accusations
will fly if new roads get clogged up too soon after completion owing to under-budgeting.
A more
cynical interpretation of the over budgeting phenomenon might be that the civil
servants deliberately mislead to grab more resources than needed so they can undertake
all sorts of projects with impunity, and have an easy ride when these projects
overrun on time or costs.
This
scepticism could even explain why, all of a sudden, the 2015 population forecast
is calling for a drop in population in 2039 (light brown highlight in Chart 1) when previous attempts have all
pointed to ever ballooning numbers of citizens.
The
rationale for this anomaly becomes clear when the hidden agenda is revealed –
since 2015, the government has started preparing for the launch of a “Future
Fund”. This means it wants our money to be put in yet another pot, managed by
faceless bureaucrats, and out of the reach of the people. To persuade us that
this desperately needed and for our own good, the easiest way is to show how
miserable and disastrous our future would be if we were left to our own
devices, that without the saintly overlords that is our government taking care
of our needs from today, we would be impoverished tomorrow. Thus, the sudden
bearish projections serve as an almost scientifically irrefutable proof to
persuade the people of HK to endorse the establishment of such a Fund. Now we
know, why blanket optimism has suddenly turned doom-and-gloom.
Case studies of past forecast misses
Turning to specific examples, we look at
some live cases of how the government’s projections (or sometimes those of
their highly paid consultants) have gone wrong, sometimes dramatically, in real
life.
1) Image project no. 1 – the HK-Macau Bridge
An image project is a Chinese specific term,
describing where major works are not undertaken for hard utilitarian needs of
the people, but for the vanity or political advancement of the cadres, whose
careers are dependent on achieving very high GDP growth figures. Such growths
are more easily attained when vast quantities of often unnecessary concrete is poured
in the name of the people.
In the case of HK, the HK-Macau Bridge
suspiciously looks like one such image project, for the following reasons:
1) at HK$110 bn All in (or 4.5% of our
annual economic output), this project does not include rail passengers, which
should be the biggest reason why a link between the two sides of the delta is
to be built;
2) the cost whilst still ballooning, and amounting
to HK$140 per vehicle over the next 30 years, is met by newer and lower traffic
projections, pushing the break-even fare to HK$380 per vehicle (i.e. nearly
3x!). Chances are cost revisions will rise further still, and the population
and traffic projections will drop further too, leaving us with even more
expensive unit rates;
3) due to lack of parking facilities, road
capacity issues, and border checking complications, the authorities are already
having to meaningfully curtail cross border car traffic before the project is
even completed.
Chart 4: Vehicle volume forecast for HK-ZH-Macau Bridge slashed by as high as a third within a decade
As can be
seen in Chart 4 above, the whole
justification for the bridge has gone down by 38%, or over a third(!) when the
latest forecast in 2008 was published, compared to the earlier one from 2000 –
even the 10% drop in population projection cannot stretch to cover the degree
of over-optimism built into the earlier set of numbers. The only explanation
for this gigantic variance has to be: to blow it up enough to pass funding
scrutiny (and withstand cuts handed by the legislators).
2) Image project no. 2 – the Express Rail project
The Guangzhou-HK
Express Rail project is also well known for overrunning on costs and time –
expenditure has ballooned 29% from HK$65bn to HK$84bn
(with government politically forced to cap at this level, leaving the MTRC to
swallow further overruns by the back door) and completion timing pushed out from
August 2015 to August 2017 (i.e. a 20% increase in construction times).
Besides
occupying the primest piece of land in downtown Kowloon, thereby depriving
astronomical revenues from land sale for other uses, the additional benefit of
the High Speed Rail has been progressively whittled down by successive
governments: from a trip time of 48 minutes to Guangzhou in 1998 to over one hour now (partly due to the number of
stops rising from four to six, effectively turning this from a national express
to a regional commuter-rail!),
and seven hours for HK-Beijing to nine
hours now. Compared to the existing through-train times on the East Rail of 1:54
hours and numerous buses from over 18 locations in HK and the convenience of
multiple stops in residential districts along the way, the High Speed Rail’s
out-of-town station (which needs connecting transport) seem all the more superfluous.
For the
purpose of identifying forecast bias, it may be the case that in order to
justify the cost overruns and time delays, near-term passenger projections needed
to be increased (in discounted cashflow terms, this results in higher value-add
in the net present value). However, it is interesting to note again that long
term passenger throughput projections are being slashed in the official
estimates by some 6%, despite the near-term boost, as shown in Chart 5 below:
Chart 5: Express Railway Passenger Forecast Error
3)
Funding
needs lead to boosts in forecasts
The above
examples demonstrated how results will likely fall short of expectations,
however, when projects have yet to be undertaken, the need to maximise budgets
and resources will lead to the opposite behaviour: increasing future
projections where the delivery dates are far in the future.
One such
example is the proposed Tung Chung New Town development which is still on the
drawing boards. To maximise public money diverted to this project, the
government has increased the population target/projection for 2023 by 19%
between the 2007 and 2015 forecasts, as shown in Chart 6 below.
Chart 6: Tung Chung New Town Population Forecast
A cause of
this revision was probably a 2015 Legislative Council debate on the development
feasibility for the Phrase II of Tung Chung New Town. It would be imperative for the government to secure
maximum resources and endorsement in the progress through the legislature and
the best way to achieve that goal would be to present a rosy view of the
completed project.
4)
Why
are we now suddenly turning uber-bearish on population?
We will
recall that back in Chart 1, the
government has all of a sudden started to envisage HK population decreasing starting
2039, after years of projecting never ending increases.
So what is
driving this unexpected change of heart? Note that from December 2015, the
government has started to express gross concern over our ageing population, and
the need to prepare for the future explosion of elderlies to be taken care of
by the public sector.
Of course,
there is the first fallacy that people cannot look after themselves without the
kind generosity of the visible hand, and secondly, why the opportune reversal
of a long held belief in HK’s perpetual growth? As we can see from Chart 7 below, one major city with
perhaps the oldest population on earth – namely Tokyo – happens to grow in
absolute size pretty much non-stop in the past two decades despite having the
oldest population of any major city. This immediately throws into doubt why
Hong Kong will see an absolute decline, despite being a global city with its
ability to attract inflows, just as Tokyo has done (despite having a more
inward looking culture).
What is
more, if a city can increase in size, it will be able to import the needed
labour to look after its elderly population without having to resort to another
form of taxation, which is what this ‘Future Fund’ must be in reality.
Chart 7 Tokyo population and Japan median age
A further
significant point that is overlooked by the bureaucrats is that longer lifespan
is now affording elderly people the ability to work beyond the traditional
retirement age – so instead of waiting for charity after 55, they could easily
work productively into their 60s and even 70s, contributing their valuable
experiences and expertise.
Indeed,
the elderly cohort seem to have the lower unemployment in both cities compared
to the population at large (Chart 8),
and as we suspected, especially in Hong Kong, are witnessing rising labour
participation rates (Chart 9) – if
the HK population ages in the fashion seen in Tokyo, we could see our elderly
participation rate (already up from 27% to 33% in the past six years) increase
further towards the 39% level in Tokyo.
Chart 8: Elderly unemployment tend to be much lower than society at large
Chart 9: Elderly labour participation rates are rising
Furthermore,
not only are the elderly cohort the wealthiest (HK lacks such statistics, but
the US data is given in Chart 11),
they are not the age group with the lowest income either (Chart 10). Of course, this income picture does not factor in the
reality that the elderlies may not want to work all the time, and would prefer
having leisure activities and live partly off their retirement savings.
Chart 10 Hong Kong Monthly income by age group
Chart 11: Wealth distribution by age: the ‘golden’ oldies!
Chances
are, as soon as the government establishes any mandatory forms of retirement
welfare schemes such as a Future Fund,
people will stop saving for retirement and become dependent on handouts. This
is what has caused the sovereign debt crisis in Europe, where the incentive to
take care of oneself has been displaced by a dependency culture nurtured
through decades of high taxes and high handouts. What we should respect is that
the aged workers should not be regarded as a burden but an asset, and
centralising self-reliance / retirement planning into the hands of bureaucrats could
turn upstanding citizens into slaves of government welfare.
The upshot
of the above analysis must therefore be: with improving life expectancy, early retirement
(eg. at 60) no longer needs to be the arbitrary end-point of people’s working
lives. Instead of taxing the people so that they lose their ability to take
care of themselves, we should encourage self reliance and family based care, for
the dismantling of centuries-old family culture by the welfare mentality has
done enough damage to the traditional social fabric of many civilisations.
Conclusion
In
conclusion, the above body of evidence clearly illustrates that government
predictions are far from perfect, even objective. Mandarins are just as prone
to manipulating forecasts for their own agendas. The people who pay the civil
servants as well as the money they spend on our behalf should stay vigilant for
every penny parted in our name. The first step to guarding our own pockets is
to question every forecast assumption presented for any good causes, however
well intended.
Special thanks to Mr Shen
Zhenxuan (沈振翾) in assisting the collection of data and charts related to this
article.
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