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undertaking had been financed from loan, as is the most usual practice, much higher charges would have had to be borne than are now proposed as interest would have been charged as well as a redemption contribution. If general revenue is not made up by this means extra taxation will have to be raised in some other form and the community will be no better off on balance, while the prime object of making the consumer of water pay the full cost will not be attained. Virtually what is proposed is to treat the past expenditure as a loan without interest repayable on generous

terms.

(b) Provision for Renewals.

The Economic Commission expressed the view that provision for deprecia- tion of works financed from revenue ought not to be included in mainten- ance charges to be debited against water revenue (Report, paragraphs 31-32); part of their objection being that such depreciation provision wast not actually paid into any Depreciation or Renewal Fund. In principle I think it is most desirable that there should be provision against the con- tingency of renewal of all works and equipment which may be expected to require renewal within a reasonable period of time, as is the common practice of other water undertakings and similar enterprises. The proper accounting procedure is to build up a Renewals Fund to which such expen- diture can be charged. In the absence of such a Fund the cost of renewal must be met by other means; e.g., renewal of the cross harbour pipe line is now necessary and will have to be met from loan. There is. however, a factor in Hong Kong finance which forces a departure from orthodox principle-the military contribution. If annual contributions were made to a Renewals Fund and revenue raised from water charges to cover such contributions, military contribution of 20% would have to be paid on such revenue. The gross additional revenue to be collected would there- fore be 25% more than the Renewals contribution. On the other hand if renewals are in due course financed from loan the charges on such loan will, if present practice is maintained be deductible from the revenue assessable to military contribution. Unless and until there is a change in the military contribution system, therefore, the balance of advantage lies in making no current provision for renewals but financing them in due course by loan. Any "surplus" of revenue which may arise should. as already indicated, be regarded as available for renewals.

6. Certain other charges which ought in strictness to be borne by an in- dependent water department, cost of postal facilities, share of audit expenses, water analysis by the Medical Department, Medical attention to staff, etc., are difficult to calculate exactly and they might be regarded as approximately offset by the free supply of water to Government offices, which it is proposed should continue.

III. Charges for Water.

7. On the general principle that the users of water should pay the full cost of what they use the following bases of charge are proposed

(i) A general charge to be made to cover the cost of water supplied for

communal "

purposes, i.e.. hydrants, street cleaning, sewers, public

buildings, free supplies to hospitals, etc.

(ii) No free allowances.

(iii) Extra costs of supply to certain areas to be covered by additional charges.

(iv) Specia! rates to be charged for supplies to building contractors and ship-

ping as at present.

(v) All other water to be supplied at standard rates.