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HONG KONG URBAN COUNCIL

of Receipts and Payments of the Urban Council for the year ended 31 March 1986.

Members will note that the Director of Audit's Certificate on the Statements is not qualified by any observation on the manner in which the Council's accounts have been kept and rendered. The Chief Treasury Accountant and his staff should be congratulated for their efforts in keeping the Council's accounts in good order.

Also in accordance with Section 40(4) of the Urban Council Ordinance, one copy of the certified statements will be forwarded to His Excellency the Governor.

MR. W. M. SULLKE, O.B.E., J.P., CHAIRMAN OF THE FINANCE SELECT COMMITTEE, said (in English):- Mr. Chairman, in rising to second your motion, I would like to add my congratulations on the sterling effort of the Chief Treasury Accountant and his staff in getting out our accounts in time and to the satisfaction of the Council and our Auditors. This is no easy task, especially when considering the size of our operation.

I hope members will bear with me if I take this opportunity to comment on the overall financial position of the Urban Council. I have already mentioned elsewhere that in 1985/86 an anticipated deficit of HK$181 million in the end was reduced to HK$20 million. This much better than expected result was achieved mainly because our income exceeded our expectations by HK$96 million, of which approximately HK$27.6 million came from a better outturn of the rates, and the rest were refunds from Government for reimbursement of salary increases. We also underspent HK$57 million on our capital projects. It must be said that most of that will remain as a commitment since it must be carried forward to the present financial year. The deficit was met out of our reserves and the Urban Council's reserves now stand at HK$301 million.

During 1985 you, Sir, conducted negotiations with Government with the aim of improving our financial situation and increasing the financial independence of the Urban Council. As a result of these negotiations, a new financial package was introduced on 1 April 1986, under which the Urban Council's share of the rate was increased from 2.5 per cent to 3.5 per cent, while the total rate in the Urban Council area was increased from 5.5 per cent to 6 per cent. Under these arrangements, the Urban Council now receives its rate income based on rates actually collected rather than the previous arrangement of rates lawfully demanded. This new arrangement could make quite a lot of difference to our income, either up or down, depending on how fast new buildings are built and occupied, or vice versa. It is interesting to note, for instance, that the demolition of the Standard Chartered Bank building in Central will reduce our rate's income by over HK$1 million per annum. Obviously, when the new building is built and occupied, our rates income will be better than before the old building was pulled down. This sort of thing will make our revenue forecasting a bit more difficult, and I can't really say whether the new method of rates dispersal will be in our favour in the long term or not, especially as the Urban Council is now required to make provision in its annual budget for projected future salary revisions, thus foregoing the special Government grant that previously covered the first year's cost of the civil service salary revision, and that may well result in swings of HK$100 million or so.

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In the short term, these new arrangements are in our favour, and the approved estimates for 1986-87 now show a surplus of HK$26 million, with the Council's yield from rates rising from HK$1,249 million in 1985-86 to HK$1,644 million in 1986-87.

In line with normal Government practice, we make a Five Year Forecast, which in many ways duplicates our budgeting processes, but because it is made somewhat earlier than our budget estimates, is often subject to inaccuracies in forecasting. I am, however, duty-bound to state that this Five Year Forecast shows a deficit for our next financial year, 1987-88, of HK$71 million, mainly as a result of lower than expected revenues (our income for rates is HK$20 million less than expected, and our income from markets and abattoirs will be less than was originally anticipated), but also as a result of the anticipated additional cost of increases in salaries, and a greater workload caused by new projects coming on stream in the next financial year. Now, I am assured by the Department that this forecast is the very worst that we can expect, and that when we come to our proper budget estimates, the picture may not look as bleak. Deficit next year is to bring home to all members that, in spite of the new financial arrangements agreed with the Central Government, we are still living somewhat precariously, and that it is important to budget within our income. So, when members come to consider the estimates for next year in the various Select Committees, I hope they will keep in mind that we always have to negotiate the very narrow passage between, on the one hand, improving the quality of life for all in the Urban areas, while on the other looms the need to live within our income.

So as not to erode our reserves any further, it is clear that we must either increase our income or cut our expenditure. I, personally, believe that it is very important not only to maintain our present services but to improve them, and this cannot be done without spending money. And since the largest part of our outgoings are personal emoluments, including a very large factor of on-cost we pay to the Government, it is important that we continue our dialogue with Government, as any increase in the Urban Council's financial obligations under the Memorandum of Administrative Arrangements could have a very serious effect on our services.

These long-term financial problems facing the Council also emphasise the importance of the regular annual reviews, which the Select Committees conduct, of our various fees and charges, and especially of our sometimes very high subsidy levels. Even though fees and charges are only a secondary source of revenue, in the present financial climate, the Council cannot afford to overlook

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