90. Traditionally, budget speeches usually come to an end at this point. I want to break with this tradition because, in the third part of my speech this afternoon, I want to address an issue which is very much on all of our minds. I want to talk about the future. About our prospects as a community as we prepare ourselves for the change of sovereignty and for the next century. I shall now describe our economic prospects and outline proposals for creating a more business-friendly environment. In particular, I shall discuss how the Government intends to support our high value-added, technology-based manufacturing sector and a world-class services sector.

Economic Prospects

91. I start with our economic prospects. After all, it is our economic success which makes everything else possible. Everything we hope for as a community. Everything we want to achieve.

East Asia

92. I am truly enthusiastic about what has been called the "Asian Miracle". How could we, as part of Asia, feel anything other than pride at the spectacular success of our region over the past two decades.

• During this period, literally hundreds of millions of people in East Asia have been lifted out of poverty and subsistence by rapid economic expansion. The economic growth rate for the region over the past five years has been twice as high as the OECD average.

• If our recent past has been impressive, our future promises to be spectacular. East Asian growth rates are set to out-perform the rest of the world well into the next century. Even by the year 2000 in East Asia, average GDP per head is expected to reach US$5,200, compared with only US$2,500 in 1990.

Economic Developments in China

93. If we can take pride as part of the region in East Asia's progress, Hong Kong can take even greater pride in the economic progress made by China. China will continue to offer the prospect of high and sustainable rates of growth well into the next century. We, in Hong Kong, are part of China's past success and its future prospects. This year is the start of China's Ninth Five Year Plan. This envisages annual real growth rates for the economy of between eight and nine per cent a year. The Plan acknowledges Hong Kong's special status, which is a welcome restatement of the Chinese Government's commitment to the Joint Declaration and Basic Law. The Plan also provides encouraging indications of the areas in which Hong Kong can do most to contribute to China's economic development. In making its contribution, Hong Kong will also benefit substantially.

A Modern Business Environment

94. So East Asia in general and China in particular are set to continue their momentous growth. We in Hong Kong stand to benefit from this expansion. What our neighbours need from us is our expertise in organising production, in marketing and design, in technology, accounting and law. They also want our services in terms of financial markets. We have to go on developing our infrastructure of skills and creating the environment in which a skills-based economy can flourish. In essence, this means getting right the blend of commercial freedom and regulation which encourages rather than stifles enterprise and innovation.

Protecting IPR

95. The international business community is particularly concerned about the protection of intellectual property rights (IPR). The Government shares these concerns. Our goal is to develop a modern and internationally-accepted framework to protect such rights. We will update the legislation on the protection of trade marks, patents, copyright and registered designs to bring it into line with prevailing international standards. The Secretary for Trade and Industry will introduce draft legislation to this effect by the end of 1996.

96. We will continue to step up enforcement against copyright piracy and trade marks counterfeiting. We are setting up a new 24-strong team in the Intellectual Property Investigation Bureau of the Customs and Excise Department to strengthen intelligence-gathering, border operations and co-operation to hit hard at piracy and counterfeiting.

A Business-Friendly Government

97. Over the past five years, there has been a quiet revolution in the way we in the Government have approached our work. We have increasingly recognised that our role is to "Serve the Community" and that this concept must be central to all our policies and procedures. I believe that we can do more to help the business community in generating the wealth on which our future prosperity depends. We should set ourselves the task of making the Government, as far as possible, user-friendly for business.

Review of Existing Government Procedures and Practices

98. As a first step, I will be asking all the Policy Branches and their Departments which directly serve the business community to carry out a high-level review of their current policies and practices. The goal will be to create an environment which is positively business-friendly. This review will not be done in a vacuum. I expect Policy Branches and Departments to consult extensively with their customers and partners in the business world. They will be expected to identify opportunities:

• to streamline existing services through new technology and process re-engineering;

• to eliminate any over-regulation and unnecessary bureaucracy;

• to transfer services to the business sector where market conditions make this possible; and

• to introduce new services which meet the needs of the business sector.

• to review the processes and costs associated with the provision of services for which the Government levies a fee or charge; and

• to use the improvements identified by these reviews as the basis for specific efficiency plans.

Tax Concessions

101. As a first contribution to this new programme, I propose to offer three tax concessions which should benefit business firms directly.

• First, I propose to halve the ad valorem fees on company registration from the current level of 0.6 per cent to 0. 3 per cent.

• Second, I propose to double the maximum average monthly turnover levels below which businesses are exempt from payment of business registration fees from $15,000 to $30,000, for the sales of goods.

• Third, where the profits of the business are mainly derived from the sale of services, I propose to raise the exemption level by 150 per cent, from $4,000 to $10,000.

A World-Class Infrastructure

103. To take the fullest advantage of the special opportunities which rapid Asian and Chinese economic growth will bring, Hong Kong needs a world-class infrastructure. This means that we must equip ourselves with the skills and technological know-how to compete in the international market place. But we must also develop our physical infrastructure - the railways, the port, the airport and the support services. Investments in our skills and our physical infrastructure make a very real contribution to our competitiveness.

Physical Infrastructure

104. The Government accepts that it must continue to improve Hong Kong's physical infrastructure to sustain trade and economic growth.

• We are moving forward with planning for the three rail links recommended in the Railway Development Strategy.

• Government will allocate $15 million in 1996-97 to provide additional staff resources to the Transport Branch and related departments to handle the appraisal and planning work involved.

• Nearly 90 per cent of our total trade goes through the port, and demand is forecast to rise steadily. We must continue building more container terminals to meet this higher demand. We shall need to have in place not only CT9 but also CT10 and the first berths of CT11 before the century is out.

• We must also ensure that our airport is able to handle efficiently the increasing flow of passengers and goods in and out of Hong Kong by air. We are on track to achieve the target opening date of April 1998 for the new airport at Chek Lap Kok. The Airport Authority, in conjunction with the Government, is looking further into the future and examining air traffic forecasts to determine the timing for developing the second runway at Chek Lap Kok.

105. These investments in our physical infrastructure, once completed, will make a contribution to every service and product that we sell. The same is true of our telecommunications and other support services. Our fully digitised telephone system and comprehensive optical fibre network are among the most advanced in the world. Our penetration rates for mobile phone and paging services are among the highest in the world. Competition brought about through the deregulation of local fixed network services in July last year will bring investment of more than $32illion over the next ten years from new operators, and they will improve still further our basic telephone network. We shall continue to discuss with the Chinese side our proposal to license new mobile communications services to relieve congestion in the existing networks. We need to increase our capacity to meet the strong local demand for mobile phone services. This will ensure that Hong Kong continues to lead the region in having the best and most advanced telecommunications services. The Government will continue to pursue a pro-competition policy in telecommunications which has already reduced the real cost of domestic line rentals by 32麖er cent over the last ten years and of international calls by up to 75麖er cent.

Human Infrastructure

106. However, while we have achieved remarkable progress in upgrading the hardware of our infrastructure, our airport, roads and the port, we must not forget the key software package which makes the infrastructure work. I mean the people of Hong Kong. The results of our earlier investments are paying dividends now. Productivity per manufacturing worker has increased by 227麖er cent over the last decade. We must go on investing in education and in skills training. The Government and the private sector must work together. For its part, the Government is reviewing the New Technology Training Scheme under which employers can obtain matching grants for training their employees in new technology in local or overseas institutions. We are considering a number of proposals, including raising the levels of grants and widening the eligibility for application. The object is to allow more people to receive training and to widen the range and level of skills to be covered by the Scheme.

Language Skills

107. Hong Kong will not be able to maintain its position as an international centre for trade and finance if it allows its language skills to slip. We need English for much of our international trade and financial services. We need Putonghua for our Chinese future. Education Commission Report No. 6 (ECR6) has made a convincing case on the urgent need to improve our language skills.

108. We need to make an early start on some of the recommendations in ECR6 dealing with English. I have earmarked funds in the Draft Estimates of $14.2 million, rising to $29.1 million on a full-year basis. This money will enable the recruitment of some 100 native English speaking teachers for our schools and the organisation of intensive English language courses for an additional 11,300 Secondary Six and Seven students. These will bring their English proficiency up to the level required for entry to tertiary institutions.

109. ECR6 also makes important recommendations on Putonghua education. I have included a provision of $10 million annually in recurrent expenditure to enable the introduction of a new Putonghua curriculum in September 1998. This will cover all levels from Primary One to Secondary Five in our schools. This new curriculum will prepare students for the new examination in that subject in the HKCEE in the year 2000. In the interim and starting in 1996, the Education Department will organise Putonghua summer courses for our students with some $30 million voted for the project by this Council last November. In麖arallel, the Language Fund has helped to organise similar projects both for students and people in full-time employment. Over the past two years, 15,000 individuals have benefited from such courses. We will provide more of these community projects in the future. We shall be enhancing in-service teacher training in Putonghua, starting in 1996.

Manufacturing

110. As we make our plans for the future, we have to support our manufacturing sector in its drive to compete in the high-value added and high-technology market place of the next century. Our manufacturers have already relocated to Southern China the lower-skilled, lower value-added production operations. The priority for manufacturing in the future must be to move further up-market. Manufacturers, of course, already recognise this and are devoting more attention to applied research and development, product design, prototypes, quality control and the sourcing of materials and components. These high-value processes are essentially creative in nature and technology-based. We must also take full advantage of our strategic location. China is much more than a low-cost production base. It contains a large pool of technological and research expertise which can make a major contribution to our own development.

111. The Government has a part to play in this. Our immediate aim is to encourage manufacturers to get into the business of applied research and development with enthusiasm. The Applied Research Council already operates two funding schemes which, in effect, are a form of venture capital fund. More than a dozen projects are being supported through loans or equity investments for individual firms.

112. We should, of course, do more to secure an advanced technology base. There are several potential projects which we will be taking forward to do exactly that.

• First, a science park. This will bring together local and international technology-based businesses. It will provide the right environment for exploiting the enormous potential from the convergence of technologies. We will decide on the most appropriate site quickly and put the institutional arrangements in place.

• Second, the Government has accepted the case for developing a second industrial technology centre. The first established in 1993 has been so successful that it cannot meet in full the strong market demand for its facilities. We will identify a suitable site quickly to enable detailed planning to proceed.

• Third, the Government has also accepted the case for developing a fourth industrial estate. Detailed planning is about to begin.

• Fourth, the Government has offered to help finance a private sector initiative to study our longer-term industrial development prospects and identify promising new industries for Hong Kong.

Services

113. As with manufacturing, so with services. Markets and enterprise have already made Hong Kong a regional and global service centre in the premier league of service providers. The challenge now is to compete and to rise within the premier league. Standing still is simply not an option, and the Government will play its part in supporting the market momentum already created by the private sector.

A Task Force on Services Promotion

114. My predecessor, Sir Hamish Macleod, promised in his last Budget Speech that the Government would look for ways in which it could contribute to the further development of Hong Kong as a world-class service centre. With his full backing, last August I established a Task Force on Services Promotion. I shall be reporting on this work in a moment. Before doing so, I want to emphasise a point central to our work. Our aim has been to identify ways which we in the Government can facilitate the success of our services sector. Our aim has not been, and never will be, to direct development, to "pick winners" or to second-guess markets and entrepreneurs. To ensure that the Task Force is kept close to business realities, I have set up an Ad Hoc Group with prominent business leaders, professionals and academics to provide us with their input. And to expand the range of outside views and contributions, a symposium will be organised jointly with the major trade and industrial associations on 12瓱arch to discuss specific issues confronting the services sector.

115. Among the Budget documents published today is the first concrete outcome from the Task Force's work. This new document,"The Services Sector: Support and Promotion", sets out:

• an eight-point "Framework for Action". This describes the strategic thrust of the Government's support for this sector; and

• 14 individual "Action Agendas". They describe the current performance of key service sectors. They state the Government's current commitments to them and outline the directions for future policy. They also set out the principal initiatives taken by the private sector and the major challenges that lie ahead.

• We must do more to promote our trade in services. The Trade Development Council has already done an outstanding job in promoting our visible trade. It has agreed to expand its work in promoting trade in services, particularly the exports of services. This will complement the work of the Trade Department and our ten economic and trade offices overseas in gaining market access under the multilateral trading regime for our service exporters.

• We must do more to promote inward investment in the services sector. The Industry Department is already very successful in attracting inward investment for the manufacturing sector. It will in future undertake a similar role for the services sector.

• We must do more to maintain Hong Kong's position as the premier tourist destination in the region. The Hong Kong Tourist Association has recently formulated a visitor and tourism strategy to help us achieve that in the increasingly competitive environment in which we operate. We will continue to give it support in this.

• The Export Credit Insurance Corporation has developed a range of facilities to support the services sector in its drive for new markets abroad. It will bring these vital services to the attention of the whole of the sector which has, so far, not made the fullest use of the Corporation's facilities.

• We must do more to support the small and medium enterprises employing less than 50 workers which make up the bulk of the services sector. We shall work with the private sector to formulate new initiatives to enhance productivity, upgrade management systems, identify financing options and make market information more accessible.

A Mortgage Corporation

118. Improving the efficiency and reducing the risks in financial intermediation is one of our core strategies in promoting the financial services sector. In the area of housing finance, there is a strong case for establishing a mortgage corporation which will offer the following benefits:

• it will reduce the concentration and liquidity risks of mortgage lending by banks;

• it will increase the availability of mortgage funds to home buyers and widen their choice of mortgage products; and

• it will issue high quality securities which help to improve the depth and the liquidity of the local debt market.

Revenue Measures for Financial Services

120. Finally, I believe there is room for two tax concessions to encourage the further development of our financial services.

• First, I propose that the interest income and trading profits derived from certain debt instruments be subject to a concessionary tax rate equivalent to 50 per cent of the normal Profits Tax rate. Instruments qualifying for this concession must be lodged with and cleared through the Hong Kong Monetary Authority, carry a suitable rating, have an original maturity of five years or more and a minimum denomination of $500,000. This concession should help to attract overseas issuers to Hong Kong, enlarge our debt market and enhance our competitiveness vis-?vis other financial centres in the region.

• Second, I propose to waive stamp duty for market makers on stock transactions for the purpose of hedging options transactions. This will help to increase trading volume, improve market liquidity and the quality of risk management, and reduce the underlying price volatility of stocks.

121. I also intend to amend the Inland Revenue Ordinance to reflect existing practice. I will -

• include a specific exemption for certain income derived from bona fide offshore funds managed in Hong Kong; and

• exclude stock brokers from potential Profits Tax liability in respect of share trading profits derived by non-resident investors for whom they act as agents.

122. This afternoon, I have outlined a package of measures designed not simply to make the Government more business-friendly but to tackle key areas where we can contribute directly to business efficiency. Members will find further details in the new Budget document to which I have already referred. I want to emphasise that this is not the end of our work. This document, and the Task Force's deliberations, should be taken as the first steps towards developing a policy support for the services sector, without neglecting manufacturing, well into the next century.