A lawsuit against the HKSTP shows government interference may be threatening Hong Kong’s global competitiveness.
Photo: Charles K Kao Auditorium – Hong Kong Science Park. License.
Hong Kong’s prosperity is built on the back of a simple philosophy: the idea that free markets bring about the most efficient allocation of resources.
According to this perspective, governments have no place interfering in markets. That way, animal spirits are free to flourish, fostering entrepreneurialism and innovation. Ultimately, this creates a bigger pie for all to share.
While this philosophy has its critics, it has helped Hong Kong become a global economic powerhouse. So successful has free market economics proved in this small island state, that its most famous contemporary advocate, Milton Friedman, wrote an essay titled ‘The Hong Kong Experiment’, in which he held up its success as proof for his theories.
Yet, a recent decision by Hong Kong’s High Court illustrates how in certain sectors, government interference is unacceptably high. Furthermore, there is evidence that this is posing a threat to Hong Kong’s global competitiveness.
In a lawsuit brought against Hong Kong Science and Technology Parks Corporation (HKSTP) by a locally owned data centre company, the Court was asked to review a number of decisions taken by HKSTP.
HKSTP is a government body responsible for promoting Hong Kong as a regional technology hub. It was established in 2001, through the merger of a number of now defunct statutory bodies, including the Hong Kong Industrial Estates Corporation (HKIEA).
The history is important, as it sheds light on HKSTP’s current policy failures.
From the 1970s, Hong Kong’s manufacturing base was progressively eroded due to competition from rapidly industrialising regional economies. In response, the government sought to prevent manufacturers from leaving by subsidising rents in the industrial estates.
This was not a success. By the time HKSTP was created, industry was long gone and Hong Kong had transitioned to a services based economy. Nevertheless, the newly established government body continued with this failed policy. To this day, it offers heavily discounted rents in the industrial estates. It is technology companies, rather than manufacturers, that now enjoy the fruits of this giveaway.
From the time this policy was introduced, the government was concerned that companies could sublet their properties at market rates for an instant profit. To prevent this, it banned subletting. This prohibition remains, with technology companies subject to what the Court referred to as a ‘no alienation’ clause under their leases.
A number of current occupants of the industrial estates operate data centres. This is no accident. Since 2009, the government has encouraged the development of a data centre industry. This forms part of its broader effort to promote Hong Kong as a technology hub.
There are various types of data centres. Under one particular model, known as ‘colocation’, operators house IT equipment belonging to their clients. The Court was asked to consider whether this amounts to subletting. It found that ‘colocation’ does not fall within the definition of subletting prohibited by HKSTP’s standard lease.
However, in considering this issue, the Court highlighted a serious flaw in HKSTP’s approach to industry assistance.
A great deal of the information stored by data centres is highly sensitive. This being the case, one of the major services their operators provide is high level security. The Court recognised this, noting that it demands ‘security systems with 24/7 monitoring and control of visitors’.
At the same time, the Court emphasised that to enforce its ban on sub-letting, HKSTP constantly monitors the operations of its tenants. Under its standard lease, HKSTP retains a right of entry into all its properties. More worryingly, as the Court observed, it regularly carries out painstaking inspections. This is deemed necessary to evaluate whether tenants are complying with the prohibition on subletting.
Plainly, this level of scrutiny by a government body conflicts with the need for data centre operators to offer high level security.
There is evidence that this situation is damaging Hong Kong’s international reputation and undermining HKSTP’s policy of establishing Hong Kong as a regional technology hub.
In 2013, Google suddenly abandoned plans to establish a data centre in the industrial estates. Its stated reason for doing so was a lack of capacity to scale up operations. A cursory look at the available infrastructure suggests this reason was entirely spurious. More likely, following due diligence, it became aware that its need for a secure facility would be compromised by HKSTP’s demands to constantly monitor its operations.
For an economy that relies on its capacity to attract global capital, this state of affairs is utterly unacceptable.
HKSTP’s conduct is particularly disappointing given Hong Kong’s otherwise excellent reputation for data privacy with the fact that Hong Kong’s private IT sector continues to offer uncompromised data security.
Hong Kong’s financial secretary from 1961 to 1971, Sir John Cowperthwaite, once rejected a proposal for subsidising start-ups by noting that “an infant industry, if coddled, tends to remain an infant industry”. He opposed reducing the price of land for strategic industries by asserting that any deviation from market prices “leads to an inefficient use of our resources”. Most pertinently perhaps, his thoughts on industrial policy were “better…to rely on the…hidden hand than trust the clumsy bureaucratic fingers”.
These were hard-learned lessons at a time when free market economics was not in fashion. Hong Kong would do well to remember them today.
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