Traditionally, a substantial number of enterprises which, in other countries would be public enterprises, operate in Hong Kong under private ownership. The services provided by such enterprises include transport, electricity, gas, telephone and overseas telecommunications. These enterprises are subject to government controls to ensure that they do not take advantage of their monopolistic position to overcharge the public.
Most of the older public enterprises in Hong Kong are departmental undertakings, but in more recent years, the Hong Kong government has been showing greater interest in either hiving-off departmental undertakings as statutory corporations, e.g. the Hong Kong Housing Authority in 1973, or setting them up where a needed public service was not provided before, e.g. the Mass Transit Railway Corporation in 1975.
The public enterprises in Hong Kong can be classified into three main groups:
- the Hong Kong Export Credit Insurance Corporation established in1966 to provide export insurance
- the Hong Kong Housing Authority to plan and construct estate buildings for publichousing
- the Mass Transit Railway Corporation to construct and operate an underground rail way system
- the Hong Kong Industrial Estates Corporation established in 1977 to construct and manage industrial estates
- the Kowloon-Canton Railway Corporation established in 1982. The railway had previously been operated as a departmental undertaking, and
It is the government's policy for the departmental undertakings to set their fees and charges so as to recover the full cost of their operations. Similarly, the statutory corporations are expected not only to pay their way, but ultimately to earn a return on investment.
In Hong Kong, there are no government-owned or controlled enterprises registered under the Companies Ordinance.
The head of a departmental undertaking is known as the Controlling Officer and under the provisions of the Public Finance Ordinance, he is statutorily responsible for the incurring of expenditure in carrying out the activities of the department. The department head is responsible to a Policy Secretary in the Government Secretariat, who sets the policy objectives of the departments.
The statutory corporations have an organisation structure that allows a high degree of financial autonomy in the manner in which they operate. However, the governing boards are appointed by the Governor and government officials sit on these boards. The respective ordinances set out in broad terms the powers and functions of the corporations and include limitations regarding capital and borrowing requirements. The audited accounts and report thereon are required to be tabled in the Legislative Council within a prescribed period. The Governor or Governor-in-Council is also given power under the respective ordinances to give directions to the corporations if he thinks it necessary to do so.
The departmental undertakings are staffed in the same way as the civil service as a whole. All staff are paid according to standard salary scales and their appointment, conditions of service, and termination of employment or retirement must comply with civil service regulations. Staff training conforms with the normal civil service arrangements with courses of training provided to update and broaden their technical, professional and management knowledge and skills.
The statutory corporations, on the other hand, have freedom in the appointment of staff and in the salaries paid to them. However, the Governor normally approves the conditions of service of the chief executives. An exception is the Hong Kong Export Credit Insurance Corporation where the Governor has to approve the conditions of service of the senior appointments, and the Financial Secretary has to approve the conditions of service of all other staff.
The statutory bodies being subsidised organisations are more strictly controlled in respect of the number and salary scales of staff. They are required to comply with the general rule that the conditions of service for staff should not be superior to those offered by the government to comparable grades in the civil service. However, this general rule has not always been strictly enforced because of difficulties in monitoring.
Arrangements for training the staff of the statutory corporations and statutory bodies do not require the approval of the government.
Departmental undertakings are financed in an identical way to other government services, i.e. by annual appropriations from the general revenue to meet their capital and recurrent requirements.
The statutory corporations are financed from their own revenue. The original capital for setting up the corporations came either from appropriations by the Legislative Council, or the government's Development Loan Fund. In some cases, land has also been provided by the government at a reduced or nil cost. In the case of the Mass Transit Railway Corporation, which is still unable to cover its full costs from its income, the government has had to inject additional capital and increase its equity holding in the Corporation.
The statutory bodies are financed mainly from annual subsidies appropriated by the Legislative Council. They also receive income from the sale of their services to the public which is taken into account in determining the amount of the annual subsidy. The statutory bodies are permitted to hold funds in a reserve account for specific purposes up to a certain level approved by the legislature.
Departmental undertakings operate within the structure of government departments and are subject to all the controls applicable to government departments with central government control exercised over staffing, budgeting and accounting. The financial controls are laid down in the Public Finance Ordinance and the regulations made thereunder.
Statutory corporations are subject to limited government control, but of a kind that does not extend to their day-to-day operations. Such controls include the requirement for the Governor to approve the appointment of the chief executives, for the Financial Secretary to approve loan requirements and the investment of surplus funds and for the Governor or Governor-in-Council to give directions if he thinks it necessary in the public interest to do so.
The statutory bodies are subject to more detailed government control and this is exercised by the heads of departments responsible for controlling the funds appropriated to subsidise the bodies concerned. The bodies are required to comply with the provision in their ordinances for the submission of budgets and programs of activities for approval and also to comply with the detailed conditions under which they are subsidised. To assist the heads of departments controlling the subsidies, guidelines on the management and control of subsidies to these bodies have been prepared. The most important conditions of subsidy relate to the detailed budgeting requirements and conditions of service of staff.
The departmental undertakings have to conform with the government financial and accounting regulations and they operate within a centralised accounting system. With the exception of the Post Office, which operates as a self-accounting department, the Treasury approves each voucher for payment. The staffing of the departmental undertakings is subject to strict control by the Civil Service Branch of the Government Secretariat and by the Public Service Commission.
The statutory corporations are largely free from day-to-day control by central government agencies.
The statutory bodies are subject to control at the time their budgets and programs of activities are examined and approved by the government. Otherwise they operate without day-to-day interference from the government.
The activities and charges levied by companies providing services to the public - transport, tunnels, electricity are subject to regulatory control, including approval of tariffs or rates of charge, by the government. The SAI has no involvement in this area.
The departmental undertakings in Hong Kong do not operate with a high degree of flexibility because of budgeting and accounting restraints that prevent them from functioning fully as commercial organisations. The undertakings are not permitted to use revenue from operations to develop their services. The revenue has to be credited to the general revenue of the government, and expenditure has to be separately justified.
Despite the inflexibility imposed by the departmental structure, these undertakings operate efficiently and, as a whole, generate a return on investment.
The statutory corporations are permitted to operate in a flexible manner and to act on commercial principles. The bottom line controlling factor is the requirement for them to make a return on investment. It has not been the practice for the government to specify a particular rate of return to be achieved.
The statutory corporations have power to set the rates of charges under the ordinances establishing the corporations. The approval of the government is not required. However, under the respective ordinances the Governor has the power to give directions. This power has been used to regulate the rates of charges.
The statutory bodies, on the other hand, do not have such a built-in controlling factor and their autonomy needs to be limited to avoid putting public funds at risk. The statutory bodies, whilst given considerable freedom to carry out their day-to-day activities, have a much stricter control structure. They are required to submit detailed annual budgets and programs of activities to the government for approval and in addition, they must comply with the conditions for the subsidies they receive in accordance with standard guidelines. These conditions include the terms and conditions of service of staff and the way in which the budget should be presented. The audited accounts and a report on their activities are required to be tabled in the Legislative Council within a prescribed period.
The provision in the ordinances governing all the statutory corporations and statutory bodies for the Governor to give directions, if he thinks it necessary in the public interest, has rarely been used and is to be regarded only as a fail-safe device in the event of the organisations deviating substantially from their statutory purposes.
The heads of departmental undertakings are civil servants. They are appointed under civil service regulations and they act as the Controlling Officers for their departments. They are subject to the policy directions of the Government Secretariat.
The governing boards and councils and the chief executives controlling the statutory corporations and statutory bodies are normally appointed by the Governor under the relevant ordinances which also set out their powers and the duties they can exercise for the proper conduct of their affairs. One (or more) government representative is usually appointed to the boards and councils of these organisations according to the ordinances.
The official accounts of the departmental undertakings are not kept on an accrual basis and do not include balance sheets and income and expenditure accounts, but it is the practice for the undertakings to prepare, on a memorandum basis, a set of operating accounts on a commercial basis. These operating accounts are used by management to see whether the undertakings are recovering the full costs in accordance with the government policy. An exception to this practice is the sea port of Hong Kong, but the Director of Marine has accepted an audit recommendation on the need for a system that provides operating accounts on a regular basis.
A computerised Ledger Accounting and Financial Information System provides a standard system for budgetary and financial control and for providing management information.
The statutory corporations are required under their respective ordinances to keep proper accounts. In some cases, these have to be kept in a manner approved by the government, e.g. Housing Authority.
The statutory bodies are also required under their respective ordinances to keep proper accounts and again in some cases in a manner prescribed by the government. In addition, the government is in the process of drawing up guidelines for accountants and auditors of the statutory bodies in receipt of a subsidy, and the guidelines will provide uniformity in accounting treatment in future.
Departmental undertakings conform to the Financial and Accounting Regulations, and to the Standing Accounting Instructions laid down under the provisions of the Public Finance Ordinance.
The statutory corporations and statutory bodies generally conform to the accounting standards of the Hong Kong Society of Accountants.
Departmental undertakings must conform to the Public Finance Ordinance and the annual Appropriation Ordinance. In their budgets, the departmental undertakings classify their revenue and expenditure by heads and sub-heads in accordance with the standard government accounting practice, and the accounts are kept on a cash basis. Revenue and expenditure are separately classified and are brought to account with other government revenue and expenditure in the General Revenue Account of the government. They are not interrelated, and the annual expenditure is limited by the appropriation approved by the Legislative Council. Although the Public Finance Ordinance makes provision for the setting up of special funds within which the departmental undertakings could operate more flexibly with a modern accounting system, the provision is not used for this purpose and the departmental undertakings operate under the government's traditional form of budgeting and accounting.
The legislative control that can be exercised through the budget is limited because the departmental undertakings do not present their budgets and accounts in a commercial form and as they are on a cash basis they do not contain the necessary information to reflect the commercial out-turn of the undertaking. As such there is a weakness in legislative control.
The statutory corporations do not need the approval of either the government or the Legislative Council for their budgets. They are, however, required to account to the Legislative Council by submitting a report and audited accounts which are laid in the Legislative Council.
The budgets of the statutory bodies in receipt of a subsidy are approved by the government, but not by the Legislative Council. However, the Legislative Council controls the level of subsidies through the Appropriation Ordinance and these bodies are also required to account to the Legislative Council by submitting a report and the audited accounts which are required to be laid on the table of the Legislative Council.
The Public Accounts Committee is a standing committee of the Legislative Council and is required to consider the Report of the Director of Audit on the accounts of the Hong Kong government, and any report he may make on his examinations of the economy, efficiency and effectiveness of any department or public body or any organisations to which his functions as Director of Audit extend by virtue of any ordinance, or which receives public monies by way of subsidy. Thus, the Director of Audit can report on the departmental undertakings of which he is the auditor under the Audit Ordinance and on the statutory bodies to which the Director of Audit has access by virtue of the conditions of subsidy. The Public Accounts Committee is therefore able to review the operations of the departmental undertakings and subsidised bodies provided that such matters are referred to in the Director of Audit's Report.
As the Director of Audit is not the appointed auditor for the statutory corporations and, with the exception of the Export Credit Insurance Corporation, has no right of access to their records, the Public Accounts Committee does not have the opportunity to review their operations. The control available to Legislative Council members is limited to questioning the government, following the tabling of the reports and audited accounts of the corporations.
The Public Accounts Committee is authorised to pursue only matters referred to in the Director of Audit's reports. However, the Legislative Council members are free to question the government following the tabling of the reports and audited accounts of the corporations. Commercial auditors are not required to appear before the Legislative Council as replies to questions raised by the Legislative Council are made by the relevant government officials appointed to the Council.
Under the Audit Ordinance, the Director of Audit (the SAI) is responsible for the audit of the accounts of the Hong Kong government and as part of his normal program of work he audits the departmental undertakings.
Except for the Housing Authority, the SAI does not have the authority to carry out audits of the statutory corporations. However, in the case of the Hong Kong Export Credit Insurance Corporation, the Ordinance provides for the Director of Audit to have access to the Corporation's records. This authority has not been exercised since the Corporation was set up in 1966. The lack of SAI involvement in the audit of the statutory corporations represents a weakness in the public accountability of these organisations. An obvious remedy would be for the SAI to be given access to the records of the corporations on the same basis as the Hong Kong Export Credit Insurance Corporation.
Although it has not been the practice to appoint the Director of Audit as the auditor of the statutory bodies, the SAI does have access to the books and records of these bodies by virtue of the conditions under which they are subsidised.
The SAI audits the departmental undertakings as part of his normal program of work. The Audit Ordinance gives the SAI power to carry out regularity audits, leading to the certification of the annual accounts of the government. In addition, for many years the SAI has been carrying out value for money audits under authority based on convention. This authority was documented in November 1986 in a set of guidelines, agreed between the Public Accounts Committee, the SAI and the Hong Kong Government, setting out precisely what the SAI can do. These guidelines were tabled in the Legislative Council.
The SAI has no authority to carry out any type of audit on the statutory corporations except for the Hong Kong Housing Authority where he is the appointed auditor, and the Hong Kong Export Credit Insurance Corporation.
The SAI has the right of access to the books and records of statutory bodies where he is not the appointed auditor under the conditions of the subsidy. As part of his regularity audit of the government's expenditure on subsidies, the SAI reviews the audited accounts of the subsidised bodies to ensure that the subsidy has been spent for the purposes intended and has been properly accounted for in the organisations' accounts. In addition, the SAI has a program, operating on a cycle of four to five years, of inspecting these bodies with a view to ensuring that the public is receiving value for money from the activities of the organisations. This system of inspecting subsidised bodies has been in existence for over ten years. Value for money audits have been carried out on such bodies as the Hong Kong Tourist Association and the Hong Kong Trade Development Council, and audit observations have been made on the efficiency of certain operations and the failure to achieve certain performance targets. As these bodies have employed their own auditors to audit and certify their annual accounts, the SAI concentrates its activities on value for money audits.
The objectives of the regularity audits are to certify the correctness of the financial transactions. The audit is to ensure that proper accounting systems and effective internal control procedures are in place, that the accounts are accurate and correct, that the expenditure incurred is used for the purposes for which it was provided and that revenues are fully and promptly accounted for.
The objectives of the value for money audits are to ensure that prudence has been exercised in the management of resources, that good value has been obtained for expenditure incurred and that the enterprises are operating economically, efficiently and effectively.
Regularity audits are carried out on the departmental undertakings as part of the SAI's audit of the government's accounts. No special audit certificate is given for the departmental undertakings; they are covered by the certificate given on the annual accounts of the government as a whole.
The SAI makes use of internal audit reports in determining the nature and extent of the audit work necessary to enable him to certify the accounts of the departmental undertakings. The Post Office, being a self-accounting department, has a more developed internal audit system than do the other departmental undertakings which come under the accounting control of the Treasury.
Commercial auditors are not employed by the Director of Audit to carry out any audits on his behalf.
Commercial auditors, however, are appointed to audit the accounts of the majority of the statutory corporations and statutory bodies, usually with the approval of the Governor or the Financial Secretary. The Director of Audit is not consulted before these appointments are made.
The SAI of Hong Kong uses the system based approach for both regularity and value for money audits. A system has recently been introduced for conducting a general survey of each department under audit once every five years with the objective of reviewing the accounting and control systems and the various policies and objectives of the departments. The general survey is designed to identify specific areas where detailed value for money audits will be justified. The general survey findings are updated each year.
Computer assisted audittechniques and statistical sampling techniques are used in carrying out regularity audits.
The SAI recently established a five year planning system for assessing audit priorities.
The SAI is divided into four divisions each headed by an Assistant Director of Audit and responsible for the audit of specific areas. The divisions are split into branches and sections. The sections, headed by professionally qualified auditors, specialise in either regularity or value for money audit work. The division heads meet with the Director of Audit and the Deputy Director at quarterly intervals to review the progress of the value for money audits.
The manual of audit procedures is currently being rewritten to take account of new audit techniques and value for money audits.
The regularity audits are carried out annually in accordance with a program of work, fn some of the bigger departments, the SAI has a permanent office. The value for money audits are conducted in accordance with the five year plan and considerable flexibility is allowed in determining priorities and the changing of these priorities.
The SAI reports annually to the Governor as the President of the Legislative Council on the result of his regularity audit of the Hong Kong government's accounts. Detailed value for money audit reports on departmental undertakings and statutory bodies in receipt of a subsidy are prepared at the end of each project and sent to the department heads concerned for their comments. After taking account of these comments, the findings and recommendations are summarised in the SAI's half-yearly report to the Legislative Council.
On receipt of the SAI's report by the President of the Legislative Council, it is deemed to have been referred to the Public Accounts Committee for their consideration and report. The government officially replies to the Public Accounts Committee's report by issuing a government minute. The Finance Branch of the Government Secretariat is responsible for following up the reports of the SAI and the Public Accounts Committee, and ensuring that appropriate action is taken.
Considerable progress has been made in recent years in developing the concept of public accountability and slowly it is becoming more widely accepted. The Public Accounts Committee was established in 1978 and this has helped to induce a greater sense of responsibility in the handling of public funds, and the SAI's reports are now taken more seriously by the auditees. Whilst not all the recommendations of the SAI and the Public Accounts Committee are accepted, the government has to give convincing reasons for not accepting them. However, in the face of some resistance from heads of departments to accepting the Public Accounts Committee's recommendations, there is a reluctance on the part of the government to issue firm and clear directions. This remains a weak point in the control of public enterprises.
Although the SAI of Hong Kong has been conducting value for money audits for many years, he has no statutory authority to do so. This has created a number of problems, giving rise to questions as to his authority and experience to conduct such audits. Whilst these problems have been partly overcome by the recent agreement with the Public Accounts Committee and the government, the SAI's position would be safeguarded if he were given statutory authority to carry out value for money audits.
While the Director of Audit has no plans at the moment to propose that he should take over responsibility for the regularity audits of the statutory corporations and bodies where he is not the appointed auditor, he is giving consideration to the need for access to the records of the statutory corporations and statutory bodies with a view to carrying out value for money audits. One problem which may impinge on his ability to extend his mandate into these areas is the control by the government of the staff and financial resources placed at his disposal.