Hopes for the handover

The tiny Portuguese-run enclave of Macau is intent on making the most of the worldwide media attention surrounding its return to Chinese rule. Good news would certainly be welcome. In recent years the territory's image has been tarnished by violent crime, while the economy has been depressed since even before the start of the Asian crisis.

Officials hope that they will be able to put across the message that Macau is actually a safe place to visit, with a culture and ambience that is unique in Asia. Meanwhile business leaders trust that the economy will benefit from a handover that is certain to accelerate and strengthen ties with the Mainland.

After 442 years of Portuguese rule, Macau will revert to Chinese administration on December 20 this year. Like Hong Kong, the territory will operate under the ‘one country, two systems' principle and will be allowed to run its internal affairs and maintain its economic system for the next 50 years.

However there are significant differences between the two handovers. First, as Lisbon actually ceased to claim sovereignty over Macau in 1974, the handover rep-resents only a transfer of administration. Second, there is little ofthe acrimony and political wrangling that was evident in the lead up to the Hong Kong handover. The people of Macau have long been prepared for change and many are looking forward to the new era. Political organisation is low and public demonstrations almost non-existent.

Hopes for the handover
Two years after the start of the Asian financial crisis, Macau is in dire need of stimulus to its beleaguered economy. GDF plunged 6.8 percent in 1998 and, while the new administration will not provide an instant remedy, it could help by cracking town on violent crime, cutting bureaucracy and improving government efficiency.

Macau's small size it has a population of just 430,000 living on an area little more than 20 sq km – has always constrained its economic development. Unlike Hong Kong or Singapore, for example, it simply doesn't have the resources to become an important commercial or industrial centre. "The space in Macau is too limited for large-scale factories," says Mr. Artur Santos, senior deputy general manager of the Macau branch of Banco National Ultramarino. "If Macau can forge closer relationships with its neighbours, it can gain scale."

Land reclamation
The economy is dominated by gambling, real estate and garment export, but none of these sectors is in a buoyant state. The Macau government has reclaimed and released a lot of land for property construction. Earlier this decade, the big project was the Nam Van Lakes waterfront property development. The infrastructure and first zone of this office, residential and retail project have finally been completed and work is progressing on the rest of the development.

The next major project in the pipeline is Cotai city, a mixed-use property development on reclaimed land between Taipa and Coloane islands. It is envisaged that Cotai city could be home to 150,000 people, but many say the scheme is too ambitious for a place as small as Macau. "At present I don't think the infrastructure of Macau can sustain an influx of 150,000 people within, say, three years," says Mr. Ambrose So, director of STDM's associate company Shun Tak Holdings. "You've got to have hospitals and schools to support that."

Such land reclamation has helped to shore up public finances. According to People's Daily, Macau's reserves stood at US$2.5bn in August, 10 times higher than eight years ago. However the action has also led to a huge over-capacity of property. Over the past decade Mainland money has poured into real estate, resulting in many empty buildings. Mr. Leong Kam-chun, vice president of the Macau Society of Accountants, estimates about 80 percent of newly constructed commercial buildings can't be sold or rented.

Gambling-related tourism remains the economic mainstay, despite frequent initiatives aimed at diversification. "There has been an interest in lessening Macau's dependence on tourism," says Santos. "But you have to select the right projects and have the people with the right skills. It is not easy to upgrade the technology in different sectors."

The tourist industry has taken a battering since the onset of the Asian crisis. As an indicator, passenger traffic on STDM's Hong Kong-Macau jetfoil has fallen 10-12 percent. However there are signs of a recovery in the Southeast Asian markets and the continued easing of travel restrictions for Mainland Chinese is another positive factor. Tour groups from the Mainland constitute a large and growing proportion of visitors to Macau. While they tend to be reluctant spenders on hotel accommodation, they do help to fill rooms during the weekdays when business is slack.

Falling casino revenues
China is Macau's biggest growth market. In the first five months of 1999 Mainland visitors were up 150 percent on the same period last year. More than one million Chinese are expected during the whole of 1999. Surprisingly, they are also among the highest (non-gambling) spenders in Macau – averaging US$350 per person per visit, exactly twice the overall average.

Some 60 percent of the Macau government's revenue comes from tax paid on gambling revenues. However STDM, which holds the exclusive gambling franchise in Macau, recorded a 20 percent fall in casino revenues in 1998, the first fall in Macau's history. The main reason is a 17 percent drop in visitor numbers from Hong Kong between 1996 and 1998.

The future structure of the gaming industry in Macau may change after the existing franchise runs out at the end of 2001. The decision on the franchise rests with the Special Administrative Region government.

"Any change to the pattern and structure of this economic pillar needs to be carefully studied. It is very difficult to say what form it should take," says Ambrose So.

The new government is to commission a study group to look at the gambling franchise. The chief executive-designate, prominent local businessman Edmund Ho Hau-wah, will act after receiving the report. Ho has been reported as saying that he would like to tighten control over the gambling sector, but So argues that the government already exerts sufficient control: "STDM's operations in the casinos are always under the supervision of the government."

Quota to be phased out
A flurry of investment in property and infra-structure initiated about a decade ago has changed the face of Macau, bringing in new investment and fuelling hopes of diversification. However, textiles and garments still account for nearly 90 percent of visible exports. Most operators are small, family-run businesses with a low technology content. Few have the capital needed to improve productivity, while rising labour costs no longer make Macau a cheap manufacturing base. To exacerbate matters, its export quota is due to be phased out by 2005. Mr. Victor Ng, president of the Macau Import and Export Association, predicts all the manufacturers will move to the Mainland after the quota privileges expire.

To make up for an anticipated further decline in textiles and garments, Macau wants to encourage investment from medium-sized, medium technology companies. Mr. Lorene Cheong of Macau's investment promotion institute, IPIM, cites electronics components, pharmaceuticals, and food and beverage processing as desirable growth sectors. He believes Macau also has the potential to become a cost effective back office support centre for service industries, such as banking and airlines.

"Salaries are 50-60 percent lower than in Hong Kong and office space is up to eight times less expensive than in Central," says Cheong. So far Star Paging and Hutchison Telecom have switched their paging support operations to Macau from Hong Kong.

In the financial sector, retail banking business has been sluggish, while financing and syndication work relating to infrastructure projects has also fallen off. "The banking business has not been favourable as it reflects the economic situation," says Santos.

The one major hope for the financial sector is the possibility of Macau becoming an offshore centre. The government is preparing an offshore financial services law to attract banks, insurance companies and fund managers. These talks are still under discussion and would have to be approved by the Legislative Council.

The biggest barrier to diversification is the shortage of skilled labour. There has certainly been an improvement in the quality and technical competence of the workforce, the result of significant state investment in education. Many young people are in tertiary education or are studying abroad. Macau now has two universities, a polytechnic and an open university for mature students. There is also a tourism school and a training school for senior police officers.

The new administration will hope that there are sufficient jobs to encourage graduates to stay. "Unemployment is not yet at a dangerous level about six percent which is still lower than in Hong Kong," says Dr. Jorge Rangel, under-secretary for administration, education and youth affairs. "We can cope with this situation."

Growth could soon return to Macau. With lower interest rates and tentative signs of recovery elsewhere in Asia, BNU expects Macau's GDP to stabilise in 1999 after falling in 1998.

Ever greater integration with the Mainland is also helping. "The new bridge [to China] should improve things and they are also renovating the existing border crossing," says Santos.

Macau has struck up a new sense of cooperation with Zhuhai but there is still an overlap of facilities. Mr. Liang Guangda, a former Zhuhai mayor and secretary of the Communist Party, was responsible for much of the overlap – for example, pressing the Chinese authorities for an international airport and formula one racing track.

"He's no longer in power, so things have become more realistic," says Rangel. "They understand that it's more important to cooperate with us. We are so close, we should try to do things in a more coordinated way. There's a lot of dialogue going on."

Last month Zhuhai put on a three-day investment and trade fair in Macau, designed to promote business and trade links. According to Chinese statistics, business people from Macau have invested in 1,800 projects in Zhuhai – one-third of the total involving investors from outside the special economic zone.

Technology transfer
By the end of 1998 Macau was responsible for US$8.9bn of contracted investment in the Mainland. Two-way trade amounted to US$870m in 1998, although the value has fallen off in the opening months of 1999.

"Research institutions and enterprises on the Mainland are encouraged to step up technology transfer to Macau and start projects on the basis of Macau's advantages in free port, financing and information," says Wang Hui, a Moftec official in charge of economic affairs with Macau, Hong Kong and Taiwan.

Macau officials talk of the role that it can play for China as a bridge to Europe and the Portuguese-speaking world, especially Brazil. "Macau and China could play a complimentary role because many producers in China are seeking new markets, including Latin-speaking countries," says Cheong. This is likely to be the major advantage in preserving Portuguese as an official language, something which is enshrined in the joint declaration.

However the benefits may take some time in coming – the Macau International Fair in April this year, a showpiece for inward investment from the Portuguese-speaking world, did not attract huge numbers.

Promoting ties with Europe could be a more realistic short-term ambition. Unlike Hong Kong or Taiwan, Macau is signatory to a 1992 trade agreement with the EU covering a range of areas including telecoms, education and manufacturing. This agreement gives Macau certain tax holidays and premium treatment for its products exported to the EU.

Bureaucracy will need to be trimmed if Macau is to become a more competitive business centre. "Portuguese rule in Macau has been rife with corruption and incompetence," says Mr. Cools Leng, president of the Macau-based Notable Policy Institute.

Santos says potential investors have to deal with several departments and, while there are initiatives to reduce bureaucracy, Macau's record has not been good.

"We have some plans to simplify documentation," says Cheong, explaining that IPIM hopes to establish a one-stop service later this autumn.

To attract manufacturers, Concordia Industrial Park was conceived in 1993. Bringing investment to the 12-hectare plot on Coloane Island has not been easy because of the down-turn in the local economy. However the entire area is now under contract. Two Mainland-funded plants, which have never actually started operations, are soon to be replaced by other investors. The emphasis is on export-oriented, medium-technology plants. Total investment in the 10 projects contracted is about US$90m and estimated employment will exceed 1,750.

Concordia hopes to expand its total area to 50 hectares, although approval will have to wait until after the handover in December. One of the new facilities will be a business incubator. "There's a lot of demand for this type of concept," says Mr Rodrigo Brum, managing director of the park.

Talks are taking place with Macau University, the productivity centre and the foundation for the development of Macau. Secretarial support, accounting services, laboratory testing, legal advice, internet access and human resources will all be provided. Brum is also keen to develop links with research institutes on the Mainland since he recognises that the number of graduates and technical staff in Macau is limited.

Concordia is at an advanced stage of talks to act as a representative to promote Mainland Chinese parks. Approval has not yet been secured but Concordia hopes to exploit its contacts and management skills to help promote parks overseas, particularly in Europe.

Security challenge
Turning round the economy will be a priority for chief executive-designate Ho. However, resolving the security issue is probably even more urgent because of the negative impact on tourism and inward investment. A pro-longed turf war between rival gangs connected to the fringes of the gaming industry has led to 28 deaths in 1999 and tarnished the image of Macau.

Government and tourist officials complain that foreign reporters exaggerate the scale of violence. "Macau has had a very bad expo-sure in terms of crime," says Rangel. "That does not mean that we have a big problem here. As a long-time resident, I am surprised Macau does not have more crime."

While it is true that Macau is a relatively safe place for tourists and business people, negative publicity will persist for as long as the violence continues. Fears of an escalation of violence were raised last month after a nail bomb killed two suspected Triad members and injured four others.

Rangel says the matter can be dealt with by the local police force, but others believe only the stationing of troops will quell the problem. Ambrose So says incidents should settle down after the handover. "The PLA can exercise the function of a disciplinary force in Macau, if necessary," he says. "This could be an emergency measure if Macau ever got out of control but the chief executive would be very cautious in order to uphold the image of one country, two systems."

The issue of stationing Chinese troops is sensitive because it is not mentioned in the joint declaration or the basic law. Since Portuguese troops left in the mid-1970s,there are no barracks for troops to be stationed and the subject remains unresolved.

In the months leading up to the handover, Ho is busy selecting his team of senior civil servants and secretaries. "If Macau is to remain an international city," advises So, "the chief executive designate needs a team who are proficient, professional and international looking."

However gaining this experience will take time, since until now all senior government positions in Macau have been appointed by Lisbon. Unlike pre-handover Hong Kong, locals in the civil service could not rise higher than the level of director.

Closer integration
Recognising the problem of localising these top positions, China has agreed that a number of senior people will have to stay in the civil service and in key professions such as doctors, judges, legal advisers and technical staff.

"According to the joint declaration, we will have to train local people," says Rangel, "so that Macau is governed by the people of Macau. We need to use all institutions available to train our senior staff."

Many training programmes have been set up to train civil servants, and Rangel says the students are enthusiastic and committed to change. "I think [Ho] should choose a young team who can be with him for a number of years," says Rangel. "We have never had a better civil service."

Closer integration with the Mainland rep-resents Macau's best chance of establishing a more diversified economy. All major sectors stand to benefit from an easing of travel restrictions with the Mainland.

Yet pursuing closer ties and embarking on ambitious construction projects risk diluting the charms of Macau and its reputation as a more relaxed alternative to Hong Kong. To balance the many construction projects which have done so much to change Macau's appearance over the past decade, the government has recently been investing heavily in cultural buildings and institutions in a bid to preserve the territory's identity.

More needs to be done, says Rangel, but he believes the younger generation will be able to preserve Macau's identity: "The best things that Portugal will leave behind are a set of values to do with our way of life, including all the freedoms and liberties and guarantees that are given to the people here."

Mixed emotions
At midnight on December 20 Macau will revert to Chinese rule and about US$30m is being spent on various ceremonies surrounding the event.

The handover ceremony will be a time for celebration in China but emotions in Macau will be more mixed. Dr. Jorge Rangel, undersecretary for administration, education and youth affairs, admits that there will inevitably be an element of sadness. However there has been plenty of time to prepare for the handover and most people have decided to stay and pledge their commitment to the territory.

Relations between Beijing and Lisbon have largely been cordial and, apart from the issue of the stationing of Chinese troops, there are no major points of disagreement.
"We're trying very hard to reach consensus on all the major issues here. However, I wouldn't say that everything is very easy," comments Rangel.

The new Cultural Centre has been widely criticised for its high cost and limited seating capacity of just 1,200 – inadequate to accommodate the 2,000-plus officials and dignitaries expected to attend the ceremony. A temporary facility next to the cultural centre will be the site of the main ceremony.

Tourist officials in Macau are keen to learn from the Hong Kong handover in 1997, where hotel prices were inflated to such an extent that visitors were deterred from staying.

Macau's handover ceremony is not being promoted as a tourist event – indeed, given the large number of Chinese and Portuguese officials that will be present, in addition to hoards of journalists, there will not be much room left for ordinary visitors.

Instead, tourist officials hope to exploit the media interest by promoting Macau's cultural identity and ambience. "We want to use 1999 as a platform to promote Macau," says Ms Helena Fernandes of the government tourist office.

The tourist office says there will be a cleanup of overt prostitution during the handover, a time when Macau will be swarming with Mainland government officials.

More important than the event itself will be the long-term impact of Chinese administration on the problem of Triad-related violence.

"If the handover improves security in Macau, that would be a positive impact on the tourism and airline industries," says Mr. Dominic Ching of Air Macau.