MACAO

A harmonious handover?

The Portuguese colony of Macao has the advantage of being able to learn from Hong Kong's early years under Chinese sovereignty. But there are some challenges which will have to wait until the handover before they can be tackled.

Macao is moving in serene fashion towards December 1999 when it reverts to Chinese rule. None of the political confrontation that has marked the period leading up to Hong Kong's handover have been apparent in this tiny colony. Officials from Macao, Portugal and China have always been quick to cite the amicable relations which have existed for most of the 450 years since the colony was annexed. Portuguese leaders are greeted with warmth when they visit the region and China's President Jiang Zemin has praised the way the two sides have cooperated and settled disputes.

But for all the political harmony between Beijing and Lisbon, the mainland will be assuming sovereignty of a territory less confident about its future economic role than Hong Kong and less prepared in handing on the baton of government and civil service. Despite all the acrimonious exchanges between London and Beijing, in Hong Kong the mainland will be acquiring a vibrant economy, a well educated population and substantial financial reserves. By contrast, Macao's largely unskilled and small workforce is proving a brake on its development while the money spent on building up the territory's infrastructure over the past decade has left little in its coffers.

Taiwan connection

While these long-standing issues are being addressed by the authorities, few of the benefits will be immediate. There are also fresh problems to tackle, including a worsening law and order situation which may have to wait until after the handover before it can be dealt with effectively.

Then there are the ramifications of direct travel between Taiwan and the mainland, a prospect which moved closer last month with talks on the subject of a renewal of direct shipping links. "This would have a big impact because the people of Taiwan will no longer need to go via Hong Kong or Macao," says Vitor Rosario, Senior Economic Advisor to Banco Nacional Ultramarino (BNU). Taiwanese companies which have been considering setting up in Macao as a gateway to the mainland may simply decide to invest directly in China.

The six months before and after the handover of Hong Kong will be a time of intense media scrutiny. Macao will not mind being out of the spotlight as it is used to playing second fiddle to Hong Kong. Its government will have two and a half years to monitor what is taking place across the water, which should enable decision-makers to absorb some important lessons.

In any case, there is much less at stake involved in Macao's handover ? there are fewer people (around 440,000 compared with over six million in Hong Kong) living in a far smaller area and earning a much lower average salary. Moreover, the Macao people are less politically motivated, with a high proportion of their numbers having arrived from the mainland within the past 10 years. And, unlike in Hong Kong, there has been no attempt to introduce greater democracy to government.

The flurry of infrastructure projects in the late 1980s and early 1990s have set Macao on a path of modernisation which has transformed the landscape and improved the business environment. However, the impact on the economy has not been so rapid. Gambling-related earnings account for about half of GDP and the other mainstay industry garment manufacture ? is fast declining because of regional competition. Attempts to diversify the economic base will take a long time to realise but at least government and industry leaders are now pulling in the same direction.

Housing improvement

Over the past couple of years, GDP growth has been around the four to five per cent mark. This is lower than in the early 1990s but that was a time of substantial infrastructure activity which saw the building of a new airport, ferry terminal, bridge and office development on the old waterfront. Hongkong and Shanghai Bank expects growth this year to stay at a similar level, while BNU predicts a small rise based a better export performance and more tourists as the airport expands its operations.

If there is modest growth, this will be welcome news for the real estate sector which has been in the doldrums in recent years since a wave of new offices and apartments came onto the market. The number of vacant apartments has fallen, partly as a. result of greater competition among the banks in mortgage lending, but there are few signs of an upturn in the commercial sector.

If 1997 turns out to be a year of consolidation, this will be welcomed as 1996 proved to be a turbulent year. The territory has been rocked by a series of violent outbreaks which will surely impact business confidence unless checked (see previous page). "The image of Macao in Hong Kong is extremely negative ? more-so than it needs to be in my opinion," comments Mr Tony Fraser, chief executive of the Macao branch Hongkong Bank. "The typical Hong Kong image of Macao is a place where it is pretty lawless and run by Triads."

Wider visitor base

Gambling revenues last year were slightly down on 1995, says Ms Julie de Senna Fernandes of Sociedade de Turismo a Diversoes de Macau, the company which owns the exclusive casino franchise. Uncertainty because of the handover in Hong Kong has led to more cautious attitudes there and an increase in savings levels. Hong Kong visitors are the most important source of gambling revenue ? some 75 per cent of those making the one-hour journey on the ferry come to play the tables or visit the race course. Gambling will continue to be allowed after the handover just as it will still be forbidden on the mainland. But there is greater regional competition for punters from Cambodia, the Philippines and the occasional gambling ship.

To compensate for the Hong Kong downturn, there was an increasing proportion of visitors from mainland China, Thailand and other developing countries, with many travelling by plane. The new airport is helping to extend the average length of visit to Macao, for example, tourists can begin their stay in Macao and then go to Hong Kong, rather than regarding Macao as an optional extra destination during their visit to the region.

Naturally their average spending power is below Hong Kong's, but diversification is entirely consistent with the government's overall economic direction.

The problem for Macao's tourist industry in 1996 was that it was unprepared for an increase in numbers. "While occupancy rates rose, the average room rate did not," says Mr Andrew Hirst general manager of the Mandarin Hotel and vice-president of the Macao Hotel Association. "In fact, as an average it declined. The hoteliers were their own worst enemy. At the beginning of the year we did not anticipate the rise in demand ? we were fighting each other tooth and nail to gain market share."

Investment incentives

Faced with an unhealthy dependence on gambling revenue and a decline in the traditional textile industry, the authorities have been looking for ways to attract investment from other sources. "The strategy for Macao should be based on specialised industries in the textile and services sectors ? this is accepted by everybody," says BNU's Rosario.

The Macau Trade and Investment Promotion Institute (IPIM) is tasked with achieving this goal. Over the past year, its focus has been to attract medium-technology companies, which offer greater added value than traditional enterprises in the garments and assembly sectors. "We are very committed to quality," says Mr Joao Domingos, President of IPIM.

He says the institute is more choosy than it used to be: "We ask whether the investment is important for the territory. For example, we received three proposals for the recycling of industrial waste. We refused them because the pollution problem would have been too big." IPIM is also looking for diversification of final market, currently heavily weighted towards the US.

The prime area set aside for new manufacturing plants is the Concordia Industrial Park, which was set up in October 1993 by the Macao government and a consortium of mainland and local investors. Because of its tiny size, Macao has an acute shortage of land available for industrial development. The park was created on Coloane Island partly from reclaimed land in order to offer industrial space at competitive process. The industrial area covers 29 acres and all infrastructure has been completed. Some 35 per cent of the area has been allocated to green space.

Initial progress has been steady rather than spectacular but interest levels are building up. "We are planning an expansion of the park as the response so far has been quite good," says Mr Rodrigo Brum, chief executive of Concordia Industrial Park Ltd. Three project contracts have been signed, resulting in one facility which is being built and the other two should begin construction shortly. "We hope to have filled up very soon," says Brum.

One of the committed companies is a fibreglass joint venture involving Boseki of Japan, one of the world's five largest fibreglass producers. Operations should start in June with full capacity reached in September. The export value is expected to exceed US$22m in the first year of operations.

Later this year, Tsin-Ip Household Electrical Appliance Industry of China hopes to begin producing electric fans from a site in the park. Up to 90 per cent of output is destined for Western European markets.

An existing Macao company, Liu's Commerce and Industry, plans to build an upgraded garment factory in the park as it strives to go upmarket. It is also investigating an electronics equipment and appliances manufacturing plant.

Competitive neighbours

Brum regards the tax and other financial incentives as being the greatest inducement to potential foreign investors. "In all of Macao we have no import duties for equipment, which compares well with China," he says.

The subsidised land price is low ? 15 patacas (US$1.88) per square metre a year for construction area, which Brum says is cheaper than equivalent areas in Zhuhai despite a recent price cut in the Special Economic Zone. Late last year, Zhuhai SEZ announced big land price cuts in an effort to attract investors. The price of industrial land for high-technology users was slashed from Yn400 per square metre to Yn150, according to Hong Kong Economic Journal. Zhuhai is the least developed of the three SEZs in Guangdong province but it is hoping for improved prospects with the opening of Guangshen Zhu Expressway.

Rather than working together, Zhuhai and Macao have been developing their own separate strategies, often leading to a duplication of facilities and head-to-head competition for internal investment.

"I don't believe we will see more cooperation until the handover," says Hongkong Bank's Fraser. "Zhuhai is an overwhelming competitor to Macao in many sectors."

Beijing on the mainland, Zhuhai has a huge labour pool at its disposal and a stronger industrial and technological base. By contrast, over the border it is the shortage of skilled workers which is one of the major concerns among potential investors in Macao. Fraser says the park must be able to utilise imported labour as the needs of high value-added companies will not be met by the colony's educational system.

The government recognises this problem and it is assessing some short-term solutions. "There is the possibility of importing skilled labour from abroad," says Brum. "Some discussions on this matter are being held right now." He says companies granted approval to set up operation in Concordia are likely to be allowed to import labour from mainland China.

Government continuity

Such discussions show that reform is possible despite the territory's reputation for bureaucracy. "The major constraint for investors is the inefficiency of the Macao government," says Mr Kwan Fung, lecturer in economics at the University of Macau. For example, industrial registration involves dealing with various government departments. "There are complaints from Taiwan investors that the investment approval procedure was too slow and too complicated. I read from the newspapers that the Zhongshan government wanted to invest in the Taipa industrial village. It took more than two years for the Macao government's approval, by which time Zhongshan government had withdrawn from the project."

Then there is the question of continuity of government, especially at high levels. Government departments tend to be headed by Portuguese while most other top jobs are help by Portuguese-speaking Macanese, most of whom are expected to leave the territory after the handover.

"My main worry in the lead up to 1999 is the need to make sure that the legal system continues to function and that there are enough people to carry it out," says Fraser. "The percentage of expatriates or Macanese in government at senior levels is very high compared with Hong Kong."

There is no doubt that Portugal wants to make a success of the transition of what is its last major colony. But there are now less than three years remaining and Kwan believes that the task of promoting efficiency within government cannot be achieved before the handover: "People expect Macao to change after China takes over ? maybe for better, maybe for worse." Enditerm

Meetings for profit

One of the Macao's hopes for the tourism sector is the growing market for meetings, incentives, conferences and exhibitions ? known in the industry as MICE. Prior to the opening of its airport, Macao could not really compete for such business, but now there are good regional links plus many quality hotels which have plenty of spare beds outside of the weekends when the gambling hordes arrive.

"For this hotel I'm putting a major emphasis on the meetings and conferences market," says Mr Andrew Hirst, General Manager of the Mandarin Oriental. "We have just completed some new meeting rooms at a cost of US$1m. In 1996, meetings and conferences were 10.3 per cent of our business. My budget for 1997 will be 14 per cent."

More delegations are trying out Macao for the first time. For example, The East Asian Insurance Congress, which attracted 1,600 delegates in Singapore last year, moves to Macao in 1998. "1996 was a very good year for conferences and exhibitions," says Mr Vitor Rosario of Banco Nacional Ultramarino, "and 1997 will be much better."

Organisers are able to select from a variety of places. Modem venues include The Forum which can seat up to 4,000 people, while traditionalists can head for a house which was once the headquarters of the East India Company. Enditerm

First business club

One of the more interesting new buildings is the World Trade Center Macau which was inaugurated last year. It is a private, profit-making company which is part of the WTC network of 300 trade centres around the world.

The WTC has been described as Macao's first business club but it also provides much-needed information and business support to local member companies. "The WTC is one more step to creating more infrastructure to support business services," says Rosario.

The 19-storey building has office accommodation, a business centre with video-conferencing and facilities for meetings and small exhibitions. Negotiations are taking place with the Mandarin over an adjoining 1,000sq metre multi-functional room. This may lead to WTC acquiring the room from the Mandarin which would enable it to host conferences and other major events. Enditerm

Law and order

Part of Macao's appeal as a place to live and work has always been its tranquil atmosphere. Over the past year, there have been several high profile criminal incidents which have harmed this image.

One evening last March, Maria de Piedale, the wife of Macao's acting governor Brigadier Lages Ribeiro, was attacked in the street by two men, No money was taken and there was no apparent motive. A month later grenades were thrown into two jewellery shops, injuring seven people.

In November, the public relations officer of Lisboa Casino, Tsui Chion, was killed shortly after returning from Zhuhai. Just hours earlier, a man suspected of being a member of a local criminal gang was murdered close to the Chinese border. Police investigated various motives for these attacks, which ranged from the smuggling of illegal immigrants to control of the local loansharking business.

Targets then switched to government officials. Macao's Under-Secretary for Security, Manuel Sotres Mong, survived art assassination attempt while in January of this year a mainland Chinese official and his driver were attacked with iron bars while on business in Macao. The official was the second secretary to the Sino-Portuguese Joint Liaison Group, Fan Lequn.

Even before this last incident, mainland Chinese authorities expressed their growing concern over what they described as a "worsening public security" problem. During December, high ranking police officers made successive visits to Macao They included Zhu Entao, China's assistant public security minister and. Chen Shaoji, Guangdong Provincial Public Security Department Director. The Macao branch of the 4:inhua news agency stressed the need for the Macao government to do more to improve public order, which was likely to harm prospects for the entire local economy. "It is especially important that we maintain social stability at the critical moment when Macao is going through the latter stage of its transitional period if we are to achieve a stable transition for Macao," said the news agency.

"It certainly reduces the interest of tourists visiting Macao," says Mr Kwan Fling of Macao University, "It is also negatively affecting foreign investors."

The Macao government is starting to respond to this wave of violence. Telephone tapping powers are to be considered by the courts in April and a witness protection scheme is also being' evaluated. Greater cooperation with the mainland authorities can also be expected in future.

Many doubt, however, whether the government has the resources to restore order and whether the police is capable of taking a firm stand. Enditerm

Airport arrival

Macao airport may have been a long time in the planning, but the wait has been worth it. Tourism revenues have surged as a consequence and air services should benefit local industry by speeding delivery of supplies and promoting 'just-in-time' operations.

Opened in 1995, the initial problem has been drumming up business ? just 1.3m passengers were carried in 1996. However at least this makes for a speedy and hassle-free check-in ? on average it takes just 30 minutes to turn around all boarding and disembarking procedures.

The biggest challenge now facing the airport is to reduce its reliance on Taiwan, which accounted for 65 per cent of passenger traffic last year. "The airport needs to increase other services in order to reduce dependence on this link," says Mr Antonio Rato, chief executive of the Administration of Airports. Should direct transport links be introduced between Taiwan and mainland China, future growth projections would have to be radically revised.

Macao airport needs an annual throughput of two million passengers to break even which the authority hopes to reach by 1998. An estimated 1.6 million passengers will be carried this year.

Cargo traffic was under target, with 25,000 tonnes of freight carried in 1996. Taiwan was the principal market accounting for 30 per cent, followed by South Korea with 16 per cent. Because volumes are low, the cargo cost is relatively high but the turnaround is rapid. "It should be the quickest in the region because the volume is very low and the facilities for cargo are very good," says Rato.

In addition to Taipei, Kaoshiung and major Southeast Asian centres, the airport serves the mainland cities of Beijing, Shanghai, Xiamen and Fuzhou. New destinations this year will include Wuhan, Guilin and Osaka in Japan.

Rato believes Macao's advantages should increase once Chep Lap Kok is opened because the time and distance differential to central Hong Kong will be reduced. As for the airport in nearby Zhuhai, there is a case for arguing that the two can be complementary since Zhuhai is currently restricted to mainland business. However, should Zhuhai begin international flights ? and there is no guarantee that it will not ? the competition will become intense. Enditerm