Tragedy of the Commons – welcome to Capitalism at its finest.

Posted: August 23, 2014 in POV
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Hong Kong is well known as a finance centre for its reputation as capitalism at its finest. As such it’s a perfect example of tragedy of the commons.  This is one of the few places in the world where you can deploy your wealth and control the government.  Private corporations control public goods.  The general public has been robbed and they are none the wiser.  Corrupt African governments would not dare privatize public goods yet they allow it in HK – a third world state parading as a first world but none of the risk, so long as you have money.  Expropriation is terrible but this is one place in the world where it would make sense.  HK folding back into China will be interesting.  This is also the only place in the world where a government can run a surplus.

Ex.

Infrastructure – you can own tunnels: Western and Eastern tunnels are owned by private corporations.  The history is the tunnels is a text book case in collusion and bid rigging.

Energy – Hong Kong Electric.  A private corporation owns the sole energy provider to HK island.

Public Transportation – ferries, bus services and MTR.

Supermarkets are a duopoly.  No one in their right mind would buy parkNshop.  You’re buying a brand to which the seller will still own the land whereby the rising rents will eventually crush your investment.  Temesek was smart to inject money into parkNshop as its risk free so long as ownership does not change else they cash out.  The biggest supermarket chain, parkNshop is owned by the biggest landlord and property developer in HK.

There are many instances of a lax in oversight.  Walk into your closest Mcdonalds and you will notice one thing, you may be one of few paying customers.  The non-paying clientele see McDonalds as a venue with ample underutilized space and air-conditioning.  Not one table of paying customers, notice the lack of McDonalds on each of the table.  The government fails to provide public space for people to enjoy, so the citizens are left to take advantage of private space.  Malls are another good example, there’s never any seating anywhere.

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I never really understood the phrase Tragedy of the Commons until moving to HK, now I notice it everywhere.  It’s a dog eat dog type of place.  Everyone is busy rushing off somewhere like a chicken with its head cut off.  You hop on the MTR/tram and guys no longer give up their seats to  females and old people.  Chivalry in this neck of the woods is dead.  You watch the HK population complain about mainlanders only to see them pull the same type of behaviour outside of HK.  There is no reason why expats are needed or required to work in HK until you work here and realize this place is in dire need of overlords.  They love to multi-task but can’t do basic tasks.  Marketing plans are never given enough time to work before trying a new thing.  Case in point, credit cards.

The people residing in HK have every single credit card available, why? because member benefits allow certain card holders the privilege of enjoying 15-20% meals depending on the restaurant.  In each dining group you are assured one person will have the necessary card to provide the perk.  I have never seen this in North America, yet it’s so prevalent here as banks have no choice but to cannibalize themselves in the hopes of garnering a sliver of a percentage in usage rates.  I don’t even dare go through the fine print.  If it’s a big purchase, use the North American card as I know for a fact customer service will bend over backwards to retain my account.  In HK, not certain so its best not to push my luck.

HK is quite a big larger than Macau, space is finite like everywhere else in the world but it would shock you to find only 25-30% of HK land is developed.  The rest of it is parkland or government land.  There is a constant need to reclaim land and fill in the harbour when it would be easier to not fight mother nature in the waterways and put out more land for building.  Too often the big developers only want to put up buildings in area of past success so they are fighting over each other to secure older buildings in Central/Wanchai/CWB/SheungWan so they can put up even bigger monstrosities.  It would be easier if they would just think outside the box and take a risk on areas of gentrification.  Governments can force developers to do their bidding.  There is a lack of public housing, so make the developers create public housing in exchange for the plot of land in high value areas.  Government will only need to make it a condition during the bidding process to be transparent.  Open the process up for bidding, allow more entrants into the market.  Any big property developer outside of HK would love to get into this market.  The ability to retain general contractors and subcontractors would be a different story.

To see the power of property developers, one need only look at roads and sidewalks.  Sidewalks appear and disappear without concern for the peasants that need to walk.  Roads are never straight as city planners do the planning after the construction of big developments.  HK roads are a mix mash mumble jumble of quick fixes to yesterday’s problems.  It does not to address the issue of future planning.  Roads are one issue, another would be the tunnels.  Private tunnels see very little traffic whereas the public tunnel is running at overcapacity.  Ask your taxi driver to take the Western tunnel next time and watch his eyes light up with excitement compared to being stuck in traffic using the normal cross harbour tunnel.  Private roads and tunnels.  A redistribution of public wealth to private individuals.  Why would the government give away the right for public goods?  It doesn’t want to take on risk?  I thought roads, bridges and subways are the ream of governments to build out transportation and grant access to all.  By giving it away, you’ve given away the ability of your citizens to enjoy it.  I’m sure the majority of the population would love to invest in private roads and tunnels, for the sole ability to toll it.  The ability to toll a major artery is a license to print money.  HK needs to look at Singapore as a better model.  I believe TV shows one of the big real estate firms, Sun Hung Kai Properties, on trial for corruption.  If one of the largest is corrupt, you can bet the rest are just the same.

Companies trading on the HK stock exchange is another prime example of lax in regulation.  There is no competition bureau to ensure the normal investors don’t get fleeced.  China state-owned entities and their IPOs have kept HK afloat.  The whole point of listing a company is to gain access to investment dollars.  There’s no need for a state backed entity to raise funds as the state provides all the funds it will ever need.  Now look at the share price/market cap performance, the majority of which fall after IPO and fail to return to their initial IPO price.  One only need to look at the senior management at these firms to know it’s not worth the investment.  Most of the rich and powerful China guys at the head of these firms have been recalled to China and subsequently disappeared.  Now HK investors are left with China shell companies without direction.  China companies were listed for the sole reason of enriching its rainmakers, now the rainmakers are gone. Uh oh.  On an investment basis, I would not go near companies solely listed on the HK exchange.  I don’t trust the securities regulation.  If they are not listed overseas to which the fear of god sets in via the US SEC, I don’t need it.

In NA, organized crime families do not list on public exchanges.  In HK, investors can easily become shareholders of companies with well known gang ties.  Junkets are well known to be operation of organized crime.  USA casinos have no choice but to rely on junkets to feed them VIPs.  It’s well known and the gaming authorities back home hate it.  It’s the cost of doing business in Macau.  Junkets would never pass muster in NA but HK is a different story.  It’s OK to have known criminals with substantiated gang ties on your management team and Board of Directors.  For a sophisticated investor, you would imagine the gangs run their business similar to a not-for-profit whereby all profits are spit out into management salaries and expenses rather than a dividend payable to all investors on record.

Junkets are getting smart too.  They’re diversifying into casino ownership in banana republics.  Actual casino developers and owners have real estate and licenses to show for it.  They have hard assets with a real replacement cost.  BTW casinos in Macau would be a great investment at the present moment when compared to their past valuations.  Junket operators trying to get into this realm solely have the license, no development so to speak but they already have the sky high valuation in their market cap, rivaling those in NA but without the hard assets on the ground.  Please tell me insider trading and pump and dumps do not exist.  I would love to see how a license to operate a casino in a banana republic is worth $3B USD.

To say insider trading runs rampant in HK would be an understatement.  Share prices are kept low to entice investors at the retail level.  You will never see people lined up waiting for the bank to open unless it’s a run on the bank.  Yet every single day old people in HK line up outside banks so they can gain access to a computer terminal and day trade.  Day time TV shows consist solely of viewers calling in to ask ‘experts’ their views on certain stocks.  The ‘experts’ view rests solely on reviewing previous days’ charts rather than on fundamental analysis.  I can tell you if you call into TV that you paid a price that is too high so you should sell and wait for a better re-entry point.  If you were not underwater on your investment, you would not have to call in.  Genius.

Every culture prides itself on the ability of its offsprings to do better.  One would value offsprings as priceless but to entrust the lowest cost provider to care for our most precious goes against the valuation we had previously assigned.  The rise of HK is built on the backs of the domestic helpers.  Sundays is their holiday yet HK cannot plan and address the problem of providing ample space.  It’s shameful and embarrassing for a world class to leave their own on the sidewalks.  Public spaces become private spaces so long as you show up early.  There are no monitors on the skywalks on any given day, except for sundays when the domestic helpers use it as a gathering place.

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But even after all this expose, would you still chose to live here?  I wouldn’t trade it for anything else in the world.  It’s a great feeling to be David and take on Goliath every single morning.  I only hope this place changes for the better, they need fairness and empathy back into the equation.  You strip away all the wealth and materialistic possessions and at the most basic level, we are all the same.  It’s just lip stick on a pig, at the end of the day we are still all pigs.

 

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