LegCo Paper No. CB(1)1890/96-97
(These minutes have been
seen by the Administration)
LegCo Panel on Environmental Affairs
Minutes of special meeting held on Tuesday, 29 April 1997, at 8:30 a.m. in Conference Room A of the Legislative Council Building
Members attending :
Members absent :
Hon Emily LAU Wai-hing
Hon Mrs Elizabeth WONG, CBE, ISO, JP
Public officers attending:
- Mr Benjamin TANG
- Deputy Secretary for Planning, Environment and Lands
Mr Danny TSUI
- Principal Assistant Secretary for Planning,
- Environment and Lands (Environment)
- Mr Ian PETERSEN
- Principal Assistant Secretary for Works
- (Policy and Development)
- Mr Peter Winder
- Business Manager
- Drainage Services Department
- Dr Mike CHIU
- Assistant Director of Environmental Protection
- (Waste & Water)
- Mr David Hall
- Principal Environmental Protection Officer
- (Sewage Infrastructure)
- Mr Chandran NAIR
Mr David ARTHUR
Clerk in attendance :
Staff in attendance :
- Miss Odelia LEUNG,
- Chief Assistant Secretary (1)1
- Ms Sarah YUEN,
- Senior Assistant Secretary (1)1
Briefing by the Administration on the final report of the Trade Effluent Surcharge Review
(LegCo Paper No. CB(1)1353/96-97)
The Deputy Secretary for Planning, Environment and Lands (Environment) (DS/PEL(E)) briefed members on the Administrations information paper on the Trade Effluent Surcharge (TES) Review. Members noted that as part of the Review, a consultation programme was undertaken from November 1996 to January 1997, during which meetings with trade associations affected by the TES Scheme and concerned political parties were arranged and a public forum was held. The views expressed at these meetings and the forum had been considered in the Review. Based on the results of the Review, ERM-Hong Kong Ltd (ERM), the consultant firm commissioned by the Environmental Protection Department (EPD) to undertake the Review, had identified and evaluated a number of options for possible changes to the current scheme in the Review Report. The Advisory Council on the Environment had been consulted on the Report. Following consultation with the Panel, the Administration would commence a six-week consultation exercise to invite written comments from relevant trade and industry associations. Special meetings with these associations would be arranged on request. Thereafter, the Administration would consider and decide on the Consultants recommendations. DS/PEL(E) emphasised that the Administration was not obliged to accept the recommendations. Before making any changes to the current charging scheme, the Administration would need to consult the Panel again.
2.Mr Chandran NAIR of ERM made brief introductory remarks on the Review Report. He emphasised that ERM had remained impartial and independent in conducting the Review. As the Scheme was part and parcel of the sewage charging scheme under the Sewage Services Trading Fund (SSTF), although the focus of the Review was the TES Scheme, it had been considered in the context of SSTF.
3.Mr David ARTHUR then followed with a slide presentation on the results of the Review. In gist, the key findings of the Review on costs and finances of the Scheme were as follows -
- The present charge levels in Hong Kong compared well with other countries which had a similar scheme aiming at recovering the operational and maintenance (O&M) costs of the service. As compared with countries which were implementing a full cost recovery system, the charge levels in Hong Kong were considerably lower.
- The total O&M costs of sewage collection and treatment were expected to triple from $640 million in 1995-96 to $1,748 million in 2000-01 and by then Stage I of the Strategic Sewage Disposal Scheme would have been completed. With increasing costs from the commissioning of additional facilities, revenues from the TES would be inadequate to recover costs without significant increases in the present charge levels. It was predicted that by 2000-01 the deficit would be of the order of $1 billion.
- The costs of TES appeals to both the appellants and the Drainage Services Department (DSD) were significant (around $30,000 to $40,000 on average to each party). DSD was spending $10 million per annum on appeals, amounting to about 24% of the TES administrative costs.
- The TES administrative costs, accounting for 28% of costs and 21% of revenues, were high. The Scheme should be modified to reduce these costs. However, DSDs administrative costs were reasonable vis-a-vis the full costs of the sewage system, including capital costs.
4.As regards operation, the findings of the Review were as follows -
- There was insufficient evidence to propose a revision of the generic Chemical Oxygen Demand (COD) levels designated for trades although there might be a case for reassessing discharge factors for some trades.
- With regard to the restaurant trade in particular, the review of statistical and other information on restaurant effluent strengths indicated that there was insufficient evidence to justify changing the trades current TES generic value of 2,000 mg/L.
- As some sampling data indicated considerable variations in effluent strengths within trades and hence considerable deviations from generic values, in the longer term greater use could be made of EPD licensing and regulatory data in agreeing appropriate effluent strengths and hence charges.
- Mixed accounts should continue to be charged in the current manner and measures implemented by traders to assess more accurately the loading of Schedule Trades areas within their business should be taken into account during reassessment.
5.On the basis of the findings, the Consultants had made the following recommendations -
- Charging rate
To keep pace with inflation, encourage efficiency and to some extent provide a vehicle to simplify rate changes and make them more acceptable, the TES revenue requirements should be adjusted annually in line with an appropriate published price index but reduced downwards by a pre-determined efficiency factor, and also adjusted to reflect the provision of additional and improved services.
- Chargeable population
In order to increase the chargeable population within the TES Scheme and hence the potential revenues, the coverage of the Scheme should be expanded by increasing the number of accounts within existing Schedule 1 trades, increasing the number of chargeable trades, and introducing individual accounts not covered by Schedule 1 trades.
- Determination of effluent quality
In determining effluent quality, the Administration should move away from relying on generic strengths based on industry categories to allowing individual appeals by actual measurement, towards a link with licensed discharge values under the Water Pollution Control Ordinance (Cap. 358). In the interim, the costs of appeal by individual measurement should be lowered.
- Pollution parameters
The use of total suspended solids (TSS) might be a more appropriate parameter than COD for measuring the strength of effluent with respect to primary treatment costs. CODs should remain as an assessment parameter.
To reduce appeal costs and hence the overall costs of administering the TES, the appeal procedure should be simplified by turning it into a "reassessment exercise between government and the trader", and by extending the validity of the appeal result.
- Fundamentally revised scheme
The TES could be improved by moving to a Trade Effluent Charge where all trades and industries had a unified charge matrix (sewage charge (SC) plus TES), whilst the existing SC be retained for domestic users. Another proposal went a stage further and proposed a Universal Sewage Charge that would encompass every customer discharging to sewers.
6.In reply to a members question, Mr ARTHUR supplemented that the six trades whose observed discharge factors were significantly below the assigned values were cocoa, chocolate & sugar confectionery, vermicelli, noodles and other similar products, bakery products, dairy products and soy & other sauces.
7.Members deliberated on the Consultants recommendations.
8.As regards the formula proposed by the Consultants to simplify rate changes, a member opined that the X factor to be applied to provide efficiency incentives to reduce the annual increase in the price index would be insignificant if it was only between 1 to 2 % points as suggested in the Report. Another member queried the rationale for pegging charge increase to price index. Members requested to know the actual annual increase rates in the ensuing years.
9.In response, Mr ARTHUR explained that the proposed formula was based on the type of formula used elsewhere to enhance the transparency of the calculation of charge increase. It should be noted that the use of the formula would only be of benefit when TES rates had been set at the correct level in terms of meeting the revenue requirements of SSTF. As for the actual annual increase rate, Mr NAIR emphasised that it was not for the Consultants to make recommendations. They had therefore only presented in Annex K to the Report the different scenarios under different increase rates to facilitate Governments consideration of the increase in consultation with the community.
10.A member was concerned that drastic increases were necessary in subsequent years to cover the rapidly increasing operating costs when sewage treatment facilities gradually came on stream. In response, the Principal Assistant Secretary for Works (Policy and Development) (PAS/W(P&D)) explained that it had been made clear to the Legislative Council when it considered the establishment of SSTF that significant increases in charges would be needed to pay for the commissioning of new facilities, which were very important for cleaning up and protecting Hong Kongs marine environment. The Legislative Council had full knowledge of this when endorsing SSTF. Moreover, Government was not seeking to make any profit from the Scheme. All fee increases would be introduced simply to cover projected operating deficits. To minimise the level of increase necessary to generate sufficient revenue to cover the operating costs, the Administration had even set the rate of return on fixed assets of SSTF at zero per cent and waived depreciation charges from the operating account of SSTF. Furthermore, if in any year any surplus was made, it would be retained in the SSTFs operating account and carried forward for reducing the levels of increases required in future years.
11.Members opined that an increase in the chargeable population would lead to more appeals and hence higher administrative costs. This was an unfair approach as people who were otherwise not covered by the Scheme would be included just for the purposes of sharing out the catering and restaurant trades burden and increasing potential revenues to help SSTF balance the books. Moreover, expansion of the scope of the Scheme would only slightly ease the burden on the catering and restaurant trade temporarily. As the Consultants had already proposed that charges should be increased to cater for projected cost increases, the trade would find themselves paying more in the course of time. At the end, despite the trades call for a fair dealing, the Scheme would be even more unfair with more people paying and each paying more.
12.In response, the Consultants explained that they only proposed to bring in people who had been inadvertently left out in the past. It was because of this perceived unfairness that they had recommended enlarging the chargeable population. The Reviews conclusion was that although the Scheme had included the majority of those discharging at rates higher than domestic levels, there might be an opportunity to bring in further trades and traders. Moreover, it had to be noted that the Government had already been shouldering four-fifths of the total costs of the Scheme and the community was required to pay charges that covered O&M costs only. Representatives of the Administration supplemented that all recommendations made by the Consultants would be considered carefully with regard to their financial implications. The recommendations also included measures to reduce the need for appeals.
13.Members opined that as Government money came from the public, the fact that the majority of costs were shouldered by the Government was no excuse for enlarging the TES net. In response, PAS/W(P&D) emphasised that in accordance with the requirements of the Polluter Pays Principle endorsed by the Legislative Council, the costs of providing sewage services were to be met through charges levied on the polluters who used them. In this regard, if money raised from General Revenue was used to subsidize the Scheme, the Scheme would be unfair as it would equate to asking people and businesses who did not pollute to subsidise the polluters.
Determination of effluent quality
14. Referring to paragraph 14 of the Administrations paper, a member asked the Administration to explain the reason for insufficient evidence to justify changing the restaurant trades current TES generic value of 2000 mg/L. In response, Mr ARTHUR said that existing data did not clearly indicate that the value should be set higher or lower but the consultants suggestion was to move away form the generic value to reduce disputes.
15. A member pointed out that according to the hotel industry, Biological Oxygen Demand (BOD) might be a more appropriate pollution parameter than COD. In response, Mr ARTHUR advised that they had considered BOD but found that this could not reflect the way sewage was currently treated. TSS was instead recommended as an additional parameter because it was fairly simple to measure and could more accurately reflect the costs of primary treatment as it directly measured the parameter which Hong Kongs primary treatment was designed to address. In the Consultants view, COD combined with TSS would be an easier means of prescribing a value to the pollution load.
16. Members were concerned that the administrative costs of the Scheme would increase rather than decrease if traders were given individual measurements. They doubted whether the results of reassessment would be accepted by the Administration.
17.In response, Mr ARTHUR and Mr NAIR pointed out that if the appeal mechanism was simplified and the validity of appeal results extended, the costs of appeals should drop. Given a more equitable and transparent scheme, the number of appeals would also decrease over time. Moreover, as 50% of the accounts were presently paying below the generic value, the number of applications for reassessment was expected to be small. In fact, it was the thrust of their recommendations that the Scheme should not rely on appeals. As for reassessment results, there was no question of non-acceptance as reassessment would be conducted jointly with the Administration. The Principal Assistant Secretary for Planning, Environment and Lands (Environment) (PAS/PEL(E)) supplemented that currently sampling tests had to be conducted by accredited laboratories.
18. Members in general felt that the Consultants had failed to conduct the Review in an objective and impartial manner. In their views, the Consultants had not addressed two main concerns, namely, the efficiency and equity of the Scheme. The latter was especially important as the catering and restaurant trade felt that they had been singled out and victimised by the cost structure. The Report had not answered many questions nor elaborated on its recommendations. Mrs Selina CHOW and Mr CHAN Wing-chan asked to record the catering and restaurant trades disappointment at the Review Report for failing to address the complaints of the trade. For example, no change had been recommended to the much queried generic COD value of the trade or to the trades unfair share of 80% of TES payable. Mr CHAN also pointed out that in assessing the discharge factor of the trade, waste water was typically taken from the inside of the grease trap for testing. This was most unfair as such water normally had higher than representative COD concentrations and hence higher TES.
19.In response, the Consultants made the following clarifications -
- It was not the consultants remit to design a new scheme or to look at the technical details but to identify the Schemes merits and demerits, and review the TES as it stood both in terms of its financial capability to sustain itself and in terms of achieving some consensus on the way forward. The Consultants had only put forward broad measures and it rested with the Government to make a decision on the new scheme.
- The Consultants had not taken the Governments perspective. In conducting the Review, they had been constrained by the existing legislation, the availability of information and the need to look at the Scheme from different angles.
20.The Assistant Director of Environmental Protection (Waste & Water) (ADEP(W&W)) clarified that waste water samples were always collected at the outlet of the grease trap, not inside it.
Efficiency of the Scheme
21. Mr ARTHUR further reported that the Review did address the efficiency issue and had established that TES related administrative costs, estimated at 20% of total revenues, were high. However, differing from many overseas schemes, TES charges and revenue collected did not reflect the full costs but only O&M costs. If full costs were recovered, the administrative costs of the Scheme would represent only 5% of revenue, which was reasonable. Notwithstanding, the administrative costs had room for reduction.
22.Members were dissatisfied with the Consultants answer regarding the efficiency of the Scheme. They opined that the Consultants should provide such details as the right level of administrative costs, the proper extent of reduction, the means to cut costs, etc.
23.In response, Mr ARTHUR advised that they had not suggested an optimal level of administrative costs because it would be arbitrary. Instead they had suggested a number of ways to simplify the Scheme so that the administrative costs could be reduced. Mr NAIR reiterated that they had not been requested to review the efficiency issue in a quantitative manner. Nor did they have the information to do so.
24.A member queried if the high administrative costs were due to inefficiency, or overstaff, or overpaid salaries. He requested a comparison of SSTFs establishment with similar schemes.
25.In response, the Business Manager, Drainage Services Department (BM/DSD) and PAS/W(P&D) reiterated the following points -
(a) The absolute administrative costs of the Scheme were clear and the Administration was endeavouring to bring these down. However, as the Consultants had pointed out, the administrative costs represented a high percentage of the total costs only because the Scheme was recovering part of the costs. If operating on a full cost recovery principle, the administrative costs would represent a lower percentage. Any reduction of administrative costs on the Governments part would only have marginal effects on the charge levels.
(b) The costs of appeals were high for two reasons. Firstly, there was a need to conduct a proper exercise to measure the pollution load. Secondly, under the current law, all traders were entitled to lodge appeals. Unless the system was simplified to make it less prone to appeal, administrative costs could hardly be reduced.
|(c) The high administrative costs were thus in no way an indication of inefficiency but simply a reflection of the costs of administering the system under the law as had been approved by the Legislative Council. Nevertheless, the Administration would positively examine the Consultants proposals and consider whether and if so how the appeal procedures could be simplified. At members request, the Administration would provide information on SSTFs establishment and the percentage of staff devoted to handling appeals.
Equity of the Scheme
26. Mr NAIR emphasised that they were conscious of the need to address the equity issue and the grievance of the catering and restaurant trade. However, they could not review the Scheme just from the restaurant trades perspective, otherwise other trades might be victimized. This was why they had sought to present an overall review of the Scheme and only proposed to simplify the Scheme to make it less prone to appeal. As a matter of fact, it was fair to say that the catering and restaurant trade as a whole was not subjected to an unfair charge. Mr ARTHUR supplemented that the Scheme was in general equitable. The restaurant trade was the largest single group of trades discharging at effluent strengths higher than domestic. Based on the Polluter Pays Principle, it was fair that the restaurant trade should pay for the treatment of that higher strength effluent. However, in recognition of the perception of the trade that their assigned generic COD value was too high and of the findings that reliance on generic values might not be the fairest way on which to base the Scheme, they had suggested that in determining the effluent quality, the Administration should move away from generic strength based on industry categories to allow individual measurements of effluent to obtain a precise discharge value for each individual trader.
The way forward
27. A member said that the Legislative Council had passed a motion urging the Government to review SSTF with a view to abolishing the target of full-cost recovery by the year 2000, extending the period in which to achieve a balanced budget, as well as injecting capital into the Fund. Members considered it necessary to introduce interim measures to resolve the problems identified, for example, to simplify the appeal mechanism.
28.Representatives of the Administration explained that should the results of the six-week consultation indicate a need for amendment to the appeal mechanism, the Administration would be happy to recommend amendments to the relevant legislation. However, as such legal process took time, interim measures would not be possible. Members urged the Administration to study the Report and the trades views in parallel and come up with means to improve the appeal mechanism before end of June.
29.In response, DS/PEL(E) and PAS/PEL(E) explained that consultation on the Report would run until 10 June 1997. Thereafter, the Administration would need time to process the views collected and study them carefully when considering the consultants recommendations. It was therefore impossible for the Administration to come up with any proposals before end of June. At members request, the Administration agreed to look at the appeal mechanism first and brief the Panel on the results of the consultation by the end of June.
(Post-meeting note: A special meeting for this purpose was scheduled for 20 June 1997 at 8:30 am.)
30.The meeting ended at 10:30 am.
Legislative Council Secretariat
19 June 1997
Last Updated on 18 August 1998