LegCo Paper No. CB(1) 1832/96-97
(These minutes have been seen by the Administration)
Ref: CB1/PL/ES

LegCo Panel on Economic Services

Minutes of the Meeting held on Monday,12 May 1997, at 2:30pm in Conference Room A of the Legislative Council Building

Members present :

    Hon Henry TANG Ying-yen, JP (Chairman)
    Hon Mrs Selina CHOW, OBE, JP
    Hon Mrs Miriam LAU Kin-yee, OBE, JP
    Hon LEE Wing-tat
    Hon Fred LI Wah-ming
    Dr Hon Samuel WONG Ping-wai, OBE, FEng, JP
    Hon Howard YOUNG, JP
    Hon CHAN Kam-lam
    Hon LAU Chin-shek

Members absent :

    Dr Hon LAW Cheung-kwok (Deputy Chairman)
    Dr Hon David K P LI, OBE, LLD (Cantab), JP
    Dr Hon HUANG Chen-ya, MBE
    Dr Hon Philip WONG Yu-hong
    Dr Hon Anthony CHEUNG Bing-leung
    Hon SIN Chung-kai
    Hon Mrs Elizabeth WONG, CBE, ISO, JP

Member attending :

    Hon Albert CHAN Wai-yip

Public officers attending :

    Mr Stephen IP, JP
    Secretary for Economic Services

    For Item IV

    Mr Alex Arena
    Head, Telecommunications Review
    Mr KWAN Wing-wah, JP
    Deputy Secretary for Economic Services (1)
    Mr Geoffrey Woodhead
    Principal Assistant Secretary for Economic Services
    Mr A S K WONG
    Director-General of Telecommunications

    For Item V

    Ms Maria KWAN Sik-ning
    Deputy Secretary for Economic Services (2)
    Miss Linda LAI Wai-ming
    Principal Assistant Secretary for Economic Services
    Mr Albert LAM Kwong-yu
    Director of Civil Aviation (Acting)
    Mrs Louisa YANG TSE Lo-lee
    Chief Treasury Accountant
    Civil Aviation Department
    Airport Authority
    Dr Henry Townsend
    Chief Executive Officer
    Ms Elizabeth Bosher
    Planning & Co-ordination Director
    Mr Clinton Leeks
    Corporate Development Director
    Mr Raymond LAI
    Finance & Commercial Director

Clerk in attendance :

    Ms Estella CHAN
    Chief Assistant Secretary (1)4

Staff in attendance :

    Mr Daniel HUI
    Senior Assistant Secretary (1)7

I Confirmation of minutes

(LegCo Paper No. CB(1)1547/96-97)

1. The minutes of the meeting held on 14 April 1997 were confirmed.

II Information papers issued since last meeting

(LegCo Papers No. CB(1)1289/96-97, 1315/96-97, 1375/96-97, 1400/96-97, 1470/96-97 and 1504/96-97)

2. Members noted the six information papers issued since last meeting.

III Date and items for discussion for the next meeting

3. Members agreed that the next meeting would be held on Monday, 16 June 1997 at 2:30 pm, to discuss the following two items :

  1. Study of the feasibility of introducing a common carrier system for gas supply in Hong Kong; and

  2. Development of fishing industry.

IV Telecommunications Review

(LegCo Paper No. CB(1)1507/96-97(01))

4. Head, Telecommunications Review (H/TR) introduced the background and objective of the Telecommunications Review as set out in the information paper. He said that a total of 30 submissions had been received as at the closing date of the review on 11 April 1997. The Economic Services Branch (ESB) had agreed with the LegCo Panel on Information Policy that the 30 submissions received by the Panel on the subject of information infrastructure would also be considered in the review.

5. Members pointed out that notwithstanding the complexity of the review, the consultation paper only provided scanty information on the subject without any policy suggestions. They were concerned that the general public, and even the industry, might not be able to provide meaningful comments. Moreover, the six-week consultation period was too short.

6. The Secretary for Economic Services (SES) advised that the pace of liberalization of the telecommunications market in the past two years was extraordinary. Three additional licences for local fixed telecommunications network services (FTNS) and six Personal Communications Services (PCS) licences were issued in 1995 and 1996 respectively. It was timely to take stock of the effects of the liberalization measures and to develop policy for future development of telecommunications in Hong Kong. The present review was an initial phase of a more substantial review to follow. H/TR supplemented that the consultation paper was intended to be a short one to make it easy for the public to focus on the issues. As proposals in the 1994 position paper on Hong Kong’s Telecommunications Policy had been largely implemented, the Administration was aiming at collating the public’s views on actions the Administration should take to further develop the telecommunications industry. The approach adopted in the review was deliberate because ESB had an open mind on future policy directions and was willing to listen to the public’s comments before formulating policy proposals. Detailed proposals on future actions would be set out in an extensive consultation paper to follow. The time allowed for the public to comment was short because ESB did not want to prolong the exercise. Nonetheless, submissions received so far were useful and reflected that the industry understood the spirit of the review.

7. Members asked whether the review would address benefits as well as adverse consequences brought about by liberalization of the telecommunications market where for example, the tight supply of qualified workers for the industry had led to relocation of some operations elsewhere. They also enquired whether there was any proposal to step up training for skilled labour. SES responded that the telecommunications market was in a healthy competitive environment. The price of mobile telephone services and international service had reduced and service providers were still able to make profits. Many investors were keen to invest in telecommunication services. The Administration had done a lot in education and training and would continue to monitor the situation closely. The relocation of some operations to neighbouring areas was mainly due to cost considerations. H/TR advised that the market was very competitive but the introduction of new technologies could bring down costs quickly and profits would continue. As regards labour, the problem was mainly with a shortage of semi-skilled workers and it was natural for investors to relocate their operation to places where they could recruit suitable workers. Hong Kong’s education institutes were producing large numbers of engineers and management personnel each year, but demand for skilled personnel grew much faster than education institutes could provide. Other overseas countries had experienced similar problems.

8. As regards timing for the second phase of the review, SES advised that a second consultation paper would be released in about three months, after internal examination of comments received and development of policy options. The second consultation paper could be a series of papers covering different subjects.

9. Members noted that there were many types of telecommunications services available at different prices in the market, and it was difficult for consumers to understand the range of choices available. They asked whether the Administration would prepare information booklets to assist consumers in selecting telecommunication services. The Director-General of Telecommunications (DG Tel) advised that the Telecommunication Authority(TA), in consultation with the Consumer Council, was considering how best to educate and provide more data to consumers.

10. Members enquired about the scope and direction of the review, and whether the Administration considered there to be a limit as to the extent of liberalization and if so, where the limit would be. SES re-iterated that the Administration had an open mind and would keep all options open at this stage. Policy proposals would be formulated after reviewing comments received. H/TR supplemented that the scope of the review would be broad, covering both the local market and overseas experiences. Overseas countires, including developing countries had been moving quickly in terms of liberalization of telecommunications. The recent World Trade Organization (WTO) agreement on liberalization of basic telecommunications had listed out market liberalization measures to be taken by 69 countries. Hong Kong had been catching up with the world trend of market liberalization since 1992, and would aim to maintain its competitiveness. As regards the use of mobile satellite, Hong Kong was committed under the WTO agreement to allow for the use of mobile satellite in Hong Kong on an open competitive basis within the constraint of the Hong Kong Telecom International’s licence.

Local Fixed Telecommunication Network Service (FTNS)

11. Members pointed out that the review should cover how FTNS had benefitted consumers. They were concerned that the three new FTNS licencees were only interested in international services and enquired whether the new licencees had any commitment in providing local FTNS to densely populated areas.

12. In response, SES advised that the FTNS licencees had to provide local services which were covered by licences granted to them. Consumers had already benefitted as local telephone services offered by the new operators were cheaper than those offered by Hong Kong Telephone Company (HKTC). DG Tel supplemented that the new licences issued at the end of 1995 had specified service areas to be covered by each operator and details of the licences could be found on TA’s Internet website. It would take about three to five years to complete the new networks. In the past two years, the new operators had made connections to HKTC’s network and started providing services to some areas. The service areas covered by the new operators would expand gradually. H/TR further advised that a lead time would be required to build up the infrastructure of such a major engineering project. The new operators were developing networks in areas around the Mass Transit Railway and would be able to provide local service to a significant proportion of Hong Kong’s population within about 12 months. The new operators were also considering wireless access services. The Administration preferred, that where economically efficient, the new operators to connect to HKTC’s network rather than having each new operator to have its own network which would be a waste of resources. The Administration would try to ensure a choice of local telephone services for the majority of Hong Kong’s population.

Information infrastructure

13. Members noted that development of telecommunications service had important impacts on economic development and were concerned that Hong Kong had fallen behind other neighbouring countries in this area. They enquired about the Administration’s vision of Hong Kong’s information infrastructure development.

14. SES agreed on the importance of development of information infrastructure and advised that Hong Kong’s development in physical infrastructure was among the forerunners in the world. The review would also cover information infrastructure and a way forward would be proposed after taking into account comments from interested parties. H/TR further advised that information infrastructure included hardware, software, training and the relevant systems in enhancing information technology and its application to other sectors of the economy. Many overseas countries had drawn up plans to cater for transformation from an industrial society to an information society. Hong Kong was at the stage of developing the physical infrastructure. The Administration had an open mind on future developments and would consider comments received before drawing up future plans. DG Tel supplemented that Hong Kong was one of the leading cities in optical fibre network, already having 200,000 km of optical fibre with access to some 2,000 buildings. Later this year, Hong Kong would be the first in providing Video-on-Demand services through optical fibre network. An Information Infrastructure Advisory Committee had been established in March 1997 to coordinate on the development of information infrastructure in Hong Kong.

Hong Kong Telecom’s international telecommunications licence

15. SES advised that as the Administration and Hong Kong Telecom International (HKTI) was discussing HKTI’s international telecommunications licence, the subject would not be included in the review. Details of the dialogue could not be disclosed at that stage on account of commercially sensitive information.

16. Members were of the view that the Administration should take consumers’ benefit into account in its dialogue with HKTI; in particular, the Administration should ensure that the price of local telephone service would not be increased because of termination of HKTI’s international telecommunications licence. SES responded that as consumers’ benefit formed the basis of the Administration’s policy on telecommunication, they would of course take consumers’ interest into account in the discussion on HKTI’s international telecommunications licence. Local telephone service was currently subsidized by international service and the impact of termination of HKTI’s international telecommunication service was being studied. The views of Panel members and the public would be taken into account before arriving at a conclusion on this issue. H/TR further advised that the Administration’s policy was to extend competition to as many sectors of the telecommunications market as possible. For example, the introduction of three new operators of local telephone services had led to lower prices. He doubted whether the Administration should continue to regulate tariff in this sector of the industry.

17. H/TR agreed that with the introduction of new technology such as the call back service, the impact, and some would say the value of HKTI’s international telecommunications licence had decreased since its issuance in 1981. As telecommunication services in many overseas countries were open to competition, it would be difficult for Hong Kong to maintain a monopolistic environment in international telecommunications.

V Airport charges at Chek Lap Kok Airport

(LegCo Paper No. CB(1)1507/96-97(02))

18. Mr Howard YOUNG declared interest as a staff member of an airline company.

19. Mr Raymond LAI highlighted the main points in Airport Authority’s (AA) information paper. In essence, the benchmarking exercise on the planned airport charges conducted by AA’s consultant revealed that airport charges for a B747 at the new airport at Chek Lap Kok (CLK) ranked ninth among 20 major airports in the world. The planned charges would be about double those at the Kai Tak (KT) airport because capital costs in KT airport were already fully depreciated whereas there would be future depreciation on new capital expenditure for the new airport. The airport charges at CLK would be cheaper than those in China, Taipei and Macau. AA’s benchmarking exercise compared total airport charges which included landing, parking, security and terminal building charges, etc., because AA considered it misleading to single out only charges falling directly on the airlines for consideration. The benchmarking done by the airlines compared only the costs paid by airlines and that explained the differences in results of the two benchmarking exercises. One of the main objectives of AA’s charging policy was that the planned airport charges should be able to maintain the competitiveness of the new airport. Landing and other airport charges paid by an airline constituted overall about 4 % of the airlines’s total operating expense, and would not therefore have a severe impact on an airline’s operation.

20. As regards the comparison of airport charges at the new airport and KT airport, Mr LAI referred to two slides (Post-meeting note : copies of the slides have been issued to members vide LegCo Paper No. CB(1)1614/96-97(03) dated 16 May 1997) and advised that total airport charges for a Boeing 747-400 was $31,195 at KT airport and would be $66,473 at the new airport, which was about double the current charges. The comparisons between airport charges at CLK and KT calculated by AA and the International Air Transport Association (IATA) were different, because IATA’s calculation of airport charges had excluded security charges and it had not taken inflation fully into account. In IATA’s projection, airport charges at CLK would be three times those of KT’s.

21. Members pointed out that the substantial increase in airport charges might be due to the requirement under the Financial Support Agreement (FSA) for AA to repay its phase 1a debt by 2001 and so plan its finances to enable it to pay a dividend to the Government not later than September 2001. They queried the reasonableness of these financial objectives given that the new airport was a large infrastructure project, and that the debt to equity ratio was lower than originally proposed. SES responded that the FSA had been agreed by both the Chinese and British governments. Moreover, the $8.2 billion phase 1a loan had not been drawn down. The repayment of loan therefore would not have a major effect on airport charges. As regards payment of dividends, AA was not a profit-making organization and its return on capital in the initial years was less than 5%. The airport charges planned had been worked out on the basis of a number of assumptions. When actual data and more accurate estimates were available later, the planned charges could be revised. For example, if there were data to show that income from franchises and rents would be greater than currently expected, it might be possible to lower airport charges. There was also a mechanism for regular review of airport charges between AA and airlines.

22. Members enquired about the possibility of setting a lower level of airport charges at the beginning with the aim of encouraging traffic volume. Airport charges could be increased in future if traffic volume did not meet the forecast. SES advised that the most important principle was that airport charges should be able to maintain competitiveness of the airport. Mr Lai supplemented that airport charges at CLK were competitive as they were lower than those in Guangzhou, Taipei and Macau. The planned airport charges could be lowered if airport operation were to be subsidized by taxpayers’ money, but this would not be appropriate. Based on current projection, there would only be a 0.2% - 0.3% real return on capital for the first two years and would not reach 5% per annum until 2010, after which it would climb more steadily to achieve the required 5% return on investment in real terms over 50 years.

23. Members doubted whether the proposed charges, once fixed, could be lowered in future and asked whether overcharges made by AA would be returned to airlines or passengers. SES assured them that there was no question of data from actual overcharging as AA’s objective was to achieve a balance in revenue and expenditure. He said that if however operation showed that the airport charges could be lower, AA would certainly consider adjustment to charges to the benefit of airlines.

24. Members enquired whether AA and the airlines could agree on a common basis for benchmarking airport charges. Mr LAI replied that according to AA’s consultant, to measure the competitiveness of the new airport the total costs for an aircraft movement should be the most important consideration and all relevant airport charges were therefore included in the benchmarking exercise. On the other hand, airlines considered that comparison should only be make with that part of airport charges borne by airlines. AA hoped that an agreement could be reached with the airlines through discussion and consultation. At the request of Mr YOUNG, Mr LAI agreed to provide a written reply to explain, with examples, that the basis for benchmarking the planned airport charges adopted by AA’s consultant was common in the industry. Airport

25. Mr YOUNG remarked that traffic volume in the new airport would affect the level of airport charges and high airport charges could reduce traffic volume. It was important to reach a solution acceptable to both AA and the airlines. He noted that most of Hong Kong’s air traffic were short haul flights. Airport charges at HK$70,000 for a Boeing 747-400 would mean a cost of $200-300 per passenger representing about 10% of the airfare for a short haul flight, while the marginal profit rate of the most profitable airline in Hong Kong was about 7%.

26. As regards the forecast traffic growth in CLK airport, Mrs Elizabeth Bosher explained with the aid of a chart (LegCo Paper No. CB(1)1614/96-97(03) issued on 16 May 1997) that AA had estimated a compound annual passenger growth rate of 5.7% up to year 2010, and compound annual air cargo and aircraft movement growth rates at 6.2% and 5.3% respectively. These projections were broadly consistent with IATA’s estimates in the early years. In the later years, IATA’s projections were higher than AA’s. She remarked that AA’s estimated figures were based on sound assumptions, including those regarding GDP growth in HK and other places. These estimates would be updated in the light of operating experience.

27. As regards forecast growth in income from commercial activities (e.g. rental and franchises), Mr LAI advised that commercial income of the new airport was estimated to be about $3 billion, compared with $2.3 billion for the KT airport in 1996-97.

28. Members enquired whether the high airport charges were due to the high cost of constructing the airport and whether additional income brought about by the second runway had been taken into account in calculating airport charges. SES replied that airport revenues were expected to cover operating expenditure plus a 5% return on AA’s investment. Out of more than $5 billion Government investment on airport services, only the cost of providing some of the services e.g. air traffic control and fire services were expected to be recovered. Mrs Bosher further confirmed that the benefit of growth in traffic and commercial income as a result of earlier commissioning of the second runway had been included in airport charges calculations.

29. Regarding a comparison of costs to travellers in using CLK and KT airports, Mr LAI explained with the aid of a chart (LegCo Paper No. CB(1)1614/96-97(03) dated 16 May 1997) that for a family of four, the cost of using the new airport would be $1,672, compared with $812 for KT airport.

30. At the request of members, SES agreed to provide information on the basis for calculating future increases.Admin

VI Any other business

31. Members noted that the issue of security and management of wholesale markets was referred to the Panel by the Public Works Subcommittee, and agreed that since the issue was concerned with the potential problem of triad infiltration when planning new markets, the subject should be referred to the Security Panel for follow-up.

32. As regards the concern about the long processing time of applications for new services and tariff revision by the Office of Telecommunications Authority referred to the Panel by the Establishment Subcommittee, members requested the Administration to provide an information paper on the issue before the next meeting.Admin

33. The meeting ended at 4:55 pm.

Legislative Council Secretariat
10 June 1997

Last Updated on 14 August 1998