PLC Paper No. FC 152
(These minutes have been
seen by the Administration)

Ref : CB1/F/1/2

Members present :

Hon Ronald ARCULLI, JP (Chairman)
Hon Henry WU (Deputy Chairman)
Hon WONG Siu-yee
Hon James TIEN Pei-chun, JP
Hon David CHU Yu-lin
Hon HO Sai-chu, JP
Hon Edward HO Sing-tin, JP
Dr Hon Raymond HO Chung-tai, JP
Hon NG Leung-sing
Prof Hon NG Ching-fai
Hon Eric LI Ka-cheung, JP
Hon LEE Kai-ming
Hon Allen LEE, JP
Hon Mrs Elsie TU, GBM
Hon Mrs Selina CHOW, JP
Hon Mrs Peggy LAM, JP
Hon Henry TANG Ying-yen, JP
Hon YUEN Mo
Hon MA Fung-kwok
Hon CHEUNG
Hon-chung
Dr Hon Mrs TSO WONG Man-yin
Hon LEUNG Chun-ying, JP
Dr Hon LEONG Che-hung, JP
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon CHAN Choi-hi
Hon CHAN Yuen-han
Hon CHAN Wing-chan
Hon CHAN Kam-lam
Hon TSANG Yok-sing
Hon CHENG Kai-nam
Hon Andrew WONG Wang-fat, JP
Dr Hon Philip WONG Yu-Hong
Hon Kennedy WONG Ying-ho
Hon Howard YOUNG, JP
Dr Hon Charles YEUNG Chun-kam
Hon YEUNG Yiu-chung
Hon IP Kwok-him
Hon Bruce LIU Sing-lee
Hon LAU Kong-wah
Hon LAU Wong-fat, JP
Hon Mrs Miriam LAU Kin-yee, JP
Hon Ambrose LAU Hon-chuen, JP
Hon CHOY Kan-pui, JP
Hon Paul CHENG Ming-fun, JP
Hon CHENG Yiu-tong
Dr Hon TANG Siu-tong, JP
Hon Timothy FOK Tsun-ting
Hon KAN Fook-yee
Hon NGAN Kam-chuen
Dr Hon LAW Cheung-kwok
Hon TAM Yiu-chung, JP
Hon CHOY So-yuk

Members absent :

Dr Hon David LI Kwok-po, JP
Hon NGAI Shiu-kit, JP
Hon MOK Ying-fan
Hon HUI Yin-fat, JP
Hon Frederick FUNG Kin-kee
Hon CHIM Pui-chung
Hon LO Suk-ching

Public officers attending :

Mr K C KWONG, JP

Secretary for the Treasury

Mrs Carrie LAM, JP

Deputy Secretary for the Treasury (1)

Mr K K LAM

Principal Executive Officer (General), Finance Bureau

Mr C C CHAN, JP

Principal Government Civil Engineer

Mr Roger TUPPER

Principal Assistant Secretary for Economic Services (D)

Mr C Y TSANG

General Manager/Operation, Marine Department

Mr Raymond H C WONG, JP

Deputy Secretary for Security

Mrs Carrie WILLIS

Principal Assistant Secretary for Security

Mr Brian BUTT

Controllor, Government Flying Service

Mr Graeme MCINTOSH

Chief Aircraft Engineer, Government Flying Service

Mr Bobby CHENG

Principal Assistant Secretary for Trade and Industry (B)

Mr Francis HO, JP

Director-General of Industry

Miss Agnes WONG

Assistant Director-General of Industry (Infrastructure Support)

Mr Sidney CHAN

Assistant Director-General of Industry (Development Support)

Mr Kevin HO, JP

Deputy Secretary for Transport

Mr Martin M GLASS

Deputy Secretary for the Treasury (2)

Mrs Agnes ALLCOCK

Principal Assistant Secretary for Transport

Mr Esmond LEE

Principal Assistant Secretary for Planning, Environment and Lands

Mr C K MAK

Government Engineer of Highways Department

Mr K Y YEUNG, JP

Chairman, Kowloon-Canton Railway Corporation

Mr Samuel LAI

Director, Finance, Kowloon-Canton Railway Corporation

Mr Ian MCPHERSON

Director, West Rail, Kowloon-Canton Railway Corporation

Miss Elizabeth TSE

Principal Assistant Secretary for Trade and Industry (D)

Mr Stephen IP, JP

Secretary for Economic Services

Mr Leo KWAN, JP

Deputy Secretary for Economic Services

Mr Geoffrey WOODHEAD

Principal Assistant Secretary for Economic Services (C)

Mr Alex ARENA

Information Infrastructure Special Adviser

Mr A S K WONG

Director-General of Telecommunications

Mr M H AU

Senior Assistant Director of Telecommunications

Clerk in attendance :

Ms Pauline NG

Assistant Secretary General 1

Staff in attendance :

Mrs Vivian KAM

Chief Assistant Secretary (1)5

Mr Matthew LOO

Senior Assistant Secretary (1)7

---

Item No. 1 - FCR(97-98)92

RECOMMENDATIONS OF THE ESTABLISHMENT SUBCOMMITTEE MADE ON 14 JANUARY, 4 AND 6 FEBRUARY 1998

The Committee approved the proposal.

Item No. 2 - FCR(97-98)93

RECOMMENDATIONS OF THE PUBLIC WORKS SUBCOMMITTEE MADE ON 7 AND 21 JANUARY, 11 AND 17 FEBRUARY 1998

2. At the request of a member, the Chairman directed that item PWSC(97-98)98 be voted separately. The proposal in FCR(97-98)93, except item PWSC(97-98)98, was put to vote and approved.

PWSC(97-98)98

HEAD 705 - CIVIL ENGINEERING65APPeng Chau typhoon shelter

3. Some members pointed out that when the Public Works Subcommittee (PWSC) deliberated on the proposal, members were not aware that the objection of the Island Provisional District Board (Island PDB) to the proposal was so strong until after a recent visit by Members to the Islands District. Members asked if due consultation had been made with the Island PDB and the fisherman community in the area on the proposed typhoon shelter at Peng Chau.

4. The Principal Assistant Secretary for Economic Services (D) (PAS/ES(D)) advised that the proposal originally formed part of the Port and Airport Development Strategy study and had been discussed at the Island District Board some time ago. The subject was again raised by the fisherman community at a meeting of the Peng Chau and Discovery Bay Area Committee in 1995. Consequent to the PWSC meeting in January 1998, the Island PDB had raised concerns and a meeting had accordingly been arranged to address various issues relating to the proposal including possible relocation of the typhoon shelter to Tai O or Silvermine Bay, whether fishermen from outside Peng Chau would also make use of the typhoon shelter, and the criminal activities that might arise. The Administration had also written to the Island PDB subsequently to explain the Administration ' s position. PAS/ES(D) added that there was genuine need for the shelter and that Peng Chau was the most suitable site. He assured members that the Peng Chau community would be kept informed of the project as the environmental impact assessment study progressed.

5. Members noted that another typhoon shelter was being planned for Tai O, and questioned the need for two typhoon shelters within such close proximity. In response, PAS/ES(D) explained that Tai O was remote from Peng Chau. A study on the typhoon shelter space requirements had forecast a total shortfall of about 87 hectares, and the proposed typhoon shelter at Peng Chau would meet 40 hectares of the shortfall.

6. In consideration of objections raised by the Island PDB and reservations expressed by members, the Chairman suggested that the Administration should conduct another round of consultation with the Island PDB and the fisherman community before re-submitting the proposal to the Committee. PAS/ES(D) agreed to proceed accordingly.	Admin

7. The Deputy Secretary for the Treasury (1) (DS/Tsy(1)) withdrew the item.

Item No. 3 - FCR(97-98)94

HEAD 166 - GOVERNMENT FLYING SERVICE

„Y ¨Subhead 603 Plant, vehicles and equipment

8. Referring to the Security Panel ' s visit to the Government Flying Service (GFS) on 20 January 1998, some members said that they agreed with the need to revamp the entire helicopter fleet although they had strong reservations about what might have led to the present situation. A member sought clarification on a number of points to which the Controller, Government Flying Service (C/GFS) and the Chief Aircraft Engineer, Government Flying Service (CAE/GFS) responded as follows:

1. Training expenses which constituted about 0.63% of the project estimate was less than that of 1.3% of the project cost in 1994 when a S70 Blackhawk was purchased. This was on account of less training required as a result of the accumulation of experience of the pilots and engineers.

2. Notwithstanding the fact that spare parts for the new fleet would not be as costly as those for the old fleet, the annual recurrent expenditure for the replacement helicopters had been pitched at the same level as that for the current fleet of $88.8 million. This was due to the fact that such an expenditure was closely related to the utilisation of the helicopters, and that the need to replace the spare parts after a certain number of flying hours still existed.

3. In the light of a delay in delivery when the last batch of helicopters was purchased, the Administration would ensure that the delivery date would be specified in the contract for the current proposal.

9. Mr David CHU expressed strong objection to the proposal and considered it a waste of public money. He pointed out that while the area of responsibility of the Hong Kong Special Administrative Region (HKSAR) Government for search and rescue operations under the International Convention on Maritime Search and Rescue was quoted as 700 nautical miles (nm) to the south of Hong Kong, the maximum operating range of the replacement helicopters would only be 200 nm. This would not enable the HKSAR Government to discharge its responsibility fully.

10. In response, the Deputy Secretary for Security (DS/S) explained that Hong Kong only assumed a co-ordinating role in long distance rescue operations while nearby cities also contributed towards the operations. Another reason for replacing the existing fleet was to purchase helicopters suitable for landing in congested areas, a model of which had became available on the market only in 1996. He added that delay had been experienced in the transfer of survivors by the S76 which did not have such a special feature.

11. Mr CHU stressed that he could not see the reason for replacing the entire fleet. He pointed out that the S70 Blackhawks were top of the line models suitable for general duties such as fire fighting, transfer of large numbers of survivors, and for landing in heavily populated areas. In order to reduce costs, he suggested that GFS should keep the S70 Blackhawks for general duties and purchase a number of light duty helicopters for rescue missions.

12. C/GFS explained that S70 Blackhawks were not suitable for offshore rescue missions as they lacked floatation equipment and as such could only provide support service to Police and fire fighting operations. If only the S76 were to be replaced, this would not help in offshore rescue operations. Conversely, if only the S70 Blackhawks were replaced, the helicopters would not be able to go beyond 100 nm and neither would the transfer of survivors be expedited. C/GFS further pointed out that a mixed fleet of three types of helicopters would increase training costs by one-third as regular training and practices would have to be provided. Mr CHU remained unconvinced of the reasons advanced and maintained his objection to the proposal.

13. In response to a query on the purchase of a S70 Blackhawk in December 1994 which was not suitable for offshore rescue missions, DS/S said the purchase was required for providing adequate backup for the two existing Blackhawks which were procured under urgent pressure in 1992 primarily for supporting Police operations.

14. Some members enquired about the programme schedule and the shelf life of the new aircraft. DS/S advised that a world-wide public tender exercise would be conducted following approval of the item by the Committee, with a view to acquiring the latest model available on the market which would best suit the needs of GFS. CAE/GFS said that some lead time would be required as manufacture of the large helicopters required 18 months, while manufacture of smaller ones would take 10 to 12 months. As regards the shelf life of the new aircraft, C/GFS advised that the S76 had been on the market for 20 years before the manufacturers could come up with a new model in 1996 for landing in congested rooftops. He estimated that the Administration would not be making similar funding requests in the next 15 years. A member requested this pledge to be put on record.

15. The Committee approved the proposal.

Item No. 4 - FCR(97-98)95

HEAD 73 - INDUSTRY DEPARTMENT

„Y ¨Subhead 700 General other non-recurrent

New item "Science Park"

16. As the discussion paper had made reference to the development of linkages with organisations overseas to facilitate technology transfer and commercialisation of research and development activities, a member asked for concrete proposals in this respect. He also sought assurance from the Administration that investments in the Science Park represented good value for money, and that the high technology developments would be useful in Hong Kong.

17. In response, the Director-General of Industry (DGI) advised that the Administration was referring to the development of linkages in the broad sense and assured the member that services would be provided to encourage and support high technology development activities. The Science Park was one of a series of measures through which the Administration aimed to achieve this goal, and others included the provision of resources to post-secondary institutions to enhance training and development activities, and injections into a number of funds such as the Services Support Fund and the Applied Research Fund as pledged by the Chief Executive in his Policy Address in October 1997. As regards application of the new technologies in Hong Kong, DGI advised that this would have to be determined by the market. Even if local firms could not make use of the new high technologies in the short term, such developments should still be encouraged if inventions in Hong Kong were to be accepted overseas.

18. Addressing another member ' s doubt on the effectiveness of the Science Park in enhancing high technology developments and increasing Hong Kong ' s competitiveness, DGI explained that Hong Kong had a well-developed financial system as well as the drive and expertise for developing high technologies in business. With sufficient incentive in the market, research results could be transformed into products. The Administration was confident that the project would be effective in centralising resources and turning Hong Kong into a technology-based and high value-added economy.

19. On the reason for not making use of under-utilised industrial land sites for the purpose, DGI clarified that Science Park was not an industrial estate. The proposed site for the Science Park at Pak Shek Kok was in close proximity to universities and support organisations for industries, and would provide an environment both conducive to the development of high technologies and attractive to multi-national companies and researchers. For this very reason and in order not to create any environmental impact, it was essential for the Science Park to be designated as a low-density development. On the other hand, on-site residential accommodation would be provided to cater for the housing needs of researchers and staff members from overseas and, at the same time, serve as a convenient meeting place to promote community spirit.

20. In reply to a member on the estimated income and expenditure of the Science Park, DGI said that while the estimates were based on certain assumptions, it was a realistic estimate and not optimistic as suggested by the member. He emphasised the benefits which the Science Park would bring about and which were not reflected in the Science Park ' s accounts, i.e., those of improving the economic structure of Hong Kong and benefitting the community at large. As regards the significantly high staff cost which constituted about 80% of the total annual expenditure throughout the 20-year projection period, DGI advised that this took into account staffing needs during the different stages of development of the Science Park. While a relatively large staffing complement would be required for planning and co-ordination duties during the years 2000 to 2006 when construction activities and the development of services would be at their peak, such a need would diminish thereafter. On this basis, the number of staff would reduce gradually from 57 in 2004-05 to 46 in 2007-08.

21. In response to a member on whether criteria would be specified for companies wishing to join the Science Park, DGI said that the Planning Committee on Science Park had listed some indicators in its report. However, as technology was developing rapidly and taking into account the four-year period for the Science Park to be fully developed, detailed indicators would have to be decided by the Board of Directors of the Science Park nearer the time of its opening. He envisaged that the first company should be established in the Science Park by the end of 2001. As regards the subject of appointment, DGI advised that appointments of members of the Board would be made by the Chief Executive and that the appointment of the Chief Executive Officer of the Science Park was expected to be made before the end of 1998.

22. A member sought elaboration on other promotional measures which would be introduced to tie in with the establishment of the Science Park. DGI said in response that these had and would take the forms of an increase in the number of universities, increases in the number of science students and researchers in higher education institutions, the raising of depreciation allowance in taxation for plant and machinery, the introduction of tax concessions on software for information technology in 1998-99 as highlighted in the Financial Secretary ' s Budget speech, and review of the pilot scheme for entry of professionals from the Mainland being undertaken. All these efforts would help in developing an environment for research in Hong Kong.

23. The Committee approved the proposal.

Item No. 5 - FCR(97-98)96

HEAD 106 - MISCELLANEOUS SERVICES

„Y ¨New Capital Account Subhead 220 "Grant to the Hong Kong Export Credit Insurance Corporation for a pilot Credit Guarantee Scheme"

24. Some members sought elaboration on the purpose of the Credit Guarantee Scheme and the difference between the Scheme and the Credit Insurance Scheme managed also by the Hong Kong Export Credit Insurance Corporation (ECIC). DGI advised that the two schemes were different and assured members that there was no overlap in these respects. The Scheme under consideration was for providing guarantees for loans on pre-shipment expenses of goods and services by companies which were unable to obtain loans from lending institutions due to insufficient collateral or credit history. In considering applications, ECIC would have regard to the past records of the companies, the contracts in question, the buyers’ records and the assessment of the company ' s credibility by the lending institutions and accordingly decide whether credit guarantees should be provided. As regards the risks of the loans guaranteed, the lending institution and ECIC on behalf of the Government shared the same responsibilities and there was no priority as such. The extent of the Scheme coverage would be up to 50% of the loan amount approved or $2 million for each individual loan, whichever was the less.

25. Referring to the proposal for the management and finances of the Scheme to be separated from other businesses of ECIC, a member enquired if administrative costs would be reduced if the Scheme were not managed separately. In reply, DGI confirmed that the Corporation would also make use of its existing resources and expertise to make assessments on applications under the Scheme, and that the proposed arrangements would be cost-effective. Regarding the investment of funds not immediately required, DGI assured members that the investments would be safe, of high mobility and quick turnover. As the money would stay in the account and would only be used when the Corporation was called upon to meet a guarantee obligation, it would be inappropriate to leave the $500 million idle in the account. He added that the Government would sign a Memorandum of Understanding with the ECIC on the management and operation of the funds.

26. As the assets of many small and medium enterprises might have been diminished by the financial turmoil, a member expressed worries that lending institutions might reduce their loans to such enterprises in consideration of the grant of $500 million to the Scheme by the Government. In response, DGI said that while such decisions rested with the lending institutions, the injection of $500 million was a major incentive for such institutions to be flexible with the loans as the Government had pledged to repay bad debts. On the adequacy of providing about 1 000 guarantees annually and whether guarantees would be extended to applications other than pre-export guarantees, DGI explained that the Scheme was a pilot one and that the future direction of the Scheme would be dependent on progress and the outcome of a review to be conducted in one year ' s time.

27. In order to provide further assistance to small and medium enterprises, a member suggested that low interest loans should also be provided. DGI pointed out that the Scheme was essentially a credit guarantee scheme, the operation of which was led by commercial and market situations. As Government was not involved directly in offering loans, it would not be possible nor appropriate to interfere with how the interest should be determined as this would conflict with the operation of banking institutions. He nevertheless advised that a reduction in the guarantee fee from the original 0.75% of the guaranteed sum to 0.5%, which was made taking into account views of the Trade and Industry Panel at the meeting in December 1997, would help to reduce costs borne by such enterprises.

28. The Chairman asked for the assumed "bad provision" which would have to be paid out in terms of the quantity of guarantee that the Administration would undertake. DGI said in reply that the worst case scenario would be for the total amount to be written-off. This explained the need for capping the expenditure of the pilot Scheme and ringfencing it by the amount sought. Commenting on DGI ' s response and having regard to the fact that ECIC would afterall only be providing guarantees, the Chairman remarked that the Administration had been ultra-conservative in undertaking only 1 000 applications annually. He requested the Administration to, without waiting for the review, assess within two months after operation of the Scheme whether the volume of business could be expanded in order to help those in immediate need. DGI undertook to follow-up on the Chairman ' s request.

Admin

29. The Committee approved the proposal.

Item No. 6 - FCR(97-98)97

CAPITAL INVESTMENT FUND

NEW HEAD "KOWLOON-CANTON RAILWAY CORPORATION"

„Y ¨New Subhead "West Rail Phase I"

30. As the Kowloon-Canton Railway Corporation ' s (KCRC) internal resources would come mainly from its East Rail and Light Rail property development profits, a member expressed concern on whether the latest estimate for the internal rate of return (IRR) of 8.9% for the West Rail project was still accurate in the light of recent decline in property prices. He also enquired about its implications on the fare level.

31. In response, the Chairman of the KCRC (C/KCRC) clarified that the project IRR was based on such factors as the operating and improvement costs and was not related to the financing costs. As such, adjustments in property prices would not have any effect on the IRR nor on the level of fare. He stressed that as the property development profits were estimated on a conservative basis, the profit margin of about $800 per square foot could still be met despite recent adjustments in property prices. He added that the real estate market might be able to resume momentum when the properties in questions were developed by 1999-2000.

32. In reply to a member on whether the amount of Government equity should be increased so as to reduce the size of KCRC ' s borrowings and the interest generated therefrom, the Director, Finance, KCRC advised that the KCRC had run sensitivity tests to examine different scenarios but the results showed that this would only have minimal effect on the IRR. According to the agreement between the Government and KCRC, KCRC would aim at an IRR of 12% and KCRC was confident of raising loan at an interest rate lower than 12%. Also in consideration of the fact that debt financing was more tax-efficient than equity, the financial arrangements as proposed would be of benefit to KCRC from the commercial operation point of view. He also confirmed that about 60% to 70% of KCRC ' s borrowings would be in the form of fixed interest loans and that this had been taken into account at the planning stage. Addressing a member ' s concern on the effect of the projected inflation increase of 8.3% on the project finance, C/KCRC said that the medium term forecast on inflation by the Government Economist was 7.5%, and the difference would be very small. KCRC would nevertheless review the situation again before it raised loans.

(Post-meeting note: The Director, Finance, KCRC clarified after the meeting that in respect of West Rail Phase I, KCRC was aiming at an IRR of 8.9% instead of 12% and KCRC was confident of raising loan at an interest rate lower than 8.9%.)

33. A member sought assurance that the operation of the East Rail and the West Rail as well as the property developments would be kept under separate accounts, and that the servicing of KCRC ' s debt would not put pressure on the level of fare. C/KCRC confirmed that the operation of the East Rail and the West Rail would be separated for as long as the two networks were separated geographically. There were however plans to link up the two networks, and proposals would be put to the Government for consideration in the context of Phase II of the Railway Development Strategy Study. As far as financial arrangements were concerned, he advised that the two networks were treated as different cost and profit centres. As regards profits from property developments, C/KCRC said that the net profits from West Rail property developments, estimated at $20 billion from the year 2004 onwards, would be paid directly into Government ' s accounts and that these would not be included in KCRC ' s accounts.

34. On the effect of the recent downgrading of the credit rating of KCRC by a credit rating agency, C/KCRC assured members that the agency concerned had only downgraded the short-term credit rating of KCRC from Prime One to Prime Two. As KCRC would not require any commercial borrowing until the year 2000, such a downgrading did not have any material effect on KCRC. He added that credit rating agencies had not changed their A rating for KCRC ' s long term loans, and that KCRC would issue long term bonds and introduce other loan measures to reinforce KCRC ' s finances.

35. Referring to the 200 objections received on the West Rail project the majority of which related to land matters and compensation issues, a member enquired if this would result in changes to the alignment and affect the implementation schedule. In response, the Deputy Secretary for Transport advised that while the Administration would aim to strike a balance between addressing the needs of all parties concerned and might make slight alterations where feasible, no resultant change to the overall implementation schedule was envisaged.

36. On measures to encourage the use of the West Rail, C/KCRC advised that these would include the promotion of Park-and-Ride schemes, and the provision of public transport connection facilities and interchanges. He also confirmed that KCRC had reviewed Phase II of the West Rail project internally in 1997, and would conduct a re-assessment before forwarding proposals to the Transport Bureau for consideration under Phase II of the Railway Development Strategy Study.

37. The Committee approved the proposal.

Item No. 7 - FCR(97-98)98

HEAD 177 -SUBVENTIONS: NON-DEPARTMENTAL PUBLIC BODIES

„Y ¨Subhead 955 Consumer Council

New item "Redemption of mortgage for Head Office premises"

38. Members noted that the paper proposed a one-off grant of $39.2 million to the Consumer Council (CC) to enable it to redeem the mortgage for its Head Office premises so that the recurrent subvention of $5.3 million so released could be directed to support an expanded programme of activities and an improvement in services. Members did not consider it appropriate to intermingle the two subjects for the sake of expediency. While the merits of investing a one-off grant to redeem the mortgage for a commercial premises would be assessed on grounds of its cost-benefits, the utilisation of funds so saved would have to be considered in the context of the overall priorities of the services for which new resources were being sought. Members observed that little justification had been provided in the paper to enable members to decide whether or not the funds so released should be used to enhance CC ' s services. The way the proposal was put in the paper gave an impression that the Administration was making use of the redemption of CC ' s Head Office to increase the annual subvention to CC.

39. In response, DS/Tsy(1) explained that CC was a subvented agency and Government subvention to it was in the form of a lump-sum grant. The virement of one type of expenses to another therefore did not require the approval of Finance Committee, but there were arrangements in place to ensure that Government endorsed the Consumer Council ' s revised budget. On this occasion, the Administration did agree that CC was in need of additional recurrent resources to expand its services. Since the $5.3 million had been provided in the baseline provision for CC, it would be cumbersome to reduce subvention by this amount as a result of the redemption proposal and then return it to CC for its expanded activities. The proposal as set out in the paper was therefore a logical presentation of the actual arrangement.

40. The Principal Assistant Secretary for Trade and Industry added that CC had concrete proposals for its expanded programme of activities, although the details had not been set out fully in the discussion paper. At the Chairman ' s invitation, she briefed members on CC ' s proposed improvement in services in the areas of promoting competition, enhancing direct service to consumers, strengthening legal and policy research, and projecting an independent and respectable corporate image.

41. Members were dissatisfied with such details being provided verbally. At the Chairman ' s suggestion, DS/Tsy(1) agreed to withdraw the proposal and provide additional information on CC ' s activities which merited additional funding.	Admin

42. The item was withdrawn by the Administration.

Item No. 8 - FCR(97-98)99

HEAD 106 - MISCELLANEOUS SERVICES

„Y ¨New Capital Account Subhead "Cash compensation for early termination of exclusive telecommunications licence"

43. To tie in with the proposed liberalisation of the telecommunications market in Hong Kong and having regard to the fact that almost half of the International Direct Dial (IDD) calls in Hong Kong were made with the Mainland, a member asked if the Administration had consulted Mainland authorities on opening up the telecommunications market in the Mainland. In response, the Director-General of Telecommunications (DGT) advised that although there was only one telecommunications operator in the Mainland providing IDD services, the operator had, for many countries, provided access to more than one operator in each country. He assured members that telecommunications authorities in the Mainland had re-affirmed their intention of providing access on non-discriminatory terms to all operators in Hong Kong upon liberalisation of external telecommunications services.

44. Mr MA Fung-kwok said that the size of the proposed cash compensation of $6.7 billion was unprecedented, and its approval warranted careful consideration. A Subcommittee formed under the House Committee to scrutinise two related sets of subsidiary legislation would meet with deputations on 6 March 1998 to receive their views before the subsidiary legislation were due for passage on 18 March 1998. Mr MA asked the Committee to consider deferring the consideration of the cash compensation until after the Subcommittee had a chance to listen to the views of operators and other parties concerned especially in relation to the effectiveness of the arrangements in enhancing competition in the telecommunications market. Approval of the cash compensation at this stage, although it would still be subject to there being no objection to the related subsidiary legislation, would send a message to the international community and potential investors that the legislature was already satisfied that a fair and open competitive market would emerge after the surrender of the exclusive telecommunications licence. On the basis of the above, Mr MA moved to adjourn discussion on the item until the next Committee meeting on 20 March 1998.

45. The Chairman advised that while members might move to adjourn discussion on the item, the date for re-submission of the item in the event of the motion being carried would rest with the Administration. He then proposed the question on the motion to adjourn discussion on the item.

46. Eight members spoke on the motion. Their views are summarised as follows.

47. Mr James TIEN said that the subject matter had been discussed thoroughly at the joint meeting of the Economic Services and the Information Policy Panels on 2 February 1998. As legislative proposals and financial requests should be considered separately, members should focus on the reasonableness of the cash compensation of $6.7 billion. He objected to the motion for adjournment.

48. Mr Eric LI said that as the amount of compensation was very substantial, it was necessary to consider the proposal not only from the angle of reasonableness but also if it was value for money. The public and interested parties should have sufficient time to air their views in order to understand their concerns. A slight deferral in the schedule for approval of the proposal would not cause any undue delay, but would convey a positive message that Council members had performed properly their checks and balance role. He supported the adjournment.

49. As the compensation package was announced only on 20 January 1998 and with the intervening public holidays, Miss CHOY So-yuk expressed dissatisfaction with the tight schedule for consultation. She also criticised the Administration for being passive in providing relevant information, and was disappointed with details regarding future adjustments in local telephone charges being still uncertain. She expressed support for the motion to adjourn.

50. While agreeing with the need for caution when considering the proposal, Mr CHAN Kam-lam said that the Administration had undertaken extensive consultation with the trade and Council members. He did not support adjournment of the item.

51. Prof NG Ching-fai was supportive of the motion. He advised that the slight deferral would not affect the compensation package but that more in-depth deliberations would increase the creditability of the Council.

52. Mr Paul CHENG objected to the adjournment as separate consideration should be given to the legislative and the financial aspects of the proposal.

53. Mr HO Sai-chu was satisfied with sufficient time and information having been provided to consider the proposal, and did not see a need for adjournment.

54. Mr KAN Fook-yee also objected to the motion on the ground that members had been thoroughly briefed about the proposal.

55. The Chairman then invited the Secretary for Economic Services (SES) to speak on the motion to adjourn. SES advised that the Administration had made extensive efforts in explaining the proposal to all concerned. The industry had affirmed their confidence in the proposal, and were in support of early approval of the compensation package in order that they could proceed with their investment plans. He stressed that the Hong Kong Telecom International Limited (HKTI) would only get the cash compensation if there were no objections to the related subsidiary legislation on 18 March 1998.

56. The Chairman then invited Mr MA Fung-kwok to reply. Mr MA said that many questions on the issue such as that of access fees remained unanswered, and that the adjournment would not result in any inconvenience or loss.

57. The Chairman then put the question on the motion to adjourn discussion of the item to members. The motion was negatived.

58. Some members raised concern about the tangible benefits brought to consumers, such as stabilising local telephone charges, as a result of greater competition. In response, DGT advised that the opening up of the telecommunications market upon surrender of the HKTI licence would open up broad scopes for competition for the four fixed telecommunications operators and 11 mobile phone networks in Hong Kong. In accordance with an agreement reached with the Hong Kong Telecommunications Limited (HKT), the parent company of HKTI, the rates for residential exchange lines would be frozen at the 1997 level in 1998 while that for the ensuing three years would be capped at $90, $100 and $110 per month. Such measures should be sufficient to bring in competitors until 2001. SES confirmed that both the New T&T and the New World Telephone had, in addition to Hutchison Communications which had announced a forecast investment of $8 billion, indicated their support for the proposal and reiterated their interest in investing in the market. Since potential operators might have to rent equipment and facilities from existing operators, a member asked if the rental charges would be capped so that consumers would not have to pay for the costs borne by both operators. The Information Infrastructure Special Adviser (IISA) said in response that legislative amendments passed in 1993 had established a vigorous monitoring mechanism whereby the regulator could have the power to set the charges which a telecommunications operator paid for the services and facilities of another operator. Hence, consumers would not have to pay double fees, and local services, value-added services and international services would all be on one bill.

59. Referring to the current market share of Hong Kong Telephone of 60% to 70% for international calls and that of almost 100% for local calls, a member asked if the Administration had conducted any assessment on the company ' s market share in five years’ time. In reply, IISA advised that by the end of the existing monopoly in 2006, it was estimated that Hong Kong Telephone would be left with only 40% of the market share for international calls while that for the local market might drop to 75% or less.

60. In response to some members on access fees, DGT advised that the rates for international calls were affected by many factors, and that different rates applied to different countries. For the United States, for example, the access fee was US 40 cents per minute plus other costs, but such a fee level should be reduced in the future. As regards access fees for local calls, the rate was 4.2 cents (in terms of Hong Kong dollars) per minute for the Internet and 6.7 cents for calls using mobile phones. The future fee level would be decided by market forces. On the subsidising of local telephone services by external services, SES agreed that such a cross subsidy should not exist in the long term. With the lifting of the statutory requirement which placed limits on the level of increase in telephone charges by Hong Kong Telephone, such an unfair phenomenon should be eliminated. IISA added that the best way to remove subsidy was to introduce competition as this would bring down costs and introduce new technology.

61. As the discussion paper had not provided an analysis on the basis on which the cash compensation of $6.7 billion had been arrived, a member sought elaboration in this respect. In response, IISA pointed out that the Administration had estimated that fair compensation to HKT should be in the region of $10 to $20 billion. However, the compensation package - consisting of the three components of $6.7 billion cash compensation, royalty foregone, and increases in local exchange line rental - meant that HKT would unlikely get more than $10 billion in compensation. Consumer benefits on the other hand was estimated to be $17 billion. IISA also made the following points to substantiate his analysis of the reasonableness of the compensation:

1. in a similar case in Singapore, the Government paid nearly $10 billion in compensation for a franchise worth half as much as that of HKTI;

2. the market value of HKT was $200 billion, and the $10 billion compensation package only represented about 5% of its market capitalisation despite the fact that HKTI itself generates 30% of HKT ' s after tax profit; and

3. against the total revenues of $11.2 billion for HKT in the last reported year, the international licence itself generated $3.7 billion in profits after tax. The cash compensation of $6.7 billion only represented about two years’ profits from the international licence.

In summary, the negotiated outcome of $6.7 billion represented good value for money for the people of Hong Kong, and the industry had expressed confidence in recouping this investment quickly through the benefits of competition.

62. As regards whether the industry was supportive of proposals made by the Administration other than the cash compensation, SES explained that one of the requirements was for HKT to open up 50% of its telephone network by 1 January 1999. He said that the industry would pledge support only when they were confident of a fair and open market. Furthermore, the Telecommunications Authority was empowered under the Telecommunication Ordinance to monitor and eliminate anti-competitive attempts. IISA also emphasised that in exchange for the compensation package, the Government would get back an old licence with relaxed conditions and which did not allow for a fair level playing field; the new agreement on the other hand imposed tough conditions for HKT to open up its network.

63. The Chairman then put the question on the proposal to members. Mr MA Fung-kwok was dissatisfied with the Administration ' s response and advised that he would abstain from voting.

64. The Committee approved the proposal.

65. The Committee was adjourned at 6:25 pm.

Provisional Legislative Council Secretariat
1 May 1998