on 27 February 1998
ITEM FOR FINANCE COMMITTEE
HEAD 177 - SUBVENTIONS: NON-DEPARTMENTAL PUBLIC BODIES
Subhead 955 Consumer Council
New item "Redemption of mortgage for Head Office premises"
Members are invited to approve a one-off grant creation of a new commitment of $39.2 million making a one-off grant to the Consumer Council for redeeming the mortgage for its Head Office premises.
The Consumer Council requires some additional financial support from Government in order to expand and improve its services to protect and promote the interests of consumers.
2. We propose to make a one-off grant of $39.2 million to the Consumer Council (the Council) to enable it to redeem the mortgage for its Head Office premises so that the recurrent subvention released can be directed to support an expanded programme of activities and to improve consumer advice and complaints services.
3. In August 1992, with the agreement of Government, the Council acquired its present Head Office premises in a commercial building in North Point at a cost of $46.9 million. This is financed by a 100% mortgage from a local bank. The mortgage agreement requires, among other things, the Council to repay the loan at an annual interest charged at 1.25% above the prime rate and in no more than 240 monthly instalments (i.e. up to August 2012).
4. In agreeing to the Council's proposal to buy rather than continue to lease office accommodation back in 1992, we accepted the Council's view that on a long term basis, it would be highly desirable and more economical for the Council to operate from owned accommodation. We have therefore agreed to allow the Council to use the original rental element in its recurrent subvention from Government, which would then not be required, for repaying the mortgage and to meet the Council's mortgage liability (under the above terms set out in paragraph 3 above) by way of a corresponding increase in recurrent subvention, if needed. In return, we have secured an undertaking from the Council not to sell, lease, assign, mortgage, charge or dispose of any part of the property to any other person without the prior written approval of Government. The Council is also obliged to unconditionally transfer the ownership of the property to Government if the Council ceases to occupy it. At the time of the agreement, At the Council's loan was subject to a mortgage interest rate of 7.75% per annum. It was calculated that on this basis, the mortgage would be repaid in 180 instalments at a monthly payment of outlay was $441,446 or $5.3 million per year.
5. Since August 1992, the mortgage interest rate has been adjusted ten times oin an upward trend. This has necessitated an extension of the repayment period while keeping the monthly payment unchanged.has been extending the repayment term in response. By December 1997, the repayment period has reached the limit of 240 monthly instalments. As a result, the limit of 240 monthly instalments. the Council has been paying more each month from its recurrent subvention since then.
6. By virtue of the understanding between Government and the Council, we are obliged to increase the recurrent subvention to the Council to meet the increased mortgage repayment requirement. Concurrently, the Council has approached the Secretary for Trade and Industry for additional resources to expand and improve its services.
7. We have reviewed the Council's mortgage liability. As at end February 1998, the Council had paid 66 instalments in mortgage repayment, totalling $29.2 million (including $21.5 million as interest charge and $7.7 million as repayment for the outstanding principal). At the prevailing interest rate of 11.5% per annum, the Council would still have to pay $41.5 million as interest charge and $39.2 million as the outstanding principal. Against this, we consider that it would be more cost-effective for Government to help the Council redeem its mortgage so that it may redeploy the recurrent funds so released repayment as necessary with recurrent subvention in any way, and in view of the Council's latest proposals to expand and improve its servicesprotect the interests of consumers. We propose to make a one-off grant of $39.2 million to the Council for this purpose.
8. Upon redemption of the mortgage, the Council will continue to honour its undertaking in paragraph 4 above in respect of the use and disposal of the property and the transfer of ownership to Government if the Council ceases to occupy it.
9. We have discussed with the Council the priority areas for service improvement. We agree that the recurrent subvention thus released, at $5.3 million per annum, should be used to enhance the Council's services in the following areas -
- in respect of promoting competition - monitoring trade practices, introducing a framework for and encouraging adoption of pro-competition codes of practices for trade and professional associations, undertaking competition-related studies, carrying out price surveillance and looking into complaints concerning competition;
- in respect of enhancing direct service to consumers - introducing a new complaints and advice telephone hotline system and enhancing consumer education activities at the district and territory wide levels;
- in respect of strengthening legal and policy research - enhancing the Council's legal and policy research capacity to support its complaint service and testing work and examining new areas for consumer protection legislation e.g. consumer fraud and misleading advertising; and
- in respect of projecting an independent and respectable corporate image - providing additional resources to strengthen contacts with the press and media, to strengthen the administrative support for the Chairman and the Board, and to assist the Chief Executive of the Council in liaison with the Mainland and other counterparts in international fora, including the Consumers International which she presides for the term 1997 to 2000.
10. Subject to Members' approval, we will disburse the immediately arrange the payment $39.2 million required by the Council in this financial year through supplementary provision under delegated authority to enable it to redeem immediately the mortgage.
11. The Council's Head Office 1992 with a 100% mortgage loan. It occupies about 1 000 square metres size and houses the bulk of the Council's staff. It also has a board room where the Council holds meetings and press conferences and a library which collects major consumer protection publications.
12. The title to the premises is vested with the Council. The Council is responsible for meeting all expenses other than the mortgage obligations, including rates, maintenance fees, claims and charges payable in respect of the property, etc. In 1997-98, the Council is receivesing a recurrent Government subvention of about $58 million.
Trade and Industry Bureau