Ref : CB1/PL/ITB/1

Members present :

Panel on Information Technology and Broadcasting

Hon SIN Chung-kai (Chairman)
Hon MA Fung-kwok (Deputy Chairman)
# Dr Hon Raymond HO Chung-tai, JP
Hon Eric LI Ka-cheung, JP
Hon Fred LI Wah-ming
Hon Howard YOUNG, JP
Hon YEUNG Yiu-chung
Hon Emily LAU Wai-hing, JP
Hon Timothy FOK Tsun-ting, JP

Panel on Planning, Lands and Works

Hon Edward HO Sing-tin, JP (Chairman)
Hon HO Sai-chu, JP
Hon LEE Wing-tat

Members attending :

Hon James TIEN Pei-chun, JP
Hon CHEUNG Man-kwong
Hon Ambrose CHEUNG Wing-sum, JP
Hon CHAN Kam-lam

Members absent :

Panel on Information Technology and Broadcasting

Hon Kenneth TING Woo-shou, JP
Hon David CHU Yu-lin
Prof Hon NG Ching-fai
# Hon James TO Kun-sun
Hon CHOY So-yuk
Hon LAW Chi-kwong, JP

Panel on Planning, Lands and Works

Dr Hon TANG Siu-tong, JP (Deputy Chairman)
Hon Ronald ARCULLI, JP
Hon WONG Yung-kan
Hon LAU Kong-wah
Hon LAU Wong-fat, GBS, JP
Hon Andrew CHENG Kar-foo
Hon TAM Yiu-chung, JP

# also a member of the Panel on Planning Lands and Works

Public officers attending :

For Item II

Mr K C KWONG
Secretary for Information Technology
and Broadcasting

Ms Eva CHENG
Deputy Secretary for Information Technology
and Broadcasting

Mr Martin GLASS
Deputy Secretary for the Treasury

Mr Albert CHENG
Chief Assistant Secretary for Works

Mr T Y CHEUNG
Project Manager (HK Island & Islands)
Territory Development Department

Mr M T WONG
Chief Engineer
Territory Development Department

Mr KWAN Chi Wai
Chief Traffic Engineer/HK
Transport Department

Clerk in attendance :

Mr Andy LAU
Chief Assistant Secretary (1)3 (Acting)

Staff in attendance :

Miss Odelia LEUNG
Chief Assistant Secretary (1)1

Mrs Mary TANG
Senior Assistant Secretary (1)2

Ms Sarah YUEN
Senior Assistant Secretary (1)4

I Election of chairman

Mr SIN Chung-kai was elected Chairman of the joint meeting.

II Briefing by the Administration on the Cyberport project
(Information package tabled at the meeting and circulated to all Members after the meeting)

2. Mr Edward HO declared interest as he was a director of a firm which had submitted an architectural proposal to the Pacific Century Group (PCG) on the Cyberport project.

3. With the aid of PowerPoint presentation, the Secretary for Information Technology and Broadcasting (S/ITB) briefed members on the details of the financial arrangements and the up-to-date progress of the Cyberport project as well as the essential infrastructure works to support the project.

Policy implications of the Cyberport project

4. Mr LEE Wing-tat enquired if the Cyberport project represented an intended change in the land disposal policy whereby PCG, a private business entity, was granted with the development right of the Cyberport project without going through the usual competitive land bidding process. He could not accept that there were sufficient grounds to justify a departure from the long held principle of open and fair competition. His views were shared by Miss Emily LAU and Mr Ambrose CHEUNG. In response, S/ITB explained that there had been precedents in making use of property development to finance infrastructural projects. Given that a Cyberport would be an important element of the economic infrastructure and that spin-off benefits would be created for other economic sectors, it was considered appropriate to make use of property development to drive the Cyberport project.

5. Mr Ambrose CHEUNG cast doubt on the above justification and indicated that awarding the contract to PCG was a clear case of cronyism. Noting that a group of property development companies had put forward an alternative proposal to Government on the Cyberport, he requested the Administration to re-examine the case for the sake of public interest. In reply, S/ITB advised that the primary interest of the property companies was on the associated property development of the Cyberport project. Up to the present moment, he had not received any formal proposal from the companies concerned expressing their preparedness to implement the information technology (IT) part of the project.

6. Given that Government was the primary land supplier and could influence property prices through various means, Mr Eric LI queried the rationale for Government to take part in a real estate development project which might give rise to conflict of interest. S/ITB stressed that Government's main objective was to develop the Cyberport. Revenue generated from ancillary property development was a side issue. In fact, revenue from the ancillary residential development was simply an instrument for financing. But in the negotiation process, Government needed to safeguard its own interest. Any excess revenue so generated would be ploughed back into General Revenue.

7. Pointing out that the process through which the Administration had come to a decision to award the development right of the Cyberport to PCG was unprecedented, Mr Ambrose CHEUNG urged the Administration to account for the decision on the award of development rights to PCG. To ensure the provision of a level playing field and to enhance transparency, he also stressed the need for the Administration to draw up a policy for future joint venture projects with clear guidelines on capital requirement and other procedural matters. S/ITB undertook to examine Mr CHEUNG's views.

Admin

Other alternatives

8. As to whether the Administration would consider awarding the Cyberport project to other companies if they were prepared to take up both the IT portion and the residential portion of the Cyberport project on terms no less favourable than those being offered by PCG, S/ITB advised that the success of the Cyberport project would depend very much on whether it would be able to secure the right mix of tenants and to attract leading IT companies to set up operations involving new IT applications in the territory. Against this background, consideration had to be given to the proponents' abilities to line up major IT companies to become anchor tenants of the Cyberport. In considering the prominent status of PCG in the IT industry, it was believed that PCG would be a suitable candidate for the project. Addressing Mr CHEUNG Man-kwong's concern about possible monopoly by PCG as a result of such preconditions, S/ITB stressed that there was no case of a monopoly as the Cyberport portion would be wholly owned by the Government. It was the intention of the Government to sell its deemed equity interest in the residential portion of the project to third parties. Further, Government maintained an open mind on other IT projects put forward by potential proponents. They would consider each case on its own. As regards the Cyberport, it would be constructed by PCG and handed to Government. As such, there was no case of a monopoly.

9. In reply to Mr Ambrose CHEUNG on whether consideration had been given to requiring PCG to pay the premium, in full or in part, for the land of the residential portion in advance so as to ensure that it could fetch its full current open market value, S/ITB explained that revenues from the ancillary residential development would be used to drive the Cyberport project. After setting aside sufficient funds to complete the project and the setting up of a $200 million Development Fund, profits would be shared according to the respective capital contribution by both parties. Government's capital contribution would be the value of the land for the ancillary residential development at the time of grant of development right to PCG. PCG's capital contribution would be the outturn of the peak funding requirement.

The decision making process

The consultancy study

10. Mr LEE Wing-tat and Mr Fred LI commented that the consultation exercise conducted by the Administration was misleading as participants were not informed of the Administration's intention to allow developers to finance the Cyberport project through revenues from the ancillary property development. In response, S/ITB emphasised that while the Administration might not have explored all possible development options with the IT companies consulted, there was no intention whatsoever to mislead them. He referred members to Annex A of the Administration's information package for details of the Study and its outcome. The Deputy Secretary for Information Technology and Broadcasting (DS/ITB) supplemented that in discussing the proposed Cyberport with IT companies, they were free to express their views on the project and no fixed agenda had been set for the purpose. In fact, revenue from the ancillary property development was simply a form of financing and the main theme of the consultation was to solicit views from the industry on how to make the Cyberport project a success. However, in general, there was very little interest expressed in constructing the Cyberport.

11. In response to Mr Fred LI's further comment that the success of the Cyberport project was very much dependent on the ancillary residential development, and hence, it should be highlighted at the first instance during consultation. S/ITB maintained that the success of the Cyberport project was dependent on whether it could create a strategic cluster of leading IT and information system (IS) companies and a critical mass of professional talents in Hong Kong in the shortest possible time.

12. Miss Emily LAU queried whether the consultant was relying on submissions put forward by PCG for conducting the study and whether an independent assessment could be made as a result. DS/ITB advised that to facilitate the strategic assessment of developing a Cyberport in Hong Kong, case studies had been performed by the consultant to obtain insights from the experience of similar developments in other countries. After a cursory examination, three overseas developments, namely, the Software Technology Park at Bangalore (India), the Staten Island Teleport at New York (the United States), and the Focus Teleport at Berlin (Germany) were selected for more in-depth assessment in consideration of their different backgrounds. Subsequently, a second phase of the study was conducted by the consultant to sound out potential users on the design and specifications proposed by PCG and their degree of interest in becoming tenants. Given the substantial number of IT/IS companies in the industry, it was necessary to identify potential Cyberport users for consultation purpose. Comments received during interviews had been used as a basis to facilitate negotiation with PCG.

13. As to Miss Emily LAU's query about whether the Study, which had taken only a few weeks to complete, could size up the situation to facilitate the Administration's decision, DS/ITB stressed that the consultees were representative of different specialities and hence, the Study should be able to yield credible results for reference. Moreover, consultees' views would be followed up to ensure the Cyberport project would serve its intended purpose. In response to members' repeated requests, S/ITB agreed to consider members' request for releasing a copy of the full report for members' reference with the sensitive parts blackened.

Admin

(Post-meeting note: The Study report with the commercially sensitive parts taken out was circulated to all Members vide LC Paper No. CB(1)1314/98-99(02).)

14. Noting that one of the Executive Council (ExCo) members was a senior partner of Arthur Anderson Business Consulting (AABC), the Consultant engaged to conduct the Study, Miss Emily LAU expressed concern about the possible conflict of interest and impartiality both on the part of the Consultant in conducting the Study and on the part of the Councillor concerned in making decisions in relation to the Cyberport project. In response, S/ITB clarified that AABC had been entrusted with the Study through an open tendering process without regard to its senior management. He, however, refused on grounds of confidentiality to disclose details of the relevant ExCo proceedings. Members instead agreed that the Chairman should write to the Administration to clarify if the Councillor concerned had declared her individual interests and abstained from discussion and voting on the Cyberport project.

Clerk

(Post-meeting note: A letter to that effect had been sent to the Director of Administration. The letter and the relevant reply were circulated to all Members vide LC Paper No. CB(1)1312/98-99.)

General observations of the steps leading to the decision

15. Referring to the chronology of events as reported in paras 3, 6, 8 and 9 of the Administration's paper, Miss Emily LAU queried the fast development of the Cyberport project, which had been struck within a few months' time. In response, S/ITB pointed out that the prompt actions taken by the Administration could be seen as signs of efficiency.

16. Miss Emily LAU further queried whether Government was under any pressure to grant the development right for the Cyberport project to PCG as a result of the allegation made by a major property developer in Hong Kong in late 1998 about the change of political environment in Hong Kong and his intention to withdraw a major investment in Hong Kong. S/ITB emphasised that no regard had been made to such statements in public or in private when coming to the decision nor was he under any pressure during the decision making process.

17. Mr LEE Wing-tat also queried the decision making process, and enquired if the Chief Executive's visit with PCG's head to Israel in January 1999 had helped to seal the Cyberport project as claimed by some media reports. He was concerned that should this be the case, Hong Kong's long-established reputation for fair competition would be tarnished. In response, S/ITB advised that the allegation that the decision was made after a tour between Chief Executive and the head of PCG to Israel was unfounded as the Administration, back in December 1998, had already accepted in principle the idea of the Cyberport project. In this regard, he pointed out that the idea of the Cyberport was presented to Government by PCG in mid 1998. Having examined the case, the Government engaged AABC in November 1998 to conduct a strategic assessment on the concept of a Cyberport in Hong Kong and the possible economic benefits to be brought about by such a project. The findings were presented to Government in December 1998. The Administration accepted that the project would produce economic benefits to Hong Kong and proceeded with intensive negotiations with PCG. In parallel a second phase of the study was conducted by AABC to sound out potential users on the design and specifications proposed by PCG and their degree of interest in becoming tenant.

18. Mr CHAN Kam-lam, on the other hand, showed appreciation for the Administration's high efficiency in concluding the Cyberport project and encouraged the Administration to continue to respond to market needs proactively with a view to developing more innovative projects. On whether the Cyberport project would be expanded should there be overwhelming response, S/ITB pointed out that it was Government's intention that the Cyberport project should act as a flagship project in promoting the development of IT in Hong Kong. He noted Mr CHAN's comment that vacant units in existing industrial estates should be effectively deployed in support of the IT industry and reported that the Administration was considering allocating part of the Science Park for such endeavours. He further reported that the Trade and Industry Bureau was assessing how the different support services provided by the Administration for industries and technologies could work together more effectively.

Concerns about the present arrangements with PCG

Tenancy arrangements

19. Assuring Mr YEUNG Yiu-chung that the tenants secured by PCG would contribute towards the target to develop Hong Kong into a centre for content creation, S/ITB pointed out that apart from maintaining the management right over the Cyberport, Government would also set up detailed selection procedures for applicants so that only suitable tenants would be secured. DS/ITB supplemented that all potential tenants understood the focus of the Cyberport and they did not simply come for the concessionary tenancy terms. In fact, some of them were already considering setting up multi-media laboratories and expanding their businesses to promote electronic commerce in the Cyberport. As such, when looked at from a wider angle, the Cyberport project could also help to bring about adjustments to the investment strategies of the IT companies concerned in Hong Kong.

20. Noting that when setting rent levels of the Cyberport, reference would be made to similar schemes of Hong Kong's competitors to ensure they would be competitive, Mr Eric LI opined that the facilities and rents of the Cyberport per se were already attractive enough and hence PCG's contribution towards attracting leading IT companies to the Cyberport was limited. In response, S/ITB advised that by securing eight anchor tenants by the time when the Cyberport Letter of Intent was signed, PCG had already more than fulfilled its commitments in this regard. As to whether the Administration had made any attempts to secure tenants but to no avail, so that PCG would need to be drawn in to make the Cyberport a success, S/ITB reiterated that because of the efforts of PCG, eight major IT companies had already indicated that they would be anchor tenants of the Cyberport. It was not a straight forward task to convince these companies to realign their business plans and strategies to suit the development of the Cyberport. PCG's marketing and their own network had been instrumental in achieving this. On the other hand, PCG was selected having regard to a number of factors and the decision was not simply based on a single factor (i.e. its ability to line up major IT firms to become anchor tenants of the Cyberport).

Other arrangements

21. S/ITB confirmed in reply to Mr Ambrose CHEUNG that although PCG could take out a mortgage loan on the development right over the site of the residential portion to finance construction of the Cyberport project, such funds would not be counted towards PCG's capital contribution for the purpose of profit sharing. Addressing Mr CHEUNG's concern about risks associated with such an arrangement, S/ITB clarified that the Government was only granting the development right of the site to PCG, not the site itself. Moreover, as stated in para 9(c)(iii) of the Administration's paper, PCG would be required to provide a bank guarantee (or corporate guarantee of the same quality) if it created encumbrances on the development right in raising financing for the Cyberport project. As such, the Government was insured against having to grant the development right to the bank concerned in the case of default by PCG. The Administration would also require PCG to specify in the mortgage agreement that should the bank concerned be entitled to the development right upon PCG's failure to repay, it would have to bear the same development obligations as those of PCG, including those not related to the residential portion.

22. On the availability in the project agreement of punitive provisions applicable in the event of slippage on the part of PCG, S/ITB advised that in such a case, PCG would have to compensate the Government for its loss in rental income. Further, as a major tenant of the Cyberport, PCG would also suffer from the slippage as they could not launch their own business plans on time. At members' request for a copy of the agreement, S/ITB and DS/ITB explained that as it would contain details of PCG's other commercial agreements, e.g., its financing agreement with the bank, it was inappropriate to release it. He, however, noted the Chairman's proposal to provide a copy of the agreement with the commercially sensitive parts blackened.

Admin

23. Noting that apart from the construction of the Cyberport, PCG would also be entrusted with the construction of the related essential infrastructure works at a cost of $791 million, Mr CHEUNG Man-kwong queried both the appropriateness of such an arrangement and whether the level of payment was reasonable. In his view, the works project should, as usual, be put up for open tender to ensure fairness. In response, S/ITB explained that it was an existing practice to engage the project contractor for the related essential infrastructure works in similar projects in respect of which a funding proposal would be put to the Public Works Sub-committee (PWSC) and the Finance Committee. The Project Manager (HK Island & Islands ) of the Territory Development Department confirmed the above and explained that to ensure smooth and speedy implementation, such an arrangement was necessary because of site constraints and programming considerations. Examples of such arrangements included Container Terminal No. 9 and the River Trade Terminal in Tuen Mun. At members' request, the Administration undertook to provide more such examples.

Admin

(Post-meeting note: The required details were tabled at the meeting on 5 May 1999 and circulated to all Members thereafter vide LC Paper No. CB(1)1275/98-99(03).)

Environmental concerns

24. Referring to paras 28 and 35 of the information paper, which showed that the Cyberport project's rezoning request and environmental impact assessment (EIA) report had been respectively endorsed by the Town Planning Board and the EIA Sub-Committee of the Advisory Council on the Environment (the Sub-Committee) expeditiously, Miss Emily LAU enquired whether the related procedures had been properly observed and that no pressure had been put on these bodies to expedite the Cyberport project. S/ITB advised that submissions to the Town Planning Board and the Advisory Council on the Environment were in line with normal procedures and no pressure was exerted by Government on these bodies in vetting the related submissions. DS/ITB supplemented that the EIA report had in fact taken a few months to prepare and that the normal procedures stipulated by the EIA Ordinance, including publication of the project brief in the newspaper and on the Internet 30 days before submission for approval, had been followed. The Chief Assistant Secretary for Works also supplemented that since the EIA report was focused on the environmental impacts of such related infrastructures as roads and sewage treatment plants, which would be necessary for any kind of development, the relevant EIA could therefore be conducted in advance for the report to come out even before the Cyberport project was finalised.

25. As regards whether public concerns about the Cyberport project had been duly addressed, DS/ITB clarified in reply to Miss Emily LAU that the Town Planning Board had only agreed that the relevant draft outline zoning plan could be gazetted according to the Town Planning Ordinance, after which the public would have a specified period, as provided for in the Ordinance, to raise objections. In the meantime, only such preparatory works as land formation could be proceeded. She also confirmed that any objection to the Cyberport project on environmental grounds could be directed to the Town Planning Board for consideration.

Financial concerns

26. Mr Ambrose CHEUNG enquired whether valuation of the land for the residential portion at HK$8 billion had already taken into consideration the rezoning of the site and the land premium. In reply, S/ITB clarified that the figure was indeed the reserve price put forward by the law firm representing a group of listed companies proposing that the site of the residential portion be auctioned off. The Administration's own valuation would be made on the basis of the ultimate use of the site, i.e. for residential development.

27. Regarding the availability of estimates on property prices in the vicinity of the Cyberport at present and upon completion of the project, S/ITB said that no estimates had been made in this regard. However, for financial planning purpose, a number of scenarios had been worked out. He further advised that whilst current prices of new flats were not available due to nil supply, the prices of second-hand flats in the district, which were mostly older flats, were in the order of $4,000 per sq. ft.

28. Addressing the Chairman's concern about the high construction cost of the Cyberport, DS/ITB explained that in setting the ceiling of the construction cost, reference had been made to high-quality housing estates where the residential portion was concerned, and to grade A commercial premises where office units were concerned. She further clarified that the cost covered the provision of facilities and the telecommunications infrastructure. At the Chairman's request, S/ITB agreed to provide a breakdown on the construction cost estimates.

Admin

(Post-meeting note: The required breakdown was tabled at the meeting on 5 May 1999 and circulated to all Members thereafter vide LC Paper No. CB(1)1275/98-99(02).)

Conclusion

29. In view of the late submission of the paper and the fact that some members were unable to attend this meeting, members agreed that one more special meeting should be scheduled to discuss the Cyberport project at greater length before it was put forward to the PWSC for endorsement.	Clerk

(Post-meeting note: the meeting was subsequently scheduled for 5 May 1999.)

30. The meeting ended at 5:50 p.m.

Legislative Council Secretariat
9 August 1999