FINANCE COMMITTEE

Minutes of the proceedings of the Meeting held on
24 May 1996 at 2:30 p.m. in the Legislative Council Chamber

Members Present :

Members Absent :

Public Officers Attending :

Mr John COLLIER, JP	Deputy Secretary for Works
Mr Bernard LAM, JP	Director of Civil Engineering
Mr Herbert LEUNG	Government Land Agent of Lands Department
Mr Raymond FAN	Principal Assistant Secretary for Education and Manpower (4)
Mr William SIU	Assistant Commissioner for Labour
Mr Stephen MAK, JP	Assistant Director of Information Technology Services
Miss Annette LEE	Principal Assistant Secretary for Education and Manpower (2)
Mr H F LEE	Assistant Director of Education
Mr Clement CHEUNG	Principal Assistant Secretary for Health and Welfare
Mr K W TONG, JP	Assistant Director of Electrical and Mechanical Services
Mr S M PANG	Deputy Director (Business Support Services) of Hospital Authority
Miss Denise YUE, JP	Secretary for Trade and Industry
Mr Patrick CHUNG, JP	EDI Co-ordinator of Trade and Industry Branch
Mr M J T ROWSE, JP	Deputy Secretary for the Treasury(2)

In Attendance :

Mr K C KWONG, JP	Secretary for the Treasury
Mr Kevin HO, JP	Deputy Secretary for the Treasury(1)
Mrs Lilian WONG	Principal Executive Officer (General), Finance Branch
Mrs Constance LI	Chief Assistant Secretary (Finance Committee)
Mr Andy LAU	Senior Assistant Secretary (Finance Committee)

Item No. 1 - FCR(96-97)16

HEAD 43 - CIVIL ENGINEERING DEPARTMENT
Subhead 700 General other non-recurrent

The Chairman advised that in view of members comments about the inconsistencies in departments estimation of consultancy fees for capital projects, the Administration had issued an Information Note FCRI(96-97)3 on Estimates of Consultants Fees for Capital Works setting out the details of a standard method recently adopted by the Administration. The Director of Civil Engineering (DCE) added that a multiplying factor of 3.0 would be used for consultants working in their own offices, while a factor of 2.5 was applied to consultants who were seconded to work in government offices.

2. Noting that the revised estimated consultancy costs based on the actual tender results were higher than the original estimates, a member asked if this was an indication of an upward trend of consultancy fees. In reply, DCE advised that the actual tender price was generally in line with the original estimate except some adjustments for inflation allowance; and there was no indication that the trend was on the rise.

3. In response to a members question that whether creating civil service posts would be more cost-effective in the long term than engaging consultancy service, DCE advised that as the proposed study was an one-off exercise to identify the maintenance responsibility of man-made slopes, it would not be economical to recruit additional permanent staff for the purpose.

4. The item was voted on and approved.

Item No. 2 - FCR(96-97)12

CAPITAL WORKS RESERVE FUND
HEAD 710 - COMPUTERISATION
Labour Department
New Subhead Replacement computer system for processing employees compensation claims

5. Responding to members questions, the Assistant Commissioner for Labour (AC for L) advised that the existing computer system had reached its capacity limit, and its frequent breakdowns also led to delays in the processing of claims. A new integrated network system was therefore proposed to improve the efficiency of the Employees Compensation Division. The new system would also enable the Employees Compensation Assessment Boards (ECABs) to make reference to precedent cases in assessing claims, and would enhance cross-office communication and data transfer.

6. On the targets of improvements to be brought about by the new system, AC for L advised that it would speed up case processing and facilitate assessment by ECABs on the loss of earning capacity, and the preparation of the Certificates of Compensation Assessment by Labour Department. As to the drawing up of new performance targets, he advised that these would be available in late 1997 after the system had been in full operation for some time.

7. The item was voted on and approved.

Item No. 3 - FCR(96-97)14

LOAN FUND
HEAD 252 - LOANS TO SCHOOLS/TEACHERS
Subhead 103 Loans to schools in the Direct Subsidy Scheme
Capital assistance loan to the French International School

8. Responding to a members question, the Principal Assistant Secretary for Education and Manpower (2) (PAS/EM) advised that the French International School (FIS) was eligible for capital assistance loan under the Direct Subsidy Scheme because it submitted the application before the introduction of the revised package of assistance to eligible non-profit-making international schools in October 1995. She confirmed that this was the last application to apply under the Direct Subsidy Scheme.

9. On the projected demand for school places, PAS/EM advised that the estimation by FIS was generally consistent with the recent consultancy report on the provision of international school places. The consultant had recommended a planning target of 7 400 additional international school places in the next five years. The Administration would provide a copy of the consultancy report to interested members. In reply to a member, the Assistant Director of Education (AD/ED) confirmed that children of local residents could also apply for admission to FIS subject to their satisfying the admission criteria including proficiency in French. He added that roughly about 50% of students of international schools came from expatriate families, 25% from families of returning emigrants and the remaining 25% from local families.

10. On the higher construction costs of the extension building as compared to that of a standard secondary school, AD/ED explained that under the Direct Subsidy Scheme, non-profit-making international schools could apply for a loan up to 155% of the cost of a standard aided secondary school to cover non-standard items which would be the standard provision in the home country of that school.

11. As regards the repayment terms, AD/ED advised that the loan was to be repaid in ten years at nil interest, and the first instalment would become due one year after the completion of the extension. In the case of default of repayment, the Administration could take possession of the school premises. The repayment of the Government loan would also be made first call upon the liquidated assets of the school in the event it closed down.

12. The item was voted on and approved.

Item No. 4 - FCR(96-97)13

CAPITAL WORKS RESERVE FUND
HEAD 708 - CAPITAL SUBVENTIONS AND MAJOR SYSTEMS AND EQUIPMENT
Medical Subventions
New Subhead Upgrading medical gas pipeline systems in public hospitals

13. The item was voted on and approved.

Item No. 5 - FCR(96-97)15

CAPITAL INVESTMENT FUND
HEAD 971 - TRADELINK ELECTRONIC DOCUMENT SERVICES LIMITED
Subhead 101 Purchase of equity in Tradelink Electronic Document Services Limited
New Subhead Loan for Tradelink Electronic Document Services Limited

14. Responding to members questions, the Secretary for Trade and Industry (STI) briefed members on the background leading to the proposal. Members noted that Government had entered into an agreement with Tradelink in December 1992 requiring Tradelink to provide a Community Electronic Trading Service (CETS) in Hong Kong. STI advised that the Government was committed to promoting the use of electronic data interchange (EDI) within the business community as Hong Kong could not afford to fall behind its competitors in this respect, if it was to maintain its position as one of the leading trading centres in the world. Tradelink had recently exhausted its paid-up equity and bank loans and required new working capital to continue its operation. To ensure that the implementation of CETS would not be held back by a lack of funds, the Government now proposed to provide a loan of up to $425 million to Tradelink as working capital. The proposed loan was a one-off commitment, and Tradelink would draw down the loan as and when necessary and repay it in full at the latest by expiry of Governments Operating Agreement with Tradelink in 2003. She envisaged that with the injection of this additional loan, Tradelink would be operating at a profit from the year 1999-2000, and be able to repay the Government loan in full together with the interest by the year 2002-2003.

15. Members expressed serious doubts about the business prospects of Tradelink in view of the criticisms of the consultant engaged to advise on the financial position of Tradelink, and the fact that the existing shareholders of Tradelink and financial institutions were unwilling to provide further financing to the company. They therefore questioned the viability of the company and the worthiness of the proposed investment.

16. In response, STI advised that from the point of view of the private sector investors, the low projected rate of return of 8%-10% of Tradelink could not be regarded as attractive. They might therefore prefer to invest in other more profitable business. However, the Government had to consider the wider policy objective of securing the implementation of EDI for trading, as the provision of such systems would be essential to the economic development of Hong Kong. She stressed that it was now the world trend to use EDI for trading, and Hong Kongs major trading partners had already adopted EDI in this respect.

17. As regards the criticisms in the consultancy report, STI advised that the Administration recognised the problems faced by Tradelink, and had taken a proactive approach to strengthen the management of Tradelink. STI had become the Chairman of the Board of Tradelink, and the company would also be restructured with a new Chief Executive Officer. Moreover, to help Tradelink to become viable, the Government had decided to make the use of EDI compulsory by stages for statutory trade-related documents such as the restrained textiles export licences. As regards the technology audit, the findings so far indicated that the system of Tradelink would be feasible. STI assured members that with these improvement measures, Tradelink would be able to turn around, and the proposed loan would incur little or no additional risks to the Government.

18. Some members considered that the proposal might not be the most viable option to proceed with CETS. They asked the Administration to provide further details on the pros and cons of the available options including replacing the loan by an equity, winding up Tradelink and leaving CETS entirely in the hands of the private sector, and taking over the business by the Government. In examining the various options, members noted the following clarifications by the Administration:

If Government was to provide an equity to Tradelink instead of a loan, it would also increase Governments liability in Tradelink. Should the rate of return on the investment turn out to be below 8%, Government would be getting a return lower than the interest (8.5%) of the proposed loan. Moreover, the Government now had 48% share of Tradelink and with STIs appointment as Chairman of the board, the Government already had sufficient influence in the company to carry out the necessary improvements in the organisation.
In the case of winding up Tradelink and re-starting CETS, the Government would have to write off its investment in Tradelink, pay off its share of liabilities and finance the total costs of rebuilding CETS. Apart from the financial loss which was estimated to be in the region of $83 million, there would be significant time loss in re-starting the system, and the Government might also have to negotiate for the transfer of intellectual property rights now in the possession of Tradelink.
Abandoning the CETS altogether would not be in the best interests of Hong Kong, as this would have serious economic consequences to Hong Kong which might lose its edge in competing with other Asia-Pacific countries. Without Governments active participation in the project, the private sector would not consider implementing a CETS, a business which involved Governments statutory trade-related documents.

19. On the suggestion of inviting other trade-related organisations such as the Trade Development Council (TDC) to become shareholders of Tradelink, STI advised that this would be pursued and the Government would be discussing with TDC on the possibility.

20. Concerning the possible risks in Governments proposed investment, several members urged the Administration to release the full contents of the consultancy report, especially the part on the risk evaluation, for members perusel. In response, STI advised that it might not be appropriate to release the full report which contained commercial sensitive information, but a synopsis of the consultants findings and recommendations had been incorporated in the discussion paper. She agreed, however, to consider whether more relevant information in the consultancy report could be made available to members.

21. After discussion, some members maintained the view that there was insufficient information to address the financial viability of Tradelink; they were therefore unable to take a view on the worthiness of the proposed investment without an analysis of the risks and benefits involved. Some members questioned the need for Government to interfere when there was insufficient market force to introduce a business which appeared to be basically commercial in nature. Some other members agreed with the Administration that CETS was essential to Hong Kongs economic development, but further information would be required on the cost-benefit analysis.

22. In view of members queries and comments, the Administration agreed to withdraw the proposal and would provide further information to members. Considering the urgency of the proposal as Tradelink would need new working capital by June 1996, the Chairman agreed to re-convene the meeting on 31 May 1996 to consider the proposal to be re-submitted by the Administration.

23. The Committee was adjourned at 4:30 p.m.

Legislative Council Secretariat
29 July 1996

Last Updated on 27 November 1998

FINANCE COMMITTEE

Minutes of the proceedings of the Meeting held on 24 May 1996 at 2:30 p.m. in the Legislative Council Chamber

Minutes of the proceedings of the Meeting held on
24 May 1996 at 2:30 p.m. in the Legislative Council Chamber