LC Paper No. CB(1)1882/98-99
(These minutes have been
seen by the Administration)

Ref : CB1/PL/ITB/1

Legislative Council
Panel on Information Technology and Broadcasting

Minutes of meeting
held on Wednesday, 5 May 1999, at 8:30 am
in Conference Room A of the Legislative Council Building

Members present :

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 Emily LAU Wai-hing, JP
Hon CHOY So-yuk

Members attending :

Dr Hon LUI Ming-wah, JP
Hon NG Leung-sing
Hon Ambrose CHEUNG Wing-sum, JP

Members absent :

Hon Kenneth TING Woo-shou, JP
Hon David CHU Yu-lin
Prof Hon NG Ching-fai
Hon James TO Kun-sun
Hon YEUNG Yiu-chung
Hon Timothy FOK Tsun-ting, JP
Hon LAW Chi-kwong, JP

Public officers attending :

For Items I and II

Mr K C KWONG

Secretary for Information Technology and Broadcasting

For Item I

Ms Eva CHENG

Deputy Secretary for Information Technology and Broadcasting

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

For Item II

Mrs Jessie TING

Deputy Secretary for Information Technology and Broadcasting

Mr Geoffrey WOODHEAD

Principal Assistant Secretary for Information Technology and Broadcasting

Mr Anthony S K WONG

Director-General of Telecommunications

Clerk in attendance :

Mr Andy LAU

Chief Assistant Secretary (1)3 (Acting)

Staff in attendance :

Ms Sarah YUEN

Senior Assistant Secretary (1)4

I The Cyberport Project

The Chairman asked members to note the following documents which were tabled at the meeting:

1. Checklist on the Cyberport project prepared by the Secretariat

2. Note entitled "Construction Cost Estimates of the Cyberport Project - Cyberport Portion"

3. Note entitled "Examples of Works Projects Entrusted to Private Developers in Recent Years"

4. Letter from Vincent T.K. Cheung, Yap & Co., representative of a group of developers

(Post meeting note : The above papers were circulated to Members after the meeting vide LC Paper No. CB(1) 1275/98-99)

2. Members noted that this item had been discussed at the joint panel meeting of the Panel on Information Technology and Broadcasting and the Panel on Planning, Lands and Works on 29 April 1999.

3. Mr Ambrose CHEUNG declared his interest as a partner of a law firm which might be representing any of the parties involved in the Cyberport project. At the Chairman's request, he agreed to supplement after the meeting the specific details on his declared interest.

(Post-meeting note: A letter from Mr CHEUNG specifying his declared interest was circulated to all Members vide LC Paper No. CB(1)1295/98-99.)

4. Referring to the information note entitled "Examples of Works Projects Entrusted to Private Developers in Recent Years", Mr Fred LI queried the relevance of the examples quoted as none of them involved a residential development as in the case of the Cyberport. In reply, the Secretary for Information Technology and Broadcasting (S/ITB) explained that for infrastructure works which were carried out concurrently with and formed an integral part of the development of a private project, it was a common practice for the Government to entrust the infrastructure works to the developer concerned. He pointed out that the Transport Interchange at Diamond Hill was quite similar in circumstances as it was also related to a residential development project.

The decision-making process

5. Dr LUI Ming-wah questioned the granting of the development right of the Cyberport to Pacific Century Group (PCG) without going through an open tendering process. In response, S/ITB explained that there was an urgency for Hong Kong to provide an environment conducive to the development of information technology (IT) and information services in order to secure "first-mover" advantages. The normal tendering procedures would delay the project which would put Hong Kong in a disadvantageous position in view of the keen competition in the region. The Administration had decided to develop the Cyberport in conjunction with PCG for three reasons, namely, its leading position in the IT sector, its ability to line up leading IT giants as anchor tenants of the Cyberport, and its commitment to bear all risks related to the financing and construction of the Cyberport.

6. Dr LUI Ming-wah did not accept the Administration's explanation. He stressed that the consultation exercise conducted by the Administration was misleading as participants were not aware of the Administration's intention to allow developers to finance the Cyberport through revenues from the ancillary property development. Miss Emily LAU shared his views. In response, S/ITB said that the Administration had no intention whatsoever to mislead them. As he had already given a full account of the background of the consultancy study at the joint panel meeting held on 29 April 1999, he therefore would not repeat his explanations at this meeting.

7. In reply to Miss Emily LAU on whether the above-mentioned time element was so important as to justify a departure from established practices, the Deputy Secretary for Information Technology and Broadcasting (DS/ITB) advised that according to the findings of Arthur Andersen Business Consulting (AABC), the consultant engaged to assess the possible economic benefits to be brought about by a Cyberport project, most of the local participants considered that the pace of implementation was of paramount importance to the success of the project. Even overseas participants considered the current development timeline reasonable.

8. As to whether the current decision on the Cyberport project was final, S/ITB stressed that an early implementation of the project would benefit Hong Kong's economy in the long run. The Administration was satisfied that interest of the Government and Hong Kong as a whole had been fully addressed in the present deal. Notwithstanding the above, he assured members that members' views given at the meetings of the Public Works Subcommittee (PWSC) and the Finance Committee would be carefully considered. Members were welcome to express views on the project at any time.

9. As regards the points made by the group of developers referred to in the letter from Vincent T.K Cheung, Yap & Co. dated 21 April 1999, S/ITB said that they were aware of the developers' concerns. The Administration had in fact held a meeting with the concerned developers on 3 May 1999. At the meeting, whilst expressing concern about the way Government granted the development right of the Cyberport to PCG, the developers were in support of the project. They also found the proposed sale of Government's deemed equity interest in the residential portion of the Cyberport project reasonable and understood that the Government needed time to work out the details of the plan. S/ITB stressed that the Administration would take into consideration the views expressed by the developers when handling similar proposals in future. At Mr Eric LI's request to state clearly the lessons so learnt and the policy and future mechanism on handling similar development proposals from the private sector, S/ITB undertook to review the subject matter. He further explained the points he made in his reply to the said letter and stressed that the Administration could not allow developers to purchase the site for ancillary residential development only and use the financial resources obtained therefrom to build the Cyberport. This would be a fundamental departure from the whole concept behind the Cyberport project which was to develop the entire Cyberport project as an integrated development. At Miss Emily LAU's request, S/ITB agreed to provide the Panel with a copy of the reply.

Admin

(Post-meeting note: The reply was circulated to all Members vide LC Paper No. CB(1)1314/98-99 (01).)

10. In response to Miss Emily LAU's query about the change of stance among developers after meeting with S/ITB, S/ITB stressed that no secret deal or commitment had been made whatsoever in ascertaining the developers' support for the project. The consensus reached at the meeting was that the developers would not object to the Administration stating in public the developer's support for the Cyberport project.

Evaluation by Government's consultant

11. Miss Emily LAU queried the reason for not requiring AABC to study how Hong Kong could compete with its Asian neighbours and the pros and cons of offering subsidy in order to enable the project to go ahead since it was apparent the project would not materialise if it were left entirely to the private sector. In reply, S/ITB explained that AABC had only been commissioned to study the economic benefits arising from the development of a Cyberport in Hong Kong. The specific arrangements of the Project were outside the scope of the consultancy study. At Miss LAU's request, he undertook to provide the consultancy report to the Panel with the sensitive business information blackened.

Admin

(Post meeting note: Extracts from the consultancy report which did not contain commercially sensitive information was circulated to all Members vide LC Paper No. CB(1)1314/98-99(02).)

12. Regarding the rationale for not using Hong Kong's regional competitors for case studies in conducting the strategic assessment, S/ITB and DS/ITB explained that the three case studies by AABC represented the different modes of operation, namely private initiative, public initiative and joint venture. In particular, similar to the Cyberport project, the Staten Island Teleport at New York was also a public/private joint venture with the land granted by the Government. S/ITB remarked that Hong Kong's regional competitors were not very willing to release the related information to Hong Kong. Miss Emily LAU opined that if AABC had not even been able to obtain such essential information so as to recommend the best strategy Hong Kong should adopt in competing with its competitors, AABC could not be regarded as performing the job well. At her request, S/ITB agreed to provide details on the consultancy fees charged by AABC.

Admin

(Post meeting note: The Administration subsequently advised that the cost of the consultancy was HK$ 1 million for Stage 1 and HK$ 890,000 for Stage 2. Members were informed accordingly vide LC Paper No. CB(1) 1314/98-99).

13. As regards the provision of the relevant Executive Council (ExCo) papers to facilitate members' understanding of the reasons for reaching the decision, S/ITB explained that he had no authority to release the papers. He stressed that great care had already been exercised before defining the Cyberport project as an infrastructural project that could be financed by residential developments, and he had given the relevant justification to members time and again. In view of the circumstances, members agreed that the Chairman should write to the ExCo to ask for the papers direct.

Clerk

(Post-meeting note: The Director of Administration had been requested to provide a relevant set of papers on the subject. The letters to and from the Administration were circulated to all Members vide LC Paper Nos. CB(1)1311 and 1317/98-99.)

Implementation details and considerations

How to ensure the objective of the Cyberport project would be met

14. Addressing Dr Raymond HO's concern about the positioning of the Cyberport and how the development of it into a centre of professional talents could be ensured in the agreement with PCG, S/ITB pointed out that it was wrong to assume that the development of IT and local IT talents should rely on the Cyberport alone as local tertiary institutes also had an important role to play. Instead, suitable facilities would be provided in the Cyberport to facilitate effective exchange in research between tenants of the Cyberport and the research centres at tertiary institutes in support of the Government's Digital 21 Information Technology Strategy.

15. Dr Raymond HO opined that suitable provisions should be included in the relevant tenancy agreements to require Cyberport's tenants to provide training for their local employees so as to achieve the purpose of technology transfer. S/ITB noted his proposal with reservation, pointing out that such initiatives should be encouraged rather than imposed.

16. In reply to Miss Emily LAU on whether the agreement with PCG would specify its undertakings as regards securing leading IT companies to be anchor tenants of the Cyberport, S/ITB stressed that PCG had already fulfilled such undertakings by securing eight anchor tenants by the time when the Cyberport Letter of Intent was signed. Subsequently, another two anchor tenants had also signed the letters of intent. On the other hand, PCG had committed to take up not less than 20% and not more than 50% of the total office space of the Cyberport. At Miss LAU's request for a copy of the agreement, S/ITB explained that the relevant legal documents were still being finalised. He undertook to brief the Panel on the main provisions of the agreement when it was ready.

Admin

Financial arrangements

17. Mr Eric LI opined that the estimated total cost for the construction of the Cyberport was on the high side, especially that for the shared facilities. He urged the Administration to examine the cost breakdown in detail so as to guard against PCG profiteering from construction of the shared facilities. S/ITB assured him this point would be taken into consideration when finalising the relevant legal documents.

18. The Chairman and Dr LUI Ming-wah opined that as land was an important asset of the general public, the site for the Cyberport should be put up for sale by auction or tender so as to secure its full market value. In response, S/ITB pointed out that revenue 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. Furthermore, the Cyberport would be handed over to the Government upon completion at no cost and all future rentals would belong to Government. In this way, the Government would receive a greater benefit from the Cyberport development than just a simple land sale for residential development.

19. As Government's capital contribution to the Cyberport project for profit sharing purpose would be based on the value of the residential land at the time of grant of its development right to PCG, the Chairman and Mr Ambrose CHEUNG were concerned about the timing of the grant. They questioned in what manner would the Government safeguard its interest in this regard and settle disagreement with PCG regarding the valuation of the land. Addressing their concern, S/ITB advised that the valuation would be determined by the Lands Department on the basis of land premium assessed at the time of the grant, which was estimated to be in mid 2000 in consideration of the time required for the completion of the necessary statutory procedures. He assured members that the market price at the time would be reflected in the valuation and, should there be any disagreement, an independent professional surveyor would be called in to conduct the valuation.

20. In consideration of PCG's ability to amass huge profits from the Cyberport project as reflected in the sharp rise in the share prices of Tricom Holdings Limited (Tricom) upon PCG's announcement that Tricom would become the listed flagship of PCG in Hong Kong for implementation of the Cyberport project, Mr Eric LI expressed concern about how Government could ensure that PCG would have long-term commitment to the Cyberport project instead of just benefiting from it through market activities. In response, S/ITB explained that PCG was fully aware that implementation of the Cyberport project would depend upon the decision on the funding proposal for constructing the relevant essential infrastructure by the Finance Committee and the related rezoning proposal by the Town Planning Board. In fact, PCG was only transferring its own property interests to Tricom, and not the development right of the Cyberport project per se. To further allay such concerns, S/ITB asked members to refer to para 9(d) of the Administration's paper, which stated that PCG might not assign or transfer its right to design, construct, develop and market the Cyberport to any person without the prior approval of Government except in the case of any assignment or transfer to a majority-owned subsidiary of PCG, and that this company would be subject to the same restrictions as PCG was in which event PCG would have to guarantee all the obligations assumed by such subsidiary.

21. Mr Ambrose CHEUNG expressed concern about the availability of restrictions on PCG's controlling shareholders from transferring their shares to other parties, and hence, the Cyberport project would not fall into the hands of another company. In reply, S/ITB assured members that the Administration had already discussed the subject matter with PCG. It was agreed that any significant change in the composition of PCG's controlling shareholders would amount to a default on its part.

22. Addressing Mr Howard YOUNG's concern that the proposed sale of Government's deemed equity interests in the residential portion of the project might result in Government losing control over the Cyberport, S/ITB clarified that such equity interests only carried entitlement to profit sharing and the purchaser had no right to take part in the design, development and management of the Cyberport.

23. As a remedial measure, Mr Eric LI proposed that when conducting valuation of the concerned site, the Government should at the same time put up for sale by auction or tender the Government's deemed equity interests in the residential portion of the project with the provision of a 15% to 20% profit margin. The higher value of the two should then be adopted as the preserve price of the land, so that its true market value could be reflected in Government's land contribution to the Cyberport project for profit sharing purposes. S/ITB undertook to consider his proposal when drafting the relevant legal documents.

Admin

Choice of site

24. Commenting on the location of the Cyberport, Dr LUI Ming-wah opined that it should be affiliated to the Science Park as the latter should enjoy more support being Hong Kong's research and manufacturing base while the former only served to facilitate foreign investment in Hong Kong. His views were echoed by Miss Emily LAU. S/ITB explained that the Science Park was under the purview of the Trade and Industry Bureau and the Industry Department, and assured members that the Government was attaching much importance to it. In fact, it was the Government's intention that the Science Park and the Cyberport should complement each other. S/ITB further explained that Telegraph Bay had been selected for the construction of the Cyberport because it was readily available for development, and was close to Central district and the future Teleport.

25. Members raised no further question on the item and noted that the funding proposal for the "Engineering Infrastructure for Cyberport Development at Telegraph Bay, Phase I" would be discussed at the meeting of the PWSC to be held on 12 May 1999.

II 1998 Review of fixed telecommunications
(Information package tabled at the meeting and circulated thereafter to all Members by general despatch.)

26. In connection with the 1998 Review of Fixed Telecommunications, S/ITB briefed members on the Administration's recent policy decisions on the extension of the moratorium on the issue of further local fixed telecommunications network services (FTNS) licences to 31 December 2002 and the progressive liberalization of the external facilities-based telecommunications market.

Concerns about the decisions' implications on consumers

27. Mr Fred LI and Miss Emily LAU expressed disappointment at the decision to extend the moratorium on the issue of further local wireline FTNS licences, claiming that such a move would affect competition and hence, consumer benefits. In particular, Mr Fred LI claimed that the decision to encourage the introduction of wireless-based technologies to provide local fixed services while extending the moratorium was merely a move to balance the interests of different operators. S/ITB refuted the claim, stressing that the main reason for encouraging wireless-based fixed services was to take advantage of newly emergent technologies and innovative services to facilitate early provision of services to areas hitherto not served by the three existing new FTNS licensees. He was confident that consumers would gain benefits from the decision.

28. As to how consumers could benefit from the extension of the moratorium, S/ITB and the Director-General of Telecommunications (DG Tel) stressed in reply to Mr Fred LI that taking into account the long lead time required and the lack of economic physical room for new entrants to build up their own networks, the extension of the moratorium on the issue of further local wireline FTNS licences subject to further network roll-out commitments from the three new FTNS licensees would be the quickest way to create effective competition in the local FTNS market. Moreover, certain breakthroughs in Type II interconnection had already been made to enhance competition. Following Hong Kong Telecom (HKT)'s earlier agreement to open no less than 50% of its lines for access by other FTNS operators, the four local FTNS licensees had agreed on a code of practice on practical arrangements for Type II interconnection through the mediation of the Office of the Telecommunications Authority. In addition, HKT and New World Telephone had recently reached a commercial agreement on Type II interconnection. HKT was discussing with the other two new FTNS licensees the conclusion of similar agreements. All such developments would accelerate effective competition to benefit consumers.

29. Miss Emily LAU was concerned about consumers' loss as a result of the extension of the moratorium, which in her view would lead to reduced competition and hence, higher telephone fees. In response, S/ITB pointed out that further opening of the FTNS market at this stage might not necessarily create effective competition. Moreover, unlike in the past, FTNS operators were already faced with keen competition not only amongst themselves but also with their counterparts in the mobile phone industry, which were offering their services at such low rates that the number of mobile phone users had already exceeded that of the fixed residential line users. DG Tel supplemented that Cable TV would also be allowed to enter the market by offering telecommunications services over its cable network. Thus, notwithstanding the extension of the moratorium on the issue of further local wireline FTNS licences, the market would become more competitive and local consumers would stand to benefit.

Other concerns

30. In response to Miss Emily LAU's concern about the lack of economic physical room for more cables to be laid, especially by new entrants, S/ITB admitted that new comers would face greater difficulty in related works, especially along congested routes. But as far as the three new FTNS licensees were concerned, since they had already by and large laid their backbone network, it was most unlikely that they would face any major capacity problems as they rolled out their network coverage.

31. Addressing Mr Howard YOUNG's concern about HKT's seemingly unbreakable market dominance, S/ITB assured members that the latest developments to facilitate type II interconnection, the introduction of services using wireless technology, the availability of an alternative broadband network and Government's decision on interconnection of broadband networks would greatly help to challenge HKT's position.

32. In reply to the Chairman on how Government could ensure that the three new FTNS licensees would fulfil their commitments on further network roll out, S/ITB assured members that the licensees would be required to provide corporate guarantees for their commitments. The commitments were also tied to milestones and penalties would be imposed against any slippage. At members' request for specifics of the commitments, S/ITB explained that since the decision to extend the moratorium had just been announced, the commitments would take some time to negotiate. He undertook to report such to the Panel when they were finalised.

Admin

33. In relation to the Administration's undertaking to consider issuing licences for the operation with effect from 1 January 2003 of external telecommunications facilities based on submarine or land cables to operators who had acquired capacity through the purchase of Indefeasible Rights of Use of cables, Mr Howard YOUNG expressed concern that the early announcement of this undertaking might discourage direct investment in bringing physical cables to Hong Kong. In response, S/ITB confirmed that some companies had already indicated interest in making direct investment in this regard.

34. The Chairman suggested that to facilitate continued discussion of this item at the next meeting to be held on 10 May 1999, members should send to the Secretariat in advance any question they would like to raise for forwarding to the Administration for preparation. In this connection, Miss Emily LAU also requested the Clerk to prepare a paper on the background of the review.	Clerk

(Post-meeting note: The background paper was circulated on 8 May 1999 vide LC Paper No. CB(1)1300/98-99. A checklist of this meeting's deliberations prepared by the Secretariat was tabled at the meeting on 10 May 1999 and circulated thereafter vide LC Paper No. CB(1)1310/98-99(02).)

III Any other business

35. There being no other business, the meeting ended at 10:45 am.

Legislative Council Secretariat
2 September 1999