File ref : TBCR 2/3151/95(98) Pt 23



LEGISLATIVE COUNCIL BRIEF

FRANCHISE OF THE HONGKONG AND YAUMATI FERRY COMPANY LIMITED AND THE PIER DEVELOPMENT PACKAGE

INTRODUCTION At the meeting of the Executive Council on 15 September 1998, the Council ADVISED and the Chief Executive ORDERED that -

  1. the present negotiations with the Hongkong and Yaumati Ferry Company Limited (HYF) and its parent company, the Hong Kong Ferry (Holdings) Company Limited (HKF), on the general terms of the pier development package (the Package) should cease; and

  2. HYF's present outlying islands, inner harbour and new town services, together with the Central to Hung Hom service operated by the "Star" Ferry Company Limited, should be grouped into different packages and put to public tender as licensed services after the expiry of the current franchises on 31 March 1999.

BACKGROUND AND ARGUMENT

General Background

2. HYF's current franchise will expire on 31 March 1999. HYF has since 1994 suffered from substantial losses due to decrease in patronage on its inner harbour and new town routes and increasing operating costs. In July 1995, the former Executive Council (ExCo) approved in principle, but subject to contract, the grant to HYF as they proposed the development rights over the four piers at Central Reclamation as a package to -

  1. ensure ferry services, in particular, those essential ferry services to the outlying islands which have no land transport alternatives, could be maintained and further improved beyond March 1999;

  2. enable losses incurred by HYF during the current franchise period could be recouped; and

  3. enable HYF to maintain a viable operation during the new franchise period.

3. The basic premise of the former ExCo's decision was that -

  1. HYF would apply for an extension of its franchise covering the period from 1999 to 2010;

  2. HYF would pay a full market premium for the development; and

  3. HYF would channel at least $640 million of the development profits to improve ferry services, keep future fare increases in line with inflation and cover HYF's operating losses.

4. Since the 1995 ExCo decision, the Administration had been in negotiation with HYF over the implementation of the package. Following three years' protracted negotiations, no agreement had been reached with HYF over several major issues, including the level of the land premium for the development.

5. On 21 July 1998, the Administration requested HYF's and HKF's written acceptance of the general terms of the package by the middle of August, and advised the two companies that if they declined to accept the general terms, the Administration intended to recommend to ExCo that the present negotiations with HYF and HKF should cease immediately and an open tender of the ferry services would be conducted. At the same time, the Administration invited indication of interest to operate HYF's 12 franchised services from 1 April 1999 to prepare for a possible tender.

6. On 14 August 1998, HYF and HKF confirmed that they did not accept the general terms offered by the Administration. HYF proposed to de-link ferry operations from the package and expressed interest in continuing the operation of selected segmented routes or a combination of routes insofar as they were financially viable.

Future of Outlying Islands Services

7. Since HYF has confirmed non-acceptance of the general terms of the package, the Administration's immediate priority is to ensure that ferry services, in particular the essential ferry services to the outlying islands which have no land transport alternatives, would be maintained and further improved after HYF's current franchise expires on 31 March 1999.

8. Having regard to the changing pattern of ferry patronage and continuous improvement in land transport infrastructure, the Administration considers that instead of committing an operator to a long term franchise, the more flexible mode of operation by way of a licence, which is normally granted for a period of three years, should be adopted to ensure provision of essential ferry services on the one hand, and to allow swift adjustment to the changing ferry services market on the other.

9. Given different outlying islands may have different characteristics in terms of patronage, and service and vessel requirements, it is decided that the six outlying islands routes should be broken up into different packages to attract good operators who would like to focus on specific routes but might otherwise be deterred from entering into the market because of its size or the scale of investment required. The approach would allow the Administration to widen the trawl for the best available operators.

10. From our enquiries, there is a strong interest in the market for ferry operations in Hong Kong. 18 companies, including HYF, have responded to the Administration's invitation of interest and submitted returns expressing an interest in operating different packages of HYF's 12 franchised services. Taking into account the commercial viability and geographical distribution, the six outlying islands routes will be grouped into the following packages for a public tender -

  1. Central to Cheung Chau, and Inter-islands services;

  2. Central to Mui Wo and Peng Chau services; and

  3. Central to Yung Shue Wan and So Kwu Wan services.

Future of Inner Harbour and New Town Routes

11. As regards the inner harbour and new town routes, it has been the Administration's policy to rationalise these services since they largely provide supplementary services and there are convenient land transport alternatives. They should also be tendered out as licensed services in different packages and let the market forces determine their viability, fare and service levels.

12. Apart from HYF's six franchised inner harbour and new town services, the franchise of the existing Star Ferry's Central - Hung Hom service will also expire on 31 March 1999. Taking into account the commercial viability and geographical distribution, the new town and inner harbour routes will be grouped into the following packages for a public tender -

  1. Hung Hom to Central and Wan Chai services;

  2. North Point to Kowloon City and Hung Hom services;

  3. Central to Tuen Mun service;

  4. Central to Tsim Sha Tsui East service; and

  5. North Point to Kwun Tong service.

Tender Invitation

13. Priority will be given to the tendering of the six outlying islands services to ensure that there will not be any disruption of these services after 31 March 1999. The tender invitation will be conducted in September 1998 with a closing date in October 1998. The public tender for the new town and inner harbour services will be conducted separately shortly after the invitation of tender for the outlying islands services.

14. In order to take care of HYF's staff that may be left redundant upon expiry of HYF's current franchise, we will make it a tender condition that if the successful tenderer(s) need to recruit new crew members and pier staff, he must make a first offer of employment to the relevant employees of HYF to fill up the vacant posts available on employment terms and conditions no less favourable than those prevailing in the ferry industry of Hong Kong.

FINANCIAL AND STAFFING IMPLICATIONS

15. The Administration may need to modify some of the piers to cater for shared use by different operators selected through the tender exercises and to permit use by smaller vessels. The costs are estimated to be $6.2 million. Funding is available under Capital Works Reserve Fund Head 705 Subhead 5101CX.

16. To enable ferry operators to improve the viability of their operations, the Administration has taken up some of the pier maintenance responsibilities in respect of structural items, e.g. pile foundation, structural floor slabs and staircases, and fresh water and sewage pumps since April 1997. Recurrent expenditure of about $49 million has been provided for this purpose in the 1998-99 financial year. To further improve the operating environment of ferry services, the Administration will take up the maintenance responsibility of some additional items, e.g. fender, handrails, and fresh water and sewage pipes, with effect from 1 April 1999.

ECONOMIC IMPLICATIONS

17. The proposal to tender out HYF's franchised services will introduce competition and improvement of services in the ferry network. The tender exercise gives potential bidders the opportunity to demonstrate how one would meet the aspirations of the travelling public in a commercially viable way. It is expected that under the new mode of operation, ferry services would be further improved with fares kept at a reasonable level.

PUBLIC CONSULTATION

18. The Islands residents have expressed the wish for better and faster services to the outlying islands. However, given the divergent economic background of the Islands residents, some may be able to afford higher fares for better and faster services, but some may prefer to have a choice between fast ferries at higher fares and ordinary ferries at lower fares. To address these concerns, there is a need for the new operators to provide an efficient and reliable service at reasonable fares.

PUBLICITY

19. A press conference will be conducted and a press release will be issued. A spokesman will be available to handle further media enquiries.

ENQUIRIES

20. Any enquiries can be directed to the following officer in the Transport Department -

    Mrs Judy Li
    Assistant Commissioner for Transport
    (Telephone No.: 2829 5209)


Transport Bureau
Government Secretariat
15 September 1998