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18th Legco Report to HKSA Council By Hon. Eric K.C. Li

I. Highlights

The world celebrated the New Millennium in style and the Y2K alert is now being dispelled as a hoax. Life returned to normal in no time and then, it was the possibility of a structural budget deficit, suggestion of new taxes and the high profile IT stock listings and mergers that had captured the imagination of the People of Hong Kong.

I predicted correctly these trends in my last report but the real changes had materialised even quicker and in certainly much more dramatic forms. I took the decision to resign from the Exchange Fund Investment Limited after SmarTone was unexpectedly included as part of the updated Hang Seng Index. I explained in a press statement at the time that it was to avoid a possible conflict of role and that I preferred to stay closely in touch with what could be described as the third economic restructuring of Hong Kong rather than to hold onto a restrictive Government appointment. I was also appointed a Director of the Hang Seng Bank on 25-2-2000.

The Financial Secretary came out boldly to warn the community of our narrow tax base and the possible erosion of our conventional tax nets by new technology. Accountants had done exactly the same even earlier. Although the community is perhaps still not ready to accept new taxes before the Government can demonstrate that it has made all the necessary efforts to economise, a more balanced, true and fair picture of our public finances has now been painted in the public's minds.

The recent Tom.com listing and PCCW-HKT merger had raised a storm in the emotional rush for IT stocks. When the dust settles, I will take an active lead in LegCo to sort out its implications.

II. Committees and Panels

1. Public Accounts Committee (PAC):
@ The Committee held 16 meetings and 5 days of public hearings before I tabled the PAC Report No. 33 at LegCo on 16 February 2000. During the public hearings, the Committee heard evidence from a total of 27 witnesses, including 6 six Bureau Secretaries and 11 Heads of Department.

The Report recommends, amongst other measures, wider disclosure of Government Accounts. It received extensive support and press coverage.

Examination of three other subjects ("The Refuse Collection Service of the Urban Services Departments", "Water Purchased from Guangdong Province" and "Management Practices of the Vocational Training Council") has commenced. We have held two further days of public hearings to receive evidence on these three subjects and are making the best endeavours to finalise our report to the LegCo at the earliest opportunity.

2. Financial Affairs Panel:
@ The Panel held 2 meetings since the last report and the relevant agenda are attached as Appendix I.

On 14 February 2000, Chairman of the Securities and Futures Commission (SFC), Mr. Andrew L T SHEUNG, and Chief Executive of the Stock Exchange of Hong Kong, Mr. Alex TUSI have provided the Panel with a report on the trade disruption in the Stock Exchange of Hong Kong (SEHK) as well as the recent performances of the information technology-related stocks. The meeting was widely reported and in particular, SEHK apologised for the system failure which led to a 20-minutes suspension of trading and the cancellation of more than $100 million in trades.

A proposed list of future agenda items is also attached as Appendix II for reference.

3. Welfare Services Panel:
@ The Panel held 2 meetings since the last report. The Panel focused on the Computerised Social Security System, the Consultancy Study on the Review of Day Care Centres, the Multi-services Centres for the Elderly, and the progress report on Social Networking for the Elderly.

It also discussed the implementation of the policy of one school social worker for each school. Manpower shortage of Social Security Assistants, as well as the report of the Working Group on Dementia.

4. Economic Services Panel:
@ The Panel held 3 special meetings since the last report. The Panel discussed the CLP Power Hong Kong Limited's generating capacity, the insurance requirements in respect of civil aircraft in Hong Kong and Hong Kong Motor Gasoline, Diesel and LPG Markets.

It also studied the Hong Kong Disneyland (Disney Theme Park), the Safety Certification of household electrical products and the terminal handling charge)

5. Information Technology and Broadcasting Panel:
@ The Panel held 2 meetings since the last report. The Panel mainly focused on the Y2K monitoring and co-ordinationg arrangements for roll-over to 1 January 2000, the increase in service fees by mobile telephone operators and the Hong Kong Supplementary Character Set.

It also studied the progress of the Cyberport projects, the Broadcasting Bill, the proposed merger of Cable & Wireless Hong Kong Telecom with Singapore Telecommunications as well as the Entertainment Special Effects Bill.

6. Finance Committee and House Committee:
@ There were 4 meetings of Finance Committee and 6 meetings of House Committee. The Special meeting of Finance Committee to examine the draft Estimates of Expenditure 2000-2001 will be held from 21 to 24 March 2000.

TD of HKSA was kept informed of progress on all bills on a weekly basis. The introduction of Government Bills in the current legislative session dated 3 March 2000 is attached as Appendix III. A mutual understanding has been reached between LegCo and the Administration that no further Bills will be tabled after 15th of March unless it is urgent and essential.

III. Bill Committees Joined

1. Telecommunication (Amendment) Bill 1999
@ There were 5 meetings (19-1-00, 26-1-00, 17-2-00, 23-2-00, 1-3-00) held since the last report.

This Bill proves to be very controversial but represent a significant step of the Government in liberalising the telecommunications market. HKSA had made a strong submission which is being followed up. It looks like that there will be some significant amendments to provide better check and balance on the 'draconian' powers given to the Administration. We are awaiting the Government's Committee Stage Amendments very shortly.

2. Electronic Transaction Bill
@ The Bills Committee held a total of 10 meetings. It has received written submission from 11 organisations and 3 individuals, and met representatives from 6 of the organisations.

To address the concerns of the HKSA, the Administration has agreed to move Committee Stage amendments to Clause No. 2, No. 18, 19 (3)(b)(i), 19(4) and (5), 37, 41(2)(a) and introduce a new Clause 14A.

Clause No. 2 is to better define the term "trustworthy system"; No. 18 is to more clearing define the point of receiving electronic message in the conclusion of a transaction. Clause No. 19 (3)(b)(i), 19(4) and (5) are to make clear the provisions whereby the certification authority may apply to the director for recognition. Clause No. 37 is to remove the references to the word 'audit' and to replace it with words like report to avoid confusion with statutory audits; Clause 41 is to tighten the provision on obligation of secrecy. The new Clause 14A is to provide flexibility for persons who are not non-Government entities to agree amongst themselves as to whether electronic record / digital signature should be used in satisfying a requirement under a rule of law for one party to provide information or to sign a document for presenting to the other party.

These changes have given the Accountants a key role to play in the development of electronic transactions well ahead of other professions such as the engineers and even the IT professionals.

The Bill was passed by the LegCo on 5 January 2000.

3. Arbitration (Amendment) Bill 1999
@ There were 3 meetings held since the last report. The purposes of the Bill are to amend the Arbitration Ordinance (Cap. 341) (the Ordinance) - (a) to give effect to what Hong Kong has agreed in the "Arrangement Concerning Mutual Enforcement of Arbitral Awards Between the Mainland and the Hong Kong Special Administrative Region" (the Arrangement); and (b) to adapt the Ordinance to bring it into conformity with the Basic Law and with the status of Hong Kong as a Special Administrative Region of the People's Republic of China.

Since the refusal of enforcement of Mainland arbitral awards in Hong Kong and vice versa after 1 July 1997, business and arbitration communities have expressed grave concerns. Given the great impact on the commercial world, this Bill warrants detailed scrutiny urgently.

The Bill was finally passed by the LegCo on 5 January 2000 and came into operation on 1 February 2000 as appointed by the Secretary for Justice by notice in the Gazette.

4. Mass Transit Railway Bill
@ The Bills Committee held a total of 15 meetings with the Administration and MTRC. It has received written submissions from 8 organizations/academic, and met the representatives from 6 of them. The Administration has arranged for 5 financial/railway experts to appear before the Bills Committee to give their opinions in relation to the proposed privatisation of MTRC and the associated regulatory framework including the fare determination mechanism.

Under the Bill, all assets and liabilities of the existing Mass Transit Railway Corporation (MTRC) will be vested in the MTR Corporation Limited (MTRCL) on a date to be appointed by the Secretary for Transport. The new company will be granted a 50-year franchise to operate the Mass Transit Railway (MTR) and to construct and to operate any extension to the railway. The Bill requires MTRCL to maintain a proper efficient service in accordance with an Operating Agreement (OA). The OA will be a legally binding document entered into between the Government and MTRCL, similar to the franchise documents for buses and ferries.

I suggested that the arbitration report of the external auditors to be appointed by the MTR Corporation Limited under (Mass Transit Railway Bill) Clause 15 of the Principal Headings of the Operating Agreement be made final and conclusive. The Administration has agreed to my suggestion and decided to amend that provision of the Operating Agreement accordingly.

The Bill was finally passed in a marathon session in the morning hours of 23 February 2000.

5. Subcommittee on Resolution under Section 3 of the Dogs and Cats Ordinance (Cap. 167) and Dogs and Cats (Amendment) Ordinance 1997 (97 of 1997) Commencement) Notice 1999
@ There was 1 meeting (25-2-00) held since the last report. The purpose of the Subcommittee is to seek the Legislative Council's approval of the Dangerous Dogs Regulation ("the Regulation") which provides for the control and regulation of fighting dogs, large dogs and known dangerous dogs. I received a number of representations from dog-owners within the Accountancy Functional Constituent. The deliberation of this Bill is at its final stages.
6. Subcommittee on Securities and Futures Bill
@ The Subcommittee is held in abeyance and unofficial exchanges in conversation suggested that the Bill is unlikely to be moved within this LegCo session.
7. Securities (Amendment) Bill 1999
@ The Bills Committee held 2 meetings with the Administration since the last report.

The purpose of the Bill is to amend the Securities Ordinance (Cap. 333) to provide for the regulation of short-selling activities, being one of the 30-Point Programme announced by the Financial Secretary in early September 1998. The most controversial part of the Bill is to criminalise stock lenders and all intermediaries i.e. investment bankers, fund managers and stock brokers for failure to disclose short-selling activities of their client. The Government is, in my view, taking a totally unnecessary strong stance in this matter.

8. Companies (Amendment) Bill 2000
@ The Bills Committee held 2 meetings with the Administration since the last report.

The objective of the Bill is to amend the Companies Ordinance (Cap. 32) ("the Ordinance") in order to - (a) implement the recommendations of the Law Reform Commission of Hong Kong ("CRC") in its Report on Corporate Rescue and Insolvent Trading; (b) implement the recommendations of the Standing Committee on Company Law Reform ("SCCLR") and (c) effect miscellaneous amendments to various sections of the Ordinance for various purpose including, inter alia.

The Bill does make significant changes to the existing regime of corporate rescue, the law governing personal liabilities of company directors and management, and in view of the possible effect on the corporate business environment and the interests of all parties affected. The Committee will have to take some time to reach conclusion. I am liaising with the Secretariat to co-ordinate our response to this wide-ranging Bill.

9. Building Management (Amendment) Bill 2000
@ The Bills Committee has held 2 meetings with the Administration. The Bill is to amend the Building Management Ordinance (Cap. 344) ("the Ordinance") to provide for: (a) specification of building management and maintenance standards for compliance by owners' corporations ("Ocs"); (b) mandatory management of buildings with serious management and maintenance problems; (c) simplifying the manner for owners of new building to convene meetings to appoint management committees; and (d) miscellaneous matters relating to insurance, auditing of OC's accounts, notice of owner's meeting and quorum at a meeting of OC.

HKSA made a written submission to the Bill. HKSA had proposed technical amendments to section 27(1A) concerning audit reporting requirements. These amendments have now been accepted by the Administration and CSA's will be moved in due course.

10. Legislative Council (Amendment) Ordinance 1999 (Amendment) Bill 2000
@ The objective of the Bill is to amend the Legislative Council (Amendment Ordinance 1999 (48 of 1999) to provide that only registered social workers are eligible to be registered as electors of the social welfare functional constituency and make other related amendments. These were the exact intentions of my Private Members Bill which was defeated by one vote earlier. It passed uneventfully on the 1 March 2000.

V. Motion Debate

List attached as Appendix IV. Speeches on my Web Page and highlights will be published in my circulars to members.

VI. Questions

I have asked 2 questions (the progress of the investigation into the collapse of Peregrine group of companies and the mechanism to ensure independence of the Director of Audit's work), since the last report which are attached as Appendix V. The relevant HKSA Committees may wish to be advised and to consider the replies further.

VII. General Political Background

The Budget to be announced tomorrow should be quite unsensational. With the LegCo election coming up in September, the Administration would probably prefer to remain low-key. Council's views welcome.

I have written an article to the Hong Kong Economic Journal (published on 3-3-2000) calling for a close look to better risk management of IT stocks. Many accountants have expressed their concerns to me on the possible audit risks if we, and the Government, failed to wake up the public early on their 'IT price / dreams.' I look forward to discussing with Council what forward looking initiatives the accountancy professionals can take in building public confidence. I will be chairing a LegCo Financial Affairs Panel to look into the recent incidence on 13-3-2000 and also intends to move a Motion Debate on 3-5-2000.

LegCo voters registration is now in the ernest and Council's help is needed to keep our voters registration rate high. The present session must end on or before 30 June 2000 because of the Basic Law and we need to work hard to complete all Bills and the Public Accounts Committee's Reports on hand. Hard work and quick response is clearly needed in the next quarter from all sides.

The Administration is also making some real, commendable efforts in their study to improve the Government's accounting methods. I hope HKSA will also devote the necessary resources in contributing to this important area of Public Sector Accounting.


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