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33rd LEGCO REPORT TO HKSA COUNCIL By Hon. Eric K.C. Li

I. Highlights

To present this report orally.

II. Committees and Panels

1. Public Accounts Committee (PAC):

The Committee held a total of 14 meetings and 5 public hearings before I tabled the PAC Report No. 41 at LegCo on 25 February 2004 (full copy of my website). During the public hearings, the Committee heard evidence from a total of 22 witnesses, including 4 Director of Bureau and 6 Heads of Department.

The Report also contains the Public Accounts Committee’s assessment of the actions taken by the Administration in response to our recommendations made in the Committee’s previous Reports Nos. 38 and 39.

2. Financial Affairs Panel:

The Panel held 4 meetings including: 1 special meeting to receive a briefing by the Secretary for Financial Services and the Treasury on the policy initiatives of the Financial Services and the Treasury Bureau featuring in the Chief Executive’s 2004 Policy Address to date and the relevant agenda are attached as Appendix I.

On 5 January 2004, the Secretary for Financial Services and the Treasury (SFST) has provided the Panel with a briefing to explain the planning of the Government to publish the first set of accrual-based accounts for 2002-03. SFST advised that the Administration would publish two separate sets of annual accounts, one under the existing cash accounting convention and the other on the accrual basis. SFST also claimed that as at 31 March 2003, the Government had a net deficit of $43.4 billion as shown in the Consolidated Statement of Financial Performance as compared to the deficit of $61.7 billion calculated under the cash basis.

I commended the Government for publishing the accrual-based accounts. It can provide more information on Government accounts with a view to enhancing public understanding of the financial position and performance of the Government. However, I pointed out that international standards on accrual accounting for the public sector were still under development. I urged the Administration to make improvements to the accounts and conduct the post-implementation review in 2006-07 in the light of emerging international standards.

I was also concerned that the value of Government’s fixed assets could not be truly reflected if the land cost involved was not reported in the accrual accounts. Given that land was a valuable asset of the public and that statutory bodies like HKHA, MTRC and KCRC had been granted with free land for development of public housing and transport infrastructure, I opined that information on land cost for these fixed assets should be included in the accrual accounts. In addition, on the provision of the Departmental Service Cost Statements (DSCSs), the Administration should also provide a clear timetable for publishing the information.

A proposed list of future agenda items is attached as Appendix II for reference. I shall follow up on the issue of the regulation of the accounting profession which will be discussed in April 2004.

3. Economic Services Panel:

The Panel held 4 meetings since the last report. The Panel studied Tsim Sha Tsui promenade beautification project, Air Transport (Licensing of Air Services) (Amendment) Regulation 2003, Merchant Shipping (Security of Ships and Port Facilities) Bill, the electricity tariff for 2004, the marine-related subsidiary legislation, the expansion of heliport facilities at Macau Ferry Terminal as well as received a policy briefing by the Secretary for Economic Development and Labour on the relevant policy initiatives featuring in the Chief Executive’s 2004 Policy Address.

It also discussed the follow-up to the Consumer Council’s Report on competition in the foodstuffs and household necessities retailing sector, the replacement of Doppler Very High Frequency Omni-Directional Range and Distance Measuring Equipment. There was also a special meeting to study the privatization of the Airport Authority.

4. Information Technology and Broadcasting Panel:

The Panel held 4 meetings to date.

The Panel discussed the progress of the Cyperport project, progress update on E-government development, 2003 surveys on IT usage and penetration in the household and business sectors as well as the licence renewal exercise for the domestic pay television programme service licence of Hong Kong Cable Television Limited.

It also studied the second consultation paper on the review of the regulatory policy for Type II interconnection, the reduction of licence fee for the carrier licensees as well as the second consultation paper on Digital Terrestrial Broadcasting in Hong Kong.

There was also a special meeting to receive a briefing by the Secretary for Commerce, Industry and Technology on details of the policy commitments relating to information technology and broadcasting.

5. Finance Committee and House Committee:

There was 4 meetings of Finance Committee and 10 meetings of House Committee (including a special meeting to discuss the issue of the long term accommodation for the Legislative Council, the co-operation between Guangdong and Hong Kong as well as the work progress of the Task Force on Constitutional Development with Mr. Donald TSANG, JP, Chief Secretary for Administration.

TD of HKSA were kept informed of progress on all Bills on a weekly basis.

III. Bill Committees Joined

1. Inland Revenue (Amendment) Bill 2000

There were 3 meetings held since the last report. In the recent round of Bills Committee, the Committee was particularly interested to know the extent of the impacts of the proposed anti-avoidance provisions on the development of the debt market in Hong Kong and how far the proposed provisions would affect the cost of financing through the issue of debt instruments of companies carrying on business in Hong Kong.

HKSA has also made a last minute reply dated 4 February 2004 with regard to the source principle on royalties (concerning the proposed section 15(1)(ba)) as well as the grandfathering provisions (the new proposed section 16 (5A)).

2. Companies (Corporate Rescue) Bill

At the House Committee meeting on 7 December 2001, the Bills Committee recommended that the scrutiny of the Bill should be held in abeyance to allow time for the Administration to conduct consultation on, and work out the details of, a new proposal based on ideas initiated by myself and refined by HKSA. The House Committee agreed to the Bills Committee's recommendation.

At the meeting on 3 October 2003, the Bills Committee was informed that the Administration had recently issued a consultation paper on the proposal (the Trust Account Arrangement under the Companies (Corporate Rescue) Bill) to the parties concerned. We are still waiting for the results of the consultation.

3. Bills Committee on Deposit Protection Scheme Bill

There were 6 meetings held since the last report. The objectives of the Bill are to provide for the establishment of a mandatory Deposit Protection Scheme (DPS) for the purpose of providing compensation to depositors under specified circumstances, a DPS Board and a DPS Fund; to provide for contributions to the Fund for the entitlement to and payment of compensation from the Fund; and to provide for incidential and consequential matters.

The Bills Committee is now studying the second batch of draft Committee Stage amendments proposed by the Administration and will soon be proceeding with the clause-by-clause examination of the Bill.

The Bill signifies an important step in the protection of deposits. It may also alter the legal and business environment in which the banking industry operates. I am also concerned that the related costs might inevitably be passed onto the consumers in way of fees and charges. The small depositors will be hit the hardest.

4. Bills Committee on Companies (Amendment) Bill 2003

There were 8 meetings held since the last report.

The Bill seeks to amend provisions in the Companies Ordinance (Cap. 32) (“the Ordinance”) which relate to (i) prospectuses; (ii) group accounts; (iii) overseas companies and incorporation procedures; and (iv) shareholders’ remedies.

The Bill proposes to amend the Ordinance in various areas, including:

(a) the regulation of the scope, application, contents, registration, amendment, construction and the advertisements of prospectus;

(b) the requirements for the contents and form of a company’s balance sheet and profit and loss account and the contents of group accounts;

(c) the regulation of the management, registration of charges, publication of accounts and filing of annual return etc. of a non-Hong Kong company and provisions relating to the incorporation procedures of a company; and

(d) the rights of a member of a specified corporation to bring or intervene in proceedings before the court on behalf o the specified corporation and inspect the records of a specified corporation.

The Bills Committee is now continuing to discuss Schedule 4 of the Bill (Amendments relating to shareholders’ remedies) and will soon be proceeding with the clause-by-clause examination of the Bill.

5. Bills Committee on Hong Kong Sports Development Board (Repeal) Bill

There was 1 meeting held since the last report. The objectives of the Bill seek to provide for:

(a) the repeal of the Hong Kong Sports Development Board Ordinance (Cap. 1149)(“the Ordinance”);

(b) the dissolution of the Hong Kong Sports Development Board (“the Board”);

(d) the closure of the Hong Kong Sports Institute Trust Fund (“the Fund”);

(e) the vesting of the assets, liabilities, rights and obligations of the Board and the Committee and any balance of the Fund in the Government; and

(f) consequential amendments.

At its meeting on 14 July 2003, the Panel on Home Affairs was briefed on the new administrative structure for sports development. Members requested additional information to be provided on the number of staff to be laid off and the amount of savings generated from the restructuring exercise as well as the amount of Government resources to be allocated for sports development. There was also a special meting on 29 July 2003 receiving views form interested parties on this new administrative structure.

The Bills Committee agreed to continue the discussion on the Bill only after the Administration had resolved the dispute with the staff of the Board over their employment upon the discussion of the Board. The next meeting would be scheduled as soon as the Administration was ready to revert to the Bills Committee.

6. Bills Committee on Electronic Transactions (Amendment) Bill 2003

There was 1 meeting held since the last report. The objective of the Bills is to introduce miscellaneous amendments to the Electronic Transactions Ordinance (Cap. 553) (ETO) to ensure that Hong Kong has the most up-to-date legislative framework for the conduct of e-business.

The amendments proposed in the Bill are introduced following a review of ETO and a public consultation of the proposals to improve and update ETO. The Bill proposes to give legal recognition of other forms of electronic signatures, apart from digital signature, for transactions not involving the Government. The Bill also proposes to accept service of documents in the form of electronic records as satisfying the requirement of service by post or in person under the statutory provisions set out in the proposed new Schedule 3 to ETO. There are the changes relating to assessment of certification authorities improving the operation of the voluntary recognition scheme for certification authorities.

The proposals of the Bill and the outcome of the public consultation on the review of the Ordinance were discussed at the meetings of the Panel on Information Technology and Broadcasting on 11 March 2002 and 7 November 2002. Members of the Panel expressed concern over a number of issues, including the criteria and the transparency of the process of approving a qualified and independent person as assessor under the voluntary recognition scheme for the certification authorities (CAs), and the measures taken by the Administration to foster the development of a competitive CA market so as to promote electronic transactions. Some members were concerned about the interface of the Ordinance with other legislation which might adopt other forms of electronic signatures pitched at a security level lower than that of digital signature.

7. Professional Accountants (Amendment) Bill 2004 – A Private Member’s Bill

I have been invited to introduce this Private Member's Bill on behalf of the Hong Kong Society of Accountants (HKSA). The Bill seeks to amend the Professional Accountants Ordinance (Cap. 50) (the Ordinance) to-

(a) change the title of the ‘Hong Kong Society of Accountants’ to the ‘Hong Kong Institute of Certified Public Accountants’;

(b) improve the existing regime on the regulation of accountants;

(c) set out an immunity provision covering the acts of persons performing statutory functions in good faith under the Ordinance; and

(d) provide for certain technical amendments to the Ordinance and the By-laws

It is expected that the Bill may be introduced to the Legislative Council on 17 or 24 March 2004.

The Bill does help to inspire public confidence in the regulatory regime in respect of the accountancy profession. Having regard to the significant role that professional accountants play in the financial reporting framework and the governance of companies and corporations, the proposed amendments would be beneficial to Hong Kong’s status as an international financial centre and the development of its capital markets.

V. Motion Debate

List attached as Appendix III. In addition, I have written two ‘Letter to Hong Kong’ regarding ‘Rocky Road to Political Reform’ on 4 January 2004 and ‘The Urgent Task of Public Sector Reform’ on 22 February 2004 for the RTHK. The speeches will be published in the February and March LegCo Columns of the Hong Kong Accountant. Other speeches on my Web Page and highlights will be published in my circulars to members.

VI. VI. General Political Background

To present this Report orally.

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