PCCW-HKT TELEPHONE LTD AND ANOTHER v. THE SECRETARY FOR COMMERCE AND ECONOMIC DEVELOPMENT AND ANOTHER

CACV 208/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 208 OF 2015

(ON APPEAL FROM HCAL No. 51 OF 2013)

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J U D G M E N T

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Hon Cheung JA :

I. Introduction

1.1  Two cardinal principles exist in public law.  First, the Government has no power to demand payment of money from its people unless authorised by legislation.  Second, where a government department is empowered to impose a fee for a particular purpose, such power should not be exercised for a collateral purpose.  

1.2  The applicants contended that these principles are engaged in a decision of the respondents contained in a Joint Statement dated 27 November 2012 (‘the Decision’) and commenced a judicial review to challenge the Decision.  Ng J held against the applicants.  The applicants now appeal.  

II.  Background

1)  The parties

2.1  Operators of telecommunication services are required under the Telecommunications Ordinance (‘TO’) (Cap. 106) to operate only with licences granted by the Government. There are different types of licences, namely,

(1)  unified carrier licence(‘UCL’);

(2)  mobile carrier licence; and

(3)  services-based operator licence.

2.2  The 1^st and 2^nd applicants are joint holders of a UCL pursuant to which they provide public internal and external telecommunication services in Hong Kong.  The 2^nd applicant is also the holder of a UCL. In addition, various affiliated companies of the applicants hold services-based operator (‘SBO’) licences.  The interested parties are other telecommunications licensees.  

2.3  The 1^st respondent, the Secretary for Commerce and Economic Development (‘Secretary’) is responsible for overseeing the Commerce and Economic Development Bureau (‘Bureau’), a unit of the Hong Kong SAR Government.  The 2^nd respondent, the Communications Authority (‘Authority’) is a body corporate established on 1 April 2012 under section 3 of the Communications Authority Ordinance (Cap. 616) (‘CAO’). Its principal role is to regulate the telecommunications and the broadcasting sectors in Hong Kong.  Its predecessor was the Telecommunications Authority (‘TA’).

2.4  The Office of the Communications Authority (‘OFCA’) is the executive arm of the Authority.  Its predecessor, the Office of the Telecommunications Authority (‘OFTA’), was an independent government department established on 1 July 1993 as the executive arm of the TA.

2)  The fees

2.5  Under section 7(2) of the TO, the Secretary may by regulations prescribe the general conditions and fees payable for a carrier licence (other than an exclusive licence).  Before making a regulation under section 7(2) of the TO, the Secretary is required under section 7(3) of the TO, by notice in the Gazette, to invite members of the public who are interested to make representations.

2.6  The Telecommunications (Carrier Licences) Regulation (Cap. 106V) (the ‘CL Regulation’) issued by the Secretary under section 7(2) of the TO provides for, among other things, the fees payable in respect of UCLs (see Part 6 of Schedule 3).  The fee structure at the time of the commencement of the judicial review was proposed by the former OFTA in 2005 and implemented in 2008.  The fees comprisedthe following: a fixed component of HK$1 million (payable annually) and a variable component, which comprised a number fee (HK$3 per subscriber number), a customer connection fee (HK$800 per each 100 customer connections), a fee for the management of radio frequency and a fee for a base station.

2.7  The licence fees payable for Public Radiocommunications Services (‘PRS’) licences and SBO licences are determined by the Authority under section 7(6) of the TO.  In accordance with the Authority’s determination, licence fees payable by holders of PRS licences (Public Radio Paging Services Licence (‘Paging’)) and SBO licences (Class 3) (being mobile virtual network operators) also include a number of components, including a component charged on the basis of mobile stations used by customers, premised on a similar basis to the UCL HK$800 customer connection fee described above.  The connection fee is set at the same level, namely HK$800 for each 100 mobile stations.

3)  OFCA Trading Fund

2.8  The fees payable by licence holders to the Authority are paid into the OFCA Trading Fund and are to be held and applied in accordance with the provisions of the Trading Funds Ordinance (Cap. 430) (‘TFO’) (see section 20 of the CAO).  The OFCA Trading Fund is the renamed OFTA Trading Fund (see section 25 of the CAO).

4)  Review of fees

2.9  On 29 June 2012, the Secretary and the Authority issued the Consultation Paper on Licence Fee Reductions for Unified Carrier Licences (UCL), Public Radiocommunications Service Licences and Services-Based Operator Licences Issued under the Telecommunications Ordinance (the ‘Proposal’) for a review of the licence fees.

2.10  By the Proposal, the Secretary proposed a downward adjustment, beginning 1 March2013, of the customer connection fee for UCLs from HK$800 to HK$700 for each 100customer connections, amounting to a reduction of HK$8 to HK$7 per customerconnection per year.  The Secretary explained the rationale for such downward adjustmentas follows:

‘ According to the records of the Office of the Communications Authority, the number of customer connection for unified carrier licences has increased by 6.6% from 13.6 million in 2010-11 to 14.5 million in 2011-12. Anticipating the continued growth of customer connections and taking into account the trend of licence administration cost, the Secretary considers that there is room for a downward adjustment of customer connection fee and proposes to reduce the fee level from $800 to $700 for each 100 customer connections.’

2.11  The Secretary stated that the other items in Appendix 6 of the CL Regulation were to remain unchanged; i.e. there would be no further reduction in the licence fees payable for holders of UCLs, including no reductions to the annual flat rate fee of HK$1 million.

2.12  In respect of PRS and SBO licences, the Authority proposed to reduce the mobile station fee for PRS licences (Paging) and SBO licences (Class 3) from HK$800 to HK$700 for each 100 mobile stations or less in tandem with, and subject to, the implementation of the proposed customer connection licence fee reduction for UCLs.

2.13  The Authority and the Secretary invited written comments on the Proposal by 30 July 2012.

2.14  The applicants made a written submission to the Proposal on 30 July 2012.  They made it clear that they welcome the Proposal but contended that the Proposal did not go far enough. They contended that, among other things, the licence fee had been set at a level which generated consistent high profits far in excess of the OFCA Trading Fund’s targeted return and this contravened the TFO and the CAO.  The applicants requested:

(1)  a refund of past licence fees paid or a total fee/tax holiday for the future;

(2)  significant (and immediate) reductions in respect of the other fee components payable for UCLs, PRS licences and SBO licences; and

(3)  an immediate or back-dated reduction in respect of the proposed licence fee reduction in respect of customer connections and mobile stations.

2.15  Other service providers, including the interested parties, also responded to the Proposal. 

5)  The Joint Statement

2.16  The Decision was contained in a Joint Statement dated 27 November 2012 entitled ‘Licence Fees Reduction for Unified Carrier Licences, Public Radiocommunications Service Licences and Services-Based Operator Licences Issued under the Telecommunications Ordinance’ (‘Joint Statement’).  The respondents decided that the Proposal should be proceeded with as planned.  In other words, the respondents did not agree to the request by the applicants.

2.17  On 10 December 2012, the Bureau issued a briefing paper to the Legislative Council indicating its intention to gazette and table an amending regulation to give effect to the Decision.

2.18  On 10 December 2012, the Bureau and OFCA attended the meeting of the Legislative Council’s Panel on Information Technology and Broadcasting and answered questions from members of Legislative Council on the Decision.  At the end, the chairman of the Panel concluded that ‘the Panel supported in principle the Administration’s decision in respect of licence fees reduction ... and the relevant legislative amendments’.

2.19  On 11 December 2012, the amending regulation intending to give effect to the Decision was gazetted as ‘LN 188’.  The gazetted amending regulation was accompanied by another brief to Legislative Council.

2.20  At the meeting of the House Committee of the Legislative Council held on 4 January 2013, no members of the Legislative Council raised queries on LN 188.

2.21  The amending regulation came into effect on 1 March 2013.

2.22  On 12 July 2013, the applicants obtained leave to apply for judicial review against the Decision.  

2.23  In the Amended Originating Summons filed on 29 July 2014, the applicants sought the following reliefs from the court:

(1)  An order of certiorari to quash the Decision.

(2)  A declaration that the Decision is unlawful and/or ultra vires.

(3)  A declaration that it was, and remains, manifestly unreasonable for the respondents to have reached the Decision.

(4)  An order of mandamus to oblige the respondents to reconsider the Decision after consultation with the applicants in accordance with the law.

III. The statutory scheme

1)  Telecommunications Ordinance

3.1  The Long Title of TO reads:

‘ To make better provision for the licensing and control of telecommunications, telecommunications services and telecommunications apparatus and equipment.’

3.2  Sections 7(2) and (6) of TO provide:

‘(2) The Secretary may by regulations prescribe-

(a)  the general conditions, including the period of validity, for a carrier licence other than an exclusive licence; and

(b)  the fees payable including for the grant and renewal of a carrier licence other than an exclusive licence and by way of annual fees.

 …

(6)    For licences other than exclusive licences and carrier licences, the Authority may determine-

(a)  the form of licences;

(b)  the conditions of licences;

(c)  the period for which a licence is valid;

(d)  the types of licences, including class licences, to be issued;

(e)  the fees payable including for the grant and renewal of licences and by way of annual fees.’

2)  Communications Authority Ordinance

3.3  The CAO was enacted, among other things, to establish the Authority and to transfer the functions of the former Broadcasting Authority (‘BA’) and Telecommunications Authority (‘TA’) to the Authority.

3.4  The functions of the Authority are set out in section 4 of the CAO:

‘(1) The Authority has all the functions conferred on it by or under the Broadcasting (Miscellaneous Provisions) Ordinance (Cap 391).

(1A)  The Authority has all the functions conferred on it or under Part 11 of the Competition Ordinance (14 of 2012).

(2)  All functions conferred on the Telecommunications Authority by or under the Telecommunications Ordinance (Cap 106), the Broadcasting Ordinance (Cap 562), the Unsolicited Electronic Messages Ordinance (Cap 593) or any other Ordinance as they were in force immediately before the commencement date and not inconsistent with this Ordinance are conferred on the Authority.

…

(4)  Without limiting any other matters to which the Authority may have regard, in performing its functions, the Authority must have regard to such of the following as appear to it to be relevant in the circumstances–

(a)  the fostering of an environment that supports a vibrant communications sector to enhance Hong Kong’s position as a communications hub in the region;

(b)  the encouragement of innovation and investment in the communications market;

(c)  the promotion of competition and adoption of best practices in the communications market for the benefit of the industry and consumers…’

3.5  Section 20(1) of the CAO provides for payments to the Authority:

‘ (1) All sums of money payable, owing or paid to the Authority on or after the commencement date must on receipt be credited to the account of the trading fund for the provision of a government service by OFCA and held and applied in accordance with the provisions of the Trading Funds Ordinance (Cap 430).’

3)  Trading Funds Ordinance

3.6  The TFO was enacted in 1993.  A trading fund is an accounting entity within the Government (but not having a separate legal existence) established under section 3 which provides that the trading fund is to manage and account for the operation of a government service for which the ‘Government has the financial objective that the service shall fund itself from the income generated from the government service.’

3.7  The object of the TFO as seen from its long title is:

‘ An Ordinance to enable certain services of the Government of Hong Kong to be financed under trading funds established by resolution of the Legislative Council on the recommendation of the Financial Secretary and for related matters.’

3.8  The relevant provisions of the TFO are as follows:

‘3. Establishment of trading funds

(1)   The Legislative Council may, on the recommendation of the Financial Secretary, by resolution establish a trading fund to manage and account for the operation of a government service for which the Government has the financial objective that the service shall fund itself from the income generated from the government service whether it is a service provided to the Government, to public bodies or to persons other than the Government.

(2)   In considering whether to recommend the establishment of a trading fund for a government service the Financial Secretary is to have regard to the capability of the provider of the government service–

(a)   to provide an efficient and effective operation that meets an appropriate standard of service; and

(b)   to have the capacity, within a reasonable time, to meet expenses incurred in the provision of the government service and finance liabilities to be specified in the resolution out of the income of the proposed trading fund.

4.   Assets and liabilities of a trading fund

(1)   The Legislative Council may by resolution appropriate to the trading fund the assets and liabilities on the terms set out in the resolution.

(2)   The net value of the assets appropriated to a trading fund is a government investment shown in the Capital Investment Fund as loan or trading fund capital or partially of one and the balance of the other, on the terms set out in the Legislative Council resolution establishing the trading fund and is to be represented in the accounts of the trading fund as the debt to, or trading fund capital of, the Government.

…

5.   Income, expenses and liabilities

(1)   Notwithstanding any provision of another Ordinance, the income received for the provision of a government service in respect of which a trading fund is established under section 3 is to be paid into the trading fund.

(2)   The expenses incurred in providing the government service and the financing of liabilities of the trading fund are to be paid out of the trading fund.

(3)   With the approval of the Financial Secretary, the general manager may establish reserves in the accounts of the trading fund and may make transfers into and out of those reserves.

(4)   In this section, “income” (收益) includes a grant from the general revenue.

6.   Control and management of a trading fund

(1)   The Legislative Council shall prescribe, in the resolution establishing the trading fund, the services to be provided under a trading fund.

(2)   The Financial Secretary shall designate a general manager to control and manage a trading fund and who is accountable to the Financial Secretary for the operations of the trading fund.

(3)   The general manager is not to vary the services undertaken by a trading fund other than in accordance with the Legislative Council resolution.

(4)   Notwithstanding subsection (3), the Financial Secretary may authorize a general manager to undertake additional operations under a trading fund that are incidental to the prescribed services of the trading fund.

(5)   The Financial Secretary may issue directions to the general manager for the control and management of a trading fund and the general manager shall comply with the directions.

(6)   The general manager shall manage a trading fund with the objectives of–

(a)   providing an efficient and effective operation that meets an appropriate standard of service;

(b)   within a reasonable time, meeting expenses incurred in the provision of the government service and financing liabilities of the trading fund out of the income of the trading fund, taking one year with another; and

(c)   achieving a reasonable return, as determined by the Financial Secretary, on the fixed assets employed.

…

10. Surplus funds

(1)   If, after having regard to estimated future requirements of the operation of the government service undertaken by a trading fund, the Financial Secretary is satisfied that any surpluses in the nature of distributable profits disclosed in the certified statements are in excess of the reasonable requirements for the provision of the service including the repayment of loans, the Financial Secretary may direct that the surpluses or a part of the surpluses be transferred into the general revenue.

(2)   If fees authorized by an Ordinance are structured so as to recover more than the cost of the provision of a government service, including a reasonable return as set out in section 6(6)(c), the Financial Secretary may direct that the whole or part of the fees as determined by the Financial Secretary to be more than the cost of the provision of the service, including a reasonable return as set out in section 6(6)(c), shall, after collection, be paid from the trading fund into the general revenue.’

3.9  In 1995, a resolution was passed by the Legislative Council establishing the OFTA Trading Fund.  It was renamed the OFCA Trading Fund in 2011 (Cap. 430 Sub. leg. D) (see section 25 of CAO). Paragraph 4 of Schedule 3 of the OFCA Trading Fund listed the services to be provided under this trading fund :

‘4(a) support the Communications Authority in administering and enforcing the TelecommunicationsOrdinance(Cap. 106),the Broadcasting (Miscellaneous Provisions) Ordinance (Cap. 391), the Broadcasting Ordinance (Cap. 562), the Unsolicited Electronic Messages Ordinance (Cap. 593) and the Communications Authority Ordinance (Cap. 616);

(b)  support and assist the Communications Authority in the performance of any functions that the Communications Authority may perform under or by virtue of any Ordinance;

(c)  administrative functions on telecommunications, broadcasting and anti-spamming matters;

(d)  any services incidental to or conducive to the provision of any of the services specified in this section.’

IV.  Background material of the Trading Funds Ordinance

1)  The Efficiency Unit

4.1  The idea of setting up a trading fund began in 1989 when the Efficiency Unit of the Government published a discussion paper entitled ‘Public Sector Reform February 1989’.  The paper identified three types of service:

(1)  Core services - services such as public order, social, economic, or regulatory carried out by the government as a matter of public policy.

(2)  Support services - ancillary services such as printing, vehicles, computing, etc. normally provided only to other government bodies.

(3)  Commercial services - services which are provided for the general public, at a charge.  Such services are frequently monopolies and traditionally have been provided by the government although this need not necessarily be the case.  Examples of such services include the Post Office and the airport.

4.2  It discussed the pricing strategy for the individual service.  The pricing strategy adopted for a particular service will also affect the choice of executive agency.  It will depend largely on the government’s economic, social and fiscal policies.  In general terms there are three strategies:

(1)  Free - free to the consumer, except possibly for a nominal charge to discourage frivolous use.

(2)  Partial cost recovery - services which earn revenue but which, for one reason or another, are subsidised.

(3)  Full cost recovery - services in which the consumers, including government departments, are charged prices that reflect the full cost of provision, including the cost of capital.

4.3  It then identified four broad different types of executive agency:

(1)  Traditional departments - funded in the present way on a cash accounting basis.

(2)  Trading fund departments - government departments established on a quasi-commercial basis with revenue accruing to the fund.

(3)  Public corporations - wholly owned by government and operating according to commercial principles.

(4)  Non-departmental public bodies - bodies with a role in government but operating at arm’s length.

(emphasis added).

4.4  It then explained the nature of the trading fund: 

‘What are they?

Trading funds are accounting frameworks established by law for departments providing services on a quasi-commercial basis with the objective of recovering costs.  Trading fund departments do not have the same autonomy as a corporation, but have greater financial flexibility than traditional government departments. Their staff, however, remain part of the civil service and subject to its terms and conditions.

Although this concept has been widely applied in the UK it would be an innovation in Hong Kong which has always operated a centralised cash accounts system. We should therefore ensure a full understanding of the issues involved before embarking on any major changes.

How do trading funds differ from the traditional cash accounting/vote recovery system?

Generally, departments financed by trading funds operate on commercial lines.  Major differences between trading funds and vote funding are :

Trading Funds		Voting Funding
On-going basis / continuing year to year		Annualised
Accrual basis of accounting		Cash basis of accounting
Cash balances retained / ploughed back		Cash balances not ploughed back but returned to General Revenue
Self financing / funding with the need to break-even		Expenditure limited to budgets.  Shortfalls not carried forward
Financial performance oriented		Resource consumption oriented    ’

2)  1992 Legislative Council Brief

4.5 The nature of a trading fund was explained in a Legislative Council Brief (‘1992 Brief’) when the Trading Funds Bill was introduced in November 1992.  The 1992 Brief stated:

‘2. A trading fund is a financial and accounting framework established by law to enable a department, or part of a department, to adopt certain accounting and management practices common in the private sector while remaining part of the Government. The assets of the department would remain government assets. Staff of a fund would remain civil servants.

3.  A number of government departments provide services on a quasi-commercial, cost-recovery basis… Trading funds would give greater financial flexibility to enable our customers’ demands, in terms of quantity or quality, to be met more promptly. 

4. All customers, in the private or public sectors, would be required to pay for any services provided by a trading fund’s operations. Such payments would be credited to the fund.  The department operating it would incur expenditure from the fund, and would be required to balance income and expenditure, taking one year with another.  A trading fund would remain subject to the existing process of approval necessary to amend fees and charges.

….

FINANCIAL AND STAFFING IMPLICATIONS

22. Apart from the implications for financial policy set out already in this paper, there are no staffing implications arising directly from the legislative proposals set out in the Bill.  This is because trading funds will retain their status as Government Departments.  Broadly speaking, the intention is that the creation of trading funds would have a neutral effect on the existing pattern of revenue and expenditure.  However, when proposals to establish individual trading funds are brought forward, the financial and staffing implications relating to them will be described in detail. Where appropriate, submission to the Finance Committee of the Legislative Council will be made.’  

(emphasis added)

3)  The Legislative Council Brief 17 February 1995

4.6  On 17 February 1995, the Secretary for Economic Services submitted a Legislative Council Brief in respect of the OFTA Trading Fund.  The paper stated, among other things, that:

‘8. Financial projections undertaken with the assistance of an external consultant have established that OFTA will be able to operate on a totally self-financing basis from the first year of the trading fund operation. The target rate of return for the OFTA trading fund will be set at 16% based on average net fixed assets, having regard to the financial position of the department, the need to provide a reasonable return on Government investment and the need to encourage financial discipline, economy and efficiency in the use of resources.

9. Licence fees charged by OFTA under the trading fund operation will continue to be determined on a full cost‑recovery basis. They will be specified in the Telecommunication Regulations and approved by the Financial Secretary. Based on current financial projection, OFTA will be able to meet the target rate of return without increasing telecom fees and charges for the next three years. Any increases thereafter will likely be in line or below inflation. The target rate of return will be kept under review having regard to the actual financial performance of the Trading Fund and the need to maintain telecom fees and charges at a reasonable and affordable level to the public and the industry.

….

11. The existing office premises, furniture, equipment of OFTA and the setting-up cost will be appropriated to the OFTA Trading Fund as fixed assets.  The value of these vested assets is estimated at $213.6 million and will be shown in the Capital Investment Fund as trading fund capital (government investment in the trading fund).  Dividend on trading fund capital will be paid to the Government having regard to the projected annual surplus and the long-term funding requirements of the trading fund.

12. The establishment of the trading fund will mean a reduction of $212 million and $96.1 million in the 1995-96 General Revenue Account for revenue and expenditure respectively. Thereafter, recurrent revenue is expected to come from the dividends of the trading fund, etc. Annual expenditure of about $60 million will be incurred by Government departments on charges payable to services provided by OFTA.’ 

4)  Hansard 10 May 1995

4.7  In the Hansard of the Legislative Council proceedings of 10 May 1995 which dealt with the establishment of the OFTA Trading Fund (page 3043-3644), the Secretary for Economic Services made the following statement in respect of the surpluses arising from the fund:

‘ Members have also expressed concerns that in its first three years of operation, the proposed OFTA trading fund is projected to earn surpluses significantly in excess of the target rate of return. We have explained to Members that this short-term over-recovery of revenue is due mainly to the very rapid growth in the telecommunications market in recent years and that it is the intention of the Director-General of OFTA to take prompt measures to reduce charges to consumers where appropriate.

Specifically, he will be taking immediate action, with effect from I June 1995, to rebalance income from different categories of telecommunications fees and charges, by reducing the paging licence fee from $80 to $75 and changing the basis for calculating the licence fees, the combined effect of which will be to reduce OFTA’s revenue from paging licence fees by over $20 million a year.  Under the trading fund mode of operation, all users of OFTA’s services will be charged on a fair and transparent basis the full cost of the services they are receiving.

As regards the use of the surpluses, the Government’s dividend policy is that the OFTA Trading Fund should repay to Government the cost of capital of the public assets vested in it, so as to avoid any hidden government subsidy to the fund.  The dividend payment would be about 50% of its annual surplus.  Because of the higher than average projected surpluses for the first three years of the trading fund operation, we have agreed to set the dividend at considerably lower levels for that period, in the 30% to 40% range.  In addition, as recommended by Members, we also agree that any operating surplus in excess of the targeted return will be transferred to a Development Reserve within the Trading Fund’s accounts.  This Reserve will be used to reduce the need for future fee increases.  As set out in the financial projections contained in the Corporate Plan, the net effect is that dividend proposed to be paid to the Government over the five-year projected period would be only around 8% of average net fixed assets.  With this arrangement and based on current financial projections, we do not envisage any increase in existing telecommunications fees for the next five years.’

5)  Evidence of Mr Sullivan

4.8  While the nature of the OFCA Trading Fund is a matter of the construction of the language used in the TFO and in its subsidiary legislation, it is also relevant to consider the expert’s evidence of Mr Eugene Sullivan, the applicants’ expert on the nature of a trading fund.

4.9  His instruction was to explain the rationale and operation of trading funds in the United Kingdom in the period from when they were introduced up until 1993 when the TFO was introduced in Hong Kong.  Within this, he was to provide specific information as to, in the United Kingdom context:

(1)  Why trading funds exist;

(2)  What the expression ‘taking one year with another’ means;

(3)  Policy options for fee setting;

(4)  The different types of trading fund and their difference, with examples; and

(5)  The principles by which they are operated and fees are set.

4.10  He set out his views in the Executive Summary part of his affirmation:

‘3.2. In summary:

3.2.1.   Trading funds exist in the UK because certain parts of government activity are more appropriate to be funded and managed separately from the normal revenue supply process.  A trading fund is established when its Minister judges that (a) the revenue of an operation would consist principally of receipts in respect of goods or services provided in the course of the operation in question and (b) setting up an agency would lead to improved efficiency and effectiveness of the management of those operation.  All trading funds are required by statute to recover principally (i.e. most of) their costs within the trading fund but there are different types of trading fund as I detail below.

3.2.2.    The expression “taking one year with another” as used in Section 6(6) of the Trading Funds Ordinance is quite common in relation to trading funds and allows for financial  objectives to be met over a financial planning period of more than one year.

3.2.3.   There are several ways to determine fees within a trading fund.  There are two which are particularly relevant in the context of this case.  One option is to set fees for profit maximization, the other is to price on the basis of recovering cost over a planning period, taking one year with another (the cost recovery model).

3.2.4.   There are relevantly two main types of trading fund - those that provide commercial services to a free market, and those that provide regulatory or statutory services.  The former are able to set fees to maximize profit with due regard to market forces of supply and demand. The latter are more constrained in terms of fee setting (see section 4(v) herein for Fee setting HM Treasury guidance for trading funds and Managing Public Money) to balance the interests of consumers and tax payers. The fee setting policy is determined by the Minister when establishing the trading fund and its Trading Fund Order (i.e. an order made for the establishment of any trading fund, the nature of which is equivalent to the resolution establishing a trading fund provided under Section 3 of the Trading Fund Ordinance in Hong Kong). Most trading funds are expected to recover the costs, taking one year with another, and are usually set an additional financial objective by the Minister to make a target rate of return on capital employed.

…’ 

(emphasis added)

4.11  MrSullivan further explained the usual financial objectives of a trading fund:

‘4.10. In the UK, the Trading Fund Order is the legal underpinning for the trading fund which stipulates the remit, authority and financial objectives of the trading fund. The financial objectives of a trading fund are usually expressed as:

i.     to ensure its revenue is not less than sufficient, taking one year with another, to meet its outgoings which are properly charged to revenue account

ii.    to meet such further financial objectives as may be set by the responsible Minister with the agreement of the Treasury.

4.11.     The further financial objective is often expressed as a surplus over and above the trading funds operating costs, usually expressed as a target percentage return on fixed assets employed.’

4.12  Mr Sullivan further referred to the Guide to the Establishment and Operation of Trading Funds (‘the Guide’) published by the Financial Reporting Policy Team HM Treasury in May 2004 (updated August 2006). He stated that:

‘ 4.24. The relevant principles of UK trading funds were established in 1973 and have been reinforced over the years, most recently in HM Treasury Guidance to the Establishment and Operation of Trading Funds published in May 2004 and updated in August 2006. Chapter 12 of Trading Fund Guide (Fees and Charges and Charging Policy) is most relevant to the question of whether and when a trading fund should be allowed to make unlimited profit. The guidance allows for the fact that a trading fund may accidently make a surplus over and above its target rate of return, and it can invest that surplus or pay it as a dividend. However, a UK trading fund undertaking statutory functions has to price to cover its costs and meet its financial targets. It is not expected to plan to exceed its target return, taking one year with another: section 8.2.2 refers - ‘Trading funds undertaking statutory functions should not, however, deliberately aim to earn these surpluses as this may be construed as hidden taxation’. Section 8.2.2 goes on to say ‘Where surplus cash arises, then chargingpolicies may need to be reviewed to ensure the surpluses do not continue’.

4.25. The point is reinforced in section 12 which gives guidance on fees and charges:

•     12.5.2 ‘For legal reasons the price of a statutory service should never be set deliberately to generate a surplus above agreed rate of return.  A planned surplus would be interpreted as illegal taxation’ ; and

•     12.5.3 ‘Where inadvertently a TF earns surplus receipts they can be used to mitigate or eliminate increases in charges, reduce charges, cover any planned loss in the following year or finance capital expenditure. ’ ’

4.13  He referred to paragraph 1.4.1 of the Guide which provided, among other things, that

(1)  a trading fund is driven, i.e. fixes its charges, in accordance with its ‘further financial objective’, which is normally to earn an average rate of return on capital employed (currently at least 3.5 per cent);

(2)  it charges, unless otherwise agreed, for the full cost of services provided; it does not normally aim to make a ‘profit’ except where it provides goods and services in competition with other suppliers or is specifically authorised to charge what the market will bear.

4.14  Mr Sullivan then referred to Chapter 6 of the latest version of the Managing Public Money Handbook (Fees, Charges and Levies) (‘the Handbook’) which also stresses the importance of governance and parliamentary authority for charges in several sections.

‘ 4.26

a)   Section 6.1.2 states ‘There are unavoidable reasons why policy on charging is important:

•   Charges substitute for taxation as a means of government finance. Decisions on charging policy should therefore be made with the same care and to similar standards as those on taxation

•  For this reason parliament expects to consider legislation on whether charges should be levied; how they should be structured and on charge levels.’

b)   Section 6.1.2 states ‘As in other areas of managing public funds, parliament expects the Treasury to make sure its interests are respected’.

c)    Section· 6.2.1 states ‘The standard approach is to set charges to recover full costs. Costs should be calculated on an accruals basis, including overheads, depreciation ... and the cost of capital’.

d)   Section 6.2.2 states ‘This approach is simply intended to make sure that the government neither profits at the expense of consumers nor makes a loss for taxpayers to subsidise.  It requires honesty about the policy objectives and rigorous transparency in the public interest’.

e)    Section 6.4.3 refers to the role of the Office of National Statistics (“ONS”) ‘ONS normally classifies charges higher than the cost of provision ... as taxes. Such charges always call for explicit ministerial decision as well as specific statutory authority’.’

4.15  The Guide and Handbook were also referred to by the applicants at the hearing of the appeal.

4.16  Mr Sullivan was also asked to give an opinion on whether the Decision in refusing to make further downward adjustment of the licence fee and the statement in the Joint Statement that there was no room for further downward adjustment of the licence fee was consistent with:

(1)  the application of the cost recovery principle;

(2)  the amount of licence fee being justified in terms of the object and purpose i.e. the operation of a government service, and not being levied as a revenue.

4.17  In my view, these questions are not for an expert to answer but rather for the court to decide.  Hence I will not refer to his views on this aspect.

V.  Success of the OFCA Trading Fund

5.  As the Judge observed, the OFCA Trading Fund has been managed with considerable financial success.  He held that:

‘ 24.  As it turned out, the Fund has been managed with considerable financial ‘success’, so to speak.  As shown in a ten-year summary of the Fund’s financial performance prepared by the Respondents (2002/2003 - 2011/2012) (‘Summary’), the Fund has consistently made a ‘profit from operations’ ranging from HK$32,652,000 in 2002/2003 to HK$97,193,000 in 2011/2012.  The Summary also records that the Fund had interest and other miscellaneous income in each of those years.

25.  During the same period, the target rate of return on fixed assets was reduced from 14.5% p.a. in 2002/2003 to 8.5% since 2006/2007.  Its actual rate of return on fixed assets increased from 17.3% in 2002/2003 to 24.3% in 2006/2007 to 48.8% in 2011/2012.

26.  As far as reserves are concerned, the general manager is authorised by section 5(3) of TFO to establish reserves in the accounts of the Fund.  A Development Reserve was indeed set up in 1995 and has been accumulated from the surpluses of the Fund. The purpose of the Development Reserve is to reduce the need for future fee increases, as undertaken by the then Secretary for Economic Services in his speech to the Legislative Council on 10 May 1995.

27.  In its Annual Report for the year 2008/2009, OFTA announced that, as at 1 April 2008, the Development Reserve stood at HK$690.2 million, that this amount should be sufficient to provide a cushion against the need for licence fee increases in the foreseeable future and that no transfer would be made to the Development Reserve starting from 2008/2009.’

VI.  The applicants’ complaints

6.1  The applicants built their case on the success of the OFCA Trading Fund. 

6.2  The Judge summarised the applicants’ complaints into four grounds:

(1)  It is unconstitutional for the respondents to levy licence fees with a view to enabling the fund to make payments to the general revenue in the name of notional profits tax and dividends (‘the constitutionality issue’).

(2)  The power conferred on the respondents to prescribe and levy licence fees being limited by its purpose, they have exceeded their power in prescribing licence fees based on financial projections which provided for a substantial surplus every year which surplus would then be paid to the general revenue in the name of notional profits tax and dividends (‘the Padfield issue’).

(3)  On a proper construction of the TFO, the fund should be managed on the ‘cost recovery principle’ i.e. the recovery of (a) operating costs and (b) the target rate of return set by the Financial Secretary out of its income.  The respondents have unlawfully failed to adhere to this principle in setting licence fees at a level which would result in a substantial surplus year after year which surplus would then be paid to the general revenue in the name of notional profits tax and dividends (‘the cost recovery principle issue’).

(4)  Wednesbury unreasonableness. The respondents failed to take into account relevant consideration and took into account irrelevant consideration.  The relevant consideration being the cost recovery principle, and the irrelevant consideration being a purpose outside the ambit of the TFO i.e. the provision for the payment of surpluses to the general revenue (‘the Wednesbury unreasonableness issue’).

6.3  As the Judge observed, at the heart of the applicants’ complaint is the applicants’ dissatisfaction with the OFCA Trading Fund’s past practice and, more importantly, financial projections which provided for payments of the fund’s surpluses to the general revenue in each of the five years from 2013/2014 to 2017/2018.

VII.  The Judge’s reasons

7.1  The Judge rejected the applicants’ arguments on the four issues.  This is a summary of the judge’s reasons:  

1)  The constitutionality issue

7.1(1) Legislative Council has authorised the charge in that it has expressly required a licence for the operation of a telecommunication service and authorised the Secretary and the Authority to determine the level of licence fees.

7.1(2) The Secretary can only prescribe the licence fee by means of subsidiary legislation (regulation) which must be gazetted, laid before the Legislative Council and subject to a process known as ‘negative vetting’.  The Decision has gone through such a process.

7.1(3) Legislative Council has authorised the transfer of surplus to general revenue by section 10(1) of TFO.  This is irrespective of the name of the surplus, be it ‘notional profit tax’, ‘dividends’ or ‘distributable profit’.

7.1(4) The trading fund is not a separate legal entity hence payments to a trading fund for the operation of a government service is payment to it for the provision of that service.  The transfer of the surplus to general revenue is just a matter of accounting.

2)  The Padfield issue

7.2(1) The Court is merely exercising a supervisory role in judicial review proceedings and should not intervene unless the principle is exercised demonstrably outside the policy object and purpose of TO or is Wednesbury unreasonable.

7.2(2) The exercise of the discretionary power to determine the level of licence fee is a matter of economic and political judgment for the respondents and not simply a matter of arithmetic calculation of the income and expenditure.

7.2(3) The Judge is not satisfied that setting the new fee at $700 is outside the policy object and purpose of the TO.

7.2(4) Although setting the fee at $700 may result in a surplus in the next five years commencing 2013/2014, the applicants have not shown why this is outside the TO’s policy object and purpose.

7.2(5) The applicants’ real complaint is the transfer of the surplus.  This depends on the construction of the TFO.

7.2(6) The difficulty faced by the applicants is that the principle conferred on the respondents to set the fees is contained in the TO and not the TFO.

7.2(7) Even if the respondents’ power to determine the fee is fettered by the TFO, the provision for surplus and its transfer to general revenue is still within the policy object and purpose of the TFO.

7.2(8) Bearing in mind one of the financial objectives of a trading fund is self-financing (sections 3 and 6(6)(b) of TFO), it is inconceivable that the Legislative Council intended the trading fund only to balance its books and not to achieve a better result.

7.2(9) Bearing in mind the two other financial objectives are to provide an efficient and effective operation and to achieve the target rate of return set by the Financial Secretary (sections 6(6)(a) and (c)), the OFCA has to be financially prudent in providing an efficient and effective operation.  This will cover both the situation of balancing the budget and achieving the target rate and also operating on a surplus over and above the target rate.  Further, achieving the target rate of return does not mean it cannot be exceeded.  It is inconceivable that this was the intention of the Legislative Council.

7.2(10) The OFCA Trading Fund is the nature of a quasi-commercial operation.  This is borne out by the 1992 Brief and ESB Paper and section 10(1) of the TFO which contemplates OFCA Trading Fund’s operation may result in surpluses ‘in the nature of distributable profits’.  This means the OFCA Trading Fund can operate with a surplus budget and for the surplus to be transferred to general revenue.

3)  The cost recovery principle issue

7.3(1) The cost recovery principle issue is a variation of the Padfield argument with regard to the proper construction of the TFO.

7.3(2) Cost recovery is provided by section 6(6)(b) of TFO but the language of the TFO and TO does not support the applicants’ argument that the respondents’ hands are tied completely by this principle.  It is also incompatible with the flexibility with which the OFCA Trading Fund is to be managed.  However, the respondents have also considered other factors, namely, the objectives set out in sections 6(6)(a) and (c), the financial needs of the fund in the near future, namely, the next five years commencing 2013/2014, the financial viability and sustainability of the fund in the longer run, the need to maintain a ‘cushion’ against any licence fees increase, the maintenance of a predictable licence fee environment for the telecommunications industry and so on.

7.3(3) As there is no suggestion that such factors are irrelevant factors, it is for the respondents to decide what weight to be attached to them and the Court should not substitute its own view for that of the respondents.

4)  The Wednesbury unreasonableness issue

7.4  Two limbs are relied upon by the applicants on Wednesbury unreasonableness.  First, the respondents had wrongfully failed to take into account a relevant factor, namely, the cost recovery principle.  This is a slightly different way of formulating the cost recovery principle.  This is also factually incorrect as the respondents had not overlooked it.  Second, the respondents had taken into account an irrelevant factor, namely, the provision for surplus and to pay them to general revenue.  This is just a variation of the argument that the respondents have acted unlawfully in levying licence fees with a view to making payments to the general revenue, i.e. the constitutionality/Padfield point.

VIII.  Grounds of appeal

8.  The applicants are in essence repeating the same arguments below when they argued that the Judge was wrong.  Their grounds of appeal can be summarised as follows:

1)   The respondents’ purpose was to make a profit and transfer it into the general revenue.

2)   The respondents’ purpose is unlawful in that it is unconstitutional and offends the Padfield principle.

3)   Sections 6(5) and 10(1) of the TFO do not confer authority on the respondents to levy tax for general revenue.  The purpose of section 10(1) was limited to authorizing the transfer to general revenue of unplanned surplus.

4)   Section 7 of TO and regulation 5 and Schedule 3 of the CL Regulation do not authorize the making of profit or transfer of profits to general revenue.

5)   The setting of the licence fees by the respondents was constrained by the TFO and TO.

6)   The Decision was Wednesbury unreasonable.  Relevant factor, namely, the costs recovery principle was ignored and irrelevant factor was considered, namely the creation of profit for transfer to the general revenue.

  IX.  The principles

1)  The constitutionality issue

(1)  Basic Law

9.1  Article 64 of the Basic Law expressly provides that the Government must obtain approval from the Legislative Council for taxation and public expenditure and Article 73(3) provides that it is the power and the function of the Legislative Council to approve taxation and public expenditure.

9.2  The provisions of the Basic Law reflect Annex I, section V, of the Joint Declaration:

‘ The systems by which taxation and public expenditure must be approved by the legislature, and by which there is accountability to the legislature for all public expenditure, and the system for auditing public accounts shall be maintained.’

(2)  Common law

9.3  What is enshrined in the Basic Law is the common law principle that there should not be unauthorised or hidden taxation.  There is no dispute between the parties of the applicable principle which is found in the case of Attorney-General v Wilts United Dairies Ltd (1921) 37 TLR 884; affd (1922) 38 TLR 781 at 885-886.  Scrutton LJ stated:

‘ It is conceivable that Parliament, which may pass legislation requiring the subject to pay money to the Crown, may also delegate its powers of imposing such payments to the Executive, but in my view the clearest words should be required before the Courts hold that such an unusual delegation has taken place. As Chief Justice Wilde said in Gosling v Veley, 12 QB at p. 407: “The rule of law that no pecuniary burden can be imposed upon the subjects of this country, by whatever name it may be called, whether tax, due, rate or toll, except upon clear and distinct legal authority, established by those who seek to impose the burthen, has been so often the subject of legal decision that it may be deemed a legal axiom, and requires no authority to be cited in support of it.” Particularly where the sums to be paid to the Crown are to be paid as a condition of obtaining a licence to exercise the ordinary rights of a subject should the clearest words be required. In practice, legislation protecting certain acts except on licence usually states the pecuniary terms on which licences can be obtained.

…

A great deal of time was occupied in arguing whether the requirement of this payment was a “tax.”  I prefer to use the words of the Bill of Rights which forbids “levying money for the use of the Crown without grant of Parliament,” and the requirement of this two pence appears to me clearly to come within these words.  It is true that the fear in 1689 was that the King by his prerogative would claim money; but excessive claims by the Executive Government without grant of Parliament are, at the present time, quite as dangerous, and require as careful consideration and restriction from the Courts of Justice.’  (emphasis added)

9.4  At 886, Atkin LJ said:

‘ …if an officer of the executive seeks to justify a charge upon the subject made for the use of the Crown (which includes all the purposes of the public revenue), he must show, in clear terms, that Parliament has authorized the particular charge. The intention of the Legislature is to be inferred from the language used, and the grant of powers may, though not expressed, have to be implied as necessarily arising from the words of a statute.’ (emphasis added)

2)  The Padfield issue

9.5  The Padfield principle is that there are no unfettered discretions in public law, and the statutory powers must be used to promote the policy and objects of the statute, to be determined by the Courts as a matter of law : Padfield v. Minister of Agriculture, Fisheries and Food [1968] AC 997.

9.6  Lord Scarman in Reg. v. Secretary of State for the Environment, Ex parte Nottinghamshire County Council [1986] 1 AC 240 at 250D-F, in an application to challenge the Secretary of State’s differentiated guidance to local authorities in his Rate Support Grant Report, summed up the legal position as follows:

‘ To sum it up, the levels of public expenditure and the incidence and distribution of taxation are matters for Parliament, and, within Parliament, especially for the House of Commons. If Parliament legislates, the courts have their interpretative role: they must, if called upon to do so, construe the statute. If a minister exercises a power conferred on him by the legislation, the courts can investigate whether he has abused his power…The courts can properly rule that a minister has acted unlawfully if he has erred in law as to the limits of his power even when his action has the approval of the House of Commons, itself acting not legislatively but within the limits set by a statute.’

9.7  In R v Secretary of State for the Environment, Transport and the Regions, ex parte Spath Holme Ltd [2001] 2 AC 349 at 396D‑G, Lord Nicholls of Birkenhead said:

‘ No statutory power is of unlimited scope. The discretion given by Parliament is never absolute or unfettered. Powers are conferred by Parliament for a purpose, and they may be lawfully exercised only in furtherance of that purpose: “the policy and objects of the Act”, in the oft-quoted words of Lord Reid in Padfield v Minister of Agriculture, Fisheries and Food [1968] AC 997, 1030. The purpose for which a power is conferred, and hence its ambit, may be stated expressly in the statute. Or it may be implicit. Then the purpose has to be inferred from the language used, read in its statutory context and having regard to any aid to interpretation which assists in the particular case. In either event, whether the purpose is stated expressly or has to be inferred, the exercise is one of statutory interpretation.

Statutory interpretation is an exercise which requires the court to identify the meaning borne by the words in question in the particular context. The task of the court is often said to be to ascertain the intention of Parliament expressed in the language under consideration. This is correct and may be helpful, so long as it is remembered that the “intention of Parliament” is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used.’

9.8  Lord Bridge of Harwich in R v Secretary of State for the Environment Ex p. Hammersmith & Fulham London Borough Council & others [1991] 1 AC 521 at 597:

‘ The restriction which the Nottinghamshire case [1986] A.C. 240 imposes on the scope of judicial review operates only when the court has first determined that the ministerial action in question does not contravene the requirements of the statute, whether express or implied, and only then declares that, since the statute has conferred a power on the Secretary of State which involves the formulation and the implementation of national economic policy and which can only take effect with the approval of the House of Commons, it is not open to challenge on the grounds of irrationality short of the extremes of bad faith, improper motive or manifest absurdity. Both the constitutional propriety and the good sense of this restriction seem to me to be clear enough. The formulation and the implementation of national economic policy are matters depending essentially on political judgment. The decisions which shape them are for politicians to take and it is in the political forum of the House of Commons that they are properly to be debated and approved or disapproved on their merits. If the decisions have been taken in good faith within the four corners of the Act, the merits of the policy underlying the decisions are not susceptible to review by the courts and the courts would be exceeding their proper function if they presumed to condemn the policy as unreasonable.’

9.9  Much has been said of the term ‘judicial deference’ which is urged upon us by Ms Cheng SC and Mr Lai for the respondents.  It is important to put this in its proper context.  Lord Hoffmann in R (on the application of ProLife Alliance) v BBC [2003] UKHL 23 at [75], [2003] 2 All ER 977 at [75], [2003] 2 WLR 1403 at [75] stated:

‘ My Lords, although the word “deference” is now very popular in describing the relationship between the judicial and the other branches of government, I do not think that its overtones of servility, or perhaps gracious concession, are appropriate to describe what is happening. In a society based upon the rule of law and the separation of powers, it is necessary to decide which branch of government has in any particular instance the decision-making power and what the legal limits of that power are. That is a question of law and must therefore be decided by the courts.’ (emphasis added)

9.10  Laws LJ in R v. Secretary of State for Work and Pensions [2003] 3 All ER 577 said at [73] that:

‘ The teaching which Lord Hoffmann’s observation provides, if I may say so, is that in any particular area the decision-making power of this or that branch of government may be greater or smaller, and where the power is possessed by the legislature or executive, the role of the courts to constrain its exercise may correspondingly be smaller or greater. In the field of what may be called macro-economic policy, certainly including the distribution of public funds upon retirement pensions, the decision-making power of the elected arms of government is all but at its greatest, and the constraining role of the courts, absent a florid violation by government of established legal principles, is correspondingly modest.’

9.11  Where a question of the legality of a public authority’s demand for money is in issue, the onus is on the public authority to establish that what was done was done with lawful authority: Congreve v Home Office [1976] 1 QB 629 at 636B, 636H-637A; R v Richmond upon Thames London Borough Council, ex parte McCarthy [1992] 2 AC 48 at p. 68B-C.

9.12  The Judge also referred to a number of cases in which the Courts had held that fees and charges set by local councils were for an improper purpose and, for that reason, ultra vires: R v Manchester City Council ex p King (1991) 89 LGR 696; Cran v Camden Borough Council [1995] RTR 346; R (Attfield) v The London Borough of Barnet [2013] EWHC 2089 (Admin); [2014] 1 All ER 304.  For example in Attfield it was held that the local authority’s power to charge residents for parking was unlawfully exercised for the purpose of generating additional income to meet projected expenditure for road maintenance and improvement, concessionary fares and other road transport costs.

3)  Wednesbury unreasonableness

9.13  The principle is well established and does not need to be repeated here.

X.  My view

1)  Nature of the OFCA Trading Fund

10.1  1The background materials relating to the establishment of the OFCA Trading Fund in Hong Kong have not been challenged.  Likewise for the material relating to the operation of the trading fund in the United Kingdom. Although ultimately, it is a matter of construction of the TFO and its subsidiary legislation, these materials are relevant to the extent that they do not, in any way, suggest that the OFCA Trading Fund is in the nature of a commercial organization which aims at maximizing its profit return.  Despite the description in these proceedings as a quasi-commercial unit, the OFCA Trading Fund is, in fact, very much a trading fund in the traditional sense of providing services to the public. 

10.2  The financial objectives of the OFCA Trading Fund are set out in section 6(6) of the TFO.  In my view the provision of an efficient and effective operation under section 6(6)(a) does not point towards a full scale profit maximizing purpose.  In any event, this provision must be read subject to the two other objectives. Section 6(6)(b) means that it is intended to be self-financing, meeting expenses out of the income and allowing the financial objectives to be met over a financial planning period of more than one year.  Section 6(6)(c) allows a surplus over and above the trading fund by way of a specific target return prescribed by the Financial Secretary on the fund’s fixed assets.

10.3  These financial objectives point towards a cost recovery principle which underpins the financial management of the OFCA Trading Fund.  As a matter of common sense and practicality, it must be accepted that budgeting is not an exact science and allowance must be given for human errors.  Financial contingencies must also be built into the budget.  That, of course, is within the province of the administrators and the Court will not interfere unless unconstitutionality, unlawfulness or Wednesburyunreasonableness are engaged.

10.4  But what is not permitted is for the administrators to set out to achieve an excessive surplus which goes far beyond meeting expenses by its income and achieving the target return rate together with a reasonable cushion, so much so that a legitimate complaint can be raised that the budgeting goes beyond the financial objectives and is intended to raise funds for the general revenue in the form of hidden taxation. The question that arises is how does one define excessive surplus?   The answer must be that this is a matter of common sense and one useful indicator is to compare the difference of the target return and the actual return after the expenses had been met by the income over a period of time.  Bearing in mind the constitutional restraints and the doctrine of separation of power, this is nonetheless a task that the Court is expected to perform and able to perform in a challenge of this kind.

2)  Fetter on the Secretary and the Authority

10.5  Although the Judge said he was prepared to proceed on the basis that the discretion of the respondents is restrained, he did not seem to accept the proposition fully.  He stated that the power of the Secretary and Authority to determine the licence fees is found in the TO and not in the TFO.  I do not see why this will make any difference.  In my view, when the Secretary and the Authority determine the licence fees they must inevitably recognize the proper approach to financial returns having regard to the financial objectives set out in the TFO.  It is irrelevant that the general manager of the OFCA Trading Fund is not the Secretary or the Authority but the Director-General of Communications.  This is because the Director-General is to implement the decision of the Authority (section 15(1)) and OFCA is required to support the function of the Director General (section 16).  It cannot be seriously argued that the financial objectives can be ignored.  Under the CAO, the Authority is to advise the Secretary on ‘any legislation, legislative proposals and regulatory policies relating to telecommunications’ (section 4).  Furthermore, the licence fees are to be paid to the Authority (section 5 of TFO and section 20 of CAO) and these sections require that licence fees paid to the Authority are credited to the account of the OFCA Trading Fund.  In other words, the OFCA Trading Fund provides the resources for the Authority and the OFCA to perform its statutory functions (section 6 of Schedule 3). The TO and TFO and its subsidiary legislation must be read together.  To that extent the exercise of the Secretary and the Authority’s discretion must be fettered.

10.6  As Mr Strachan SC and Mr Beresford for the applicants rightly pointed out, before the establishment of the OFCA Trading Fund, the power of the relevant authorities on financial budgeting must be exercised within the recognized ambits, namely, they must be subject to the constitutional restraint and the Padfield principles.  When it has not been suggested that such powers have been enlarged by the establishment of the OFCA Trading Fund, the exercise of such power under the new statutory regime must likewise be subject to the same restraint.  The fact that the powers are expressly provided for in the TFO does not make any difference on how such powers are to be exercised.  It is of note that the OFCA Trading Fund is merely an accounting entity within the Government but not having a separate legal existence, a principle accepted by the parties and not, as the respondents mistakenly submitted, not properly understood by the applicants.

3)  Section 10(1) of TFO

10.7  Section 10(1) and (2) of the TFO allow surplus to be transferred to the general revenue at the direction of the Financial Secretary.  The Judge held that section 10(1) is the clearest indication that it is permissible for the OFCA Trading Fund to operate with a budget surplus.  Mr Strachan submitted that section 10(1) deals with ‘unplanned’ surplus while section 10(2) deals with ‘planned’ surplus.  There is no dispute by the parties that section 10(2) is not applicable in the present case.

10.8  I am of the view that based on the wording of these sections, section 10(1) is aimed at ‘unplanned’ surplus.  Section 10(2) specifically referred to ‘fees …are structured so as to recover more than the cost of the provision of a government service, including a reasonable return as set out in section 6(6)(c)…’  By contrast, section 10(1) merely refers to ‘any surpluses in the nature of distributable profits….are in excess of the reasonable requirements for the provision of the service including the repayment of the loans…’.  This points towards an interpretation that section 10(1) deals with unplanned surplus and not with the situation where surplus is planned in a way which far exceeds the cost recovery and target return objectives.  If section 10(1) encompasses this later situation, then one cannot see why section 10(2) is still required.  With respect I disagree with the Judge’s view on section 10(1) if he meant that the respondents are entitled by section 10(1) to plan surplus in such large scale as appeared in the past performance which I will now deal with.

4)  The past performance

10.9  The best way to examine whether the respondents had acted unlawfully is to look at the figures of the actual performance and projected performance.  I will deal with the past first.  The Judge did not consider this issue in his judgment probably because of his approach on budgeting.

10.10  The respondents have summarized the financial position of the OFCA Trading Fund based on its past actual performance over a ten year period from 2002/2003 to 2011/2012 (‘the Ten Year Summary’) which is annexed to this judgment as Annex 1.  The financial year begins on 1 April of each year.

10.11  The rate of target return from 2002/2003 to 2005/2006 was prescribed at 14.5%.  The actual rate of return including interest and excluding interest for these four years were respectively,

2002/2003	2003/2004	2004/2005	2005/2006
17.3% / 11%	25.2% / 19.1%	29.7% / 23%	30.7% / 19.8%

10.12  The projected budget for each of the ten years was not produced because they were held by the Judge to be irrelevant when discovery was sought for their production.  However, there is no suggestion that the projections were so far off the mark from the actual performance that one cannot even begin to draw any inference from the actual performance of a planned excessive surplus. 

10.13  There is dispute between the parties on whether interest should be included in calculating the return rate.  Ms Cheng objected to the applicants’ method of including interest income in the returns.  The dispute, in fact, had arisen and was decided in the Court below.  The applicants had sought leave to amend Form 86 on the first day of the hearing to challenge the respondents’ exclusion of interest in calculating the rate of return by adding the following:

‘ 106B. As a matter of law and the proper construction of the Trading Funds Ordinance and the resolution of the Legislative Council establishing the OFTA Trading Fund, the word ‘income’ in the Trading Funds Ordinance includes interest income on reserves and investments and such income is required to be included in the numerator of the rate of return referred to in section 6(6)(c).  However, the respondents have failed to include interest income in their reported and projected rates of return, thereby distorting the calculation of the rate of return both as a measure of the return and as a measure of performance, and leading to an apparent requirement for more income than is necessary to achieve the prescribed rate of return.  In the premises, the respondents erred in law and/or failed or failed properly to take a relevant factor, namely interest income, into account in reaching the Decision.’

10.14  The respondents objected to the proposed amendment and the Judge disallowed the amendment.  In the applicants’ closing submission, they again submitted that interest should be included in calculating the rate of return.  The respondents’ written submission repeated their objection to the applicants raising this issue.  In the applicants’ reply submission, they clearly recognized that the challenge on exclusion of interest did not arise in the Form 86.  The Judge did not address whether it was lawful to exclude interest.  Neither should this Court: this was not a matter that had arisen below because of the Judge’s refusal on the applicants’ proposed amendment on the issue of interest. This being the case, I see no reason why this Court should not rely on the respondents’ method of calculating the returns.  Based on the respondents’ summary in which the interest was excluded, the actual return was not excessive as compared to the target return of 14.5% in the first four years as shown in the Ten Year Summary.

10.15  For the remaining six years from 2006/2007 to 2011/2012, the target return was prescribed at 8.5%.  By then the calculation of actual return had excluded interest income and one can immediately see the huge excessive returns from these six years as compared with the target return of 8.5%:

2006/07	2007/08	2008/09	2009/10	2010/11	2011/12
24.3%	25.4%	15.9%	32.2%	44.7%	48.8%
(nearly 3 times)	(3 times)	(nearly 2 times)	(nearly 4 times)	(over 5 times)	(nearly 6 times)

10.16  Up to 2008, the OFCA Trading Fund was expressly allowed, and in fact required, to set up a Development Reserve.  By 2008, the Development Reserve had reached $690.2 million and after that year there was no further transfer of income into this reserve.  Without the additional budgeting for the reserve, the actual rate of return in the four years after 2008 in fact highlighted the excessive surplus that had been achieved.

10.17  The respondents had not explained these excessive returns for the four years from 2008/2009 to 2011/2012.  In the written closing submission below, the respondents’ case was simply stated as, ‘the subject matter under challenge is not licence fees paid by the applicants in the past’.  This remains to be the position taken by the respondents until being asked by the Court about these excessive surpluses.  Ms Cheng then referred to certain events that had happened in these years.  In 2007, OFCA was required to manage additional legislation such as the Unsolicited Electronic Message Ordinance. In 2008, there was the conversion of fixed lines to UCL.  2008 also saw the collapse of the Lehman Brothers which caused a drop in the profit.  There was also lower investment returns.  At the same time expenditure had increased.  In 2009/10, specific measures were introduced by OFCA to control the expenditure resulting in an increase of profit despite the drop of revenue.  In 2010/2011, there was a huge increase in the number of mobile phone subscribers resulting in an increase on the receipt of licensing fees.

10.18  The respondents had filed the affidavit of Mr Chang Chi Ho, Ivanhoe, Principal Assistant Secretary for Commerce and Economic Development (Communications and Technology) to oppose the judicial review.  He was equally short on the explanation for the vast surpluses for these four years. Mr Chang had only briefly referred to the fact that for 2006/2007 to 2008/2009, the actual rate of return had decreased from 24.3% to 15.9% and the reasons for it.  His emphasis was that the ‘reduction in licence fees is a forward looking exercise such that we have to consider the trend of administration costs and revenue of OFCA Trading Fund for the coming five years instead of the historical profit and loss situation of OFCA Trading Fund’.

10.19  Mr Chang had said that licence fees had been reduced from time to time in the past.  This being the case, the excessive surpluses for the four years from 2008/2009 are all the more inexplicable.

10.20  The surplus, after meeting the target returns and (until 2008) after being transferred to the Development Reserve, was paid into general revenue.  In addition to that, the OFCA Trading Fund also paid a sum representing notional tax on the profits (i.e. income less expenditure).  It is not necessary to go into a discussion on the legal basis (or the lack of it) for paying the notional tax because even if the notional tax was not separately paid, it would remain as part of the surplus to be transferred to the general revenue.

10.21  The amount of payment to the general revenue can be seen from the summary prepared by the applicants for the performance of the OFCA Trading Fund in the eight year period from 2006/2007 to 2013/2014 which is annexed to this judgment as Annex 2.

10.22  The target rate of return has been set at 6.7% for the year 2012/2013 onwards.  As pointed out earlier, the licence fee was reduced from 2013/2014 onwards.  The applicants’ summary indicated that for the eight year period up to 2013/2014, the dividend paid to general revenue was $580,215,000 and the notional tax paid was $109,361,000.

10.23  The applicants also referred to the accumulated Development Reserve of $690.2 million.  However, as correctly pointed out by the respondents, the Development Reserve is not the subject matter of the judicial review and its purpose as stated by the Secretary for Economic Services (Hansard of 10 May 1995) is ‘to be used to reduce the need for future fee increases’.  However, leaving aside the Development Reserve, the accumulated dividend and notional tax paid over in the eight year period came to $689,576,000.  This is almost of the same size of the Development Reserve of $690,200,000. 

10.24  It is in this context and focusing on the four year period of 2008/2009 to 2011/2012, that a serious question does arise as to whether there was indeed planned surplus which far exceeded the permissible financial objectives of the OFCA Trading Fund.  It is a specific ground of the applicants’ challenge that in making the Decision the respondents had failed or failed sufficiently to take the past surpluses into consideration.  It raises directly the issue of the vice of hidden or unauthorized taxation and levying charge beyond its proper objective.  The burden is on the respondents to show there is no such vice. Bearing in mind the approach taken by the respondents below in not defending the past performance, it may be said that the respondents’ burden in respect of the four specific years has not been discharged and the additional circumstances referred to by the respondents for these four years is not a sufficient answer to these excessive surpluses since it is not permissible to advance a justification which was not relied upon by Mr Chang himself. However it is not necessary for me to come to a final view on these matters in the light of the following discussion.

5)  Future projections

10.25  Even assuming these points in the applicants’ favour, this does not mean that the applicants have succeeded in their challenge because it is still necessary to examine how the respondents reached the Decision of only reducing the licensing fees from $8 to $7 per customer connection per year.

(1)  Projections considered before the Decision

10.26  The respondents had considered a number of financial projections for the five year period 2013/2014 to 2017/2018.  Some of the earlier projections showed a very high actual return as compared to the target return of 6.7%. However, as mentioned by Mr Chang, after the consultation on the Proposal had begun, there were developments which caused the respondents to prepare a further five year projection in October 2012 (‘the October projection’).  The Judge identified this projection in paragraph 11 of his judgment:

10.27  The new development were that the establishment of the Authoritywhich required additional staff support and the substantial expansion of the scope of services to be covered by the OFCA Trading Fund relating, for example, to the unfair trade practices, and the new competition law regime.  As can be seen from the October projection, while there is still a huge difference between the actual return projected for 2013/2014 of 25.4% and the target return of 6.7%, the difference gradually narrowed in the subsequent four years:

	2013/2014	2014/2015	2015/2016	2016/2017	2017/2018
Actual return	25.4%	17.5%	11%	6.7%	2.2%
Target return	6.7%	6.7%	6.7%	6.7%	6.7%

10.28  I will adopt the respondents’ summary because, as pointed out earlier, the interest income was excluded from the returns.

10.29  Ms Cheng had also handed up a set of figures showing the difference in percentage between the excess surplus and the projected expenditure.  Ms Cheng described this as the buffer which a prudent administrator in preparing a budget is entitled to adopt.  Hence, for example, in respect of the October projection, the difference is:

2013/2014	2014/2015	2015/2016	2016/2017	2017/2018	Total
12.8%	8.3%	3.6%	0.8%	-1.4%	4.5%

10.30  I am not sure if these figures were put before the Judge.  In any event, Mr Chang had not relied on these figures in his affidavit to justify the excess surplus.  It is not necessary for me to rely on these figures in deciding the challenge to the Decision.

10.31  The applicants disputed the respondents’ view that they will assume additional responsibility or require additional manpower to man the OFCA. Mr Strachan also submitted that the projected actual return of 2.2% for 2017/2018 was only five years away which can be remedied by financial planning adopting the ‘taking one year with another’ approach.  In my view, this is an area where the Court in exercising its supervisory role must tread carefully. The call that the Court is not in a position and should not attempt to micro-manage the activities of the decision makers particularly those involving political and economic implications come into play.  Based on what Mr Chang had said about the developments which were reflected in the October projection, the vice that I have discussed earlier in the judgment simply does not arise in respect of the returns for these five years.  If after taking into account the October projection, the respondents considered that the proper approach was to only reduce the customer  connecting fee by $1 for the future, it cannot be seriously suggested the Decision is unconstitutional, unlawful or Wednesbury unreasonable.  The broader economic landscape requires taking into consideration the growth of mobile phone users may not be sustained and a possible economic downturn.  The following parts of the Joint Statement highlighted this:

‘ A Further Downward Adjustment of Licence Fees

7. The Administration noted the requests of the respondents for a further reduction of licence fees. However, the proposal to reduce customer connection fee from $8 to $7 represents already a rate of reduction of 12.5% of the customer connection fee, which is nearly twofold of the growth in customer connections / mobile stations of 6.3% for the three types of licences concerned in 2011-12.  The Administration worked out the Proposal with due consideration of the financial results of the former Office of the Telecommunications Authority Trading Fund (“OFTATF”) for the past few years and the financial forecast of the current Office of the Communications Authority Trading Fund (“OFCATF”) for the coming five years.  As elaborated in the consultation paper, the Proposal is premised on the assumption that there will be a continuous growth in the number of customer connections/mobile stations.  However, this is by no means guaranteed as the penetration rate of mobile services has already exceeded 220% of the population in Hong Kong.  Moreover, the recent passage of the Competition Bill and the Trade Descriptions (Unfair Trade Practices) (Amendment) Bill 2012 has introduced much more comprehensive and sophisticated regulatory frameworks to tackle anti-competitive conduct as well as unfair trade practices of licensees providing communications services. Substantial additional resources will be needed by OFCA for the CA to carry out its duties effectively under these new regimes.  Furthermore, OFCA also needs to allocate resources for various new initiatives, including the Customer Complaint Settlement Scheme which started operation on 1 November 2012.  As a result of the above, there will be a substantial increase in the administrative costs of OFCA in the coming years and the Administration considers that on the basis of the current forecast, there is no room for further downward adjustment of the licence fee for customer connection / mobile station.

…

Refund of the Licence Fees Paid and/or Creation of a Fee/Tax Holiday

12. Pursuant to section 5(3) of the TFO, the general manager of a trading fund is allowed to keep the surplus with a reserve account.  The reserve of the OFCATF accumulated over the past years has the function of acting as a cushion against any need for licence fee increases.  It is crucial to ensure a predictable and consistently low licence fee environment for telecommunications operators to operate their businesses in Hong Kong.  Taking into account the current proposal of licence fees reduction, the possible economic downturns in the future and the need to incur higher administrative costs as elaborated in paragraph 7, the Administration considers it undesirable to undermine the reserve of the OFCATF by way of a refund of the past licence fees and/or creation of a fee/tax holiday.’ 

(emphasis added)

10.32  The next question is whether the respondents had taken into account the applicants’ complaint of the excessive ‘profits’ in the past in arriving at the Decision.  The answer must be yes.  As highlighted earlier, paragraph 7 of the Joint Statement specifically stated that there was due consideration of the financial results of the former OFTA Trading Fund for the past few years together with the projection for the next five years.  Paragraph 10 specifically referred to the submission on past high rate of return over the past three years and the requests for refund or tax holiday.  Paragraph 17 stated that it had been regularly monitoring the financial performance of the former OFTA Trading Fund.  In my view the Respondents having considered the past performance together with the future projection, were clearly entitled to decide only on a reduction of $1 in the licensing fees and not to accede to the applicants’ other request.  When the past performance had already been considered, the Court is not in a position to unravel or micro-manage the Decision. 

(2)  Projection after the Decision

10.33  After the Decision was made, the respondents updated their financial projections by a March 2013 projection for the same five year period.  One can see that the actual return expressed as a percentage of ANFA (average net fixed assets) and target return as a percentage of ANFA have even considerably narrowed further :

	2013/2014	2014/2015	2015/2016	2016/2017	2017/2018
Actual return	9.7%	11.1%	8.2%	8.5%	7.2%
Target return	6.7%	6.7%	6.7%	6.7%	6.7%

10.34  On no account can it be said that excess surplus has been included in the budget projections.

6)  Approval by Legislative Council

10.35  Further, the Decision had gone through the prescribed legislative process and was actually approved by members of Legislative Council.  This was more than a mere ‘negative vetting’ of the legislation.  In the light of this, there is all the more no room for intervention by the Court.

7)  Pending action

10.36  Mr Strachan informed the Court that the applicants had commenced an action to recover the licence fees paid in the past.  Ms Cheng stated that the respondents have not been served with the writ.  I will refrain from making any comments on that case.

XI.  Conclusion

11.  Accordingly, the Judge’s decision not to accede to the judicial review is correct.  The appeal is dismissed with an order nisi that the applicants are required to pay the respondents the costs of the appeal with a certificate for two counsel.

Hon Kwan JA :

12.  I agree with the judgment of Cheung JA.

Hon Chu JA :

13.  I agree with the judgment of Cheung JA.