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

HCAL 51/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO 51 OF 2013

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JUDGMENT
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I. Introduction

1.  This judicial review is concerned with the proper interpretation of Trading Funds Ordinance, Cap. 430 (“TFO”), Telecommunications Ordinance, Cap. 106 (“TO”) and Communications Authority Ordinance, Cap. 616 (“CAO”) and their interaction with each other.

2.  The Communications Authority (“Authority”), the 2^nd Respondent in these proceedings, is a body corporate established on 1 April 2012 under section 3 of CAO. As its long title suggests, the CAO was enacted inter alia to establish the Authority and to transfer the functions of the former Broadcasting Authority and Telecommunications Authority (“TA”) to the Authority. Its principal role is to regulate the telecommunications and the broadcasting sectors in Hong Kong.

3.  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. Like its predecessor, OFCA is and has at all material times been operating on a trading fund basis as a self‑financing accounting entity under the TFO. The income of the OFTA/OFCA Trading Fund (“Fund”) was and is derived mainly from fees payable by various licensees as defined under section 2 of the TO, including the Applicants and the Interested Parties.

4.  The Applicants have been the joint holders of a unified carrier licence (“UCL”) pursuant to which they provide public internal and external telecommunications services in Hong Kong. The 2^nd Applicant has also been the holder of a UCL. In addition, various affiliated companies of the Applicants hold services-based operator (“SBO”) licences.

5.  The 1^st Respondent (“Secretary”) is responsible for overseeing the Commerce and Economic Development Bureau (“Bureau”), an agency of the Hong Kong SAR Government. The Secretary is the “Secretary” referred to in section 7(2) of TO.

6.  On 29 June 2012, the Respondents jointly issued a consultation paper to invite members of the public to make representations on the proposed “Licence Fee Reductions for Unified Carrier Licences, Public Radiocommunications Service (“PRS”) Licences and Services‑Based Operator Licences” issued under the TO (“Proposal”).

7.  In relation to UCLs, the Proposal was to reduce, beginning 1 March 2013, the customer connection fee from HK$800 to HK$700 for each 100-customer connection; in other words, a reduction from HK$8 to HK$7 per customer connection per year. The other items of fees payable by holders of UCLs, including the annual flat rate fee of HK$1 million, were to remain unchanged. In relation to PRS and SBO Licences, the Proposal was 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, in tandem with, and subject to, the implementation of the proposed reduction of customer connection fee for UCLs.

8.  Written comments were submitted by the Applicants and some of the Interested Parties. The preponderance of the written comments was, for one reason or another, to request a further, and immediate or backdated, reduction in licence fees than that set out in the Proposal. There were also requests for a refund of licence fees paid and/or a fee/tax holiday and a review of licence fees on an annual basis.

9.  In an 8-page 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 published their responses to the submissions received and their decision on licence fees reduction (“Decision”) as follows:

“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.

…

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.

…

The Administration’s Decision

18. Having duly considered the views and comments received in [the] context of the consultation exercise, the Administration has come to the decision that the Proposal should be proceeded with as planned.” (emphasis added)

10.  In essence, the Decision was that the Respondents did not accede to the request of the Applicants and others in the industry to further reduce the licence fees, refund any licence fees paid or to grant a fee/tax holiday. Nor did the Respondents agree to implement the fees reduction stated in the Proposal earlier than 1 March 2013.

11.  For ease of reference, the most up-to-date financial projections of the Fund prior to the making of the Joint Statement were these:

	13-14	14-15	15-16	16-17	17-18
	$M	$M	$M	$M	$M
Revenue	455.2	463.5	471.2	478.0	489.4
Expenditure	(391.3)	(413.4)	(439.9)	(460.1)	(483.4)
Operating surplus before interest and tax	63.9	50.1	31.3	17.9	6.0
Interest income	45.6	49.2	51.3	52.4	52.4
Taxation	(11.3)	(9.0)	(6.0)	(3.8)	(1.8)
Surplus after taxation	98.2	90.3	76.6	66.5	56.6
Transfer from development reserve	0.0	0.0	0.0	0.0	0.0
Surplus after transfer from development reserve	98.2	90.3	76.6	66.5	56.6
Proposed dividend	(98.2)	(90.3)	(76.6)	(66.5)	(56.6)
Surplus after dividend	0.0	0.0	0.0	0.0	0.0
Transfer to reserve	0.0	0.0	0.0	0.0	0.0
Retained surplus for the year	0.0	0.0	0.0	0.0	0.0
Financial Performance Measures
Average net fixed assets (ANFA), $’M	207.3	234.3	230.2	209.1	188.9
Actual return as % of ANFA	25.4%	17.5%	11.0%	6.7%	2.2%
Target return as % ANFA	6.7%	6.7%	6.7%	6.7%	6.7%

12.  According to these projections, the actual rate of return on fixed assets would drop to 2.2% in 2017/2018, about one-third of the target return of 6.7% set by the Financial Secretary.

13.  On 27 February 2013, the Applicants sought leave to apply for judicial review against the Decision. After hearing the Applicants ex parte, this court granted leave on 12 July 2013.

14.  In the amended Originating Summons filed herein on 29 July 2014, the Applicants sought the following reliefs from this 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.

II. The Statutory Regime

(1) TO

15.  The Long Title of TO reads:

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

16.  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) TFO

17.  The TFOcame into operation on 12 March 1993. Its object can be glimpsed from its Long Title:

“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 ancillary matters.”

18.  The relevant provisions of the TFO, for the present purposes, 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) CAO

19.  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).

(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…”

20.  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).”

III. The Fund

21.  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 section 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.” (emphasis added)

22.  The Fund, then known as the OFTA Trading Fund, was established on 1 June 1995. 

23.  The financial implications of the setting up of the OFTA Trading Fund was stated in a paper prepared by the Economic Services Branch dated 17 February 1995 (“ESB Paper”):

“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.” (emphasis added)

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. [1] Its  actual rate of return on fixed assets increased from 17.3% in 2002/2003 to 24.3% in 2006/2007[2] 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.

IV. Grounds of Review

28.  In the amended Form 86, the Applicants have set out four grounds in support of the present application. It is not necessary to set them out in any detail here. This is because, in the course of the hearing, Mr Yu, for the Applicants, has condensed the grounds of review into three points of law, the common thread of which is that, in coming to the Decision, the Respondents have acted unlawfully or ultra vires. The three points of law are:

(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 (“Constitutionality Point”).

(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 (“Padfield Point”).

(3) On a proper construction of the TFO, the Fund should be managed on the “cost recovery principle” ie 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 (“Cost Recovery Principle Point”).

29.  At the heart of the three points of law is the Applicants’ dissatisfaction with OFCA’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. 

30.  As a slight variant to these three points of law, Mr Yu, in his reply submissions, maintains that the Applicants are also relying on Wednesbury unreasonableness in impugning the Decision. The unreasonableness consists of the Respondents’ failure to take into account relevant consideration and taking into account irrelevant consideration, the relevant consideration being the cost recovery principle, and the irrelevant consideration being purposes outside the ambit of the TFO ie the provision for the payment of surpluses to the general revenue.

V. Constitutionality Point

31.  The Applicants’ submissions go like this.  It is a fundamental principle of English law that no minister of the Crown has power to demand the payment of money from any subject for any purpose unless authorised to make that demand by express plain words of a statute or other legislative enactment: Attorney-General v Wilts United Dairies Ltd (1921) 37 TLR 884; affd (1922) 38 TLR 781; Congreve v Home Office [1976] QB 629; Vestey v Inland Revenue Commissioners [1980] AC 1148, 1172E.

32.  In Attorney-General v Wilts United Dairies Ltd supra at 885 ‑ 886, Scrutton LJ said:

“It is conceivable that Parliament, which may pass legislation requiring the subject to pay money to the Crown, may also delegate the 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 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 under clear and distinct legal authority, established by those who seek to impose that 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 to support 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 twopence 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.”

33.  At 886, Atkin LJ said:

“…if any 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 statue”. (emphasis added)

34.  Mr Yu submits that, in line with constitutional principles, the HKSAR Government has no power to demand payment of money from a subject for any purpose unless authorised to do so expressly by the Legislative Council. This is a principle of constitutional importance. He further submits that, in the present case, the Government is effectively saying to the Applicants (and other licence holders) that they can have a licence but they have to pay a fee which is calculated on the basis of a budget which seeks to channel very substantial sums of money to the general revenue. That, in his submission, is impermissible.

35.  Ms Cheng, for the Respondents, does not dispute the validity of the principles stated above but submits that they do not invalidate the Decision.

36.  I agree with Ms Cheng. In the view of this court, the constitutional principles stated in the authorities do not at all undermine the lawfulness of the Decision, for three reasons.

37.  First, in the present case, the Legislative Council has indeed expressly required the obtaining of a licence before anyone can offer, in the course of business, a telecommunications service: section 8 TO. The Legislative Council has also expressly authorized (i) the Secretary to prescribe, by regulation, the licence fees payable for the grant and renewal of a carrier licence (other than an exclusive licence) and by way of annual fees: section 7(2) TO, reg. 5 and Schedule 3 of Telecommunications (Carrier Licences) Regulation, Cap. 106V; and (ii) the Authority to determine the licence fees payable for the grant and renewal of licences (other than exclusive licences and carrier licences) and by way of annual fees: section 7(6) TO.

38.  As far as section 7(2) TO is concerned, the Secretary can only prescribe the licence fees payable by regulation. Under section 34 of Interpretation and General Clauses Ordinance, Cap. 1 (IGCO”), such regulation must be laid on the table of the Legislative Council after publication in the Gazette and subject to its scrutiny by a process commonly known as “negative vetting”. On the materials before this court, the Decision to reduce the customer connection fee for UCLs from HK$800 to HK$700 for each 100-customer connection was implemented by way of amending regulation which was indeed laid on the table of the Legislative Council. The Legislative Council supported the reduction and chose not to exercise its power of amendment under section 34(2) IGCO. In consequence, the amending regulation came into effect on 1 March 2013 as proposed.

39.  It is therefore clear in the present case that the levy of the licence fees in question and the determination of their amounts are expressly authorized by the Legislative Council. In the words of Atkin LJ in Attorney-General v Wilts United Dairies Ltd supra, “Parliament has authorized the particular charge”.

40.  Second, under section 6(5) of TFO, the Financial Secretary may issue directions to the general manager for the control and management of the Fund and the general manager must comply with such directions. One of the directions expressly authorised by the TFO is the treatment of the Fund’s surpluses. Under section 10 (1) of TFO, the Financial Secretary is expressly authorised to direct the transferof the Fund’s surpluses into the general revenue.

41.  Hence, as far as legislative authority for the transfer of surpluses to the general revenue is concerned, this court is satisfied there is ample authority for the general manager of the Fund to do so upon the direction of the Financial Secretary, and the Respondents have not erred in taking into consideration the provision for such a transfer in coming to the Decision.

42.  Just as the levy of money, by whatever name it is called, for the use of the Government without authority from the Legislature is unconstitutional, the reverse is also true for the levy of money, by whatever name it is called, for the use of the Government with authority from the Legislature. In my judgment, if the transfer of the Fund’s surpluses to the general revenue is authorized by the Legislature and is constitutional, which this court concludes it is, then it should not matter by whatever name these surpluses are called - whether they are described as “notional profits tax”, “dividends” or, using the language of section 10 (1) of TFO, “distributable profits”. The substance and effect of the arrangement is the same – the Fund’s surpluses are earmarked for transfer to the general revenue, and are so transferred.

43.  Third, at this juncture, one might as well bear in mind a thing or two about the nature of a trading fund.

44.  By definition, a trading fund is merely “an accounting entity within the Government”: section 2 TFO – it is not a separate legal entity which can earn income, incur liabilities and accumulate assets in its own right. Further, the establishment of a trading fund is for the purpose of managing and accounting for the operation of a Government service: section 3(1) TFO. On a strict legal analysis, payments to a trading fund for the operation of a Government service are payments to the Government for the provision of that service. The crediting of such payments to a trading fund is merely an accounting exercise authorized and required by TFO; so is the transfer of a trading fund’s surpluses into the general revenue if the Financial Secretary so directs.

45.  In the present context, the levy of licence fees is to pay for the operation of a service provided by OFCA. There is no suggestion from the Applicants that OFCA should provide the service for free or that the charging of a fee for the provision of a service is unconstitutional or unlawful. The fees paid to the Fund are strictly speaking payments to the Government for that service but treated separately as a matter of accounting. The transfer of surpluses from the Fund to the general revenue is also simply a matter of accounting – rather like the transfer of money from one’s left pocket to the right. In these circumstances, this court does not accept that the actual or projected transfer of the Fund’s surpluses into the general revenue, authorized as it is by the TFO, offends any constitutional principles as suggested by the Applicants. 

46.  For the above reasons, this court rejects the Constitutionality Point.

VI. Padfield Point

47.  Of course, the existence of legislative authority to levy licence fees and determine their amount does not preclude the court from examining whether such authority has been abused. In Reg. v. Secretary of State for the Environment, Ex parte Nottinghamshire County Council [1986] 1 AC 240 at 250D-F, Lord Scarman, 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.”

48.  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.”

49.  Mr Yu has also cited a number of authorities to illustrate the circumstances under 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. These cases are no more than illustrations of the Padfield principle as applied to the particular governing statutes and facts of the cases and do not really assist the resolution of the present application.

50.  Mr Yu submits this court has to ascertain the purpose and object of the power conferred by section 7 of TO on the Respondents to levy and determine the licence fees payable by various licence holders. He submits that it is certainly not one of the objects and purposes of the TO to confer on the Respondents the power to levy licence fees with a view to providing for a surplus for transfer to the general revenue.

51.  Mr Yu further submits that this court also has to construe the TFO in order to ascertain the policy and object of the establishment of a trading fund. In essence, the policy and object of a trading fund is to enable certain services provided by the Government to be self‑financed pursuant to the terms of the Ordinance, and no more. There is nothing in the TFO which supports the proposition that one of the objects of establishing a trading fund is to hive money off for general revenue.

52.  This court agrees, as a general proposition, that the power conferred by the TO on the Respondents to grant and renew licences and to levy and determine licence fees is to enable them to better control the provision of telecommunications services, as suggested in its Long Title. The imposition of the requirement of licences and the payment of licence fees as one of the means to control the provisions of telecommunications services cannot be doubted. Indeed, the Applicants do not dispute that the imposition of licence fees is within the policy, object and purpose of the TO – they only dispute the amount so imposed.

53.  The question is: should the court interfere with the Respondents’ determination of the amount of licence fees? In order to answer this question, one must firmly bear in mind the supervisory role of the court in judicial review proceedings in the context of public finance.

54.  In Reg. v. Secretary of State for the Environment, Ex parte Nottinghamshire County Council supra at 248E-249A, Lord Scarman said:

“The trial judge, Kennedy J., rightly reminded himself of an observation made by Lord Diplock in Secretary of State for Education and Service v. Tameside Metropolitan Borough Council [1977] AC 1014, 1064:

‘The very concept of administrative discretion involves a right to choose between more than one possible course of action upon which there is room for reasonable people to hold differing opinions as to which is to be preferred.’

And he concluded, after giving more attention to the detailed arguments as to the financial consequences of the guidance than they were strictly entitled to receive:

‘In my judgment, although the Secretary of State could, of course, have set different guidance which would perhaps not have caused the applicant authorities to complain, it cannot be said that the approach which he has adopted was unreasonable in the Wednesbury sense.’ ”

55.  The same can be said of the Decision.

56.  By the TO, the Legislative Council has entrusted the tasks of determining the level of licence fees to the Respondents. There is no express limit on the discretionary power so conferred, for sound reasons. The exercise of the discretionary power to determine the amount of licence fees is essentially a matter of economic, and, to some extent, political judgment for the Respondents. Certainly, it is not simply a matter of arithmetic calculation of the income and expenditure of OFCA and balancing one against the other as far as humanly possible. The Legislature could in theory have imposed such a rigid formula when it approved the setting up of the Fund. But it has not. As can be seen from the Joint Statement itself, the economic arguments for and against a further reduction of the licence fees were varied. At the risk of stating the obvious, the weight to be attached to each economic argument is a matter of value judgment upon which there is room for reasonable people to differ.

57.  Given that the Legislative Council has conferred the discretion on the Respondents, this court in its supervisory function should refrain from intervening in the exercise of such discretionary judgment unless it is demonstrably outside the policy object and purpose of the TO (or is Wednesbury unreasonable). On the materials available, this court is not satisfied that setting the licence fees in question at lower than HK$700 for each 100‑customer connection / 100 mobile stations would be within the policy object and purpose of the TO in better controlling the provisions of telecommunications services in Hong Kong, but setting them at HK$700 would not.

58.  It is true that setting the licence fees at HK$700 for each 100‑customer connection / 100 mobile stations might result in a surplus in the next five years commencing 2013/2014. According to the Fund’s financial projections quoted verbatim above, it would result in a surplus. But no serious argument has been put forward by the Applicants as to why creating a surplus in the Fund is outside the policy object and purpose of the TO in better controlling the provision of telecommunications services in Hong Kong.

59.  The Applicants’ complaint is focused notso much on the creation of the surplus as such, but on the application of the surplus ie its transfer to the general revenue. It seems to this court the validity of their argument cannot be resolved by a proper construction of the TO which is silent on the application of the Fund’s surpluses. Rather it is a matter of ascertaining the intention of the Legislative Council in enacting the TFO and, by resolution, approving the setting up of the Fund. The power conferred on the Respondents by the TO only affects the revenue/ credit side of the Fund. It is the TFO which governs the expenditure/ debit side of it.

60.  That leaves the Applicants with the argument based on the proper construction of the TFO.

61.  The first difficulty faced by the Applicants concerns the subject matter of these judicial review proceedings. The Applicants, no doubt advisedly, are not seeking to challenge (i) the Fund’s past practice of transferring surpluses to the general revenue, or (ii) the Fund’s financial projections for the five years commencing 2013/2014 which envisaged such a transfer. Instead, they are challenging the Decision which was to set the licence fees in question at HK$700 per 100‑customer connection/100 mobile stations starting from 1 March 2013, and not some lower figure. However, the power conferred on the Respondents to set licence fees is not contained in the TFO. It is contained in the TO. As far as the Padfield Point goes, this court has already concluded that the Decision to set the licence fees in question at HK$700 for each 100‑customer connection/100 mobile stations is within the policy object and purpose of the TO in better controlling the provision of telecommunications services in Hong Kong.

62.  The second difficulty faced by the Applicants is that, even if the Respondents’ power to determine the licence fees in question is somehow fettered by the TFO, in my judgment, it would still be within the policy object and purpose of the TFO for the Fund to make provisions for a surplus in preparing its financial forecast and for such a surplus to be transferred to the general revenue. If so, the Respondents were not acting ultra vires in setting the licence fees in question which might or would result in a surplus and which in turn would end up in the general revenue. Nor was it Wednesbury unreasonable for the Respondents to have done so. The reasons are these.

63.  Under section 3 of TFO, a financial objective of a trading fund is that the operation of the Government service in question shall fund itself from the income generated from such a service. This is reiterated in section 6(6)(b). If that objective is in accordance with the policy object and purpose of the TFO, which the Applicants do not challenge, it is inconceivable the intention of the Legislative Council was such that the Fund must not achieve a better financial result than simply meeting expenses out of its income or, putting it in another way, balancing its budget.

64.  One must bear in mind that meeting expenses out of its income is not the only policy object and purpose of the TFO. Sections 6(6)(a) and 6(6)(c) of the TFO set out two further objectives for the general manager of the Fund ie to provide an efficient and effective operation that meets an appropriate standard of service and to achieve the target rate of return set by the Financial Secretary. All three objectives point to one common thread: the general manager of the Fund has to be financially prudent in providing an efficient and effective operation. That means the Fund must not, at least over a reasonable period of time, operate on a budget deficit so as to require further funding from the Government. But the concept of being financially prudent is certainly apt to cover scenarios in which the Fund is able to (i) just balance its budget and achieve the target rate of return or (ii) operate on a budget surplus over and above the target rate of return.

65.  The fact that the general manager of the Fund is expected to provide an efficient and effective operation that meets an appropriate standard of service means inter alia it should deploy sufficient resources to provide the requisite standard of service. The fact that the Fund is expected to meet expenses out of its income means it should not incur expenditure more than its revenue, over a reasonable period of time. Lastly, the fact that the Fund is expected to achieve the rate of return on fixed assets set by the Financial Secretary does not mean that it cannot exceed the Financial Secretary’s expectation.

66.  Under a trading fund accounting framework, the Fund is required to adopt accounting and management practices of the private sector like a quasi-commercial operation. This is borne out not just by the 1992 Brief and ESB Paper quoted above, but also by the provisions of the TFO. Section 10(1) of TFO contemplates the Fund’s operation may result in surpluses “in the nature of distributable profits”.[3] In my judgment, section 10(1) is the clearest indication in support of the proposition that, under the TFO regime, it is permissible for a trading fund to operate with a budget surplus which, if materialized into actual surplus, can be distributed to its investor ie the Government by transferring it into the general revenue.

67.  All financially prudent organizations, commercial or quasi‑commercial, set targets as a motivation for its staff or as a benchmark by which their performance is measured. The same goes for governmental or quasi-governmental organizations. The difference between the two is that the targets for commercial or quasi-commercial organizations are usually financial whereas the targets for governmental or quasi‑governmental organizations are usually performance‑based. These organizations are expected to reach the set target. But if they can exceed the target, so much the better.

68.  It is inconceivable that the intention of Legislative Council in enacting the TFO was such that a trading fund was permitted to achieve the target rate of return set by the Financial Secretary, but was not permitted to exceed it. Had that been the intention of the Legislative Council, one would expect some indication to that effect in the TFO – none can be found. Paraphrasing the words of Lord Nicholls of Birkenhead in ex parte Spath Holme Ltd supra, this court is unable to impute to the Legislative Council in respect of the language used in the TFO an intention to preclude the Fund from achieving a surplus which exceeds the Financial Secretary’s target rate of return.

69.  For these reasons, this court rejects the Padfield Point.

VII. Cost Recovery Principle Point

70.  Mr Yu submits that, as a matter of construction of the TFO, the manager of the Fund must adhere to the so-called cost recovery principle. In the present context, it means The Fund’s budget should provide for income which will cover expenses and the target return specified by the Financial Secretary and no more. If the manager of the Fund were to budget for something over and above that and seek to make a profit, he would be going outside the terms of the TFO. If so, the Respondents would also be going outside the terms of the TFO in setting licence fees at a level which would result in such a profit.

71.  It should be readily apparent that this cost recovery principle Point is just another way of formulating the Padfield Point with regard to the proper construction of the TFO. To be fair to Mr Yu, he admitted as much when opening his case to this court on the first day of the hearing when he told this court this point was “basically a different route in coming to the same conclusion”. In the view of this court, the reasons given above for rejecting the Padfield Point apply with equal force to rejecting this point.

72.  Further, this court agrees with Ms Cheng that the Applicants have grossly overplayed the cost recovery principle.

73.  To start with, there is nothing in the language of TFO which suggests cost recovery is the only guiding principle in the management of a trading fund or that it must assume prime importance over and above any other considerations. On the Applicants’ own case, the cost recovery principle is derived primarily from the wording of section 6(6)(b) of TFO. While recovery of cost is an important objective which must be taken into consideration in making any financial projections for the Fund, other factors i.e. the objectives set out in sections 6(6)(a) and (c), the financial needs of the Fund in the near future ie 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 are also relevant in the weighing exercise. These factors have been taken into account by the Respondents in coming to the Decision, as evident from the Joint Statement, and there is no suggestion from the Applicants that any of these are irrelevant considerations.

74.  In my judgment, the proposition that the Respondents’ hands are completely tied by the cost recovery principle is not supported by the language of the TFO (or the TO for that matter) and is incompatible with the flexibility under which a trading fund is supposed to be managed.

75.  If the factors which the Respondents have actually taken into account in coming to the Decision are relevant considerations, which this court rules they are, then it is for the Respondents to decide how much weight to be attached to each of them in arriving at the proper level of licence fees - this court would not lightly substitute its own view for that of the Respondents. 

76.  In R v. The Director General of Telecommunications, ex parte Cellcom Ltd & Ors [1999] ECC 314, Lightman J observed at [26] and [27] as follows:

“[26] … Where the Act has conferred the decision-making function on the Director, it is for him, and him alone, to consider the economic arguments, weigh the compelling considerations and arrive at a judgment. The applicants have no right of appeal: in these judicial review proceedings so long as he directs himself correctly in law, his decision can only be challenged on Wednesbury grounds. The court must be astute to avoid the danger of substituting its view for the decision-maker and of contradicting (as in this case) a conscientious decision-maker acting in good faith with knowledge of all the facts…

If (as I have stated) the court should be very slow to impugn decisions of fact made by an expert and experienced decision‑maker, it must surely be even slower to impugn his educated prophesies and predictions for the future…

[27] The court may interfere with a decision if satisfied that the Director has made a relevant mistake of fact or law.  But a mistake is not established by showing that on the material before the Director the court would reach a different conclusion…The court may interfere if the Director has taken into account an irrelevant consideration or has failed to take into account a relevant consideration. But so long as the Director takes a relevant consideration into account, the weight to be given to that consideration and indeed whether any weight at all should be given to that consideration is a matter for the Director alone, so long as his decision is not perverse.”

77.  This court would gratefully adopt and echo the sentiment of Lightman J.

78.  For the above reasons, this court also rejects the Cost recovery principle Point.

VIII. Wednesbury unreasonableness

79.  This is pleaded in various paragraphs in the amended Form 86, including paragraph 107 as Ground 3 of the judicial review, but can be dealt with briefly.

80.  As stated earlier, Mr Yu maintains the Applicants’ reliance on Wednesbury unreasonableness to this extent: in coming to the Decision, the Respondents have (a) wrongfully failed to take into account a relevant factor ie the cost recovery principle, and (b) taken into account an irrelevant factor ie the provision for surpluses and to pay them into the general revenue.

81.  In the view of this court, point (a) is a slightly different way of formulating the Cost recovery principle Point, while point (b) is just another way of saying the Respondents have acted unlawfully in levying licence fees with a view to making payments to the general revenue ie the Constitutionality / Padfield Point.

82.  For the reasons given above, this court is unable to accept the contention that the Decision should be impugned as Wednesbury unreasonable. Further, point (a) is factually incorrect. As evident from paragraph 8 of the Joint Statement, the Respondents have certainly not overlooked the cost recovery principle. Where they differed from the Applicants was the weight to be attached to it.

IX. Disposition and costs order nisi

83.  The application for judicial review is hereby dismissed.

84.  There shall be an order nisi that costs of and occasioned by the application be to the Respondents, to be taxed if not agreed, with certificate for two counsel.

85.  I would like to thank counsel for their detailed and helpful submissions.