Pccw-hkt Telephone Ltd and Another v. The Secretary for Commerce and Economic Development and Another
Read the full judgment text of CACV 208/2015 on BabelCite. This Court of Appeal judgment was delivered on 17 May 2016.
4. Assets and liabilities of a trading fund
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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 ________________________ Hon Cheung JA : I. Introduction 1.1Two 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. 1.2The 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 2.1Operators 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. 2.2The 1st and 2nd applicants are joint holders of a UCL pursuant to which they provide public internal and external telecommunication services in Hong Kong. The 2nd 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. 2.3The 1st 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 2nd 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’). 2.4The 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 2.5Under 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. 2.6The 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. 2.7The 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 2.8The 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 2.9On 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. 2.10By 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:
2.11The 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. 2.12In 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. 2.13The Authority and the Secretary invited written comments on the Proposal by 30 July 2012. 2.14The 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. 2.15Other service providers, including the interested parties, also responded to the Proposal. 5) The Joint Statement 2.16The 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. 2.17On 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. 2.18On 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’. 2.19On 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. 2.20At 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. 2.21The amending regulation came into effect on 1 March 2013. 2.22On 12 July 2013, the applicants obtained leave to apply for judicial review against the Decision. 2.23In 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 3.1The Long Title of TO reads:
3.2Sections 7(2) and (6) of TO provide:
2) Communications Authority Ordinance 3.3The 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. 3.4The functions of the Authority are set out in section 4 of the CAO:
3.5Section 20(1) of the CAO provides for payments to the Authority:
3) Trading Funds Ordinance 3.6The 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.’ 3.7The object of the TFO as seen from its long title is:
3.8The relevant provisions of the TFO are as follows:
3.9In 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 :
IV. Background material of the Trading Funds Ordinance 1) The Efficiency Unit 4.1The 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. 4.2It 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. 4.3It 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). 4.4It then explained the nature of the trading fund:
2) 1992 Legislative Council Brief 4.5The 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:
3) The Legislative Council Brief 17 February 1995 4.6On 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:
4) Hansard 10 May 1995 4.7In 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:
5) Evidence of Mr Sullivan 4.8While 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. 4.9His 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. 4.10He set out his views in the Executive Summary part of his affirmation:
4.11MrSullivan further explained the usual financial objectives of a trading fund:
4.12Mr 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:
4.13He 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. 4.14Mr 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.
4.15The Guide and Handbook were also referred to by the applicants at the hearing of the appeal. 4.16Mr 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. 4.17In 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:
VI. The applicants’ complaints 6.1The applicants built their case on the success of the OFCA Trading Fund. 6.2The 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’). 6.3As 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 7.1The 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 7.4Two 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:
IX. The principles 1) The constitutionality issue (1) Basic Law 9.1Article 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. 9.2The provisions of the Basic Law reflect Annex I, section V, of the Joint Declaration:
(2) Common law 9.3What 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:
9.4At 886, Atkin LJ said:
2) The Padfield issue 9.5The 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. 9.6Lord 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:
9.7In 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:
9.8Lord 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:
9.9Much 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:
9.10Laws LJ in R v. Secretary of State for Work and Pensions [2003] 3 All ER 577 said at [73] that:
9.11Where 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. 9.12The 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 9.13The principle is well established and does not need to be repeated here. X. My view 1) Nature of the OFCA Trading Fund 10.11The 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. 10.2The 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. 10.3These 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. 10.4But 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 10.5Although 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. 10.6As 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 10.7Section 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. 10.8I 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 10.9The 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. 10.10The 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. 10.11The 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,
10.12The 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. 10.13There 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:
10.14The 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. 10.15For 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%:
10.16Up 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. 10.17The 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. 10.18The 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’. 10.19Mr 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. 10.20The 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. 10.21The 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. 10.22The 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. 10.23The 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. 10.24It 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 10.25Even 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 10.26The 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:
10.27The 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:
10.28I will adopt the respondents’ summary because, as pointed out earlier, the interest income was excluded from the returns. 10.29Ms 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:
10.30I 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. 10.31The 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:
10.32The 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 10.33After 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 :
10.34On no account can it be said that excess surplus has been included in the budget projections. 6) Approval by Legislative Council 10.35Further, 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 10.36Mr 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.
Mr Mark Strachan SC and Mr Roger Beresford, instructed by Baker & McKenzie, for the 1st and 2nd applicants Ms Teresa Cheng SC and Mr Adrian Lai, instructed by Department of Justice, for the 1st and 2nd respondents The 1st to 9th interested parties unrepresented, absent
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Cases cited in this judgment
Further hearings and rulings under CACV 208/2015