***********************************************

Following is a speech by the Secretary for Information Technology and Broadcasting, Mrs Carrie Yau, in moving the resolution on amendments to the Telecommunications (Method for Determining Spectrum Utilization Fees) (Third Generation Mobile Services) Regulation in the Legislative Council today (July 4):

President,

I move that the amendments to the Telecommunications (Method for Determining Spectrum Utilization Fees) (Third Generation Mobile Services) Regulation be passed to adopt the "fifth leaver" rule to conduct the spectrum auction for the third generation (3G) mobile services. The content of the motion is provided in the paper forwarded to Members.

2. In order to complete the scrutiny of both the principal and subsidiary legislation for the 3G exercise within this legislative session, the draft Regulation was submitted to the Bills Committee at an early stage when the principal legislation was under examination. With the support of the Bills Committee and the House Committee, a Subcommittee was set up promptly to scrutinise the Regulation to tie in with the 3G mobile services licensing exercise. I would like to take this opportunity to express my heartfelt thanks to Members for their support and co-operation.

The Amendments

3. During the examination of the Regulation by the Subcommittee, the most controversial issue which Members had discussed in great detail was the "fourth leaver" rule originally proposed by the Government. Under such proposal, the price willing to be paid by the lowest successful winner will become the ultimate price of the spectrum auction for 3G mobile services. However, the Subcommittee considered it more appropriate and hence proposed to adopt the "fifth leaver" rule whereby the price to be paid by all winners is determined by the price bid by the fifth highest bidder.

4. Having considered very carefully the implications of the "fifth leaver" methodology, we decide to accede to the Subcommittee's request and make the necessary amendments. We are of the view that our original proposal, i.e. the adoption of the "fourth leaver" rule in an auction based on bidding on royalty percentages and minimum guarantee payments, is a balanced arrangement. Not only does it meet the policy to allocate the licences in a fair and efficient manner, but also achieve the aim of encouraging entry into the 3G market under the current conditions of the telecommunications market. Nevertheless, we do not have any objection in principle to the adoption of the "fifth leaver" rule proposed by the Subcommittee since the primary objectives of the licensing exercise have been achieved.

5. As regards the possible implications of the amendments on public revenue, we note the Subcommittee's wish to provide an attractive environment for the operation of 3G mobile services through the amendments. However, we cannot quantify the potential effects of such amendments on public revenue, as interest in the auction will depend on market conditions at that time. We hope that through competition, any benefits arising from a lower price payable by the operators will be passed on to consumers.

Details of the Amendments

6. Having accepted the proposal of the Subcommittee, we propose to amend the regulation by stipulating the royalty percentage payable as the lowest common royalty percentage offered by all successful bidders. This percentage should not be lower than the royalty percentage offered by the fifth highest bidder. As the price is determined by the price bid by the fifth highest bidder under the revised methodology, the royalty payable will be the reserve price if there is no fifth highest bidder (e.g., as a result of one of the successful bidders is disqualified).

7. We will ensure that the revised auction design with the 'fifth leaver' rule will continue to meet our policy objectives of encouraging entry to the 3G market, enhancing competition in the market, minimizing market distortion and allocating the spectrum bands in a fair and efficient manner. As a measure to minimize collusion and preserve the integrity of the auction, we must maintain the confidentiality feature of the auction.

Timetable

8. The preparation of the information memorandum for the 3G auction is now in full swing so that applications for licences can be invited as soon as possible after the passage of the amendments today. We estimate that we would be in a position to release the information memorandum in July in order to conduct the 3G spectrum auction as scheduled.

9. For this purpose, I hope to have the support of the Legislative Council to pass the amendments at the earliest possible time. Thank you.

End/Wednesday, July 4, 2001

NNNN