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

The Chief Executive in Council has agreed that Government should proceed with detailed discussions with the Pacific Century Group (PCG) on the development of the Cyberport based on the Letter of Intent signed with the Group.

Announcing this today (Thursday), a spokesman for the Information Technology and Broadcasting Bureau said the Government hoped to conclude the legal documentation by summer so that planning, design and construction works by PCG could begin as soon as possible.

The Government will liaise closely with the anchor tenants and other companies which have expressed interest in becoming tenants at the Cyberport.

"Detailed specifications are being drawn up and anchor tenants and interested companies will be consulted to ensure that the Cyberport meets their requirements," the spokesman said, adding that, in addition to the eight anchor tenants, 34 companies have so far registered interest in becoming tenants.

The spokesman emphasised that the Cyberport was an information infrastructure project which would serve as a flagship to put Hong Kong firmly on the global information technology and services map.

He said the Government reached agreement with PCG on the broad framework for the development of the Cyberport in February this year. Based on the terms set out in the Letter of Intent signed with PCG, both parties will continue discussions with a view to finalising the legal documentation expeditiously. The key terms in the Letter of Intent include :

* The Government's equity contribution will be based on the land value assessed at the time of grant of the development right, which is expected to take place immediately after the Town Planning Board's approval for the rezoning of the Telegraph Bay Outline Zoning Plan, in around 12 to 15 months' time.

* The value of the land for the ancillary residential development at the time of grant of development right to PCG was estimated at around $5.5 billion when the Letter of Intent was signed. PCG's capital contribution is estimated at $7 billion.

* The construction cost for the Cyberport portion is estimated at $5 billion and that for the ancillary residential development is $8.7 billion.

* After allowing for the construction costs and $200 million for a Cyberport Development Fund, profits will be shared between the Government and PCG according to their respective capital contribution. According to the current assumptions (i.e. including a land value of $5.5 billion for the residential portion), the Government and PCG will share profits at the ratio of 44 : 56. If the land value of the residential portion turned out to be higher at the time of grant of the development right, say $8 billion (the reserve price suggested by a group of companies in a recent submission through their lawyer to the Financial Secretary), the ratio between Government and PCG would become 53 : 47.

The spokesman noted that the Government had taken the risk factors into consideration when structuring its financial arrangement with PCG.

Under the Letter of Intent, the Government will retain significant control of the land and the development right if PCG defaulted; the Government has the right to sell its equity interest in the project to third parties; PCG will guarantee the timely completion of the Cyberport and the ancillary residential project according to a pre-determined timetable and a fixed price, and will guarantee completion to pre-agreed specifications; PCG will provide a bank guarantee to ensure the availability of six months' anticipated cashflow and a bank guarantee if PCG creates encumbrances on the development right in raising financing for the project.

"Our analysis shows that the Government's downside risk is strictly limited. Except for the market risk involved in the sale of the flats in the residential portion, the other risks involved in the construction, financing, etc. of the Cyberport project would be borne by the private sector partner. On the other hand, the Government will share in the upside gains in the sale of flats in the residential portion," the spokesman noted.

Turning to the alternative proposal put forward recently by a group of developers through their lawyer, the spokesman said the proponent had suggested the Government would receive an up-front cash amount of $8 billion by auctioning off the ancillary residential property. The Government could then use $5 billion for the construction of the Cyberport portion.

"Under that proposal, the Government's upside gain will be capped at a fixed amount of $3 billion; but at the same time all risks associated with the development of the Cyberport portion will be borne by the Government," he said.

"More importantly, the proposal goes against the whole concept of the Cyberport development, which is that the entire site including both the Cyberport portion and the residential portion should be developed as an integrated package.

"Also, the private sector partner should not only become an anchor tenant of the Cyberport but also actively assist in finding leading IT and information services companies as anchor tenants as well."

The following table shows the Government's return profile net of the Cyberport construction cost between the Letter of Intent (which provides 100% ownership of the Cyberport portion) and the developers' proposal at an assumed land value of $8 billion for the residential portion :

Sales Price per square foot	Government's return as per Letter of Intent (Discounted to Present Value)	Government's return as per Developers' Proposal
$4,000	$4,233 million	$3,000 million
$5,000	$5,862 million	$3,000 million
$6,000	$7,506 million	$3,000 million
$7,000	$9,164 million	$3,000 million
$8,000	$10,837 million	$3,000 million

"Comparing the two proposals, the financial arrangement under the Letter of Intent clearly yields a significantly higher return for the Government at a much lesser risk," the spokesman said.

"This is an assessment based purely on financial terms. We must bear in mind that the Government's objective in developing the Cyberport is to ensure that a cluster of top information technology and services companies and a pool of talents be created in the shortest possible time.

"We believe that the current arrangements meet this objective and will provide the Government with a reasonable rate of return," he stressed.

The draft Pokfulam Outline Zoning Plan (OZP) incorporating the rezoning proposal of the site will be gazetted tomorrow (Friday). "We expect the Town Planning Board to reach a final decision of the rezoning proposals in the draft OZP by early 2000," the spokesman said.

Meanwhile, the Government will make a submission to the Public Works Sub-committee and Finance Committee of the Legislative Council to seek funds for the essential infrastructure works, including the access roads to and within the site, sewage treatment facilities, public transport interchange, etc.

END/Thursday, April 29, 1999 NNNN