File Ref.: THB(T) L 2/11/136

LEGISLATIVE COUNCIL BRIEF

Ferry Services Ordinance (Chapter 104)

Application for Franchise Extension by

The “Star” Ferry Company, Limited INTRODUCTION

At the meeting of the Executive Council on 18 December 2007, the Council ADVISED and the Chief Executive ORDERED that a new franchise with terms set out at Annex A1, conferring upon the “Star” Ferry Company, Limited (“the Company”) the exclusive right to continue operation of its existing two franchised ferry routes for ten years from 1 April 2008 to 31 March 2018, should be granted under sections 6 and 7 of the Ferry Services Ordinance (Cap. 104) (“the Ordinance”).

A

JUSTIFICATIONS

Ferry Franchise 2. Section 12 of the Ordinance states that a grantee shall at all times during the franchise period maintain to the satisfaction of the Commissioner for Transport (“Commissioner”) a proper and efficient ferry service. The Government’s key consideration in awarding a ferry franchise to an operator is its capability of providing a proper and efficient ferry service. 3. The Company’s two franchised ferry routes are widely regarded by the local community and overseas visitors as part of Hong Kong’s important heritage. Since the granting of the current franchise, the Company has been providing a proper and efficient service to the public. Moreover, the Company has agreed to the inclusion of new franchise conditions which would enhance service standards and enable better 1 The franchise document is available for Members’ reference at the Legislative Council Secretariat.

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regulation of its operation. On such basis, same as the existing 10-year franchise arrangement, the Company should be granted a new franchise for 10 years upon the expiry of its current franchise on 31 March 2008. Assessment of Application (A) Service Performance 4. To assess whether the Company has been providing a proper and efficient ferry service, the Transport Department (“TD”) has been conducting regular reviews of the performance of the Company through passenger opinion surveys, site surveys, examination of regular returns and public feedback. In 2006, the average daily patronage of the two franchised ferry routes was 73,2602, covering 0.64% of the total public transport patronage. In the monitoring surveys conducted by the TD on the two ferry routes, it was found that the adherence rate to the Schedule of Services remained high, ranging from 93.1% to 100% throughout the franchise period so far. 5. On safety, the number of accidents was kept at a consistently low level. From 1998 to 2006, the Company recorded 20 accidents in total, of which only three involved minor injuries. The average number of accidents per million passenger trips for the Company was 0.07 in 2006 while the average number of accidents per million passenger trips for the whole domestic ferry industry3 was 0.11. 6. In 2006, the average number of complaints per million passenger trips for the Company was 0.37 while the average number of complaints per million passenger trips for the whole domestic ferry industry was 2.63. In early 2007, the TD commissioned a passenger opinion survey which also showed that about 97.2% of the respondents considered that the Company’s franchised ferry services met or exceeded their expectation. (B) Additional Commitments by the Company 7. To bring further benefits to passengers, the Administration has

2 In 2006, the average daily patronage of “Central –Kowloon Point” was 52,058 and that of “Wan Chai - Kowloon Point” was 21,202. 3 It refers to the two ferry routes under the Company’s franchise and 27 regular passenger ferry routes under licences in Hong Kong.

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secured the following additional commitments from the Company in its new franchise :

(i) implementing environmental improvement measures; (ii) enhancing service standards; and (iii) enhancing service controls.

(i) Implementation of Environmental Improvement Measures 8. The Company’s operation of the two franchised ferry routes currently meets the existing legislative emission standard as set out in Section 51 of the Merchant Shipping (Local Vessels) Ordinance (Cap. 548) which states that no local vessel in the waters of Hong Kong shall emit smoke in such quantity as to be a nuisance. Moreover, it is already in compliance with the new regulatory requirements stipulated in the Merchant Shipping (Prevention of Air Pollution) Regulation submitted by the Marine Department to the Legislative Council in July 2007 for negative vetting to implement the air pollution requirements put in force by the International Maritime Organization as set out in Annex VI of the MARPOL Convention. The new regulations set standards on sulphur oxide emission, nitrogen oxide emission, ozone depleting substances and shipboard incineration. In addition to the above, the Company has also agreed to implement further environmental improvement measures. Specifically,

(a) the Company has agreed to include a new franchise clause to undertake the adoption of the latest commercially available and proven technologies in maritime trade as far as reasonably practicable to reduce exhaust emission when acquiring new vessels and setting specifications for such acquisitions, having due regard to the financial viability of the operation of the ferry services under its franchise and its obligations and ability to provide a proper and efficient ferry service;

(b) the Company has agreed to include a new franchise clause to

undertake the adoption of such commercially available and proven technologies and products in maritime trade on its existing vessels, at such time and in such manner, as the Commissioner may reasonably specify for the purpose of reducing exhaust emissions in the operation of the ferry services under the franchise, having due regard to the financial viability of

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the operation of the franchised ferry services and its obligations and ability to provide a proper and efficient ferry service; and

(c) the Company has indicated that it will use cleaner fuel subject to

satisfactory trial results. To further reduce exhaust emission from vessels, the Company has been conducting trials on the technical and operational feasibility of using more environmentally friendly fuels, such as emulsified fuel and ultra low sulphur diesel. These fuels vary in the degree of reducing different kinds of exhaust emissions. Subject to the trial results on the environmental effect and operational feasibility of adopting these fuels, the Company has indicated that it will adopt the most appropriate solution identified.

(ii) Enhancing Service Standards 9. The Company has indicated that it will adopt the following measures to enhance service standards :

(a) on the areas of safety and service enhancement, it will install closed circuit televisions at the navigation and engine rooms of all its existing vessels by the third quarter of 2008. These can be used for monitoring the ferry captains’ performance and assisting in accident investigations; and

(b) it has agreed to add a new franchise clause to undertake to

conduct passenger satisfaction survey annually, and more frequently if required, with a view to monitoring and enhancing its service performance.

(iii) Enhancing Service Control 10. The Company has agreed to add new franchise clauses to enhance its operational transparency and to facilitate financial monitoring. These include its undertaking to acquire goods and services through an open and competitive process and to strengthen the procurement guidelines. 11. The major new and revised franchise terms are summarized at

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Annex B for Members’ reference.

B

Fare Concessions

12. The Company has indicated that it will continue to offer fare concessions on existing scale and mechanism to passengers aged 65 or above (upon production of Hong Kong Identity Card or Senior Citizen Card), passengers with disabilities (upon production of Registration Card for persons with disabilities), and children from 3 to under 12 years old during the period of the new franchise. IMPLICATIONS OF THE GRANT OF FRANCHISE

13. The grant of the ferry franchise to the Company has environmental and sustainability implications as set out in Annex C. It is in conformity with the Basic Law, including the provisions concerning human rights. It has no financial, civil service or economic implications.

C

PUBLIC CONSULTATION

Transport Advisory Committee’s Advice

14. The Transport Advisory Committee (“TAC”) considered that the Company has been maintaining a proper and efficient ferry service and supported granting a new ten-year franchise to the Company for its continued operation of the two ferry routes. The detailed views and advice of the TAC are set out in its letter to the Secretary for Transport and Housing at Annex D. D Legislative Council Panel on Transport 15. The Legislative Council Panel on Transport was consulted on 30 October 2007. Members were generally satisfied with the Company’s performance and some considered the Company’s franchised ferry services as part of Hong Kong’s heritage. Nevertheless, some Panel members remarked that the Administration should continue to assist the Company to generate more non-fare box revenue, exercise control over the Company’s

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fare adjustment and closely monitor the implementation of the Company’s environmental improvement commitment during the course of the new franchise. Overall, the Panel was positive about the grant of a new franchise to the Company. PUBLICITY 16. A press release will be issued. A spokesman will be made available to address media enquiries. BACKGROUND 17. The current franchise of the Company covers a period of ten years from 1 April 1998 to 31 March 2008. The Company has applied for an extension of the current franchise on the same franchise conditions for 15 years, taking effect upon expiry of the current franchise. However, the Administration considers this an opportune time to revise the franchise conditions so as to introduce further improvements to the franchised ferry services.

ENQUIRIES

18. Enquiries concerning the brief should be directed to the following officer -

Mr Don Ho Assistant Commissioner for Transport Tel. No.: 2829 5208

Transport and Housing Bureau December 2007

List of Annexes

Annex A - New Franchise of the “Star” Ferry Company, Limited

Annex B - Summary of Major New/ Revised Terms in the New Franchise

Annex C - Implications of the Grant of Franchise

Annex D - Transport Advisory Committee’s Advice

Annex A

FERRY SERVICES ORDINANCE (Chapter 104)

FRANCHISE

IN EXERCISE of the powers conferred by section 6 of the Ferry Services Ordinance the Chief Executive in Council hereby grants to The “Star” Ferry Company, Limited, a company duly incorporated and having its registered office at 16th Floor, Ocean Centre, Canton Road, Kowloon, Hong Kong, subject to the terms, covenants and conditions hereinafter contained, the right to operate Ferry Service of the type, between such points and to the extent specified in the First Schedule and in any notices under sections 13 and 14 of the Ferry Services Ordinance for the period of ten years beginning from and including the Commencement Date and ending on and including 31 March 2018 and such period may be extended under section 7(2) and (3) of the Ordinance in respect of the routes specified in the First Schedule. 1. In this franchise, unless the context otherwise requires –

Definitions

‘Adjacent Government Land’ in relation to a Pier means those areas of Government Land adjacent to that Pier and shown and delineated for identification on plans drawn up by the Director of Lands and signed by the Grantee and which are deposited with the Director of Lands. Government Land shall have the meaning of ‘unleased land’ in the Land (Miscellaneous Provisions) Ordinance (Cap. 28);

‘charter hire service’ means a service for the letting of a vessel or vessels of the Grantee or any part thereof for use by a particular person or group of persons for any purpose for reward;

‘Clause’ means a clause of this franchise;

‘Commencement Date’ means 1 April 2008;

‘Commissioner’ means the Commissioner for Transport;

‘Facilities’ means each of the following : ticketing offices, Grantee’s offices, turnstiles, fans, queue

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railings, pontoons, washrooms, canteens, toilets and such other facilities located at the Piers which are used or to be used by the Grantee for the purpose of operating the Ferry Service;

‘Ferry Service’ means the Grantee’s business of operating a ferry service under this franchise;

‘Grantee’ means The “Star” Ferry Company, Limited;

‘other ferry service’ means any ferry service operated by the Grantee other than the Ferry Service and shall include, inter alia, licensed service, cargo service, permitted service, tour service and charter hire service;

‘Ordinance’ means the Ferry Services Ordinance (Cap. 104) as amended from time to time;

‘Pier’ or ‘Piers’ means a pier or piers specified by notice in writing by the Commissioner under section 20 of the Ordinance for use by the Grantee for the purposes of this franchise and is/are particularly delineated and coloured red for identification on the plans drawn up by the Director of Lands and signed by the Grantee and is/are deposited with the Director of Lands;

‘qualified auditor’ means a person who – (a) is qualified for appointment as an auditor of a

company under the Professional Accountants Ordinance (Cap. 50); and

(b) is not disqualified under section 140(2) of the Companies Ordinance (Cap. 32);

‘Related Party’ or ‘Related Parties’ means parties that are considered to be related to the Grantee for the purposes of the Hong Kong Accounting Standard (HKAS) No. 24 “Related Party Disclosures” issued by the Hong Kong Institute of Certified Public Accountants in December 2004 as the same may be amended from time to time;

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‘Retirement Fund’ means the fund or funds provided or to be provided by the Grantee for the payment of employees’ pensions or other retirement benefits in respect of employees engaged directly or indirectly in the operation of the Ferry Service;

‘Secretary’ means the Secretary for Development;

‘subsidiary’ of another company means any company, wheresoever incorporated, resident or managed, which is a subsidiary, as defined in the Companies Ordinance (Cap. 32), of another company;

‘Undertaking’ means all vessels and pontoons to which the Grantee has right, title or interest which are used and/or to be used or are kept and/or to be kept by the Grantee for the purposes of or in connection with this franchise;

‘Stock Exchange Company’ means the Stock Exchange Company as defined in section 1 of Schedule I to the Securities and Futures Ordinance (Cap. 571).

2. (1) Any expression or word not specifically herein defined shall have the meaning assigned to it by the Ordinance and, if not defined therein, by the Interpretation and General Clauses Ordinance (Cap. 1) and the Hong Kong Reunification Ordinance (Cap. 2601).

Interpretation

(2) This franchise shall be construed to be in all respects subject to the Ordinance and the other laws of the Hong Kong Special Administrative Region of the People’s Republic of China; without limiting the foregoing it is declared that –

(a) nothing in this franchise shall alter or derogate from all and singular the provisions of the Ordinance; and

(b) in fulfilling and observing the provisions of section 22 of the Ordinance, the Grantee and the Commissioner shall comply with the provisions set out in the Second Schedule hereto.

(3) For the avoidance of doubt, it is declared that the right of the Grantee to use a Pier in connection with the Ferry Service shall include the right of the Grantee to –

(a) berth all vessels employed in the Ferry Service at or

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alongside such Pier; (b) take on and discharge passengers from and onto such

Pier; and

(c) man and operate such Pier for the purposes aforesaid.

(4) The First, Second and Third Schedules shall be an integral part of this franchise and in case of any inconsistency between Clauses 1 to 23 of this franchise and the First, Second and Third Schedules, the provisions of Clauses 1 to 23 shall prevail over those of the First, Second and Third Schedules.

(5) For the avoidance of doubt – (a) where this franchise confers upon any public officer

power to do or enforce the doing of any act or thing, all such powers shall be also conferred as are reasonably necessary to enable the public officer to do or enforce the doing of the act or thing.

(b) without prejudice to the generality of paragraph (a) above, where this franchise confers power upon any public officer –

(i) to grant approval, consent or exemption, such power shall include power to impose reasonable conditions subject to which such approval, consent or exemption may be granted;

(ii) to approve any person or thing, such power shall include power to withdraw approval thereof; and

(iii) to give directions, such power shall include power to couch the same in the form of prohibitions.

3. (1) This franchise is granted subject to the Grantee complying with –

(a) the terms and conditions on its part to be performed in any franchise applicable to the Grantee under the Ordinance and in force in the period ending 31 March 2008; and

Franchise subject to performance of obligations, etc.

(b) the provisions of the Ordinance.

(2) This franchise confers upon the Grantee an exclusive right to operate the Ferry Service between such points specified in the First Schedule.

Ferry Service

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4. (1) Where the Grantee shall itself be a company whose shares are listed and quoted on the Stock Exchange Company –

(a) the Grantee shall forthwith advise the Commissioner if the Grantee knows or is aware or has reasons to know or be aware of any change in the legal or beneficial ownership of its shares which may justify or be reasonably expected to result in any change in the membership of the Grantee’s board of directors; and

Change in ownership of shares

(b) the Grantee shall, if it has reason to believe that its shares may be suspended from being traded on the Stock Exchange Company or where such suspension actually occurs, immediately notify the Commissioner of such belief or suspension and shall forthwith upon being so requested provide to the Commissioner all facts known to the Grantee in relation thereto.

(2) If the Grantee is a subsidiary of another company which is a company whose shares are listed and quoted on the Stock Exchange Company, the Grantee shall, if it has reason to believe that the shares of that other company may be suspended from trading and that such suspension may adversely affect the proper and efficient operation of the Ferry Service, immediately notify the Commissioner of such belief or knowledge and shall forthwith upon being so requested provide to the Commissioner all facts known to the Grantee in relation thereto.

5. (1) The Grantee shall have the right, subject as otherwise permitted hereunder, to use the Piers for the provision of a proper and efficient Ferry Service Provided that –

Use of Piers

(a) nothing in this franchise shall prevent any vessels belonging to any parties other than the Grantee from using a Pier at any time in the event of an emergency;

and in any such event, the Grantee shall not be required to make good any damage to the Pier that may be caused by such vessels.

(b) Government vessels and vessels performing any task for Government may use a Pier, provided that on each occasion –

(i) 24 hours’ prior notice has been given to the Grantee by the Commissioner;

(ii) the relevant Pier is suitable for use by such vessel; and

(iii) such use does not result in unreasonable interference with the Grantee’s normal operation of the Ferry Service,

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and in any such event, the Grantee shall not be required to make good any damage to the Pier that may be caused by such vessels.

(2) Notwithstanding any other provision of this franchise, if at any time the Commissioner is of the opinion that –

(a) a Pier or any part of a Pier is not required for use by the Grantee for the provision of a proper and efficient Ferry Service; and

Cancellation or Suspension of Use of Pier and Facilities by Grantee

(b) such Pier or such part thereof is required for use by another ferry operator or person specified by the Commissioner,

the Commissioner may, after consultation with the Director of Marine and the Director of Civil Engineering and Development and having regard to the views of the Grantee, by three months’ notice in writing to the Grantee, cancel or suspend the right of the Grantee to use the Pier or any part thereof and the related Facilities with effect from a date as specified in such notice Provided Always that such cancellation or suspension of the right of the Grantee as aforesaid shall not come into effect whilst such Pier or such part thereof is the subject of a continuing agreement referred to in Clause 8(1).

6. (1) Subject to Clause 6(2), the Grantee shall have access to and may use any Adjacent Government Land for the provision of the Ferry Service.

Use of Adjacent Government Land

(2) The Director of Lands may in his absolute discretion at any time and from time to time by at least three months’ notice in writing suspend or extend the Grantee’s right to use any Adjacent Government Land Provided that when exercising his discretion to suspend such right, the Director of Lands shall to the extent practicable consult the Grantee’s views in advance, and take reasonable steps to mitigate the adverse impact on the operations of the Pier for passengers and other users.

7. (1) The Grantee shall manage – (a) the Piers; and

(b) the Adjacent Government Land, in accordance with this franchise.

Management of Piers and Adjacent Government Land

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(2) If it appears to the Commissioner that without reasonable excuse the Grantee has failed to exercise due diligence to manage a Pier or any part thereof or the Adjacent Government Land to the Commissioner’s satisfaction, the Commissioner may serve on the Grantee a notice in writing requiring the Grantee to take measures or make arrangements to remedy the failure within a reasonable period of time specified in the notice.

(3) If, having considered any representations made by the

Grantee, the Commissioner is of the opinion that the Grantee has failed without reasonable excuse to comply with the requirements specified in the notice given under Clause 7(2), the Commissioner may by notice in writing served on the Grantee cancel the rights and obligations of the Grantee to manage the Pier or any part thereof and/or any Adjacent Government Land.

(4) Notwithstanding anything to the contrary herein contained, the Commissioner may – (a) by three months’ notice in writing terminate the

Grantee’s rights and obligations to manage any Pier or any part thereof and/or any Adjacent Government Land; and

(b) approve or disapprove any application by the Grantee to cease and be released from its rights and obligations to manage any Pier or any part thereof and/or any Adjacent Government Land.

8. (1) Where the Commissioner, after consultation with and having regard to the views of the Grantee, is of the opinion that –

(a) a Pier or any part of a Pier is not required for the exclusive use by the Grantee for the provision of a proper and efficient Ferry Service; and

Shared use of Piers and Facilities

(b) such Pier or such part thereof is required for use by another operator or person specified by the Commissioner,

the Commissioner may direct in writing that the Grantee shall use its best endeavours to enter into an agreement with another ferry operator or person permitted to use that Pier or such part of that Pier with respect to the shared use of that Pier and related Facilities on such conditions as shall be first approved by the Commissioner.

(2) In the event that within three months no agreement pursuant to Clause 8(1) is entered into, then the Commissioner may

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direct, on such terms and conditions as he considers suitable, the Grantee to permit that other operator or person to use such Pier and related Facilities at such times and for such purposes as the Commissioner shall specify.

(3) For the avoidance of doubt, no agreement referred to in this

Clause or entered into pursuant to this Clause shall or shall be deemed or construed to relieve the Grantee from any of its obligations (including without limitation management or maintenance obligations) in respect of the Pier and related Facilities under this franchise.

9. (1) Notwithstanding any direction made by the Commissioner

under Clause 8, the Grantee shall pay to the Government quarterly rental specified in the schedule of Piers gazetted by the Commissioner on 28 March 2008 for the use of the Piers, such rental to be paid on or before the first day of January, the first day of April, the first day of July and the first day of October each year during the currency of this franchise. In addition to such rental the Grantee shall also pay and discharge all rates and other charges of an annual or periodic nature which may be assessed, charged or imposed on or in respect of each of the Piers during the currency of this franchise.

Pier Rental

(2) In the event that the right of the Grantee to use any part of a Pier is cancelled or suspended under Clause 5(2), the Commissioner shall consult the Grantee with respect to any rental adjustment. On each such occasion a revised schedule of Piers will be gazetted.

10. (1) The Grantee shall not have any right, title or interest whatsoever in or over the whole or any part of the Piers and any Adjacent Government Land, and this franchise shall not constitute or be deemed to constitute a lease or grant or disposition of any right, title or interest whatsoever in or over any land or any agreement in respect thereof.

Grantee’s right over Government Land

(2) For the avoidance of doubt, Government may at any time during the continuance of this franchise, after consultation with the Grantee, grant to any person easements, rights and/or other privileges on, in, through, over, under or in respect of the Pier, Provided that the Government shall notify the Grantee the nature and extent of the grant made under this Clause prior to the effective date of the grant and such grant will not prevent the Grantee from providing a proper

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and efficient Ferry Service. When making the grant, the Government shall take reasonable steps to mitigate the adverse impact on the operations of the Piers for passengers and other users.

11. (1) The Grantee shall be responsible for the maintenance of the

Piers, the related Facilities, and any works or structures erected thereon or thereat or on the Adjacent Government Land by the Grantee with the authorization of Government to the satisfaction of the Director of Civil Engineering and Development save and except for – (a) items of maintenance duties taken up by the

Government as specified by the Commissioner in writing to the Grantee from time to time; and

(b) damage caused to a Pier and/or Adjacent Government Land by an act of God, a latent defect or subsidence, or negligent acts of any Government officers, agents or contractors.

Maintenance of Piers, Facilities and Adjacent Government Land

(2) The Director of Civil Engineering and Development may, in his absolute discretion at any time and from time to time serve a three months’ notice in writing on the Grantee to suspend temporarily the Grantee’s right to use any area of the Pier and/or Adjacent Government Land for the purposes of carrying out maintenance or other works. When exercising his discretion to suspend such right, the Director of Civil Engineering and Development shall to the extent practicable consult the Grantee’s views in advance, and shall take reasonable steps to mitigate the adverse impact of the works on the operations of the Pier for passengers and other users. Notwithstanding anything to the contrary herein contained, in the event of any emergency situation which will inhibit the Grantee from operating a proper and efficient Ferry Service, the Director of Civil Engineering and Development may suspend the Grantee’s right to use the Piers and/or Adjacent Government Land without prior notice or with reasonable notice as the circumstances may permit.

(3) The Grantee shall not carry out any work of a structural nature and/or erect any structure on any Pier or Adjacent Government Land without obtaining the prior written approval of the Government for such work and the Grantee shall carry out any approved work to the satisfaction of the Government.

12. (1) The Grantee may grant concessions for retail or other Concession on

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commercial purposes on the Pier or on any Adjacent Government Land after having first obtained the prior written approval of the Secretary who shall use his best endeavours to process any such application by the Grantee for approval within one month after receiving the applications together with all necessary information from the Grantee.

Piers under the management of the Grantee

(2) The Secretary may, in granting any approval under Clause 12(1), impose such conditions as he reasonably requires, including, but without limitation, conditions with respect to –

(a) the rental which shall be charged by the Grantee (which shall in any event, in the opinion of the Commissioner of Rating and Valuation, be a fair market rental) and the method pursuant to which such rental shall be calculated;

(b) the period of concession; and (c) the terms and conditions of the concession.

(3) Notwithstanding Clause 12(1) but subject always to Clause 11(3), the Grantee may grant at will concessions solely for advertising purpose on the Pier or any Adjacent Government Land.

(4) The Grantee shall provide and supply to the Secretary such information in connection with any concessions for advertising purposes as the Secretary may from time to time in his absolute discretion require.

(5) All revenue accruing to the Grantee from concessions granted under this Clause shall be deemed to be and shall be treated for all purposes under the Ordinance and this franchise as revenue derived from the Grantee’s operation of the Ferry Service.

13. The Commissioner may by notice in writing direct the Grantee to

procure and provide at its own expense such related Facilities at or on any of the Piers as the Commissioner may reasonably require for the purpose of maintaining a proper and efficient Ferry Service.

Grantee to provide Facilities

14. (1) When acquiring new vessels and setting specifications for such acquisitions, the Grantee shall as far as reasonably practicable adopt the latest commercially available and proven technologies in maritime trade to reduce exhaust emission having due regard to the financial viability of the

Environmentally-Friendly Ferry Service

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operation of the Ferry Service and the Grantee’s obligations and ability to provide a proper and efficient Ferry Service.

(2) For the purpose of reducing exhaust emissions in the operation of the Ferry Service under this franchise, the Grantee shall adopt, at such time and in such manner, such commercially available and proven technologies and products in maritime trade on its existing vessels as the Commissioner may reasonably specify, after consultation with the Grantee, Director of Environmental Protection and Director of Marine, and having due regard to the financial viability of the operation of the Ferry Service and the Grantee’s obligations and ability to provide a proper and efficient Ferry Service.

15. The Grantee shall at its own expense and to the satisfaction of the Commissioner make appropriate arrangements to liaise, communicate with and receive the opinions of the public for the purpose of assessing and improving standards relating to the performance of the Ferry Service.

Passenger Liaison Groups

16. (1) The Grantee shall at its own expense and to the satisfaction of the Commissioner make appropriate arrangements to conduct an annual passenger satisfaction survey in such form and manner, by such means and at such time as may be reasonably required by the Commissioner, after consultation with the Grantee.

(2) Notwithstanding Clause 16(1), the Commissioner may after

consultation with and having regard to the views of the Grantee, direct in writing that the Grantee shall make appropriate arrangements to conduct additional passenger satisfaction surveys in such form and manner, by such means and at such times so required by the Commissioner.

Passenger Satisfaction Survey

17. The Grantee represents that its Undertaking at the Commencement Date shall be as set out in the Third Schedule. The Grantee shall maintain the Undertaking at all times during the period of this franchise so as to enable the Grantee to operate a proper and efficient Ferry Service in accordance with the Ordinance and this franchise.

Grantee to maintain Undertaking

18. The Grantee shall provide such information as the Commissioner may require in writing in respect of the Retirement Fund and its use within one month from the date of such written request by the

Retirement Fund

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Commissioner.

19. (1) The Grantee shall provide in writing to the Commissioner – Financial (a) without delay upon request by the Commissioner

procurement policies, procurement procedures and practice manual of goods and services relating to the operation of the Ferry Service such as fuel, vessels, pontoons, spare parts, plant and machinery, repair and maintenance and cleaning services;

information to be supplied to the Commissioner

(b) annual audited financial statements certified by a qualified auditor within four months after the close of each accounting year;

(c) monthly management accounts (including profit and loss account) within two months or such longer period as the Commissioner may specify from the ending date of the period concerned;

(d) quarterly report on the fuel price, fuel cost, fuel consumption and hedging contracts on fuel for the months concerned, in such form and manner as the Commissioner may specify, within one month from the ending date of the period concerned; and

(e) such other information within such period as the Commissioner may from time to time reasonably require for the purpose of assessing the financial position of the Grantee.

(2) Subject to the provisions of the Ordinance, this franchise and the accounting policies approved by the Commissioner under Clause 19(3), the Grantee shall prepare and keep its accounts related to the Ferry Service in accordance with the prevailing accounting standards and principles generally accepted in Hong Kong.

(3) The Grantee shall not later than three months before the end of each accounting year submit for the approval of the Commissioner the accounting policies governing the accounts of the Grantee which are related to the Ferry Service in the form and manner as the Commissioner may specify. Such approval shall not be unreasonably withheld or delayed. The Grantee shall comply with such accounting policies as approved by the Commissioner for keeping and preparing its accounts relating to the Ferry Service. The Grantee shall not make any change to the accounting policies approved by the Commissioner hereunder without the prior written approval of the Commissioner.

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(4) Without prejudice to the generality of Clause 19(3), the Commissioner may, after consultation with the Grantee, give reasonable direction as to :

(a) the criteria for apportionment of the Grantee’s general income and expenditure; and

(b) the charging basis for transactions between the Ferry Service and the Grantee’s other businesses.

(5) The Grantee shall procure and provide to the Commissioner financial information of all transactions which are related to the Ferry Service made between the Grantee and any Related Party on an annual basis within five months after the close of each accounting year or as the Commissioner may from time to time reasonably require.

(6) The Grantee shall ensure that contracts that are material to the Ferry Service shall be put out for tendering as far as practicable. Where it is not practicable for tendering, the relevant transactions shall be submitted to the Grantee’s board of directors for approval. The Grantee is also required to specify in any internal paper on procurement of services or goods or both whether or not the bidders or suppliers and the Grantee are Related Parties.

(7)

The Grantee shall obtain approval from the Grantee’s board of directors before awarding any contract that is material to the Ferry Service to a Related Party save and except where such award is effected as a result of an open tendering process which can be participated by any third party which is not a Related Party. In seeking the board of directors’ approval to award a contract to a Related Party without going through an open tendering process, the Grantee shall, in so far as practicable, provide relevant information to its board to –

(a) explain and justify why an open tendering process cannot be conducted; and

(b) confirm with supporting evidence that the terms and conditions of the proposed contract are not less favourable to the Grantee than those in a contract which might otherwise be entered into with a third party which is not a Related Party.

20. (1) The Grantee shall keep separate detailed profit and loss accounts for the Ferry Service and its other businesses.

Publication of accounts and operational

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(2) The Grantee shall, within five months after the close of each accounting year, publish for the information of the public -

information

(a) such summary of the annual accounts of the Grantee which are related to the Ferry Service in such form and manner and at such times as the Commissioner may from time to time require; and

(b) such information kept by the Grantee relating to the operation of the Ferry Service in such form and manner and at such times as the Commissioner may from time to time require.

21. For the purpose of this franchise, the following practice shall be observed in the accounts of the Grantee – (1) Subject to the residual values set out hereunder, the

following shall be the annual rates of depreciation of the fixed assets calculated on a straight-line basis with effect from the Commencement Date –

Depreciation of Fixed Assets

Fixed Assets

Depreciation (Useful life)

Residual Value

Buildings (a) Terminal buildings - five years

(b) Other buildings -

Term of lease or forty years, whichever is shorter

Nil

Vessels and pontoons

twenty years

Nil

Motor vehicles six years Nil

Plant, machinery and equipment furniture, fixtures and fittings

five years Nil

(2) For the purpose of this Clause, fixed assets shall be valued

at their cost of acquisition less the cumulative depreciation effected in respect of such fixed assets.

(3) The net book value of all fixed assets calculated in

accordance with Clauses 21(1) and 21(2) will be written off

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uniformly over the remainder of the useful life of such fixed assets.

22. The Grantee shall publish its Code on Corporate Social

Responsibility by the end of the calendar year from the Commencement Date and, annually thereafter –

Corporate Social Responsibility

(a) publish statements to summarize what have been done for individual items of the Code on Corporate Social Responsibility; and

(b) review and update the Code on Corporate Social Responsibility for the purpose of continuous improvement.

23. Without derogation from the provisions of Section 13(8) of the

Ordinance, if the Grantee wishes to cease operation of the Ferry Service, it shall at least twelve months before the intended date of such cessation apply to the Commissioner for permission to cease operating the Ferry Service under section 13(8) of the Ordinance. For the avoidance of doubt, nothing herein shall oblige the Commissioner to give the permission sought nor shall it oblige the Chief Executive in Council to give his consent to the Grantee’s application.

Cessation of Ferry Service

Dated this day of December 2007. COUNCIL CHAMBER

Clerk to the Executive Council

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FIRST SCHEDULE

(Extent of Ferry Service: Exclusive)

Route

Type of ferry service Period of Grant

(1) A pier located in Central1 to a pier located in Kowloon Point2

Passenger Service 1.4.2008 – 31.3.2018

(2) A pier located in Wan Chai3 to a pier located in Kowloon Point

Passenger Service 1.4.2008 – 31.3.2018

1 A pier located in Central means a pier located along the waterfront north of Man Yiu Street. 2 A pier located in Kowloon Point means a pier located along the waterfront south of Salisbury Road and west of Canton Road. 3 A pier located in Wan Chai means a pier located along the waterfront east of ExPo Drive East and west of Marsh Road.

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SECOND SCHEDULE

Clause 2(2)

Forward Planning Pursuant to Section 22 of the Ordinance

1. (1) The Grantee shall not later than 30 June each year submit to the

Commissioner a proposed forward plan relating to its proposed operations under this franchise for the period of five years commencing on 1 January next occurring and covering the matters provided for in sub-clause 1(2) of this Second Schedule.

(2) Such proposed forward plan shall include, inter alia, details of - (a) any proposed alterations to or cancellation of the Ferry Service

operated by the Grantee at the time of submission of the proposed forward plan;

(b) any service improvements proposed to be introduced; (c) the capital investment programme of the Grantee; (d) fleet size; (e) any additional Facilities required to implement any service

improvement proposal; and (f) forecast financial statements, including without limitation the

profit and loss account by route, and, balance sheet and cashflow statement in respect of the Ferry Service. The forecast financial statements shall show the effect of each of the items specified in sub-clauses 1(2)(a) to (e) above on the fares that are currently charged by the Grantee.

2. (1) The Commissioner shall not later than 30 September in each year

furnish to the Grantee his written response to the proposed forward plan submitted by the Grantee. In his written response, the Commissioner shall detail all aspects of the proposed forward plan (if any) which he disagrees.

(2) Forthwith following the giving of the Commissioner’s response, the

Grantee and the Commissioner shall use their best endeavours to reach agreement on the proposed forward plan. Any points of disagreement which have not been resolved on a date later than 30 November shall be deemed to be points in disagreement for the purpose of section 22(2) of the Ordinance.

3. In formulating a forward plan each year, the Grantee and the Commissioner

shall have regard to and shall ensure such forward plan appropriately take account of -

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(a) the projected demand over a reasonable period for ferry services; (b) other transport services and facilities provided or to be provided

(whether by the Grantee or otherwise); (c) the availability of the Piers and ferry vessels; (d) the financial implications of the proposed forward plan for the

Grantee; (e) any additional resources that may be required by the Grantee;

and (f) any other factors that the Commissioner or the Grantee

considers relevant.

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THIRD SCHEDULE

Clause 17

Grantee’s Undertaking

The Grantee hereby undertakes to maintain at all times until the expiration of the routes granted under this franchise the following fleet of double-deck vessels of carrying capacity of between 555 and 755 passengers having an appearance substantially as described in the illustration below. Fleet of Vessels Routes

Number of Vessels Required

1.

Central – Kowloon Point

4

2. Wan Chai – Kowloon Point 3 Operation Reserve

1

Illustration of Vessels

The vessels are : double-ended, double-deck, white top with two black stars on each side of the funnel and green bottom hull ferries.

1

Annex B

Summary of Major New/Revised Terms in the New Franchise

Clause

Details

6 This clause is amended to specify clearly that when the

Director of Lands exercises his power to suspend or extend the Grantee’s right to use any Adjacent Government Land, he shall to the extent practicable consult the Grantee’s views in advance, and take reasonable steps to mitigate the adverse impact on the operations of the Pier for passengers and other users.

10 This clause is revised to specify more clearly that the

Government shall take reasonable steps to mitigate the adverse impact on the operations of the Piers for passengers and other users when Government grants to any person easements, rights and/or other privileges on, in, through, over, under or in respect of the Pier.

11 This clause is amended to specify clearly that when the

Director of Civil Engineering and Development exercises his power to suspend temporarily the Grantee’s right to use any area of the Pier and/or Adjacent Government Land for the purposes of carrying out maintenance or other works, he shall to the extent practicable consult the Grantee’s views in advance, and shall take reasonable steps to mitigate the adverse impact of the works on the operations of the Pier for passengers and other users.

14 The new clause is added with a view to reducing emission

arising from the operation of the Ferry Service.

(a) The new sub-clause (1) is added to require that theGrantee, when acquiring new vessels and setting specifications for such acquisitions, shall as far as reasonably practicable adopt the latest commercially

2

Clause

Details

available and proven technologies in maritime trade to reduce exhaust emission having due regard to the financial viability of the operation of the franchised services and the Grantee’s obligations and ability to provide a proper and efficient Ferry Service.

(b) The new sub-clause (2) is added to require the Grantee to adopt, as such time and in such manner, such commercially available and proven technologies and products in maritime trade on its existing vessels as the Commissioner may reasonably specify, after consultation with the Grantee and relevant departments, and having due regard to the financial viability of the operation of the franchised services and the Grantee’s obligations and ability to provide a proper and efficient Ferry Service.

16 The new clause is added to require that the Grantee, shall at its

own expense and to the satisfaction of the Commissioner, make appropriate arrangements to conduct an annual passenger satisfaction survey; and empower the Commissioner to, after consultation with and having regard to the views of the Grantee, direct in writing that the Grantee shall conduct additional surveys in such form and manner, by such means and at such times as required by the Commissioner.

18 This clause is amended to require the Grantee to provide

information in respect of its retirement fund and its use to the Commissioner instead of the Financial Secretary as this involves the day-to-day operation of the Grantee.

19 This clause is amended to vest the power to require financial

information from the Grantee in the Commissioner instead of the Financial Secretary as this involves the day-to-day operation of the Grantee. In addition, the clause is amended –

(a) to require the Grantee to provide, in addition to those already required under the current franchise – (i) procurement practice manual of goods and services

3

Clause

Details

relating to the operation of the franchised services; (ii) monthly (instead of mid-year) management accounts;(iii) quarterly report on the fuel price, fuel cost, fuel

consumption and hedging contracts on fuel for the months concerned;

(b) to require the Grantee to submit for the approval of the Commissioner the accounting policies governing the accounts of the Grantee; and

(c) to enable the Commissioner to, after consultation with the Grantee, give reasonable direction as to the criteria for apportionment of the Grantee’s general income and expenditure, and the charging basis for transactions between the Ferry Service and the Grantee’s other businesses.

To enhance transparency and fair deal between the Grantee and

its related parties, sub-clause (5) is amended and sub-clauses (6) and (7) are added – (a) to require the Grantee to procure and provide to the

Commissioner financial information of all transactions which are related to the Ferry Service made between the Grantee and any related party on an annual basis within five months after the close of each accounting year or as the Commissioner may from time to time reasonably require;

(b) to require the Grantee to ensure that contracts that are material to the Ferry Service shall be put out for tendering as far as practicable. Where it is not practicable for tendering, the relevant transactions shall be submitted to the Grantee’s board of directors for approval; and

(c) to require the Grantee to obtain approval from the Grantee’s board of directors before awarding any contract that is material to the Ferry Service to a related party without going through an open tendering process; and in seeking such approval, the Grantee shall, in so far as practicable, provide relevant information to its board to (a) explain and justify why an open tendering process cannot

4

Clause

Details

be conducted; and (b) confirm with supporting evidence that the terms and conditions of the proposed contract are not less favourable to the Grantee than those in a contract which might otherwise be entered into with a third party which is not a related party.

20 This clause is amended to require the Grantee to publish the

summary of the annual accounts of the Ferry Service in such form and manner and at such times as the Commissioner, instead of the Financial Secretary, may from time to time require as this involves the day-to-day operation of the Grantee.

21 This new clause is added to specify the useful life of the major

fixed assets to fairly reflect the financial performance of the Grantee.

22 This new clause is added to require the Grantee to publish a

Code on Corporate Social Responsibility by the end of the calendar year from the commencement date of the new franchise and annually thereafter to publish statements to summarize what have been done for individual items of the Code and to review and update the content of the Code.

23 This new clause is added on the Company’s request to

recapitulate section 13(8) of the Ordinance which states that the Commissioner may with the consent of the Chief Executive in Council by agreement with a grantee permit the grantee to cease operating a ferry service. A time period of 12-month for the Grantee to apply for service cessation is specified in the clause so as to allow the Administration time for arranging replacement operator(s). For the avoidance of doubt, nothing herein shall oblige the Commissioner to give the permission sought nor shall it oblige the Chief Executive in Council to give his consent to the Grantee’s application.

5

Clause

Details

First Schedule

This schedule is amended to record the Piers that will be specified by the Commissioner under Section 20 of the Ordinance for use by the Grantee for the Ferry Service.

Second

Schedule This schedule is amended to require the Grantee to provide

forecast financial statements in its forward plans prepared under Section 22 of the Ordinance.

Third

Schedule This schedule is amended to specify the routes to be operated

and vessels to be used by the Grantee during the new franchise period.

Existing

Franchise Clauses deleted

The existing franchise clause requiring the Grantee to waive its right to petition Chief Executive in Council and to claim compensation in respect of the following are deleted :

(a) relocation of piers due to reclamation works; (b) suspension of the Grantee’s right to use any area of the

Pier and/or Adjacent Government Land for carrying out maintenance works;

(c) suspension of the Grantee’s right to use any area of Adjacent Government Land; and

(d) the Government granting any person easements, rights and/or other privileges on, in, through, over, under or in respect of the Pier.

Department of Justice’s advice is that the right of appeal is conferred upon the Grantee by Section 41 of the Ordinance. In such circumstances, the franchise should not include conditions which take away the Grantee’s legitimate right.

Annex C Environmental Implication New franchise clauses will be included for the Company to implement environmental improvement measures with a view to reducing emissions from the franchised ferry operation. The Company has been conducting trials on the technical and operational feasibility of using more environmentally friendly fuels such as emulsified fuel and ultra low sulphur diesel. The Company has agreed to adopt the most appropriate solution subject to satisfactory trials results. Sustainability Implication

The Company has agreed to undertake the adoption of proven technologies to reduce adverse air quality impact as far as practicable. This is in line with the sustainability principle of seeking opportunities to enhance environmental quality and minimize inefficiencies and the unwanted side effects of development.