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LCQ1: Development of data centres in Industrial Estates

     Following is a question by the Hon Frederick Fung and a reply by the Secretary for Commerce and Economic Development, Mr Gregory So, in the Legislative Council today (March 25):


     On the 11th of last month, I raised a question on the grant of the sites in the Industrial Estates (IEs) under the Hong Kong Science and Technology Parks Corporation (HKSTPC) for the development of data centres. In this connection, will the Government inform this Council:

(1) as the authorities replied that "HKSTPC has previously conducted investigations into some suspected cases of letting or subletting the premises to a third party. Individual grantees which were substantiated to be in breach of the terms and conditions of the lease (lease-breaching) have rectified the breach upon follow-up by HKSTPC. HKSTPC will continue to monitor the operation of data centres in the IEs and take follow-up actions according to the lease agreement as appropriate", whether the Government knows the details of the lease-breaching cases in the past three years and the mechanism for imposing penalties on the lease-breaching grantees, including the penalties for a first breach and for repeated breaches, as well as the circumstances under which the sites will be recovered; whether the various lease agreements entered with the grantees contain such penalty clauses; if so, of the details; if not, whether HKSTPC will consider including such clauses; if HKSTPC will not, of the reasons for that;

(2) given that on the one hand, HKSTPC needs to attract investors to IEs for income generation and, on the other, is responsible for monitoring the companies to which IE sites are granted to see if there is any breach of the lease, how the authorities avoid HKSTPC's performance of such dual functions giving rise to conflicts of roles and interests; and

(3) whether "the provision of a fair business environment" is a consideration and a principle adopted when the authorities formulated the strategies for promoting the development of data centres; if so, given that HKSTPC has granted IE sites for premiums that are below market value and thus attracted quite a number of multinational enterprises to set up data centres in its IEs, whether the authorities have assessed if such practice has put operators who set up data centres outside IEs on an unlevel playing field; if there is such an unfair situation, whether the authorities will conduct a comprehensive review of the strategies concerned with a view to creating a fair and transparent business environment?



     To address the demand for land from the local manufacturing industry, the Government developed the Industrial Estate (IE) Programme in the 1970s with the following objectives:

(a) underpinning wider economic development through broadening the industrial/manufacturing base and upgrading technology levels; and

(b) providing land for manufacturing industries with special needs which could not operate in flatted factories or should be located away from urban areas because of the need for more horizontal space, high floor loading, greater headroom requirements and/or environmental considerations.

     At present, the Hong Kong Science and Technology Parks Corporation (HKSTPC) is responsible for administering the three IEs in Tai Po (TPIE), Yuen Long (YLIE) and Tseung Kwan O (TKOIE), offering a total of 217 hectares of land for long lease until 2047. Operation in IEs over the years in a way demonstrates the transformation of industrial base in Hong Kong. In the early years since the opening of TPIE and YLIE in 1978 and 1980 respectively, traditional manufacturing industries, such as manufacturing of machinery parts, metal products, packaging materials, construction materials as well as heavy water users like waste paper recycling, bleaching and dyeing constituted the majority of the land grants. In the late 1980s and early 1990s, technology advancement was observed in new projects of electronic parts manufacturing including printed circuits boards and semiconductors in the two IEs. Food and beverages production as well as printing and publishing also constituted a major sector during this period. With the introduction of TKOIE in two stages between 1994 and 1996, greater opportunities were offered to those operators that had requirements for larger sites or requiring marine access. Due to scarcity of land and cost reasons, etc., a significant number of industries involving mass manufacturing have gradually moved to the Mainland. However, Hong Kong has competitive advantages such as strategic location, access to the huge Mainland market, international intellectual property protection regime, good "brand name", good supply of talent, etc. These render it suitable for high value added and high technology industries such as high-end data centres, pharmaceutical and other clean industries. In this connection, the Government extended in 1998 the scope of industrial activities permissible in the IEs to cover the industrial services sectors, such as broadcasting and telecommunications.

     Under the existing IE policy, the land in the IEs is granted at a premium based on land development costs and adjusted periodically taking into account of inflation and prevailing market conditions. HKSTPC will not specify industries for individual IE sites. All industries which meet the basic admission criteria to IEs are eligible to apply, and all applications are vetted according to the same mechanism by HKSTPC, which also monitors the operation of the industries in the IEs.

     My reply to the three parts of the question is as follows:

(1) As the management authority of the IEs, HKSTPC conducts site inspection of the premises on a regular basis to monitor the operation therein. Over the past three years, only one suspected case of letting or subletting the premises to a third party involved the operation of a data centre. HKSTPC has conducted a number of site inspections to the data centre concerned and made enquiries to its operator since 2013. HKSTPC is currently seeking legal advice based on the information gathered and will continue to negotiate with the data centre. If the grantee is found to be in breach of the terms and conditions of the lease agreement, HKSTPC will take appropriate legal actions according to the lease terms. As it involves sensitive commercial information of the data centre and will affect the legal proceedings which may be taken in the future, we are not able to disclose the relevant details.

     Generally speaking, HKSTPC will make enquiries to the grantee about operations suspected of breaching the terms and conditions of the lease and will demand the grantee to cease the alleged breach. If the grantee is found to be in breach of the terms and conditions of the lease agreement and refuses to take appropriate remedial actions, HKSTPC will take appropriate legal actions according to the lease terms, including charging an additional premium, depending on the severity of the breach. If the breach is still not rectified, HKSTPC reserves the right to initiate the re-entry procedure according to the lease agreement. It is stipulated in all lease agreements of the IE sites that HKSTPC can take actions on any breaches. However, as each case of breach varies and for some complicated cases, HKSTPC may need to seek legal advice before deciding on the action to be taken, we consider it not feasible to pre-specify the approach in handling repeated breaches of the lease.

(2) As mentioned above, the objective of the IE Programme is to underpin the overall development of Hong Kong's economy through broadening its industrial base and upgrading its technology levels. To enable our economy to move up the value chain, HKSTPC has to provide land suitable for special-purpose manufacturing and service industries having regarding to the changes in the needs of the industries in Hong Kong. To implement this public policy objective, HKSTPC has developed conditions of grant that are fair and just and a transparent premium policy which are applicable to all industries in the IEs. To ensure that grantees will operate according to the conditions of grant, the IEs have established a stringent monitoring mechanism, and the management will also report to the Board of Directors appointed by the Government on its lease enforcement actions. This is necessary for the implementation of the IE policy and will not lead to conflict of roles or interests of HKSTPC in managing the IEs.

(3) Level-playing field is key to Hong Kong's success and underpins all Government policies and measures. Same as other companies operating in IEs, data centres in IEs have to comply with the criteria, conditions and restrictions stipulated in the land grants as set out by HKSTPC.

     In respect of data centre development, recognising that data centres are essential infrastructure to sustain Hong Kong's continuous economic development and entrench our position as a trading and financial centre, the Government has implemented a number of facilitation measures to promote their development, including providing land, encouraging the conversion of industrial buildings and use of industry lots for data centre use, and providing one-stop support services. These measures are applicable to all types and sizes of data centres. To foster a favourable business environment for the data centre sector, we have been continuously reviewing and fine-tuning the facilitation measures in light of industry's feedback.

     Ends/Wednesday, March 25, 2015
Issued at HKT 12:38