TNAG-1986-FCO40-2819-Presentation-of-UK-policy-on-Hong-Kong-to-the-media-1989 — Page 13

proposal by HCV appears to be inadequate in terms of ensuring a public share in the benefits accruing from

competition. addition, HCV's proposals to split the advertising and

revenues

limited

from

In

sponsorship and to exclude certain subscription revenue sources not only complicate the royalty package but also provide loopholes for royalty avoidance. An improved offer from HCV will need to be negotiated to effectively increase average of royalty

the

overall

payment s as a

percent age of gross receipts. The scheme should also cover advertising and subscription revenue

in its entirety.

While

(viii) According to the consultants analysis of HCV's and HKCC's submissions, both bidders can expect gross receipts over the fifteen year period to be in the region of $38 billion. initially revenue will be relatively low (between $50-$150 million) it is expected to increase steadily to about $5.4 billion by 2004. Taking into account their expenses, both bidders are unlikely to make any profit in the first five to six years of operation.

(ix)

>

a

Given this information, there appears to be a case for the application of a sliding scale of royalty rather than a flat rate. This would provide some relief to the successful bidder during the early years but would

would generate larger yield when revenue reaches higher levels. On this basis, it is proposed that the successful bidder should be required to pay royalty calculated on the following scale but subject to an overall ceiling of 10% on gross receipts

First $500 million @ 1%

Next

$500 million @ 3% Next $500 million @ 6% Next $500 million @ 9% Next

$500 million @ 12%

Exceeding $2,500 million @ 15%

CONFIDENTIAL