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OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN HONG KONG REGULATIONS AFFECTING THE GROUP The Government’s telecommunications regulatory regime is rooted in the approach that competition can maximise consumer benefits. The Telecommunications Authority is a public officer appointed by the Chief Executive of the Government under the Telecommunications Ordinance. The Telecommunications Authority is supported by OFTA, the executive arm of the Telecommunications Authority. The Telecommunications Ordinance, together with the Telecommunications Regulations and administrative orders, applicable licence conditions and various statements, guidelines and codes of practice issued by the Telecommunications Authority, operate to form the overall regulatory landscape of Hong Kong’s telecommunications industry. The Communications and Technology Branch of the Commerce and Economic Development Bureau (“CEDB”) is responsible for developing the telecommunication policies for Hong Kong and monitors the overall regulatory regime. The industry itself also plays a role in the development of the regulatory environment. OFTA regularly issues consultation papers to solicit views of the public and industry in respect of proposed guidelines and regulations that would subsequently form part of the regulatory framework governing Hong Kong’s telecommunications market. In Hong Kong, competition regulations currently only exist on a sector-specific basis. So far, only the telecommunications sector and the broadcasting sector are subject to competition regulations. The governing competition provisions for the telecommunications sector are Sections 7K, L and N of the Telecommunications Ordinance, which prohibit anti-competitive conduct, abuse of dominance and discriminatory practices. The Telecommunications Authority has recently published “Guidelines to assist licensees to comply with the competition provisions under the Telecommunications Ordinance.” Mergers and acquisitions of telecommunications carriers in Hong Kong are also subject to the sector-specific merger control rules that are embodied in Section 7P of the Telecommunications Ordinance. The merger control rules are administered by the Telecommunications Authority based on his assessment as to whether the acquisition or merger transaction has, or is likely to have, the effect of substantially lessening competition in the relevant telecommunications market. A general Competition Bill was gazetted in July 2010 and is currently being debated within the Legislative Council (“LegCo”). The primary objectives of the bill are to prohibit multi-lateral conduct (e.g., agreements and concerted actions) or unilateral conduct (i.e., abuse of a substantial degree of market power) which prevents, restricts or distorts competition in Hong Kong. The bill also would prohibit mergers that substantially lessen competition in Hong Kong. The merger provision appears to be drafted to only apply, initially, at least, to transactions involving carrier licensees in the telecommunications sector. The bill includes transition arrangements relevant to the existing sector-specific competition laws. By these arrangements, the proposed Competition Commission would possess concurrent jurisdiction with the Telecommunications Authority to enforce the conduct and merger rules under the bill. Separately, a bill is now before LegCo that would merge the Broadcasting Authority and the Telecommunications Authority into a single regulator, the Communications Authority. This legislative proposal is intended to reflect the convergence of the two industries and to follow global best practices. The bill would merge the personnel of the two agencies. Consequential changes to the Telecommunications Ordinance and Broadcasting Ordinance would follow that merger in due course. SPECIFIC POLICIES AND REGULATIONS Licensing framework The Telecommunications Ordinance sets out the overall licensing framework for Hong Kong’s telecommunications market. Essentially, no person may establish or maintain any means of

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OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN HONG KONG telecommunications or offer any telecommunications services in the course of business without an appropriate licence. The Telecommunications Regulations and the Telecommunications (Carrier Licences) Regulation set out the prescribed licences and provide for the licence conditions that may be issued under the Telecommunications Ordinance. Since August 2008, the Telecommunications Authority has created and started using the Unified Carrier Licence (“UCL”) as the single licensing vehicle for the provision of fixed-line, mobile and/or converged services, in lieu of the existing fixed-line and mobile carrier licences. Service providers who do not have their own network facilities but wish to provide telecommunications services may seek to be hosted by a UCL holder and offer service under a Services-Based Operator (“SBO”) licence. Spectrum allocation The Telecommunications Authority has the power to allocate frequencies and bands of frequencies in all parts of the radio spectrum used in Hong Kong, and he is obliged to promote the efficient allocation and use of the radio spectrum as a public resource of Hong Kong. The title to all radio frequencies remains with the Government, and while spectrum trading is under evaluation by the Government, at the Latest Practicable Date it is not permitted. After concluding its review of the Government’s spectrum policy, CEDB in April 2007 issued a statement promulgating the “Radio Spectrum Policy Framework” for future spectrum management. The framework stated that the Government would employ, as far as possible, a market-based approach in future spectrum management. As a general guideline, spectrum that may be available to the market will be assigned by way of auction or other open bidding process. Spectrum use for non-government use would be subject to payment of spectrum utilisation fees. Government’s spectrum release plan Pursuant to the above-mentioned “Radio Spectrum Policy Framework”, the Government annually publishes, on a non-binding basis, a spectrum release plan to inform the industry and the public of the potential supply of spectrum through an open competitive bidding or tendering process for the following 3 years. The current spectrum release plan was published by the Telecommunications Authority in April 2011 and covered the period from 2011/12 to 2013/14. Pursuant to this current spectrum release plan, the Government has announced that it will (subject to the negative vetting process of the LegCo) release spectrum in the 2300 to 2390 MHz frequency band for auction in the second half of 2011. Previously, in the Telecommunications Authority’s March 2011 Statement concerning Assignment of the Available Radio Spectrum in the 2.3 GHz Band for Provision of Broadband Wireless Access Services, he had announced that three spectrum blocks of 30 MHz each would be made available under the auction. Review of fixed-mobile convergence In view of the growing convergence of fixed and mobile services, the Telecommunications Authority has, since 2005, been continually reviewing the existing regulatory framework by way of public consultation with respect to fixed-mobile convergence (“FMC”) with the objective of rendering the regulatory regime conducive to the development of FMC. Topics reviewed have included the fixed-mobile interconnection regime and its charging arrangements, unified licensing for fixed, mobile and convergent services, fixed-mobile number portability and LAC for origination and termination of international calls. With respect to the fixed-mobile interconnection regime and its charging arrangement, the Telecommunications Authority concluded in its Statement entitled “Deregulation for Fixed-Mobile Convergence” dated 27 April 2007 (“FMC Statement”) that the existing regulatory guidance for fixed and

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OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN HONG KONG mobile interconnection arrangement (whereby mobile telecommunications operators are required to pay fixed-mobile interconnection charges (“FMIC”) to fixed operators in respect of calls originated from or terminated at mobile networks, i.e. the so-called “Mobile Party’s Network Pays” model) would be withdrawn on 27 April 2009 after a two year transition period commencing from 27 April 2007. Since 27 April 2009, the obligation to pay interconnection charges for interconnection between fixed and mobile networks has been subject to the parties’ commercial negotiation and agreement, failing which a determination may be made by the Telecommunications Authority. As at the Latest Practicable Date, the Group has not yet been able to successfully agree FMIC with certain other fixed-line or mobile operators. However, as operators are subject to a regulatory obligation to deliver calls even though no commercial agreement has been signed, traffic continues to be passed between networks. To facilitate the provision of converged fixed-mobile telecommunications services, the Telecommunications Authority introduced a UCL in August 2008 as the single licensing vehicle for the provision of fixed-line, mobile and/or converged services. From August 2008, no new fixed-line or mobile carrier licences have been issued. With respect to fixed-mobile number portability, as a result of a public consultation exercise, the Telecommunications Authority concluded in his Statement on Fixed Mobile Number Portability issued in July 2009 that fixed-mobile number portability may be implemented by operators on a voluntary basis. Operators co-operating on fixed-mobile number portability are free to agree commercial terms for portability, subject to submitting proposals addressing the technical and operational aspects of the arrangements for portability to the Telecommunications Authority for approval. In December 2009, the Telecommunications Authority issued a consultation paper entitled Review of LAC to solicit views on the way forward for the LAC regime. OFTA currently administers a LAC framework under which local fixed network operators may charge ETS providers for origination and termination of ETS traffic on local networks. Under the current LAC regime, OFTA fixes these interconnection charges. In this consultation paper, the Telecommunications Authority proposed 4 possible options as to how LAC should be dealt with in the future. These were: (i) maintain the status quo, viz. LAC would continue to be payable to fixed-line operators only for origination and termination of international calls; (ii) extend the obligation to pay LAC to mobile operators for calls originating and terminating on mobile networks; (iii) extend the obligation to mobile networks but deregulate the level of the LAC payable; and (iv) fully deregulate the LAC regime. After considering the submissions from the industry, the TA released a second consultation paper in March 2011 proposing that option (iii) be adopted (after an 18 month transition period) such that both fixed-line and mobile operators would be entitled to charge for LAC but the rate levels were to be commercially agreed between the interconnecting parties. This consultation is still in progress. LICENCES Fixed-line services (local, international, data, Internet) The Group currently holds a UCL for the provision of fixed-line services which comprise of local and international voice (i.e. IDD), data services and broadband Internet access services. Previously, the Group operated under a Fixed Carrier (“FC”) Licence. The UCL was granted in June 2010 upon expiry of the FC Licence and is valid for 15 years. Prior to the opening up of the local telecommunications market by the Government in 1995, the Group was the monopoly local fixed-line voice and data services provider. In June 1995, besides the Group, Fixed Telecommunications Network Services (“FTNS”) licences were also awarded to 3 other operators: Hutchison Global Communications Limited; Wharf T&T Limited; and New World Telecommunications Limited, permitting them to provide local fixed-line voice and data telecommunications services.

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OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN HONG KONG The Group was also the monopoly provider of international telecommunications services. Then, in January 1998, the Group signed an agreement with the Government to prematurely end its exclusive right to provide international telecommunications services with effect from 31 March 1998. The market for international services was therefore liberalised, starting with services-based competition in January 1999, followed by facilities-based competition in January 2000. As a result, today, besides the Group, international telecommunications services are provided by other network operators licensed under the FTNS/FC/UCL regime as well as many service providers holding ETS licences. The Group provides broadband Internet access services via its UCL. Internet access services were first offered by the Group as dial-up Internet access services in 1996 under its NETVIGATOR brand. Mobile services The Group currently uses W-CDMA network technology for its 3G mobile telecommunications service. It is licensed to provide 3G service in the 1900-2200 MHz radio spectrum band (“3G Spectrum” which is made up of a paired spectrum of 14.8MHz x 2 plus 5 MHz unpaired spectrum), which is licensed for 15 years up to October 2016. Under special condition 37 of its UCL for mobile services, the Group (as in the case of other 3G licensees) is subject to open network access requirements to make available up to 30% of the capacity of its networks for use by non-affiliated Mobile Virtual Network Operators (“MVNOs”) on a commercial basis. The network capacity is determined as the sum of the capacities of the installed base station equipment plus the extra capacity that can reasonably be deployed through the addition or reconfiguration of base station equipment in a prescribed period of time. However, this does not impose an obligation on the licensees to deploy additional carrier frequency or base station sites. The 3G Spectrum is subject to an annual spectrum utilisation fee, which is set at 5% of network turnover or a progressively increasing prescribed flat fee (which was set at HK$100,622,000 for 2011 up to HK$151,243,000 for 2016), whichever is higher. The governing licence conditions require 3G licensees to adopt separate accounts for their network and service operations in accordance with a prescribed accounting manual. The Group currently uses GSM network technologies for its 2G mobile operations in the 1700/1800 MHz radio frequency band (using paired spectrum of 13.2 MHz x 2) (“1700/1800 MHz Spectrum”). The 1700/1800 MHz Spectrum is licensed for 15 years up to September 2021. The 1700/1800 MHz Spectrum is subject to payment of spectrum utilisation fees, which is set at the rate of HK$145,000 per MHz per annum for the initial five years. Thereafter, it is set at HK$1,450,000 per MHz per annum or 5% of the annual network turnover in respect of the spectrum, whichever is higher. Special condition 37 of the Group’s UCL also provides for open network access requirements to make available up to 30% of the capacity of the group’s networks for use by non-affiliated MVNOs. In November 2008, the Group was awarded a Mobile Carrier Licence to operate a CDMA2000 mobile network in the 850 MHz band (using paired spectrum of 7.5 MHz x 2) (“850 MHz Spectrum”). The 850 MHz Spectrum is licensed for 15 years up to November 2023. The spectrum is principally used to provide a mobile inbound roaming service. The spectrum utilisation fee of HK$76,000,000 was fully paid up front as one lump sum in November 2007. There is no open network access requirement for the CDMA2000 mobile service provided by the Group. Through a jointly controlled company, the Group also holds a licence to use spectrum in the 2500/2600 MHz band (paired spectrum of 15 MHz x 2) (“2500/2600 MHz Spectrum”) for broadband wireless access services. The 2500/2600 MHz Spectrum is licensed for 15 years up to March 2024. Under the UCL held

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OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN HONG KONG by a jointly controlled company of the HKT Trust, service and network roll out are to be ready by March 2014. The spectrum utilisation fee of HK$518,000,000 was fully paid up front as one lump sum in March 2009. There is no open network access requirement for the broadband wireless access service to be offered by the Group. SBO Licence In January 2006, OFTA introduced a new SBO licence for the provision of telephony services offered by service providers who do not have their own network facilities and hence need to be hosted by an FTNS/FC licensee or UCL holder. An SBO licence presently operates under a three-class (Class 1, Class 2 and Class 3) structure. Class 1 services are those services that have all the attributes of conventional telephone services, and licensees under Class 1 are required to fulfil the licensing conditions of the FTNS/FC licences or UCL relevant to the provision of local voice telephony services. Class 2 services are those services that do not have all the attributes of conventional telephone services, and Class 2 licensees are only subject to minimal licensing conditions that serve to protect consumer interests and safeguard competition. Class 1 and Class 2 SBO licences were introduced in January 2006. Subsequently, in October 2009, a Class 3 was added to the SBO licensing regime. The Class 3 SBO licence replaced the Public Non-Exclusive Telecommunications Service (“PNETS”) licences that were in use up until that time. From October 2009 onwards, no new PNETS licences have been issued. An SBO licence is valid for one year, and is renewable on an annual basis. Existing FTNS/FC licensees and UCL holders are allowed to provide Class 1 services with their existing licences. Consequently, the Group does not have any SBO licences as it provides such services under its pre-existing licences. KEY INDUSTRY REGULATORY ISSUES Interconnection in general All carrier licensees have the obligation to: •

Interconnect their network with other licensees’ networks and such other licensed telecommunications networks and services as directed by the Telecommunications Authority;

•

Use all reasonable endeavours to ensure interconnection is carried out promptly, efficiently and at charges that are based on reasonable, relevant costs incurred by the licensee so as to fairly compensate the licensee for those costs; and

•

Provide facilities and services reasonably necessary for prompt and efficient interconnection.

The Group’s interconnection arrangements have been entered into on customary terms, negotiated on an arm’s length basis and in the ordinary course of business, and do not contain any material terms which are unusual having regard to the industry practice prevailing at the relevant time. OFTA has provided statements setting out configuration and principles for interconnection arrangements. The Telecommunications Authority also has the power to determine the terms and conditions of interconnection which may include any technical, commercial and financial terms and conditions as the Telecommunications Authority considers fair and reasonable. Fixed and mobile carrier licensees are free to come to commercial agreement on fixed fixed-mobile, fixed-fixed and mobile-mobile interconnection charges, subject to the observance of the regulatory guidance given from time to time by the Telecommunications Authority.

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OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN HONG KONG Fixed-line interconnection Fixed-line interconnection is divided into two types based upon the physical modes of interconnection as follows: •

Type I - interconnection between network gateways; and

•

Type II - interconnection at a point on the local loop.

The charges for Type I interconnection are commercially agreed between the fixed-line operators. The Telecommunications Authority determined the Type I interconnection charge rate between the Group and Wharf T&T Limited in February 2003 specifying the rates to be applied for the period from July 1999 to June 2003. Since expiry of the determination, the Telecommunications Business and Wharf T&T Limited have continued to adopt the last determined rate for their traffic. Other fixed-line operators have tended to use the determined rate as reference and are charging around the same rate. As the Type I related traffic is essentially balanced the Local Interconnection Charge revenue flows are essentially a wash. The mandatory requirement of Type II interconnection (i.e., unbundled local loops) for local fixed-line telecommunications services at the telephone exchange level was withdrawn in June 2008. Type II interconnection is now provided per commercial agreements. The number of Type II lines provided to competitors has fallen over time. Mobile interconnection Ever since mobile services were commercially available in Hong Kong in the 1980s, the mobile operators have agreed to interconnect their networks with each other on a Bill-And-Keep (“BAK”) charging basis. Under BAK, each mobile operator agrees to terminate calls from the other mobile network at no charge. Interconnection costs are recovered via retail prices. Operator Number Portability (ONP) and Mobile Number Portability (MNP) All licensees are subject to the mandatory obligation to implement ONP between and among fixed-line operators, and MNP, between and among mobile telecommunications operators. There is no mandatory number portability between fixed and mobile operators. Tariff setting The Telecommunications Ordinance does not contain any express provisions regulating retail tariffs or setting principles as to initial tariffs except that under section 7G of the Telecommunications Ordinance, the Secretary may impose price controls on a fixed carrier licensee who is in a dominant position in a telecommunications market. It does, however, require licensees to publish tariffs in accordance with the requirements of their respective licence or directions issued in writing by the Telecommunications Authority. Prior to January 2005, HKTC was the only fixed-line carrier in Hong Kong deemed to be dominant. OFTA issued a statement in January 2005 that revoked the tariff approval requirements applicable to HKTC and converted HKTC’s FTNS licence to a new FC licence. Under the new FC licence, HKTC is no longer presumed to be dominant in any market sector and any alleged abuse of dominant position will be assessed on a case-by-case basis on an ex-post manner. Along with the removal of the presumption of dominance, the FC licence also allows HKTC to offer discounts to its published tariffs subject to a 24-hour advance notification to OFTA. HKTC replaced its FC licence with a UCL upon expiry of its FC licence in June 2010.

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OVERVIEW OF THE RELEVANT LAWS AND REGULATIONS IN HONG KONG Universal Service Obligation Under the terms of the UCL, the Group is required to ensure that, subject to any exemption granted by the Telecommunications Authority, its Basic Service is made reasonably available to all persons in Hong Kong on the terms of its applicable published tariff. Basic Service is defined in the Telecommunications Ordinance as comprising, amongst other things, a public switched telephone service, public payphones, a directory enquiry service and various weather-related information services. In return for assuming the role of a Universal Service Provider, the Group is entitled to receive a Universal Service Contribution from the other operators. Regulatory enforcement If a licensee breaches any of its licence conditions, any provision of the Telecommunications Ordinance or any regulation made thereunder or any direction issued in respect of the licensee by the Telecommunications Authority, the Telecommunications Authority may revoke, suspend or cancel a licence or vary the conditions thereof by a notice served in writing on the licensee or by public notice. Additionally, the Telecommunications Authority may impose a financial penalty on a licensee. Upon application to a court, a financial penalty may be as high as 10% of the turnover of the licensee in the relevant telecommunications market in the period of the breach, or HK$10 million, whichever is higher. If any person is aggrieved by an opinion, determination, direction or decision of the Telecommunications Authority with regards to competition matters, an appeal may be made to the Telecommunications (Competition Provisions) Appeal Board. Industry self regulation The industry has also taken steps to self regulate where appropriate, and particularly in relation to consumer issues. This is primarily accomplished through the adoption of voluntary codes of practice. In the 2010 year alone the following consumer protection measures were adopted by the industry: •

An industry Code of Practice for the Provisions of Chargeable Mobile Content Services (to ensure that consumers are better informed of the charges of mobile content services);

•

An industry Code of Practice for Communications Service Contracts (including cooling-off periods, meeting consumer requests for termination of services, and many other consumer protection clauses);

•

Best Practice Indicators on Representations on Mobile Broadband Services (to prevent misleading or deceptive conduct in the promotion of mobile broadband services);

•

Publication of measures to prevent consumers from incurring unexpected charges for data supplied via SMS messages;

•

Publication of the measures adopted by mobile operators to prevent unintentional incurring of mobile charges; and

•

Publication of performance pledges by mobile operators in respect of mobile broadband services (to increase the transparency of the service performance).

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