It has all along been the policy of the Government that we should enhance economic efficiency and the free flow of trade, thereby also benefiting consumer welfare.

While our sector-specific approach has been effective in the past, the market developments and the evolution of best practices worldwide prompted us to re-orientate the approach to ensure the effective implementation of our competition policy.

Following the recommendation of the Competition Policy Review Committee in June 2006 and community endorsement after the public consultation in late 2006, Hong Kong decided that our general competition policy should be guarded and buttressed by a cross-sectoral competition law regime that entails a full range of regulatory powers and functions.

The same view had been reaffirmed by the majority community support when we consulted the public again in May 2008 on the details of the proposal.

As you can imagine, the setting up of a competition law regime involves a host of economic, legal and social considerations. The Government never underestimates the complexities inherent in this formidable yet crucial initiative.

Hence, we have been prudent in the preparatory work and devoted much time and efforts in crafting a Bill that is suited to local requirements.

We listened, we considered, we debated. I am glad to say that this challenging process is bearing fruit. In the preceding 12 months we have also identified some areas for changes that represent an improvement to the Competition Bill.

As originally proposed, the Competition Commission under the competition law regime is to operate under a civil-enforcement model with full powers to investigate, adjudicate on and hand down penalties in respect of anti-competitive conduct. The Competition Tribunal, on the other hand, is empowered to hear appeals and review the commission's decisions.

As some of you are aware, the Court of Final Appeal of Hong Kong delivered its judgement on the case Koon Wing Yee v Insider Dealing Tribunal and the Financial Secretary in March 2008, ruling that any fine on a person that exceeds his gain or loss avoided as a result of an unlawful act should be considered a criminal fine.

If punitive remedies for infringements are to be applied, appropriate criminal safeguards, including fair trial, protection against self-incrimination and standard of proof beyond reasonable doubt, must be in place during the investigation and adjudication of such infringements so as to meet the requirements of the Hong Kong Bill of Rights.

In the light of the judgement of the Koon case, we need to ensure that the enforcement model adopted under the Competition Bill can comply with relevant human rights perspectives and stand up to legal challenges, such that the relevant authority can effectively impose all the intended types of penalties and remedies under the Competition Bill, including those financial penalties significant enough to be "criminal".

This judicial decision, coupled with concerns expressed by some during consultation earlier about concentration of too much power in one body under the civil administration model, led us to review the institutional arrangements for the Competition Bill.

Our current intention is that we will modify the original proposal from a civil enforcement mechanism to a judicial model, details and feasibility of which we are examining with the Judiciary.

Under the revised arrangement, we propose that the independent Competition Commission will assume the role of an investigator and prosecutor of anti-competitive conduct. The adjudicative power will be vested with the Competition Tribunal, which will be created as a special court within the Judiciary to hear competition-related cases brought by the commission as well as private actions.

The tribunal will be empowered to apply a full range of remedies, including but not limited to pecuniary penalties; award of damages; injunction; termination or variation of an agreement; and disqualifications orders. Such decisions or determinations of the tribunal are reviewable on appeals to the Court of Appeal.

On the other hand, we see the need for preserving some "teeth" for the Competition Commission to deter and restrict anti-competitive behaviour prior to bringing a case to prosecution before the tribunal. Availability of such enforcement tools is considered to be essential in overseas jurisdictions to ensure the most effective administration of the competition law.

To this end, we propose that the Competition Commission can issue infringement notices to an undertaking allegedly having infringed the anti-competitive rules. The undertaking has the discretion not to accept the infringement notice, and such decision would not prejudice its case before the tribunal eventually.

The whole idea is to enhance the deterrence effect of the enforcement regime, enabling the commission to deal with the less significant infringements quickly, hence freeing its resources to handle the prosecution of more serious, hard-core anti-competitive conduct.

Many would then ask how the proposed institutional framework interfaces with the existing regulatory regimes in the broadcasting and telecommunications sectors where the Broadcasting Authority and the Telecommunications Authority currently regulate competition-related conduct involving their respective licensees.

Guided by the policy objective of having a single competition law applying across all economic sectors in Hong Kong, we must ensure consistency in enforcement of the law across the board.

At the same time, the authorities in the broadcasting and telecommunications sectors have built up considerable specialist knowledge about competition matters specific to their sectors.

We see merit of preserving such expertise of the respective authorities in the two sectors when the competition law regime initially operates. Most respondents to the public consultation held in 2008 concurred with this view.

To reconcile the new law with the existing regulatory frameworks, it is proposed that the Broadcasting Authority and the Telecommunications Authority will exercise concurrent jurisdiction with the Competition Commission in respect of investigation and prosecution of competition-related cases in the broadcasting and telecommunications sectors respectively, while the existing adjudicative function conferred by the Broadcasting Ordinance and the Telecommunications Ordinance will be passed to the newly created Competition Tribunal.

As a result, all three competition regulators, namely the Competition Commission, the Broadcasting Authority and the Telecommunications Authority, will apply the same set of conduct rules and be empowered with the same enforcement powers and the discretion to reach settlement, including the issue of infringement notices, with allegedly infringing undertakings in their respective sectors.

On appeals, all reviews relating to competition matters will be channelled to the Court of Appeal in place of the existing appeal systems under the respective legislation. Consequential amendments to the Broadcasting Ordinance and the Telecommunications Ordinance will be made in the Competition Bill.

So much on the institutional framework that sets the scene. I will now turn to another core component of the Competition Bill, that is the conducts that we propose to prohibit and regulate.

As heralded in earlier consultations, we aim to prohibit two major areas of anti-competitive practices, firstly agreements, decisions or concerted practices, and secondly the abuse of substantial market power in a market. These are the so-called "First" and "Second" Conduct Rules.

More importantly, these acts are not viewed as anti-competitive per se: It must be proved that the conduct of the undertaking concerned has the object or effect of preventing, restricting or distorting competition within Hong Kong before such acts are determined as infringement of the conduct rules. These are in line with international best practices.

Another important principle underpinning the conduct rules is that we will not provide an exhaustive list of examples constituting breaches of the general rules under the Competition Bill. The simple reason, which is widely supported by overseas experience, is that economic activities are varied and possibilities in the business context infinite.

Attempting to specify anti-competitive acts, without due regard to the dynamic changes of commercial activities in various shapes and forms, are doomed to fail. Having said that, we do recognise the importance of providing non-exhaustive examples in the Competition Bill, which will be supplemented by the guideline on conduct rules to be promulgated by the Competition Commission, to enable undertakings to understand the intended scope of the prohibitions, thus enhancing certainty of the law.

Astute followers of our earlier discussions would have noticed that in respect of the Second Conduct Rule, we stick to our original proposal of using "substantial market power" instead of "dominance" as the threshold of infringement.

Overseas jurisprudence suggests that there is no material or practical difference between substantial market power and dominance. While "substantial market power" seems to be a terminology for the economists, both terms are merely indicators in the evaluation about the market power of undertakings involved in anti-competitive cases.

Other relevant factors pointing to the degree of market power, such as barriers to entry, durability of market power, technical and commercial lead of the undertaking concerned, and economies of scale, will also provide useful guidance to the question of whether the undertaking has abused its position and violated the anti-competitive rules.

It is worth noting that counterparts in the European Commission, the UK competition authorities, and some respectable respondents to our consultations, often use the terms "substantial market power" and "dominance" almost interchangeably.

Another aspect of the Conduct Rules would be merger controls. It has been acknowledged by the Competition Policy Review Committee back in its review in 2006 that there were very few local merger activities of any significance in Hong Kong.

In certain situations, mergers in a small economy like Hong Kong may be viewed as an efficient way to achieve economies of scale. The committee further recommended that the competition law regime should focus on prohibiting anti-competitive conducts, not market structure through regulation of mergers. The views of the public on this issue have been divided.

What we now recommend, which we consider as a pragmatic and sensible approach, is not to regulate merger activities under the Competition Bill, except for the telecommunications sector which is already subject to such regulation under the Telecommunications Ordinance.

The proposal gives the Competition Commission more time to focus its initial work on enforcing the conduct rules, and as experience and expertise about the competition law regime build up, we would be in a better position to review the operation of the law and assess whether merger provisions are desirable for other sectors.

I have given a fair picture of what our Competition Bill will look like and cover. But that portrait would be incomplete without mentioning the exemptions and exclusions mechanism, which would be an indispensable part of our competition law.

Across the globe, competition law regimes of all forms and extent accommodate certain circumstances under which exclusions from the application of the competition law would be allowed. Exclusions are commonly granted on the grounds of overriding economic benefit or wider public interest.

Like other jurisdictions, the Competition Bill of Hong Kong will also entail an exclusions mechanism, under which undertakings will be encouraged to self-assess or seek determination of their conduct in order to exclude and exempt such conduct from the law.

Our proposed exclusions mechanism comprises two limbs. The first limb concerns conducts to be performed by an undertaking which may be exempt from the competition law if they satisfy the following tests:

*  First, the Economic Benefit Test, which excludes conducts if they are likely to enhance overall economic efficiency through enhanced technical, allocative and/or dynamic efficiency.

*  Second, the Services of General Economic Interest Test, which excludes conducts if an undertaking is entrusted by the Government with the operation of services of general economic interest.

* Third, the Compliance with Other Laws Test, which excludes conduct if agreements and conduct are required by or are necessary in order to comply with another law of Hong Kong.

The second part of the exclusions mechanism requires ex ante determination, whereby an undertaking should seek a determination by the Chief Executive-in-Council, before the conduct is performed, in order to be excluded from the competition law.

Determinations may be granted if exclusion of the conduct is justified for exceptional and compelling reasons of public policy, or it is necessary to avoid conflict with an international obligation relating to Hong Kong, such as those relating to air-services agreements.

Apart from the above exclusions applicable to all undertakings, the Competition Bill will also provide for exemptions to government and statutory bodies from the outset, recognising that most activities undertaken by the government and statutory bodies are not economic in nature.

In other words, they will be automatically exempt from the competition law in any event, and by virtue of the tests set out above. Exempting them outright from the realm of the competition law provides a higher degree of certainty to these organisations.

The arrangement can also alleviate efforts and resources of the Competition Commission to grant exemptions to a large volume of governmental and statutory bodies at the organisation's infancy stage.

As expected, the proposal has attracted some criticisms, mainly on the argument that some of the statutory bodies are operating in the economic circuits to a great extent, thus upfront exemption of these bodies is unfair to other undertakings. We are fully aware of such concerns.

To this end, we are working on a list of statutory bodies which we do not intend to grant the prima facie exemption because their conducts or activities concerned are economic in nature beyond the control of the Government, and are in direct competition with private sector entities with an impact on the economic efficiency of a specific market. These exceptions would be specified in a schedule to the Competition Bill.

Let me assure you that we will exercise care in considering exemptions to statutory bodies. We fully appreciate that exemptions should only be given to the most justifiable cases, and we are scrutinising each and every one of some 500 statutory bodies under common yardsticks to ensure fairness.

The enactment of the Competition Bill will be the foundation of the competition law regime. Other important building blocks would be the effective discharge of functions of the Competition Commission and Competition Tribunal, the creation and nurturing of a pool of experts on competition affairs, and heightened awareness of the regulatory framework.

To allow sufficient time for the community to familiarise itself with the concept and arrangements, we propose a phased approach to implementing the Competition Law, with the establishment of the relevant regulatory bodies coming first, to be gradually followed by the operation of the conduct rules, sanctions and relevant proceedings.

There will also be ongoing endeavours in promotion, training and public education to drive home the message and build up the capacity of our systems.

It's about time that I should stop. I hope my sharing has enlightened you on where Hong Kong is heading in respect of competition law. May I also take this opportunity to make it crystal clear that we remain 100% committed to introducing the cross-sector competition law, with a target date in the 2009-10 legislative session.

The time and resources that have been invested in the process are considerable, but the ultimate benefits that the law could bring in terms of enhanced efficiency, productivity and innovation are all that matter.

In closing, may I thank the Asian Competition Forum for its commendable efforts in fostering valuable discussion among competition law experts and practitioners in the region. Your input and insights during the process are contributing to the capability building of the competition regime in Hong Kong.

Under Secretary for Commerce & Economic Development Gregory So gave this address at the 5th Annual Conference of the Asian Competition Forum.