Encouraging PRD Business Operators to Implement Air Quality
Improvement Measures (5 July 2006)

MR JAMES TIEN (in Chinese): President, it has been reported that the United States Environmental Protection Agency has launched a five-year programme offering loans to business operators in the Pearl River Delta (PRD) Region, including those from Hong Kong who set up their plants there, for purchasing machinery or implementing emission reduction measures for the purpose of reducing pollution and conserving energy, while the annual costs saved as a result can be used to repay the loans. In this connection, will the Government inform this Council:
(a) whether it knows the details of the above programme and the response of the business sector;
(b) whether it will implement measures to tie in with the programme; and
(c) whether it will, in the light of this programme, implement the measures to improve air quality as proposed in the motions passed by the Legislative Council on 15 December 2004 and 7 December 2005 respectively, including providing tax relief on depreciation of the relevant systems for business operators from Hong Kong who have installed air pollution control systems in their plants in the PRD Region?

SECRETARY FOR THE ENVIRONMENT, TRANSPORT AND WORKS (in Chinese): President,
(a) According to the information from the United States Commercial Service in Hong Kong, the United States Commercial Service has started to promote a Pollution Prevention and Energy Efficiency (P2E2) environmental financing programme since May 2005. The programme originates from the Joint Commission on Commerce and Trade between the United States and the Mainland, and takes advantage of the Mainland/Hong Kong Closer Economic
Partnership Arrangement. It facilitates loan financing by Hong Kong commercial banks for environmental equipment projects, using the loan guarantees of the Asian Development Bank (ADB) or the International Finance Corporation of the World Bank Group, and the credits of the United States Export-Import Bank. A project includes the following main elements ─ A Hong Kong-based environmental service company will first conduct a study (without pay) for a mainland factory, power plant or real estate development company on how to reduce pollution and save energy; and then seek
a loan from a Hong Kong commercial bank for purchasing or leasing the necessary equipment. The bank will evaluate the application with a view to providing the loan, having regard to the performance contract prepared by the company, mainland commercial credit risks and the loan guarantees from the ADB, and so on. The loan will be repaid through cost savings from reduced energy and raw material usage as measured and verified by an independent technical audit body.

As at early June 2006, nine Hong Kong commercial banks and two investment funds have expressed interest in participating in the programme. Some 20 Hong Kong-based environmental and energy service companies are pursuing opportunities in the Mainland and at least eight firms are interested in providing measurement and verification services.

(b) The P2E2 programme operates on a commercial basis and puts in place financial and technical arrangements for helping enterprises operating in the Mainland to install energy efficient and pollution control equipment, thereby reducing pollution to the environment. The Administration welcomes this programme. We will continue to liaise with the business community, the United States Consulate General and related organizations so as to know the progress of the
programme and the feedback from the business community. We will also support the promotion of the programme to the factories in the PRD by the related organizations.

(c) In line with our general taxation principle, expenses incurred in the production of taxable profits are allowed as deductions. Similarly, depreciation allowance can be deducted for plant and machinery used to produce those profits. If a Hong Kong-owned factory's operation in the PRD forms part of the activities that produce taxable profits in Hong Kong, the expenses for installing pollution control equipment in that factory can at present be deductible as
depreciation allowance. However, if the proposal were to allow tax deductions on expenses irrespective of whether the expenses are incurred in producing profits taxable in Hong Kong, the proposal would depart from the above principle, be prone to abuse and create enforcement difficulties.