the benefits exceed costs by a very large amount - HK$5,300 million or a multiple of 3.3 of the corresponding costs. We have also assessed the sensitivity of the analysis by using a 10% tariff reduction as the basis for calculation. It can be seen on Exhibit 2 that the conclusions remain valid, although the absolute magnitude of the benefits over costs is reduced.
27.
CWHK's monopoly franchise of international services has in fact, until the year 2006 to run. In order to clarify further the effect on the benefit-cost balance of alternative dates of competitive service introduction, we have been instructed to consider the following timing options:
28.
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for local voice services, competition starting in 1990 and 1995
for international services, competition starting in 1995, 2000 and 2006.
The margin of benefit over costs increases as the starting dates are brought forward. This is a consequence of the fact that the
communications market, both local and international, is already sufficiently large to justify the introduction of a second network from the standpoint of economic welfare; therefore the sooner this comes about, the greater the benefits.
29.
We conclude that the optimal timetable for introduction of competition, (were there no contractual or legal constraints on the introduction of full competition) would allow the competitor to begin service at some date in the period 1990 to 1995. The competitor would, preferably, provide both local and international service.
30.
In defence of the monopoly scenario it must be acknowledged that the estimates of benefits, although higher than those of costs, are also less robust. Cost penalties arising from duplication of technical facilities can be calculated with considerable precision, while the benefit assessments are based on weaker evidence. It is only if international competition is permitted in due course that we can conclude with confidence that network construction of a second telecommunications network is desirable.
OTHER TELECOMMUNICATIONS POLICY CONSIDERATIONS
31.
An analysis of benefits and costs should consider not only aggregate gains or losses, but also the distribution of benefits among members of the population. Particularly when there is a structure of cross subsidy in place, the incidence of benefit redistribution can be quite complex. By and large, the introduction of a more competitive industry structure tends to reduce the extent of cross subsidy among different users of a service. This does not always follow, but it is the long run response most commonly observed, not only in the telecommunications industry but also in markets such as airline transportation. Therefore benefits will tend to fall more heavily on those users which were formerly cross subsidising others (in so far as such patterns of cross subsidy can be defined and identified) and less
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