and 2007. For the purpose of these calculations we have assumed the following dates of service introduction: non franchised services, 1990; franchised local services, 1995; international services, 1995. sensitivity of the findings to changes in these starting dates is calculated later.
The percentage of each service market which is subject to competition under each scenario is determined on the basis of several factors, some are derived from quantitative data submitted by the two potential franchisees and some are based on our own judgement. For example, the proportion of business line revenues subject to competition under scenario 4 is calculated from the proportion of buildings which would be served by the second network which has been costed under scenario 4. The proportion of data services which would be subject to competition is based on essentially qualitative judgements as to the likely coverage of this market by a competitive supplier in each scenario. Estimation of these percentages is made more difficult by the fact that the proportion of a market subject to competition is dependent to a considerable extent on factors under the new competitor's control, such as the geographical coverage of its marketing sales force. Nevertheless, we are confident that the sizes of revenues indicated in the central column of each of Exhibits 5.5, 5.6 and 5.7 represent a reasonable approximation to the size of a competitively affected market.
As we noted in Chapter 1, the same confidence cannot be attached to the next stage of the calculations, namely the estimation of benefits indicated in the right hand column of each of the exhibits. We argue in 1.3 that international experience indicates that price reductions, and in the long term resource cost savings, in the region of 15% may follow the introduction of competition. This figure is only intended to be illustrative. Readers having alternative views of the likely impact of competition on tariffs may substitute other percentages; the benefits indicated on the right hand columns will grow or diminish proportionately. Throughout this chapter we have shown, by way of illustration, the magnitude of benefits resulting from either a 15% or a 10% reduction in long run costs (see Exhibits 5.5 to 5.8).
The final step in the methodology is to make a direct comparison between the benefits of second network competition and the associated costs. The relevant data are presented in summary form in Exhibit 5.8. The numbers on that Exhibit are taken directly from the corresponding costs Exhibits (5.1, 5.2 and 5.3) and the corresponding benefit Exhibits (5.5, 5.6 and 5.7).
We conclude the following from the results presented in Exhibit 5.8. With the progression from scenario 3 to 4 and then to 5, the benefits grow very markedly, as does the margin of benefits over costs. Scenario 3 does generate a quite small net benefit (benefit minus cost) of about HK$10 million at the 10% benefit level, and HK$60 million at the 15% level. This is a consequence of HCV's very limited ability to derive revenues from telecommunications services while both the local voice and international monopolies are in force. With scenario 4 the situation. improves sharply. The benefits here exceed the costs by some HK$500 million (10% benefits) or HK$1,350 million (15% benefits), implying a clear justification for introducing a second network carrier for local
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