(Note that this calculation may slightly understate the extent of cross subsidy due to the different ratios of turnover to assets in the two parts of the network; since the local network is more capital intensive, the margin on operating costs required to recover 16% on shareholders' funds is likely to be higher. Conversely, the subsidy may be overstated by up to about HK$7.5 million per year due to failure to take account of the marginal cost of use of the local network for international calls, as calculated earlier.)
5.7.2 The effect of competition on the cross subsidy from international
services
The introduction of competition in international services would have two impacts on this pattern of subsidy:
it would reduce, by comparison with the monopoly scenario, the total sum available for financing low cost local service under the existing 40:60 agreed split of international call revenues, due to diversion of some of the call revenues to the second domestic carrier
it would result in downward competitive pressure on each international call charge, resulting in a reduction in the subsidy available per call.
The first of these effects would be consequent on the introduction of local service competition, while the second would follow from introduction of international service competition.
We do not consider that either of these factors should cause introduction of competition to be delayed. With regard to the first, the total amount of revenue provided by sharing of international call revenues to support low cost use of the local network will grow throughout the forecast period of our study, even when the diversion of traffic to a second carrier has been accounted for. Assuming a second carrier is authorized locally in 1995, the international revenues carried by the main carrier in the period from then till 2007 will still grow by over 90%, providing ample funds to finance low pricing of local line rentals, since the number of lines will grow over the same period by only 30%. With regard to the second, it is precisely a reduction in international call charges which is the desired objective of introducing international competition. We consider that the existing level of international tariffs represents a significant hurdle to the potential growth and development of businesses in Hong Kong, particularly in those involved in trading. Maintaining such high tariffs level allows the shareholders of the international telecommunications carrier to benefit at the expense of export-oriented businesses in Hong Kong.
Based on the data reviewed in this study, and particularly on the analysis in section 5.7.1, we can draw the following general conclusions concerning the impact of international service competition on local telephone tariffs.
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