CONFIDENTIAL
XCC(91)127
29
On the other hand, HK Telecom supports the consultants' recommendation in favour of price-capping and agrees in principle that if the Government considers rebalancing of international and local charges to be desirable, the most effective price cap regime would be one that covers both domestic and international services. HK Telecom expects that we are likely to seek to introduce further competition by adopting the incremental liberalisation option. On this basis, the company has indicated that it is prepared to co-operate with the Government with the aim of reaching agreement on a mutually acceptable telecommunications environment that will benefit customers, as well as providing adequate investment incentives for telecommunications service providers.
30
HK Telecom has not accepted that local network competition is desirable and has submitted a paper commissioned from consultants McKinsey & Co. (copy at the Appendix to Annex C) that supports the view that such a development would not be in Hong Kong's best interests. McKinsey consider that a second network would only be viable with some form of subsidy or increased tariffs and that there is little room for a second network to improve the quality or price of the services provided by Telco. However, the paper prepared by McKinsey contains no economic cost-benefit or financial analysis to support its conclusions. The BAH report, on the other hand, does contain such analysis supporting the contrary view. BAH did detailed costings of a second domestic carrier serving the business districts of Central, Wanchai and Tsim Sha Tsui as part of a financial model that showed that the operator of such a facility could expect profits (up to 2005, in 1991 prices) of $343 million assuming it was allowed to compete in the provision of local telephone services from 1992, and $293 million if this were delayed to 1995. Further analysis by BAH indicated that the market could support up to two new domestic carriers. BAH's cost-benefit analysis supporting the case for local network competition has already been referred to in paragraph 26 above.
31
McKinsey also claim, again without detailed supporting analysis, that while a competing local network would be likely to bring benefits to large businesses, this would be done at the expense of residential and smaller business users. McKinsey maintain that the operator of a second local network would initially concentrate on marketing its services to large businesses. This could put pressure on the current pattern of cross-subsidies between services. However, BAH has found that the burden of the main cross-subsidy, between international and local services, is increasingly