CONFIDENTIAL
13
Discounts on overseas calls offered by a second network would likely result in a higher proportion of outgoing calls. Since the originating country has to pay the receiving country for international traffic, this increase in outgoing calls would widen Hong Kong's deficit – which is projected to be HK$1.4 billion - by as much as HK$654 million, or 48% (see Exhibit 12). Significant discounting might also encourage rerouting of traffic from China through Hong Kong. If this occurred, it would further exacerbate Hong Kong's payments deficit and potentially strain relationships.
C
NEW REGULATORY
VISION FOR HONG KONG
In addition to resolving the specific policy issues raised by the prospect of a second network, we believe that the Government has an opportunity to articulate a comprehensive regulatory vision for Hong Kong's telecommunications industry. The opportunity exists to enhance consumer choice and value by encouraging innovation and investment in technologies that will improve Hong Kong's future competitiveness in an efficient and effective way. In particular, Government might consider the following approach:
1. Focus regulatory initiatives on ensuring that Hong Kong offers internationally competitive product choice and prices in local telecommunications, rather than on promoting competition as an end itself. This can be achieved by regularly monitoring developments elsewhere, comparing Hong Kong's product range, price, and service quality levels with the best in the world and taking selective initiatives to introduce new technologies or services where needed.
2. Ensure rate stability for consumers and provide performance incentives for Telco. Regulators around the world are recognizing the limitations of traditional rate of return regulation and are adopting price cap regulation to guarantee real price reductions for consumers and encourage efficiency by service providers. Incentive- based regulation - such as price cap regulation, which has been widely adopted in the U.K., Australia, and the U.S. (see Exhibit 13) - would lock in stable non-inflationary rate increases by requiring Telco to reduce the overall tariff burden for basic services in real terms at a predetermined rate. In return, Telco would have greater flexibility to realize the financial benefits of efficiency improvement and cost reduction.
McKinsey&Company, Inc.
CONFIDENTIAL