TNAG-1779-FCO40-2539-Hong-Kong-international-telecommunications-1988 — Page 247

Local telephone tariffs are currently 27% lower than the levels which would obtain if the contribution, or effective cross-subsidy, from international services were removed immediately and in full (i.e. HK$519 million divided by HK$1,891 million). In the long run, if international competition were introduced in such a way as to eliminate this cross subsidy entirely, local network charges would rise correspondingly. International experience suggests that telecommunications industry costs fall over the long run by approximately 3% per year (this was the figure set by the UK government when establishing the RPI-X formula for British Telecom price control, and was based partly on a review of such international evidence). This corresponds to a cost reduction of approximately 26% per decade. We conclude that normal technological progress, if it has similar effects on Hong Kong Telephone's local network costs as are being experienced in the world's telecommunications industry generally, would allow local telephone tariffs to be maintained at a constant level provided the elimination of cross subsidy from international services was phased in no more quickly than during the course of the next decade. (Given that costs are falling most slowly in local service provision, due to the large capital investment which have already been made, it may in fact take longer than 10 years to achieve this cost reduction.)

It would not be necessary to eliminate, in part or in full, the cross subsidy from international to local tariffs if competition in international services were to be introduced. The impact on local service tariffs could consequently be altered; local service tariffs could be allowed to fall rather than remain at their present level. However if the regulatory arrangements requiring 40% of international call revenues to accrue to the local service carrier remained in place following the introduction of international competition, a substantial part of the benefits due to introducing such competition would be lost. We envisage therefore that a smaller proportion than 40% would accrue to the local carrier as competition developed. A reduction in this percentage may indeed be appropriate even if international competition were not introduced, if arrangements could be made to ensure that corresponding reductions in international tariffs were implemented, so that benefits flowed to Hong Kong's business and residential community rather than only to the shareholders of the international carrier.

In the very long run, it would be desirable from the standpoint of economic efficiency to eliminate completely the regulatory control of the interface between local and international carriers, whereupon the proportion of international call revenues accruing to the local portions of each network operation would correspond roughly to the cost of providing this portion of the service. As noted earlier, if such a condition came about in less than approximately 10 years from now (say by 1998) the result would be an increase in local service tariffs, reflecting the partial or total removal of the 27% cost reduction they now enjoy on account of the cross subsidy arrangements. If the transition to a fully unsubsidised tariff structure occurred after that date, it is likely that normal cost reduction pressures would allow the present (i.e. 1988) level of tariffs to obtain following the introduction of full competition.

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