TNAG-1779-FCO40-2539-Hong-Kong-international-telecommunications-1988 — Page 279

CONFIDENTIAL #

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B. Calculation of Net Benefits

HK Telecom : If costs and benefits are recalculated with

(i)

a reduced forcast of demand stimulation;

(ii)

a tariff reduction effect of 5% rather than BAH's 10-15%; and

(iii) the inclusion of indirect costs to the public,

then there is no net benefit to be gained from the introduction of network competition.

Administration's Response: Taking HK Telecom's suggested alterations in order.

(i)

BAH only assumed a one-off 5% demand

stimulation as a result of a 15% tariff

reduction. The forecast increases in revenue are actually largely due to the natural growth of demand for telecommunications services over

the next two decades. In fact, BAH's international telephone revenue growth forecast is slighty lower then HK Telecom's

own. This is the key forecast as international telephone revenue forms the major part of the revenue subject to competition under scenario 5, the size of which determines the overwhelming net benefit

of that scenario.

(ii)

The 10-15% tariff reduction/benefit effect is

a reasonably conservative forecast of the medium to long term improvement associated with competition based on US and UK experience.

G.F. 326

CONFIDENTIAL #3