CONFIDENTIAL
XCC(91)127
13
One major criticism identified by BAH in 1988, concerned HKTI's restrictive practices regarding the use of international private leased circuits (IPLCs), in particular, the use of IPLCs to provide value-added services to third parties. The new report indicates that there has been some improvement in this area initiated by the Government, which has been welcomed by users. It highlights criticism from major users of inflexibility by Telco, which insists on "bundling" certain services with equipment (for which additional charges are levied) that the users could provide more cost-effectively themselves.
(c) Cross-subsidy position
14
In many places, including Hong Kong, part of the surplus revenue obtained from highly profitable international services has been channelled into subsidising local telephone charges. In 1988, BAH calculated that the international telephone service was contributing a subsidy of $519 million per annum (1988 prices) to the local service. The current study concludes that this cross-subsidy has fallen to $491 million per annum (1990 prices). If the local service were to pay its way in full, including a 32% operating margin (which is Telco's current high level of return), BAH concluded that exchange line charges would have to rise by 32%. This would amount to a $15 per month increase, which is equivalent to some 0.05% of average household GDP.
15
One of the effects of competition is that it tends to drive prices towards cost and thus force out cross-subsidies. While some may argue that a cross-subsidy for local services is desirable, from an economic point of view it results in an inefficient allocation of resources. The cross-subsidy provided by international services is also an additional cost on the users of such services, who are mainly businesses. As such, it has an adverse impact on the competitiveness of businesses in Hong Kong in relation to other countries (see paragraph 9 above).
16
BAH observed that, as large businesses shift an increasing amount of their communications on to leased circuits, opting out, in effect, of the high cost IDD network, the burden of the cross-subsidy is increasingly being borne by small and medium-sized companies, as well as residential IDD users. BAH were made aware of our concern that elimination of the cross-subsidy (as a result of introducing local network competition) might have an adverse impact on local telephone charges, affecting residential
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