WORK COMPLETED TO DATE BY HUTCHISON

Hutchison is three years into a major construction programme for a territory-wide optical fibre network intended to cover all major business and residential areas in Hong Kong Island, Kowloon, Lantau Island and the New Territories. Construction work is still in progress and the work completed to-date includes:

- Hong Kong Island fibre backbone network
- Kowloon peninsula fibre backbone network
- Lantau Island/Tung Chung fibre backbone
- Total fibre duct length of 600 kilometres
- Broadband high-speed access network to over 700 commercial and residential buildings

The fibre backbone linking all major towns in the New Territories is being constructed and is due for completion in mid 1999. Direct fibre connections from the backbone to customer buildings are rapidly being built with the aim of providing not only basic telephone service but also high speed data, multimedia and Internet services to a large percentage of the Hong Kong population. Unlike HKT's legacy network, the Hutchison network will allow it to offer a much wider choice of service at higher quality. Major customers currently include the Hospital Authority and Airport Authority.

Hutchison's current network topology is as set out in Annex A.

MAJOR DIFFICULTIES ENCOUNTERED

Building the network takes time. Physical constraints distinguish Hong Kong from other markets where space is less of a problem. Networks are being built from scratch and building access facilities put in place. This is a time consuming and capital intensive business with many physical constraints resulting in timetables which run into years.

Equipment room space and facilities to access building are already in critically short supply. In many existing buildings the space allocated to telecom equipment is already fully occupied by HKT.

Road opening for duct works imposes a severe adverse environmental impact. Road opening restrictions (imposed by Government of up to 5 years) and requirements for co-ordination or joint undertaking by all FTNS Operators of construction works and road openings further compound the difficulties.

HKT currently controls most street ducts, duct into buildings, equipment space in buildings, in building wiring and all currently operational telephone exchanges. New FTNS Operators are also critically dependent upon HKT for the provision of interconnect circuits. In all these areas new FTNS Operators are making great efforts to provide their own facilities but physical, regulatory or landlord constraints inevitably dictate lengthy timetables.

Most of these problems do not apply to other markets where space is generally less of a problem. They should not be increased by the licensing and building of more duplicate network facilities.

WHY ARE WE SLOW IN GETTING MARKET SHARE?

Local telephony in Hong Kong is a distorted market place in which local calls are free, telephone lines are tariffed at less than cost (requiring the offer of even lower prices and 3 months' free line rental to win a customer), cut throat competition in international call charges has left margins very thin and unlike most parts of the world there are no domestic long distance calls to yield a revenue stream.

In many districts our network is already fully built and operational. However, reaching customers with that network is often not possible by virtue of difficulties accessing buildings. As noted above, in some cases there are very real physical constraints but in others landlords simply block access for commercial reasons (e.g. allegiance to another operator) or in order to extract unreasonably high charges. Any possibility of the issue of limited scope FTNS licences will exacerbate this problem considerably.

HKT thwarts our sales effort in many ways:

HKT has unique experience of and access to information about the Hong Kong market. It uses this to maximum advantage in many ways:

• HKT maximises its revenue by maintaining high prices in sectors of the market which are not price sensitive because new FTNS Operators are not able to compete effectively. This avoids giving discounts to those customers which would stay with HKT in any event.

• At the same time, HKT is able to use and has used its 'monopoly' profits (not to mention HK$12 billion of tax payers money received as compensation for early termination of the HKTI international gateway monopoly) to finance unapproved discounts. These discounts are again targeted at the price sensitive sectors of the market only and are often offered only when an HKT customer is on the verge of switching to a new FTNS Operator!

  In short, customers are induced to remain with HKT by the offer of discounted prices which are often well below cost.

• Informal, often verbal offers are hard to prove. A TA Statement declaring certain marketing packages anti competitive, and a subsequent formal TA Direction prohibiting them have, as reported in the press, all been ignored resulting ultimately only in a paltry fine of HK$20,000.

The reality is that whatever the regulatory constraints, HKT defends its customer base by all means available. Major corporate customers are induced to remain with HKT with offers which would drive a new FTNS Operator out of business.

WILL MORE LICENCES SOLVE THE PROBLEM?

More licences will not solve the problems:

• Issuing more licences will not remove the obstacles. Can a new licensee dig roads faster? Can a new licensee find new space in buildings now crowded with the equipment of not one operator but four? Can a new licensee compete for customers any more effectively when faced with HKT's unapproved below cost discounts? Clearly not.

• The Hong Kong economy is contracting rapidly. Currency and equity markets are in turmoil, loan finance is increasingly difficult to obtain and Asia in general is in financial crisis. In these economic circumstances, even the dominant operator HKT is cutting salaries and laying off hundreds of staff, an example followed by NT&T which is reported to have laid off 80 employees within the last week.

  Before the Government decided on the number of FTNS licenses to be issued in 1995, a study was conducted to determine the maximum number for the Hong Kong market. The conclusion then was four. That was at a time when the economy was buoyant! With a much depressed economy today, market capacity is already well beyond market demand and the market will not be able to accommodate even four licensees on a sustainable basis.

• Too many licenses will simply fragment and substantially weaken competition with HKT. What will emerge will be only large international carriers 'cream skimming' major multinational company accounts (many of whom will be their customers in other parts of the world) and taking their profits out of Hong Kong.

  Foreign carriers will inevitably treat Hong Kong as a small part of their overall global strategy and will have little incentive to build complete and comprehensive network infrastructure to serve the general needs of the Hong Kong public. They will therefore put very little into the Hong Kong economy.

• Limited scope FTNS licences would similarly facilitate 'cream skimming' by landlords with a captive customer base of high quality corporate tenants and also give landlords the opportunity to impose high building access costs on other operators, which costs will be borne ultimately by the consumers.

• Hong Kong taxpayers have paid HK$12 billion to HKT in freeing Hong Kong of an onerous international gateway monopoly, a step which exceeds Hong Kong's commitment to WTO. Hong Kong is under no WTO obligation to issue further FTNS licences.

• With the grant of an international gateway facility licence ("IGF"), FTNS Operators will be able to offer even more competitive prices for international calls than the very competitive rates already available. If foreign carriers are allowed to simply hold an IGF licence, the wider benefit to them of achieving global reach for their international network and customers will permit them to accept no profit or even losses on the Hong Kong outbound international traffic. This will result in unfair and cut throat competition which may ultimately put the existing FTNS Operators who are commited to Hong Kong out of business.

  If further licences are issued, Hutchison will be compelled to drastically cut back not only its future investment plans but also its existing commitments and employees. The taxpayer's money of HK$12 billion paid to HKT will be totally wasted as neither an alternative network nor Hong's desperately needed Information Infrastructure Super Highway will be built.

We must learn from the PCS experience:

An example of the Government's oversight in this respect, was its decision to issue so many PCS licences. Six PCS licenses were issued creating at the time eight mobile operators holding eleven mobile licences. This forced existing operators onto the defensive with a resulting price war and collapsing margins. Within months of licence issue, 2 independent PCS Operators have been acquired by existing mobile operators reducing the total number of operators to six. More consolidation is confidently expected.

The Singapore example:

These lessons in the hard school of experience have at least not been wasted in Singapore. Despite its commitment to both free trade in general and WTO in particular, this harsh reality of a limited market place has been recognized by the Singaporean Government which ultimately decided to issue only one new fixed network licence despite a publicly stated original intention to issue two.

WAY FORWARD

• Current liberalisation measures pave the way for removal of market distortions and in particular rebalancing of local tariffs to a level at which prices at least equal costs plus a reasonable rate of return.

• The TA's proposal to amend the telecommunications Ordinances are generally welcome and address the major areas of concern. However they must be coupled with a more proactive and timely approach to market regulation. Light handed regulation has been tried for more than 3 years and has conspicuously failed!

CONCLUSION

The Government must provide a viable environment for investors to:

• complete the second networks currently under construction;

• offer effective competition to HKT;

• offer consumers a greater choice of service.

This must be supported by firm regulation.

The Hong Kong economy is contracting rapidly. Currency and equity markets are in turmoil and Asia in general is in financial crisis.

Now is not the time to be pursuing idealistic notions of unlimited access to already overly competitive markets.

Existing investment plans are already hard to justify in the current economic circumstances. In these perilous economic times it is vital that the Government gives support to maintaining these plans and the thousands of Hong Kong livelihoods critically dependent upon them.

A moratorium or "wait and see" policy risks nothing. On the other hand, the granting of further licences will certainly lead to unwanted redundancies as well as cherry picking foreign interest. You will recall that despite a then favourable economic climate, foreign investment failed to materialize when foreign operators were given the opportunity to bid for FTNS licences at the same time as the existing FTNS Operators.

The issue of further FTNS licences prior to, at the very earliest, 2003 would thus be to court disaster. Widespread redundancies would be inevitable. We would be forced to review our investment plans. Financial survival would necessitate drastic scaling back and even closure of existing operations. A company such as Hutchison which has clearly demonstrated its commitment to Hong Kong reasonably expects to receive the Governments support in its efforts. At the very least, it is entitled not to have its investment and commit totally undermined by Government policy. The Government should not even consider issuing more licences.