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Financial aspects of Korean telecommunications
TELEMATICS and INFORMATICS
Vo[. 9, No. 1,pp. 13-19, 1992 Copyright © 1992 Pergamon Press Ltd. Printed in the USA 0736-5853192 $5.00 + .00
FINANCIAL ASPECTS OF KOREAN TELECOMMUNICATIONS Hansuk Kim Abstract--Since telecommunications sector requires huge investments, it is crucial to effectively secure necessary funds and optimally manage them. Financial operations of Korean telecommunications sector in the 80s turned out to be a successful example of the task accomplished. However, as competition becomes a norm in the industry, as reflected in a recent revision in the Korean telecommunications law, current Korean tariff system needs to be restructured and streamlined with an emphasis on the sustained expansion of universal services provision.
1. INTRODUCTION Telecommunications network construction requires huge investments for an extended period o f time and, hence, is a significant burden to any national economy. Aside from the question o f whether the telecommunications investment should precede investments in other sectors of the economy, the sheer size o f the telecommunications investments poses practical challenges for policymakers. Among the difficult problems that policymakers face include an important and politically sensitive issue: who should pay and through which policy instruments for how long. Since Korea built a fairly large telecommunications network recently, it may be worthwhile to closely examine Korean experiences to help solve the problems many countries face. From a Korean point o f view, examining past experiences will shed light on establishing and implementing more effective policy tools to foster further advances in the telecommunications sector. This article analyzes some aspects of financing the telecommunications sector in Korea and proposes new directions for a future tariff structure. In Section 2, a condensed account of the past growth in Korean telecommunications is provided, followed by some detailed analyses o f financial operations during the period in Section 3. Section 4 discusses future directions for the Korean tariff structure.
2. KOREAN TELECOMMUNICATIONS IN THE 1980s Korea has successfully constructed its large-scale telecommunications network in a relatively short period o f time; mainly in the 1980s. An average annual growth rate o f 17.8070 in the number of main lines from 1966 to 1990 raised the number o f main lines from a mere 300,000 to over 15 million with about 33 subscribers per 100 people. Domestic automatic network was completed in 1987, including all of small villages Hansuk Kim is with the Management Analysis Section, Korea Telecom Research Center, 17 Woomyon-dong,Socho-gu,Seoul, Korea. 13
14
Hansuk Kim Table 1. Progress of Korean telecommunications.
Year Telephone supply Investment Backlog Lines/ employee R&D/sales (%)
1982
1983
1984
1985
1986
1987
1988
1989
1990
n/a n/a 427
1.0 1.2 464
1.1 1.2 498
1.4 1.4 280
1.6 1.4 160
1.6 1.5 1
1.2 1.3 51
2.0 1.8 2
(2.8) (2.0) (0.7)
122
131
147
166
178
201
218
253
(264)
1.7
1.9
2.4
3.0
3.0
3.3
3.1
3.3
(3.8)
Note. Telephone supply in million lines, investments in billion U.S. dollars, backlog in thousand, and R&D/sales in percent. Exchange rates are as of year ends. Tentative numbers in parentheses. Source: Statistical Yearbook of Telecommunications (Korea Telecom, 1990a) and Telecommunications Yearbook (The Electronic Times, 1989, 1990).
with 10 households or more, and islands with 50 or more households across the country. During the 1980s, the quality of the basic telephone services improved dramatically. However, Korea had to experience its fair share of difficulties. As the economy boomed during the 1970s, an unfilled demand for the telephone subscription was growing at an alarming rate, with a peak of 605 thousand in 1981. A subscription was selling for as high as about 3,000 U.S. dollars in the market and it took an average of 270 days for installation. An enormous amount of pressure, from both consumers and industries, built up. To effectively cope with the situation, the Ministry of Communications decided to retain only the policy and regulatory responsibility and leave the telecommunications network operations with two newly created corporations in 1982: Korea Telecom and Data Communications Corporation of Korea. Since then, the growth of the telecommunications sector accelerated. As shown in Table 1, annual investment expenditures on the telephone expansion exceeded one billion U.S. dollars and research and development expenditures grew to over 3% of annual sales. Productivity, as measured by lines per employee, improved; and the backlog of telephone demand diminished steadily. When compared with other domestic investments during the period from 1982 to 1986, telecommunications sector accounted for about 6.5% of the total government investment (equivalent to about one third of the manufacturing and mining sectors combined) and about 1.9% of the current GNP. This indicates that Korean telecommunications investment was a significant portion of the national economy. In terms of the average annual growth rate of the telephone supply for the period from 1978 to 1988, Korea (18.8%) ranks third next to Saudi Arabia (22.3%) and Oman (21.4070). 3. F I N A N C I N G T E L E C O M M U N I C A T I O N S
INVESTMENTS
3.1 Tariffs a n d finance's
An enormous amount of investment is necessary for a massive supply of telephones. Necessary funds have to be raised either internally or externally. Net profits, capital consumption allowances, and the sale of assets constitute the internal source; whereas, installations charges, domestic and international loans, and bonds make up the external source. Table 2 summarizes Korea Telecom's financial resources in the 1980s. As indicated in Table 2, the ratio of the internal sources to the total increased from 60.2°-/o in 1982 to 82.5°-/0 in 1990. Of the internal sources, capital consumption
Korean telecommunications
15
Table 2. Financial resources of Korea Telecom, 1982-1990. Year Internal Net profit Capital consumption Sales of assets, etc. Subtotal External Installation Telephone bonds Internationalloans Corporate bonds Subtotal Total Internal sourcingratio(%)
1982 1983 1984 1985 1986 1987 1988 1989 1990
177 458 590 1225
134 160 73 270 309 519 457 482 589 778 915 950 1374 1826 1942 2171 131 268 148 140 110 210 268 243 853 1206 1135 1360 1794 2555 2667 2896
192 221 237 213 242 301 518 639 712 160 172 189 210 246 296 0 0 0 333 211 130 66 22 2 0 0 0 124 0 0 0 0 0 0 0 0 810 604 555 489 510 599 518 639 712 2035 1457 1762 1624 1870 2392 3073 3306 3508 60.2 58.6 68.5 69.9 72.7 75.0 83.2 80.7 82.5
Note. Currency in million U.S. dollars, with exchange rates at end of each year. Sales of telephone bonds for the years 1980 and 1981 were 117 and 184 million current U.S. dollars, respectively. Source: Annual issues of statements of changes in financial positions, 1982-1990, Korea Telecom.
allowances take up two thirds of the total in 1990. While net profits increased at an annual rate of 13.3070, the allowances grew at 21.5°70 during the same period. This was mainly caused by a series of adjustments made to the depreciation rate, due to shortened product life cycles in the industry. The installation charges became the sole source of the external funds since 1988. It is worth noting that foreign and domestic loans tapered off during the 1980s. During the period from 1984 to 1990, telephone tariffs were essentially unchanged. In addition, a series of discounts were introduced on long-distance and international calls, and calling zones were widened. Despite these direct and indirect tariff reductions, Korea Telecom's total revenue increased from $1,678 million to $4,274 million (annual growth of 20.6%), due to the rapid growth in subscriptions. Consumers benefited from the nominally fixed tariffs as well. For example, during the same period, CPI and per capita GNP in Korea grew at an annual rate of 4.2070 and 13.9070 respectively, implying reduced consumer burdens in real terms by 18.7°70 annually. Installation charges in urban areas were kept as high as two to four times those in rural areas. This was due to the universal service policy aiming at a balanced growth between urban and rural areas by relieving the burden of rural subscribers. The installation charges remained fixed at around $I00 to $400 since 1974. Thus, considering the growth in per capita GNP and CPI since then, the installation charges have been reduced by almost 60 times in real terms during the period from 1974 to 1990.1 In addition to the installation charges, a new subscriber had to purchase telephone bonds. The mandatory telephone bond purchase was enforced between 1980 and 1984, and it served to suppress the ezploding demand and to secure additional investment funds by taking advantage of the chronic excess telephone demand during that time. The dollar amount of the bond purchase was differentiated between urban and rural areas, ranging from $100 to $300. Total sales of the bond accounted for about 20070 in 1982 and 49% in 1987 of the external sources. International loans played a very important role, especially early in the development tHowever, it is worth noting that in 1974 the installation charges amounted to about 20e/0 to 110°70 of then per capita GNP.
16
Hansuk Kim Table 3. Tariff comparison of selected countries.
Korea Germany France United Kingdom Belgium Japan
Installation
Monthly rental
0.0149-0.0743 0.0018 0.0019 0.0132 0.0064 0.0224
0.0060-0.0090 0.0007 0.0002-0.0003 0,0006 0.0005-0.0007 *0,0002-0.0005 * *0.0004-0.0007
Peak local rate (per 3 minutes) 7.4 2.3 2.8 14.9 4.5 3.0
x x x x x x
10E-6 10E-6 10E-6 10E-6 10E-6 10E-6
Note. Exchange rates: 1 U.$. = 1.88 DM = 6.38 Fr = 39.39 BF = 0.61 £ = 137.96 Yen (1989 annual average). *Residential. * *Commercial. Source: Revision of tariffs: Eurodata foundationyearbook Eurodata Foundation, 1989, and Telecommunications services guidebook '89 (Nikkei Business Publications, Inc., 1989).
stage. The ability to raise a large amount of domestic financial resources was very limited. Further, virtually all equipment and technology had to be imported. Thus, an introduction of the foreign capital linked with equipment imports was a natural choice. However, as the internal sourcing became easier and import substitutions of some of the necessary telecommunications equipment continued, the dependency on the international loans decreased substantially, and no new loan was raised since 1988. 2 Foreign loans raised since 1959 totaled 1,529 million U.S. dollars. Corporate bonds were issued in 1982, with only a limited amount raised (15.3% of the external source during the year, see Table 2).
3.2 Tariff policies Tariff policies set forth by the Ministry of Communications in the 1980s were (1) a cost-oriented rate system, (2) higher priorities placed on raising necessary investment funds during the first half, but on welfare considerations in the second half, and (3) high installation charges fixed at the previous level. These policies pursued the expansion of the public telephone network with modern equipments and an attainment of the universal service. As a result of the tariff policy, Korean tariffs were kept high in real terms relative to other countries. Table 3 compares Korean tariffs with those of selected European countries and Japan for the year 1989. For a fair comparison, each rate has been deflated by the respective per capita GNP figures. Korean installation charges and the monthly rental run as high as 40 times those of Japan and the European countries. However, Korean local rate is relatively less expensive. Thus, it can be argued that the subscription tariffs are set disproportionately higher than the usage tariffs in Korea to secure necessary funds without distorting much of the welfare of consumers. However, the policy could not sustain itself on such high consumer burdens indefinitely because of mounting consumer resistance. Furthermore, a digression from the policy objective of the cost-based tariffs was unavoidable by letting local rates to stay low relative to long-distance and international calls, due to political considerations favoring low local rates. Current Korean telecom2TDX series medium and large capacity electronic switching systems were domestically developed, and as of the end of 1990, about 2.5 million lines have been installed with these systems.
Korean telecommunications
17
munications law requires advance government approvals on tariff rates. The Economic Planning Board exercises further control on the general price level, including the telecommunications tariff. On the other hand, a well-developed cost-accounting system for the telecommunications industry is yet to be devised and adopted. Presently, estimated costs tend to be tentative and policy instruments to regulate the tariffs are not quite sophisticated.
4. RECOMMENDED DIRECTIONS FOR FUTURE TARIFF STRUCTURES 4.1 General outlook Korean policymakers are considering the adoption of a single nationwide calling zone system, a cost-based tariff structure, and a uniform accounting system in the 1990s. This tariff restructuring will require careful calculations of the implications it might have on the telecommunications sector and the national economy in general. The consolidation of the calling zones into a single one is a very ambitious plan under which all calls are treated as local and there is no longer any distinction between local and long-distance calls. Anticipated benefits of the system are an expansion of the basic universal service usages and facilitated data communications. However, coupled with the policy objective of the cost-based tariff system, a single calling zone system raises complicated questions such as cross subsidies between services and a possibility of reverse subsidies to the rich and business users by local residents. Actual details of the policy instruments are yet to be determined, but it seems that Korean tariff system is likely to undergo a few major adjustments soon because of a strong pressure for reduced tariffs from consumers, and domestic competitors and international operators willing to enter the fast growing Korean telecommunications market. In meeting with such demands and changes, Korean telecommunications law has recently been revised. The new law with stepped-up regulations states explicit restrictions on the cross subsidies by favoring an adoption of cost-based tariffs and introduces competition in value-added network services, data communications, and international calls. Active debates among telecommunications operators, researchers, and regulatory agencies about the competitive telecommunications environment include whether the government monopoly system should be abandoned for a limited competitive scheme at this developmental stage of Korean telecommunications. For the time being, it seems that those favoring competition receive more support from the public favoring lower rates anticipated from the competition. The extent of the benefit and the cost of introducing competition should be closely examined. Regardless of the outcome of the debate, current Korean tariffs seem to need restructuring to enhance consumer welfare and efficiency of the operator.
4.2 Installation charges While it is most common to differentiate the installation charges between business and residential users, Korean system differentiates according to areas of subscription. There are criticisms that the system is unnecessarily complicated and the charge differentials are not precisely justified. There are a total of seven classes and the cheapest charge is about one half of the most expensive (about $340 in larger cities). It is not clear whether or not the general income level in the most expensive area is twice as high as that in the least expensive region. Furthermore, not only low-income households in
18
Hansuk Kim
large cities have to pay more to have phones installed than their counterparts in rural areas, but high-usage business users do not pay any more than residential users in the same area. Clearly, there is room for some improvement by charging more to business users, with generally much higher willingness to pay than their residential counterparts.
4.3 Monthly rentals and usage rates It is generally accepted that Korean monthly rentals and local usage rates fall short of recovering the legitimate costs. The monthly rentals are differentiated depending on areas of subscription with three different levels. As to the local services, prior to January 1, 1990, all local calls were for unlimited duration. Recognizing the inefficiency the system caused, a gradual application of a three-minute pulse has been introduced starting from larger cities. At the same time, to compensate for the increased telephone bills to the consumers, a progressive cut in the monthly rentals in those larger cities has been initiated, resulting in a rather awkward and inconsistent tariff structure. As the three-minute pulse scheme spreads nationwide, this peculiarity will eventually disappear. According to An and Huh (1991), while the total revenue requirement is met, the structure of the tariff system is not well balanced; with local revenues falling short of recovering the costs which must be subsidized by revenues from long-distance and other services. Although the proposed revision in Korean telecommunications law states that the tariffs be based on costs, a remedial policy implication of the foregoing discussion is not politically attractive: monthly rentals and local rates should be increased at the price of reduced long-distance and international rates. While political considerations and current telecommunications environments may exercise some influence on the reshaping of the Korean tariff system, a cost-based tariff system is likely to be the ultimate direction of Korean telecommunications tariff policy. A major emphasis should continue to center on the universal services provision, taking into account the income distribution of Korean subscribers. Even with its fairly large network size, Korea will have to set aside considerable resources for continued expansion of the universal services provision. 5. CONCLUSION Korean telecommunication industry experienced a rapid growth, especially in the 1980s. There were several major reasons for this success. First, in the early phase of the development, bullish large-scale investments were carried out. Second, tariff policies were effective in raising necessary funds for investments without serious impact on consumers. Future policies will focus on cost-based tariffs with limited cross subsidies, consolidating calling zones into one nationwide zone, and introduction of domestic and international competition among operators. It has been argued that, to facilitate further telecommunications growth and maintain healthy financial status of the telecommunications industry in Korea, the tariff system needs to be restructured to reflect the cost of the services and the true value of the services to subscribers, with continued emphasis on promoting the provision of universal services. REFERENCES An, J. K., & Huh, N. K. (1991). On restructuring telephone tariffs (working paper). Seoul, Korea: Korea TeZecom Research Center.
Korean telecommunications
19
Bank of Korea. (1990). Economic statistics yearbook. Seoul, Korea: Author. Eurodata Foundation. (1989). Revision o f tariffs: Eurodata foundation yearbook, 1989-1990. London, United Kingdom: Author. Korea Telecom. (1982-1990). Annual issues of statements o f changes in financial positions, 1982-1990. Seoul, Korea: Author. Korea Telecom. (1990a). Statisticalyearbook of telecommunications. Seoul, Korea: Author. Korea Telecom. (1990b). World telephone tariffs and telecommunications statistics. Seoul, Korea: Author. Korea Telecom. (1990c). tVorld telecommunications statistics. Seoul, Korea: Author. Ministry of Communications. (1982). Communications policies. Seoul, Korea: Author. Ministry of Communications. (1990). Annual Reports on telecommunications. Seoul, Korea: Author. Ministry of Communications. (1988). Korean telecommunications--Development strategies and outcomes in the 80s. Seoul, Korea: Author. Nikkei Business Publications, Inc. (1989). Telecommunications services guidebook "89. Tokyo, Japan: Author. The Electronic Times. (1989, 1990). Telecommunications yearbook. Seoul, Korea: Author. Wenders, J. T. (1987). The Economics o f telecommunications. Cambridge, MA: Ballinger Publishing Company.
Vo[. 9, No. 1,pp. 13-19, 1992 Copyright © 1992 Pergamon Press Ltd. Printed in the USA 0736-5853192 $5.00 + .00
FINANCIAL ASPECTS OF KOREAN TELECOMMUNICATIONS Hansuk Kim Abstract--Since telecommunications sector requires huge investments, it is crucial to effectively secure necessary funds and optimally manage them. Financial operations of Korean telecommunications sector in the 80s turned out to be a successful example of the task accomplished. However, as competition becomes a norm in the industry, as reflected in a recent revision in the Korean telecommunications law, current Korean tariff system needs to be restructured and streamlined with an emphasis on the sustained expansion of universal services provision.
1. INTRODUCTION Telecommunications network construction requires huge investments for an extended period o f time and, hence, is a significant burden to any national economy. Aside from the question o f whether the telecommunications investment should precede investments in other sectors of the economy, the sheer size o f the telecommunications investments poses practical challenges for policymakers. Among the difficult problems that policymakers face include an important and politically sensitive issue: who should pay and through which policy instruments for how long. Since Korea built a fairly large telecommunications network recently, it may be worthwhile to closely examine Korean experiences to help solve the problems many countries face. From a Korean point o f view, examining past experiences will shed light on establishing and implementing more effective policy tools to foster further advances in the telecommunications sector. This article analyzes some aspects of financing the telecommunications sector in Korea and proposes new directions for a future tariff structure. In Section 2, a condensed account of the past growth in Korean telecommunications is provided, followed by some detailed analyses o f financial operations during the period in Section 3. Section 4 discusses future directions for the Korean tariff structure.
2. KOREAN TELECOMMUNICATIONS IN THE 1980s Korea has successfully constructed its large-scale telecommunications network in a relatively short period o f time; mainly in the 1980s. An average annual growth rate o f 17.8070 in the number of main lines from 1966 to 1990 raised the number o f main lines from a mere 300,000 to over 15 million with about 33 subscribers per 100 people. Domestic automatic network was completed in 1987, including all of small villages Hansuk Kim is with the Management Analysis Section, Korea Telecom Research Center, 17 Woomyon-dong,Socho-gu,Seoul, Korea. 13
14
Hansuk Kim Table 1. Progress of Korean telecommunications.
Year Telephone supply Investment Backlog Lines/ employee R&D/sales (%)
1982
1983
1984
1985
1986
1987
1988
1989
1990
n/a n/a 427
1.0 1.2 464
1.1 1.2 498
1.4 1.4 280
1.6 1.4 160
1.6 1.5 1
1.2 1.3 51
2.0 1.8 2
(2.8) (2.0) (0.7)
122
131
147
166
178
201
218
253
(264)
1.7
1.9
2.4
3.0
3.0
3.3
3.1
3.3
(3.8)
Note. Telephone supply in million lines, investments in billion U.S. dollars, backlog in thousand, and R&D/sales in percent. Exchange rates are as of year ends. Tentative numbers in parentheses. Source: Statistical Yearbook of Telecommunications (Korea Telecom, 1990a) and Telecommunications Yearbook (The Electronic Times, 1989, 1990).
with 10 households or more, and islands with 50 or more households across the country. During the 1980s, the quality of the basic telephone services improved dramatically. However, Korea had to experience its fair share of difficulties. As the economy boomed during the 1970s, an unfilled demand for the telephone subscription was growing at an alarming rate, with a peak of 605 thousand in 1981. A subscription was selling for as high as about 3,000 U.S. dollars in the market and it took an average of 270 days for installation. An enormous amount of pressure, from both consumers and industries, built up. To effectively cope with the situation, the Ministry of Communications decided to retain only the policy and regulatory responsibility and leave the telecommunications network operations with two newly created corporations in 1982: Korea Telecom and Data Communications Corporation of Korea. Since then, the growth of the telecommunications sector accelerated. As shown in Table 1, annual investment expenditures on the telephone expansion exceeded one billion U.S. dollars and research and development expenditures grew to over 3% of annual sales. Productivity, as measured by lines per employee, improved; and the backlog of telephone demand diminished steadily. When compared with other domestic investments during the period from 1982 to 1986, telecommunications sector accounted for about 6.5% of the total government investment (equivalent to about one third of the manufacturing and mining sectors combined) and about 1.9% of the current GNP. This indicates that Korean telecommunications investment was a significant portion of the national economy. In terms of the average annual growth rate of the telephone supply for the period from 1978 to 1988, Korea (18.8%) ranks third next to Saudi Arabia (22.3%) and Oman (21.4070). 3. F I N A N C I N G T E L E C O M M U N I C A T I O N S
INVESTMENTS
3.1 Tariffs a n d finance's
An enormous amount of investment is necessary for a massive supply of telephones. Necessary funds have to be raised either internally or externally. Net profits, capital consumption allowances, and the sale of assets constitute the internal source; whereas, installations charges, domestic and international loans, and bonds make up the external source. Table 2 summarizes Korea Telecom's financial resources in the 1980s. As indicated in Table 2, the ratio of the internal sources to the total increased from 60.2°-/o in 1982 to 82.5°-/0 in 1990. Of the internal sources, capital consumption
Korean telecommunications
15
Table 2. Financial resources of Korea Telecom, 1982-1990. Year Internal Net profit Capital consumption Sales of assets, etc. Subtotal External Installation Telephone bonds Internationalloans Corporate bonds Subtotal Total Internal sourcingratio(%)
1982 1983 1984 1985 1986 1987 1988 1989 1990
177 458 590 1225
134 160 73 270 309 519 457 482 589 778 915 950 1374 1826 1942 2171 131 268 148 140 110 210 268 243 853 1206 1135 1360 1794 2555 2667 2896
192 221 237 213 242 301 518 639 712 160 172 189 210 246 296 0 0 0 333 211 130 66 22 2 0 0 0 124 0 0 0 0 0 0 0 0 810 604 555 489 510 599 518 639 712 2035 1457 1762 1624 1870 2392 3073 3306 3508 60.2 58.6 68.5 69.9 72.7 75.0 83.2 80.7 82.5
Note. Currency in million U.S. dollars, with exchange rates at end of each year. Sales of telephone bonds for the years 1980 and 1981 were 117 and 184 million current U.S. dollars, respectively. Source: Annual issues of statements of changes in financial positions, 1982-1990, Korea Telecom.
allowances take up two thirds of the total in 1990. While net profits increased at an annual rate of 13.3070, the allowances grew at 21.5°70 during the same period. This was mainly caused by a series of adjustments made to the depreciation rate, due to shortened product life cycles in the industry. The installation charges became the sole source of the external funds since 1988. It is worth noting that foreign and domestic loans tapered off during the 1980s. During the period from 1984 to 1990, telephone tariffs were essentially unchanged. In addition, a series of discounts were introduced on long-distance and international calls, and calling zones were widened. Despite these direct and indirect tariff reductions, Korea Telecom's total revenue increased from $1,678 million to $4,274 million (annual growth of 20.6%), due to the rapid growth in subscriptions. Consumers benefited from the nominally fixed tariffs as well. For example, during the same period, CPI and per capita GNP in Korea grew at an annual rate of 4.2070 and 13.9070 respectively, implying reduced consumer burdens in real terms by 18.7°70 annually. Installation charges in urban areas were kept as high as two to four times those in rural areas. This was due to the universal service policy aiming at a balanced growth between urban and rural areas by relieving the burden of rural subscribers. The installation charges remained fixed at around $I00 to $400 since 1974. Thus, considering the growth in per capita GNP and CPI since then, the installation charges have been reduced by almost 60 times in real terms during the period from 1974 to 1990.1 In addition to the installation charges, a new subscriber had to purchase telephone bonds. The mandatory telephone bond purchase was enforced between 1980 and 1984, and it served to suppress the ezploding demand and to secure additional investment funds by taking advantage of the chronic excess telephone demand during that time. The dollar amount of the bond purchase was differentiated between urban and rural areas, ranging from $100 to $300. Total sales of the bond accounted for about 20070 in 1982 and 49% in 1987 of the external sources. International loans played a very important role, especially early in the development tHowever, it is worth noting that in 1974 the installation charges amounted to about 20e/0 to 110°70 of then per capita GNP.
16
Hansuk Kim Table 3. Tariff comparison of selected countries.
Korea Germany France United Kingdom Belgium Japan
Installation
Monthly rental
0.0149-0.0743 0.0018 0.0019 0.0132 0.0064 0.0224
0.0060-0.0090 0.0007 0.0002-0.0003 0,0006 0.0005-0.0007 *0,0002-0.0005 * *0.0004-0.0007
Peak local rate (per 3 minutes) 7.4 2.3 2.8 14.9 4.5 3.0
x x x x x x
10E-6 10E-6 10E-6 10E-6 10E-6 10E-6
Note. Exchange rates: 1 U.$. = 1.88 DM = 6.38 Fr = 39.39 BF = 0.61 £ = 137.96 Yen (1989 annual average). *Residential. * *Commercial. Source: Revision of tariffs: Eurodata foundationyearbook Eurodata Foundation, 1989, and Telecommunications services guidebook '89 (Nikkei Business Publications, Inc., 1989).
stage. The ability to raise a large amount of domestic financial resources was very limited. Further, virtually all equipment and technology had to be imported. Thus, an introduction of the foreign capital linked with equipment imports was a natural choice. However, as the internal sourcing became easier and import substitutions of some of the necessary telecommunications equipment continued, the dependency on the international loans decreased substantially, and no new loan was raised since 1988. 2 Foreign loans raised since 1959 totaled 1,529 million U.S. dollars. Corporate bonds were issued in 1982, with only a limited amount raised (15.3% of the external source during the year, see Table 2).
3.2 Tariff policies Tariff policies set forth by the Ministry of Communications in the 1980s were (1) a cost-oriented rate system, (2) higher priorities placed on raising necessary investment funds during the first half, but on welfare considerations in the second half, and (3) high installation charges fixed at the previous level. These policies pursued the expansion of the public telephone network with modern equipments and an attainment of the universal service. As a result of the tariff policy, Korean tariffs were kept high in real terms relative to other countries. Table 3 compares Korean tariffs with those of selected European countries and Japan for the year 1989. For a fair comparison, each rate has been deflated by the respective per capita GNP figures. Korean installation charges and the monthly rental run as high as 40 times those of Japan and the European countries. However, Korean local rate is relatively less expensive. Thus, it can be argued that the subscription tariffs are set disproportionately higher than the usage tariffs in Korea to secure necessary funds without distorting much of the welfare of consumers. However, the policy could not sustain itself on such high consumer burdens indefinitely because of mounting consumer resistance. Furthermore, a digression from the policy objective of the cost-based tariffs was unavoidable by letting local rates to stay low relative to long-distance and international calls, due to political considerations favoring low local rates. Current Korean telecom2TDX series medium and large capacity electronic switching systems were domestically developed, and as of the end of 1990, about 2.5 million lines have been installed with these systems.
Korean telecommunications
17
munications law requires advance government approvals on tariff rates. The Economic Planning Board exercises further control on the general price level, including the telecommunications tariff. On the other hand, a well-developed cost-accounting system for the telecommunications industry is yet to be devised and adopted. Presently, estimated costs tend to be tentative and policy instruments to regulate the tariffs are not quite sophisticated.
4. RECOMMENDED DIRECTIONS FOR FUTURE TARIFF STRUCTURES 4.1 General outlook Korean policymakers are considering the adoption of a single nationwide calling zone system, a cost-based tariff structure, and a uniform accounting system in the 1990s. This tariff restructuring will require careful calculations of the implications it might have on the telecommunications sector and the national economy in general. The consolidation of the calling zones into a single one is a very ambitious plan under which all calls are treated as local and there is no longer any distinction between local and long-distance calls. Anticipated benefits of the system are an expansion of the basic universal service usages and facilitated data communications. However, coupled with the policy objective of the cost-based tariff system, a single calling zone system raises complicated questions such as cross subsidies between services and a possibility of reverse subsidies to the rich and business users by local residents. Actual details of the policy instruments are yet to be determined, but it seems that Korean tariff system is likely to undergo a few major adjustments soon because of a strong pressure for reduced tariffs from consumers, and domestic competitors and international operators willing to enter the fast growing Korean telecommunications market. In meeting with such demands and changes, Korean telecommunications law has recently been revised. The new law with stepped-up regulations states explicit restrictions on the cross subsidies by favoring an adoption of cost-based tariffs and introduces competition in value-added network services, data communications, and international calls. Active debates among telecommunications operators, researchers, and regulatory agencies about the competitive telecommunications environment include whether the government monopoly system should be abandoned for a limited competitive scheme at this developmental stage of Korean telecommunications. For the time being, it seems that those favoring competition receive more support from the public favoring lower rates anticipated from the competition. The extent of the benefit and the cost of introducing competition should be closely examined. Regardless of the outcome of the debate, current Korean tariffs seem to need restructuring to enhance consumer welfare and efficiency of the operator.
4.2 Installation charges While it is most common to differentiate the installation charges between business and residential users, Korean system differentiates according to areas of subscription. There are criticisms that the system is unnecessarily complicated and the charge differentials are not precisely justified. There are a total of seven classes and the cheapest charge is about one half of the most expensive (about $340 in larger cities). It is not clear whether or not the general income level in the most expensive area is twice as high as that in the least expensive region. Furthermore, not only low-income households in
18
Hansuk Kim
large cities have to pay more to have phones installed than their counterparts in rural areas, but high-usage business users do not pay any more than residential users in the same area. Clearly, there is room for some improvement by charging more to business users, with generally much higher willingness to pay than their residential counterparts.
4.3 Monthly rentals and usage rates It is generally accepted that Korean monthly rentals and local usage rates fall short of recovering the legitimate costs. The monthly rentals are differentiated depending on areas of subscription with three different levels. As to the local services, prior to January 1, 1990, all local calls were for unlimited duration. Recognizing the inefficiency the system caused, a gradual application of a three-minute pulse has been introduced starting from larger cities. At the same time, to compensate for the increased telephone bills to the consumers, a progressive cut in the monthly rentals in those larger cities has been initiated, resulting in a rather awkward and inconsistent tariff structure. As the three-minute pulse scheme spreads nationwide, this peculiarity will eventually disappear. According to An and Huh (1991), while the total revenue requirement is met, the structure of the tariff system is not well balanced; with local revenues falling short of recovering the costs which must be subsidized by revenues from long-distance and other services. Although the proposed revision in Korean telecommunications law states that the tariffs be based on costs, a remedial policy implication of the foregoing discussion is not politically attractive: monthly rentals and local rates should be increased at the price of reduced long-distance and international rates. While political considerations and current telecommunications environments may exercise some influence on the reshaping of the Korean tariff system, a cost-based tariff system is likely to be the ultimate direction of Korean telecommunications tariff policy. A major emphasis should continue to center on the universal services provision, taking into account the income distribution of Korean subscribers. Even with its fairly large network size, Korea will have to set aside considerable resources for continued expansion of the universal services provision. 5. CONCLUSION Korean telecommunication industry experienced a rapid growth, especially in the 1980s. There were several major reasons for this success. First, in the early phase of the development, bullish large-scale investments were carried out. Second, tariff policies were effective in raising necessary funds for investments without serious impact on consumers. Future policies will focus on cost-based tariffs with limited cross subsidies, consolidating calling zones into one nationwide zone, and introduction of domestic and international competition among operators. It has been argued that, to facilitate further telecommunications growth and maintain healthy financial status of the telecommunications industry in Korea, the tariff system needs to be restructured to reflect the cost of the services and the true value of the services to subscribers, with continued emphasis on promoting the provision of universal services. REFERENCES An, J. K., & Huh, N. K. (1991). On restructuring telephone tariffs (working paper). Seoul, Korea: Korea TeZecom Research Center.
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Bank of Korea. (1990). Economic statistics yearbook. Seoul, Korea: Author. Eurodata Foundation. (1989). Revision o f tariffs: Eurodata foundation yearbook, 1989-1990. London, United Kingdom: Author. Korea Telecom. (1982-1990). Annual issues of statements o f changes in financial positions, 1982-1990. Seoul, Korea: Author. Korea Telecom. (1990a). Statisticalyearbook of telecommunications. Seoul, Korea: Author. Korea Telecom. (1990b). World telephone tariffs and telecommunications statistics. Seoul, Korea: Author. Korea Telecom. (1990c). tVorld telecommunications statistics. Seoul, Korea: Author. Ministry of Communications. (1982). Communications policies. Seoul, Korea: Author. Ministry of Communications. (1990). Annual Reports on telecommunications. Seoul, Korea: Author. Ministry of Communications. (1988). Korean telecommunications--Development strategies and outcomes in the 80s. Seoul, Korea: Author. Nikkei Business Publications, Inc. (1989). Telecommunications services guidebook "89. Tokyo, Japan: Author. The Electronic Times. (1989, 1990). Telecommunications yearbook. Seoul, Korea: Author. Wenders, J. T. (1987). The Economics o f telecommunications. Cambridge, MA: Ballinger Publishing Company.