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One country, two systems: contrasting approaches to telecommunications deregulation in Hong Kong China
Telecommunications Policy 23 (1999) 245}260
One country, two systems: contrasting approaches to telecommunications deregulation in Hong Kong and China夽 Xu Yan *, Douglas C. Pitt Department of Information and Systems Management, Hong Kong University of Science and Technology, Clearwater Bay, Kowloon, Hong Kong Strathclyde Business School, 50 Richmond Street, Glasgow G1 1XT, UK
Abstract Telecommunications deregulation strategies have been self-evidently di!erent in Hong Kong and China due to di!erences existing in political and economic systems. This paper will provide an overview of contemporary trends in telecommunications deregulation in these two territories. Comparisons will be drawn between the two systems with regard to ownership, foreign direct investment, respective regulatory frameworks and the government's perseverance in propelling deregulation. The study clearly indicates that the shared goal of deregulation can be reached at di!erent rates by di!erent routes (&policy paths') dependent on situational contingencies. 1999 Elsevier Science Ltd. All rights reserved. Keywords: Deregulation; Foreign direct investment; Ownership; Regulatory framework
1. Introduction &One country, two systems' was the proposed political solution for anticipated problems emergent from the territorial hand-over of Hong Kong. There had been considerable doubts and suspicions concerning the reality and feasibility of this deal since it was formulated in the 1980s. After the o$cial hand-over, the eyes of the world remain on Hong Kong to see whether this policy experiment is succeeding. De"nitive judgement remains premature. The area of telecommunications constitutes a policy arena in which the &one country, two systems' approach has been very much in evidence since deregulation happened in early 1990s. 夽 This paper is a revised version of a presentation made at the Twelfth Biennial Conference, organized by International Telecommunation Society, Stockholm, Sweden, June 21}24, 1998. *Corresponding author. Tel.: (852) 2358 7640; fax: (852) 2358 2421; e-mail: [email protected].
0308-5961/99/$ - see front matter 1999 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 8 - 5 9 6 1 ( 9 9 ) 0 0 0 0 6 - 3
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Strategies of deregulation have been self-evidently di!erent in Hong Kong and China. These di!erences lie in the format of ownership, foreign involvement, respective regulatory systems and the government's perseverance in implementing deregulation. This raises a question that whether the shared goal of deregulation could be reached by di!erent routes (&policy paths') dependent on situational contingencies. Such obviously include the idiosyncrasies of the respective political and economic systems. So far, studies in this aspect are limited. Mesher and Zajac (1998) remark that the &rate' of telecommunications liberalisation varies widely from country to country. They use Twight's theory of institutional change (Twight, 1994) and Becker's political oligopoly model (Becker, 1976) to explain this phenomenon. The conclusion they draw is that the destruction of the &postal-industrial complex', supported by a clientelistic coalition of monopolist provider, trade unions, major suppliers and the political &left', is typically accompanied by a period of intense political rivalry between powerful interest groups } representing, respectively, the status quo (monopoly provision) and radical change (liberalisation and privatisation). Interest groups of roughly equal political power will battle to establish or oppose the formation of a new equilibrium. This struggle will crucially depend on each nation's history, demographics, property rights and legal structures, and its culture norms. From such a perspective, it is hardly surprising that the rate at which liberalisation of telecommunications has progressed has varied widely from country to country. Mesher and Zajac's insight into the transition economics and politics of the &new telecommunications paradigm' can be usefully applied to contemporary Chinese developments and those in Hong Kong, the newly designated &SAR' (Special Administrative Region). Di!erences between the destruction process of the &postal-industrial complex equilibrium' in Hong Kong and China lie not just in the &rate' of change, but also in the &path' taken by the change process. This is mainly due to the di!erences existing in the social and economic systems of these two territories. For example, all the telecommunications operators in Hong Kong are owned by the private sector, while in China competition is taking place between two state-owned operators. As the ownership is directly related to the composition and strength of individual interest groups, patterns of rivalry would undoubtedly be di!erent in Hong Kong and China. This paper, pre-empting the phrase &one country, two systems' as a main theme, will provide an overview of contemporary trends in telecommunications deregulation in Hong Kong and China. A parallel comparison will be drawn between the two systems in regard to the regulatory framework, ownership of operators, foreign direct investment and the government's perseverance in propelling deregulation. The study will con"rm Mesher and Zajac's model of the &rate of liberalisation', and, simultaneously, con"rm that the shared goal of deregulation can be achieved by di!erent policy paths which themselves are &situationally' located in a network of discrete institutional and political norms.
2. Antecedents of deregulation Hong Kong and China adopted the deregulatory mechanism in the telecommunications sector at almost the same time, i.e., in the early 1990s. Government in both territories clearly recognised For the sake of simplicity, China represents Mainland China throughout this paper.
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the advantages that had been conferred by deregulation in such early mover countries as the UK and the US. However, due to the di!erences existing in the social and economic systems, initial deregulatory forays adopted by the two Governments were self-evidently di!erent. Portraits of Hong Kong as an entrepreneurial &little dragon' have been frequently #attering viz. &Hong Kong's unique history and circumstances have fostered a vital economy characterised by openness, an international outlook and #exibility'. (Enright et al., 1997). Arguably such dynamism has, in part, been fostered by &an unfettered press, freedom of information #ows and an outstanding communications infrastructure'. (Enright et al., 1997). However, compared with early mover countries and regions, telecommunications deregulation started very late in Hong Kong. But if Hong Kong could be justi"ably portrayed as a deregulatory laggard, the 1990s have revealed an accelerating pace of deregulatory change. Under the terms of the license conferred by the Government, Hong Kong Telecom, the sole operator of telecommunications services, was granted exclusive franchise over local and international telecommunications, until respectively 1995 and 2006. In reality, franchises (for local and international services) were held respectively by Hong Kong Telephone Company (HKTC) and Hong Kong Telecom International (HKTI), both subsidiaries of Hong Kong Telecom with separated accounting systems. Government intentions to review telecommunications policy followed self-imposed expiry of its rate of return policy in March 1991 and the termination in June 1995 of HKTC's franchise over local telephone service. Following extensive consultation, deregulation was adopted as a policy stance in June 1992 with the government announcing abolition of HKTC's exclusive privilege in local telecommunications on its expiry in June 1995. In July 1992, the government o$cially published its guidelines for issuing new licenses for local telephone network operation. These could be unlimited in number, subject to an open and transparent application process and under the oversight of a new regulator. By the close of the bidding process on 1st February 1993, the Government had received seven applications and "nally decided to issue three licences to, respectively, Hutchison Communications, New World Telephone and New T&T in addition to that granted to HKTC in March 1995. July 1995 marked the advent of true deregulation in Hong Kong's domestic telephone market. In China, the development of telecommunications has been given high priority due to o$cial recognition that telecommunications was central to the modernisation ambitions of the Chinese government and a facilitator of economic growth. With generous investment and favourable policies from central and local governments, telecommunications has been the most rapidly developing industrial sector in China during the past decade. The annual average growth rate of telecommunications was 45% during the period of 1990 to 1995. (People1s Daily, 1995). This huge and highly pro"table market has attracted intentions of investment from other industrial sectors. All related ministries were eager to share a portion of this enlarged cake with the monopoly operator } the Ministry of Posts and Telecommunications (MPT) } by means of either integrating their self-manufactured equipment with the expanding network or diverting part of the tra$c to their formidable private networks. In 1993, the State Council agreed a joint proposal from several in#uential ministries for deregulating the Chinese telecommunications market. In July 1994, China Unicom, a joint venture with shareholders from the Ministry of Electronic Industry (MEI), Ministry of Railways (MOR), Ministry of Electrical Power (MEP) and thirteen other giant state-owned companies, was formally
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established. (Pitt et al., 1996). The establishment of China Unicom provided these ministries with a gateway to enter this huge market. Importantly, this heralded a process of policy discontinuity } a break with the orthodoxy of centralised monopoly provisioning in telecommunications. However, the adoption of a duopoly approach clearly re#ects the government's doubts and hesitations over this deregulatory policy experiment.
3. The regulatory framework To facilitate telecommunications deregulation, both Hong Kong and China restructured their regulatory framework in the initial stage of this &policy experiment'. In Hong Kong, a new regulatory agency } the O$ce of Telecommunications Authority (OFTA) } was established in 1993 clearly similar to the British OFTEL model. Headed by a Director General in turn reporting to the Secretary of the Economic Services Branch of government, it was to similarly enjoy independence from direct ministerial control. Armed with a wide remit extending to the entire telecommunications market, it would be responsible for oversight of strategic telecommunications development in Hong Kong. &Light rein' regulation was implicit in its choice of #exible regulatory instruments, most notably the &Littlechild' RPI-x price cap model. Clearly, the Director General has presided over a fast evolving policy process. The speed of change has encouraged the views that, while deregulation developed in Hong Kong almost a decade after it had become embedded in &"rst mover' countries, Hong Kong is currently (1999) at the deregulatory forefront. In many ways, Hong Kong has become a &test-bed' and showcase (or &policy laboratory') for later deregulators in the region (Ure, 1997). Examples of Hong Kong's policy pro-activism would include its status as the "rst city in the world to introduce full geographic and operator number portability which went into operation with the entry of new entrants in July 1995. Number portability for mobile phones would soon be available from March 1999. Also of signi"cance has been the policy innovation of incorporating payment schemes (in contrast to auctions) into the administration of spectrum management. The regulator has typically intervened to bring about a consensual approach to the solution of contentious issues. Such was evident in the case of interconnection. In September 1995 New T&T expressed dissatisfaction with the HKTC's announced interconnection charge of 9 cents per minute and took their complaint to the regulator. Following OFTA's intervention, access fees were signi"cantly reduced (6 cents per minute) and New T&T became the "rst operator to achieve agreement with the incumbent (Wong, 1997). In China, soon after the establishment of China Unicom, the Directorate General of Telecommunications } the telecommunications operating arm of the MPT } was separated out and was renamed as China Telecom. However, China Telecom was, in reality, at best a quasi-independent operator, as all key functions, including "nance and planning, remained under central MPT control, while networks in di!erent provinces were subject to the administration of individual provincial Posts and Telecommunication Administrations (PTAs). Ironically, despite this strong a$liation between the MPT and China Telecom, the MPT was designated as state regulator to supervise the duopoly competition between China Telecom and China Unicom. To some extent, the MPT enjoyed twin status as both referee and player. The
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MPT's close a$liation with China Telecom rendered China Unicom vulnerable to competitive discrimination. The ambiguities inherent in this regulatory framework also made such issues as network interconnection a hard and protracted process. Further impediments were injected into the process by the relative subordinate status of MPT to other agencies. For instance, it was through the intervention of the State Planning Committee that China Unicom eventually reached an agreement with China Telecom on network interconnection. (Li, 1997) Obviously, this is di!erent from the case in Hong Kong. Additionally, the crucial lack of a Telecommunications Act in China has made e!ective regulation even more intractable, con#ictual and complicated (Pitt et al., 1996). In Hong Kong, telecommunications is regulated according to a Telecommunications Ordinance, making the process of regulation more transparent and legitimate. In China, however, no such statutory document is available yet. Senior governmental o$cials typically settle disputes between the incumbent and new operators on such issues as spectrum allocation and network interconnection on an ad hoc basis through sporadic intervention (Xu et al., 1997). A clearly emergent #aw of this modus operandi is ensuing lack of consistency.
4. Restriction on foreign direct investment Telecommunications deregulation has provided important incentives for operators to accelerate their own development. Additionally, foreign direct investment is undoubtedly one of the most important "nancial resources for network upgrading and expansion. In Hong Kong, foreign investment has not been subjected to any restrictions. Hong Kong Telecom is primarily owned by Cable and Wireless } a British company. China Telecom also holds 13% shares of Hong Kong Telecom. Among the new entrants, Hutchison has 20% shares owned by Telstra, and New World has "ve per cent shares owned by US West } a baby Bell company. In China, as members of a capital-intensive industry, both China Telecom and China Unicom have potentially insatiable needs for "nancial investment. They have been quick to recognise the necessity of foreign investment. However, they have been forced to "nd methods of bypassing the regulation, as the government has very strict control over foreign direct investment in the indigenous telecommunications sector due to its concern over national sovereignty and security. In March 1997, China Telecom and Telpo } a corporation a$liated to the MPT } jointly opened a branch in Hong Kong } China Telecom (HK). Its main function is to absorb foreign investment, and re-invest it in the Chinese telecommunications market. Soon after its establishment, China Telecom (HK) took over the mobile communications system in Zhejiang and Guangdong provinces. In October 1997, China Telecom (HK) sold its 2.6 billion shares in Asia, Europe and North America, and has been listed on the Hong Kong and New York stock market. The capital thus collected will be used for development of its mobile communications system in the coming three years (Capital, 1997). To meet the requirements for share sale, China Telecom (HK) optimised its capital structure and management system according to international common standards and requirements. The sale was a great success, conferring considerable experience on China Telecom for attracting further foreign capital in the future. Until now (1999) China Unicom has not yet sold shares on the stock market. Its preferred strategy in recent years is summarised in its so-called &China-China-Foreign' (CCF) joint
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Fig. 1. CCF investment scheme of China Unicom (Soure: China Unicom).
investment scheme. According to this scheme, a company owned by local government or one of China Unicom's shareholders establishes a joint venture with foreign companies. The objective of this joint venture is similar to the strategy of China Telecom (HK), i.e., to attract necessary investment funds. It re-invests in the building of mobile communications infrastructure leaving China Unicom responsible for operational management. Cash-#ows are shared between the joint venture and China Unicom according to an agreed ratio. In this way, China Unicom has, indeed, bypassed government's restrictions on foreign direct ownership. By April 1998, China Unicom has invested in 23 projects with total investment of US$1.5 billion through the CCF scheme (Ming Pao Daily, 1998). Figure 1 illustrates how this system works. In spite of the government's strict control over foreign direct investment, China Telecom and China Unicom, as noted above, have managed to "nd ways to circumvent government restrictions, and, in consequence, have secured much sought after investment "nancing. Indeed, without such foreign direct investment and operation, competition between the two operators alone is unlikely to deliver the full potential bene"ts of a full-blown competitive regime.
5. Ownership of operator In Hong Kong, all operators are now under private ownership. In China, however, both China Telecom and China Unicom remain state owned. Competition without privatisation has been a unique path adopted by the Chinese government given the constraints of its traditional centrally planned economic system and Marxist ideological provenance. Di!erences in ownership might be the most essential di!erences between Hong Kong and China, because they are the basis, as will be suggested below, for the classi"cation of di!erent interest groups. They are also crucial in strengthening or weakening the relative power of individual interest groups. According to Mesher and Zajac (1998), it is the rivalry between interest groups that facilitates the deregulatory process, while the transition rate depends on each nation's speci"c political and
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economic circumstance. Regulatory framework restructuring in Hong Kong and China in early 1998, as stated below, provides strong supportive evidence for this conclusion. In Hong Kong, the Government is able to distance itself from all telecommunications operators' interest, especially that of the incumbent operator, due to the absence of public ownership in the telecommunications sector. Thus, government serves a broad public interest in favour of e$ciency and e!ectiveness, judged to be best served by deregulation. The newly established operators share with government the ambition of achieving a deregulated telecommunications marketplace o!ering an array of basic and value added services. Shareholders of the incumbent operator, i.e., Hong Kong Telecom, are undoubtedly in an opposing camp. The relative independent status of Hong Kong Government enables it to take a seemingly relentless pro-competitive stance, and policy making is based on such objective assessments as technological convergence only. The restructuring of telecommunications regulatory framework in early 1998, which was triggered o! by the issue of a licence to Hong Kong Telecom for its provision of Interactive TV (ITV) service, is an evident example. On 23 March 1998, after more than three-year-long trials and more than HK$1 billion investment, IMS (Interactive Multimedia Services), a wholly owned subsidiary of Hong Kong Telecom, o$cially launched the world's "rst full commercial ITV service. Services over ITV include Video On Demand, Music On Demand, Home Shopping, Home Banking and Network Games. Broadband Internet service has now also been made available (Hong Kong Telecom IMS, 1998). However, these latest e!orts by Hong Kong Telecom raised serious challenges to the pre-existing regulatory framework. As indicated below, the issuing of the ITV license triggered o! a round of controversial debates over Hong Kong's telecommunications policy. When Hong Kong Telecom indicated its intention of providing Video On Demand (VOD) service in December 1993, Wharf Cable Ltd., the sole operator of cable TV in Hong Kong, immediately charged Hong Kong Telecom with infringement of its exclusive franchise over TV broadcasting. The issue was raised to the Broadcasting, Culture and Sports Branch of the government. After several meetings between this Branch and the Economic Service Branch, it was commonly agreed that VOD is in the category of telecommunications, as it provides service in the form of point-to-point rather than point-to-multi-point. However, its contents should be subjected to the regulation of the Broadcasting Act. That is, Hong Kong Telecom should obtain two separate licences for its operation and contents from OFTA and the broadcasting regulator respectively. (Wong, 1997). After the protracted arguments, and in spite of fears that VOD might further enhance Hong Kong Telecom's dominant position in the telecommunications market, ITV has "nally become a reality. Controversies occurring during the debate have raised the necessity of restructuring the regulatory framework for the information and media sectors, where convergence has become an increasingly evident phenomenon. In April 1998, the government re-adjusted the organisation of its regulatory structure (Fig. 2) (Ming Pao Daily, 1998). This organisational recon"guration has given birth to a new department entitled Information Technology and Broadcasting Bureau. OFTA is now a subordinate branch of this new department, The worries were based on the fact that Hong Kong Telecom might charge outrageous price for competitors to use the VOD network and use set-top box to create interconnection barriers for other service providers. See Asia}Paci,c ¹elecoms Analyst, (1997).
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Fig. 2. Restructured regulatory framework.
and is no longer responsible to Economic Service. Broadcasting and information technology regulation falls under the same roof as telecommunications. The motivation of the Hong Kong Government behind these changes is clear: to facilitate future deregulation of information-related services. In China, similar regulatory restructure was witnessed in 1998, but the motivations of the government are not identical. In China, the public interest may be served by the new entrant } China Unicom } while the incumbent operator, China Telecom, is on the opposing side. However, state ownership of China Telecom lends ambiguity to the status of the central government, which is caught between the interest of two rival coalitions of interest. On the one hand, the government would like to achieve the bene"ts of competition by incorporating the deregulatory mechanisms into the telecommunications sector. On the other hand, however, it has no ambitions to invest in the construction of extra networks like that of broadcasting. In recent years, the broadcasting network of the Ministry of Radio, Film and Television has developed at an extraordinary velocity. The main driving forces are the extremely high rental fees and the notorious quality of services provided by the MPT. For example, it would cost 54 million Yuan for Shanghai Radio, Film and Television Bureau to rent network resources from the MPT for a period of three years, while it would cost only 20 million Yuan to build a private optical network with the same area coverage (Yun Tao, 1997). This kind of economically unsound deal has been the main reason for the Ministry of Radio, Film and Television and other ministries to reluctantly co-operate with the MPT, and, consequently, private networks have developed rapidly. These private networks have raised the concerns of government, as they threaten the public network on which the government has invested heavily in past twenty years with redundancy. Additionally, as all these private networks are owned by the state, the budget-strapped government has considered such duplicative investments to be a waste of public resources. In this case, preventing over-investment and improving the utilisation of the PSTN became one of the major incentives behind the regulatory framework restructuring in 1998 (Luo Gan, 1998). The integration of telecommunications, broadcasting and computing networks has been a major guideline behind this restructuring. Of course, pressures from shareholders of China Unicom on establishing an independent regulator is also one of the most powerful driving forces.
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Under this restructuring scheme, the Ministry of Posts and Telecommunications, the Ministry of Electronic Industry and Network Division of the Ministry of Radio, Film and Television have been merged into a new ministry named the Ministry of Information Industry (MII). Both China Telecom and China Unicom are now under the umbrella of the MII. Compared with the OFTA in Hong Kong, the independent status of the regulator comes "ve years late in China. Importantly, the rationales behind the integration of telecommunications and broadcasting regulator in 1998 are evidently dissimilar.
6. Perseverance in the government:s competitive stance Another important in#uence upon telecommunications deregulation is arguably perseverance in the Government's stance in embracing competitive schemes. In Hong Kong, the unbiased relationship of the government with all the operators enables it to take determined stance in strengthening Hong Kong's position as the information hub of Asia through a fully deregulatory policy approach. There are clear signs that the Hong Kong Special Administrative Region (SAR) Government is keen to promote new telecommunications developments in Hong Kong. Hong Kong Telecom's current trial of a new broadband digital service } &O$ce on Demand' } is a case in point. This service, having obtained encouragement and non-"nancial support from the government, is aimed at the SME sector (companies with fewer than 50 employees) which, amazingly, comprises 98% of the Hong Kong economy. This system will enable Hong Kong's SMEs to outsource their IT system to Hong Kong Telecom and enjoy, at reasonable cost, the latest information technology supplied by IT companies via the broadband platform provided by Hong Kong Telecom. This is a harbinger of other similar developments and signals, quite clearly, the SAR Government to both recognise the continuing economic potential of telecommunications and their determination to retain Hong Kong's position as a leading telecommunications hub in the new millennium. Simultaneously, the government has apparently not slowed down its relentless process of telecommunications deregulation. On 20 January 1998, the government concluded an agreement with Hong Kong Telecom for the early termination of the exclusive international license of Hong Kong Telecom International (HKTI). In return, Hong Kong Telecom obtained a package of compensation measures including HK$6,700 million in cash, net of tax. Key elements of this agreement include the surrender of HKTI licence in March 1998 and the introduction of competition in international telecommunications services with e!ect from January 1999 (Hong Kong Telecom, 1998). The licenses of the incumbent domestic service licensees were amended to allow the supply of non-exclusive international services from 1 January 1999 and international facility-based services from 1 January 2000. An important feature of the agreement is the intention to rebalance tari!s in order to remove the cross subsidisation of residential lines from international service revenue. Hong Kong Telecom is also committed to open 50% of its local network for type II interconnection } the company to make its local loop available to other "xed telephone network service (FTNS) licensees (Economic Service Bureau of Hong Kong SAR Government, 1998). This move was radical, exceeding as it did Hong Kong's WTO commitments. It clearly indicated the SAR Government's determination and consistence of deregulating telecommunications in
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Hong Kong. Notwithstanding the current economic di$culties being experienced in Hong Kong, the above brief account of the contemporary telecommunications scene in Hong Kong is suggestive of a dynamic and changing regulatory environment, increasing market contestability and determination on the part of the new government to both recognise and foster telecommunications as pivotal to the SAR's future. In contrast to the &fast track' deregulatory approach endorsed by the SAR government, examination of the Chinese experience reveals an alternative and conservative deregulatory stance. In China, telecommunications has developed at an extraordinary speed in recent years. The turnover of China Telecom has increased from 13.41 Billion Yuan in 1991 to 135.55 Billion Yuan in 1997, about 1.8% of the GNP (Annual Report of the Ministry of Posts and ¹elecommunications, 1998). Obviously, China Telecom is now one of the major sources of national income. This critical position of China Telecom leads to the Government's vague stance in implementing deregulation in telecommunications sector. For example, the government a$rms that it encourages the incorporation of competitive mechanisms into the telecommunications sector and at the same time claims that China Unicom is only a supplement to the public network of China Telecom (Document of the Chinese State Council, 1997). Additionally, telecommunications has heavily cross-subsidised the loss-making postal service in past years, as both telecommunications and postal service have been under the same MPT umbrella. In China, postal service is still regarded as a social obligation with appropriately low tari!s. De"cits from the postal service have been extremely high due to considerably increased transportation cost in recent years. As a result, the postal service sector lost three billion Yuan in 1994 and "ve billion Yuan in 1995 (China Daily, 1996). Since the central government is unwilling to take on this "nancial burden, it tacitly condones the MPT's a$liation with China Telecom in past years. Until the restructuring of regulatory framework in 1998, all the revenues of China Telecom have been handed out to the MPT, while the MPT reportedly re-allocated 0.5% of this revenues back to China Telecom for its expenditures (China ¹elecom Newsletter, 1995). The above analysis clearly indicates that the speci"c economic and political system in China has left the Government in a dilemma. Its interests are caught between the "nancial contribution of the dominant operator, i.e., China Telecom, and the potential bene"ts of a deregulated telecommunications market. It is clearly concerned about the negative e!ects of China Telecom's monopolised market power, and at the same time, exercised over the waste of public resource in the form of duplicative construction. It expects an e$cient regulatory system, but does not intend to assume the "nancial burden for turning this aspiration into reality. Unsurprisingly, in comparison with Hong Kong, the Chinese Government has shown weak perseverance in implementing a deregulatory policy in the telecommunications sector.
7. Deregulatory impact Although governments in Hong Kong and China have adopted distinct approaches, an indisputable fact is that both territories have bene"ted dramatically from telecommunications deregulation. Deregulation has had a major impact in Hong Kong albeit with occasional unintended consequences. For example, while the major intent of the deregulatory process was to open up the domestic market segment to competition, the full impact of deregulation has been in evidence in
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Table 1 Mobile phone market segmentation in Hong Kong as in May 1998 Operator
CSL
Hutchinson
Smarton
Mandarin
New World
People's Phone
Market share (%)
[39]
[35]
[16]
[5]
[3]
[2]
Source: OFTA
international service o!erings. Recent (February 1998) statistics revealed that 98.5% of local exchange lines continued to be provided by Hong Kong Telecom, while more than 30% of international tra$c had been siphoned away by new entrants (OFTA, 1998). The main hurdle deterring domestic market entrance, according to a government report issued in 1998, is the obvious fact that local tari!s are currently below costs (Technology and Broadcasting Bureau of Hong Kong SAR Government, 1998). Contestability in the international telecommunications sector of the market owes much to OFTA's interpretation of international call-back services as consistent with Hong Kong Telecom's mandate to provide international service emanating from Hong Kong. As interpreted in an OFTA statement, call-back voice service and international simple resale (ISR) via leased lines for international data and facsimile (no voice) communications are not included in Hong Kong Telecom's franchise (OFTA, 1996). The removal of regulatory barriers to call-back service has strongly stimulated the development of so-called indirect IDD services in Hong Kong. Asymmetry between monopolised international telephone services in Hong Kong and fully deregulated markets in the US and other "rst mover countries has acted as a propellant to bypass activity on the part of new entrants. They can earn high margins as a result of monopoly pricing in Hong Kong and relatively low tari!s in other deregulated countries. Ironically, this situation provides some comfort to Hong Kong Telecom due to high settlement prices obtained from foreign operators (Lam, 1997). Additionally, Hong Kong Telecom also acts as a call-back service provider for its own customers. Call-back service has developed at an extraordinary speed. As a result, there is a rising imbalance between incoming and outgoing tra$c. For example, the incoming to outgoing tra$c ratio between Hong Kong and US rose to 3 : 1 in 1995 and 7 : 1 by the end of 1996 (Lam, 1997). At the same time, rates for international calls have been reduced signi"cantly. The rate for a one minute international call from Hong Kong to the US, for instance, has reduced from HK$9.8 in March 1994 to around HK$2.00 in 1998. In Hong Kong, another highly competitive telecommunications market is mobile telephony. In 1985, Hutchison Communications began to provide mobile phone service in Hong Kong. In 1987, Paci"c Link and CSL (Customer Service Ltd., the subsidiary company of Hong Kong Telecom) entered this market as well. Since then, full-blown competition has developed. By the end of 1997, there were seven operators running 11 mobile cellular networks, including six recently launched low price PCS high frequency digital networks. Table 1 shows the market segmentation in the Hong Kong mobile phone players in May 1998.
The lowest rate in 1998 is HK$0.99 per minute o!ered by CTI.
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Fig. 3. Turnover of international telephone service against overall services (Source: Hong Kong Telecom Annual Report, 1998).
Increasingly relentless competition in traditional telecommunications market has exerted prodigious pressure on the incumbent operator. Hong Kong Telecom has lost considerable international market to its new rivals in past years (Hong Kong ¹elecom Annual Report, 1998). Fig. 3 shows that the proportion of international telephone service turnover expressed as a percentage of Hong Kong Telecom's overall turnover has reduced dramatically in recent "scal years. To defend its leading position in the market, Hong Kong Telecom swiftly reshaped its product structure. In April 1996, Interactive Multi-media Service (IMS) of Hong Kong Telecom launched its interactive Internet service } Netvigator. In addition to Internet access, Netvigator introduces its customers to "nancial information, interactive advertising and marketing, as well as on-line shopping. It turned Wellcom } a popular supermarket in Hong Kong } into the largest &CyberSupermarket' in Asia. By March 1998, Netvigator had attracted 235,000 customers, which is more than a 40% share of this highly competitive market. (Hong Kong Telecom IMS, 1998). Additionally, the Interactive TV of IMS has enabled Hong Kong become the "rst city in the world that provide commercial Video on Demand service. Competition has brought both economic and innovative services to Hong Kong. In China, although &enjoying', at best, a weak negotiating stance, the new entrant } China Unicom } has fully exploited its (mainly political) strengths. As a result, a protean contestable market has been formed. As summarised below, the telecommunications sector, especially mobile communications, has achieved bene"ts in the shape of three notable successes since the inception of deregulation in 1994. First, competition has acted as a strong propellant of telecommunications development. Fig. 4 shows the exponential growth of mobile subscribers in China since China Unicom entered the market. Secondly, customers have bene"ted from competition between China Telecom and China Unicom. Since deregulation and the introduction of competition, the customers' role in the telecommunications market has changed from a passive to an active stance. They have already
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Fig. 4. Mobile phone subscriber development in China (unit: thousand) (Source: Ministry of Information Industry).
Fig. 5. Price reduction of mobile phone handsets (including installation fee) (Unit: Yuan) (Source: China Unicom).
bene"ted from reduced tari!s and installation fees, shortened waiting lists and improved service quality. Fig. 5 illustrates the drastic reduction of mobile phone handset prices (including installation fees) since China Unicom entered the market. Thirdly, competition has advanced the technology level of the infrastructure. Before China Unicom entered the mobile communications market with the most advanced GSM system in 1995, the MPT had adopted the TACS system for eight years although GSM was available as early as 1991. The high quality of GSM di!erentiated China Unicom's service, which, consequently, exerted high pressure on China Telecom. As a result, China Telecom had to up-grade its own system from analogue to digital. In 1996, China Telecom declared that the GSM digital mobile phone roaming service was available in 23 out of the 29 provinces of China (People1s Daily, 1996). In 1997, China Telecom began to introduce CDMA technology to its mobile communications system. By 1997,
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more than 46% of the overall mobile communications system in China has been digitised. (China Telecom Newsletter, 1998).
8. Unity of objective, diversity of approach Both Hong Kong and Mainland China are late movers in telecommunications deregulation. However, as suggested above, approaches to deregulation have obviously di!ered, although they share common objectives: to fully propel the development of telecommunications with the help of competitive mechanisms. By 1 January 2000, all telecommunication sectors in Hong Kong will be fully opened for competition. From the experience of the past, competition in international telecommunications will be particularly "erce. Compared with China, Hong Kong will exemplify the &fast track' route to deregulation. However, China's bold policy experiment with telecommunications deregulation should not be lightly disregarded. The establishment of China Unicom was courageous and represented a discontinuous break with the past. Realistically it must be admitted though that while China Unicom was licensed for all telecommunications services, competition has only taken place to date mainly in mobile communications. The "ve per cent market share of China Unicom in mobile communications is admittedly small, although its activity in this "eld has contributed to the formation of a contestable market. The key problem lies less in the strategic competitive frailty of China Unicom but rather more in the somewhat immature and irregular regulatory framework which had e!ectively inhibited an aggressive and proactive stance on the part of the maturing company. Additionally, the existence of a duopoly system has also frustrated the development of a more comprehensive telecommunications competition policy. Compared with the current situation in Hong Kong, China still has to undertake an arduous deregulatory &long march'. The recent restructuring of regulatory framework is just a step next to the start. The experience of Hong Kong and China has strongly a$rmed Mesher and Zajac's conclusion that telecommunications deregulation is a process of political rivalry between powerful interest groups, and that the &rate' of deregulation varies from country to country due to di!erent political and economic systems in individual countries. Additionally, the di!erent approach adopted by Hong Kong and Chinese Governments have also clearly indicated that the common objective can, to some extent, be achieved by di!erent path. The key factor behind the policy option, as analysed above, is ownership of telecommunications operation. State ownership places the Chinese Government in an evidently di!erent stance in the telecommunications sector as compared with the Hong Kong Government. Although studies have shown that privatisation has many advantages over state ownership, including increased productivity (Kwoka, 1993) and rapid expansion of network (Ramaruti, 1996) its absence does not necessarily mean that deregulation is not applicable in countries where it cannot be taken for granted as a given in the policy process. The early achievement of telecommunications deregulation in China, as reviewed here, clearly indicates that the public is able to achieve bene"ts from competitions between state-owned operators, as long as determined schemes of organisational reform are rigorously pursued. Schemes adopted by the Chinese telecommunications sector include, in addition to the setting up of a duopoly competitive framework, a contractual
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responsibility system, an economic accounting system, material incentives and #exible "nancing policy (excluding foreign direct investment) (Xu et al., 1998). Bearing in mind that China is unlikely to jettison its socialist economic system in the near future, telecommunications deregulation will undoubtedly continue to display somewhat idiosyncratic characteristic.
9. Conclusion Hong Kong and China have now engaged in telecommunications deregulation in their respective telecommunications sectors for several years. Due to the existence of di!erent economic and political systems, each government has been forced to adopt di!erent deregulatory approaches. Evaluation of the putative superiority of a particular approach should be cautious } each is subject to the contingencies of the political economies and cultures of their host societies. In China, an irregular and contradictory regulatory framework developed in the telecommunications sector over the past four years emanating from the adoption of a &satisfying' decision making mode recognising that limited liberalisation was the only feasible policy alternative given the unique institutional provenance of Marxist ideology. In Hong Kong, innovation in the form of such new services as ITV and &O$ce on Demand' will undoubtedly continue to strain the deregulatory envelope suggesting a trajectory of &continuous deregulation' within a rapidly maturing deregulatory institutional fabric. Comparison of the Hong Kong and Chinese deregulatory policy paths suggests that development of telecommunications is a goal attainable by di!erent roads. Certainly it seems premature to conclude that in this case, the so-called &one country, two systems' approach to telecommunications deregulation in the China/Hong Kong dyad is merely a temporary phenomenon. While the Chinese government may be content, indeed enthusiastic, to view Hong Kong as a laboratory of telecommunications deregulation, the transfer of such policy experimentation to the mainland may be subject to obvious situational constraints. The search for the universal &one best way' approach to telecommunications deregulatory governance must remain a questionable and perhaps futile preoccupation.
References Annual Report of the Ministry of Posts and ¹elecommunications (1998) Asia}Paci,c ¹elecoms Analyst, 17 November, 1997. Becker, G. (1976) Comment on Peltzman's &Toward a More General Theory of Regulation'. Journal of ¸aw and Economics, XIX, 245}248. Capital (1997). The Battle for Chinese Telecommunications Market, November. China Daily, (1996). 19 March. China ¹elecom Newsletter (1995). July. China ¹elecom Newsletter (1998). 5 (3). Document of the Chinese State Council (1997). (39). Economic Service Bureau of Hong Kong SAR Government, ¸iberalisation of Hong Kong's external telecommunications } A policy statement (1998). 20 February. Enright, M. J., Scott, E. E., & Dodwell, D. (1997). ¹he Hong Kong advantage. Oxford: Oxford University Press. Hong Kong Telecom (1998). Hong Kong ¹elecom News, 20 February.
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Hong Kong ¹elecom Annual Report (1998). Hong Kong Telecom IMS (1998). ¹he driving force in interactive multimedia services. Information Technology and Broadcasting Bureau of Hong Kong SAR Government (1998). ¹he 1998 Review of Fixed Telecommunications } A Consultation Paper. Kwoka, J. E. (1993). The e!ects of divestiture, privatization and competition on productivity in U.S. and U.K. telecommunications. Review of Industrial Organization, 8 (1). Lam, P. L. (1997). Erosion of monopoly power by call-back. ¹elecommunications Policy, 21 (8), 693}695. Li, H. F. (1997). Speech at the News Conference Celebrating the ¹hird Anniversary of China ;nicom, 19 September. Luo Gan (1998). Former State Councilor and Secretary-General of the State Council, Report to Ninth National People's Congress on Institutional Restructuring, March. Mesher, G., Zajac, E. E. (1998). Toward a theory of the global liberalization of telecommunications. Paper delivered at 12th Biennial Conference of International ¹elecommunications Society, Stockholm, Sweden, June. Ming Pao Daily (1998). 12 March. Ming Pao Daily (1998). 23 April. OFTA (1996). ¹he Interpretation of the Exclusivities of Hong Kong ¹elecom International ¸imited. April. OFTA (1998). State of the ¸ocal ¹elecommunications Market. March. People's Daily (1995). 29 December. People's Daily (1996). 20 July. Pitt, D. C., Levine, N., & Xu, Y. (1996). Touching stones to cross the river: Evolving telecommunications policy priorities in contemporary China. Journal of Contemporary China, 5 (13), 347}365. Ramaruti, R. (1996). Privatizing monopolies: ¸essons from the telecommunications and transport sectors in ¸atin America. (1996). Baltimore: The John Hopkins University Press. Twight, C. (1994). Political transaction-cost manipulation. Journal of ¹heoretical Politics (6), 189}212. Ure, J. (1997). ¹elecommunications in Asia } policy, planning and development. Hong Kong: Hong Kong University Press. Wong, M. H. (1997). Information age. Hong Kong: Hong Kong Economic Daily Press. Xu, Y., Pitt, D., & Levine, N. (1997). Network interconnection } Bottleneck to future Chinese telecommunications deregulation? In P. Enslow, P. Desrochers, & I. Bonifacio, 21st Century communications networks (pp. 106}114). Amsterdam: IOS Press. Xu, Y., Pitt, D. C., & Levine, N. (1998). Competition without privatization } the Chinese path. In S. Macdonald, & G. Madden, ¹elecommunications and socio-economic development (pp. 375}392). London: Elsevier Science Yun Tao, (1997). By Whom, The Ministry of Posts and Telecommunications or the Ministry of Radio, Film and Television. China Computer =orld, 15 December.
One country, two systems: contrasting approaches to telecommunications deregulation in Hong Kong and China夽 Xu Yan *, Douglas C. Pitt Department of Information and Systems Management, Hong Kong University of Science and Technology, Clearwater Bay, Kowloon, Hong Kong Strathclyde Business School, 50 Richmond Street, Glasgow G1 1XT, UK
Abstract Telecommunications deregulation strategies have been self-evidently di!erent in Hong Kong and China due to di!erences existing in political and economic systems. This paper will provide an overview of contemporary trends in telecommunications deregulation in these two territories. Comparisons will be drawn between the two systems with regard to ownership, foreign direct investment, respective regulatory frameworks and the government's perseverance in propelling deregulation. The study clearly indicates that the shared goal of deregulation can be reached at di!erent rates by di!erent routes (&policy paths') dependent on situational contingencies. 1999 Elsevier Science Ltd. All rights reserved. Keywords: Deregulation; Foreign direct investment; Ownership; Regulatory framework
1. Introduction &One country, two systems' was the proposed political solution for anticipated problems emergent from the territorial hand-over of Hong Kong. There had been considerable doubts and suspicions concerning the reality and feasibility of this deal since it was formulated in the 1980s. After the o$cial hand-over, the eyes of the world remain on Hong Kong to see whether this policy experiment is succeeding. De"nitive judgement remains premature. The area of telecommunications constitutes a policy arena in which the &one country, two systems' approach has been very much in evidence since deregulation happened in early 1990s. 夽 This paper is a revised version of a presentation made at the Twelfth Biennial Conference, organized by International Telecommunation Society, Stockholm, Sweden, June 21}24, 1998. *Corresponding author. Tel.: (852) 2358 7640; fax: (852) 2358 2421; e-mail: [email protected].
0308-5961/99/$ - see front matter 1999 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 8 - 5 9 6 1 ( 9 9 ) 0 0 0 0 6 - 3
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Strategies of deregulation have been self-evidently di!erent in Hong Kong and China. These di!erences lie in the format of ownership, foreign involvement, respective regulatory systems and the government's perseverance in implementing deregulation. This raises a question that whether the shared goal of deregulation could be reached by di!erent routes (&policy paths') dependent on situational contingencies. Such obviously include the idiosyncrasies of the respective political and economic systems. So far, studies in this aspect are limited. Mesher and Zajac (1998) remark that the &rate' of telecommunications liberalisation varies widely from country to country. They use Twight's theory of institutional change (Twight, 1994) and Becker's political oligopoly model (Becker, 1976) to explain this phenomenon. The conclusion they draw is that the destruction of the &postal-industrial complex', supported by a clientelistic coalition of monopolist provider, trade unions, major suppliers and the political &left', is typically accompanied by a period of intense political rivalry between powerful interest groups } representing, respectively, the status quo (monopoly provision) and radical change (liberalisation and privatisation). Interest groups of roughly equal political power will battle to establish or oppose the formation of a new equilibrium. This struggle will crucially depend on each nation's history, demographics, property rights and legal structures, and its culture norms. From such a perspective, it is hardly surprising that the rate at which liberalisation of telecommunications has progressed has varied widely from country to country. Mesher and Zajac's insight into the transition economics and politics of the &new telecommunications paradigm' can be usefully applied to contemporary Chinese developments and those in Hong Kong, the newly designated &SAR' (Special Administrative Region). Di!erences between the destruction process of the &postal-industrial complex equilibrium' in Hong Kong and China lie not just in the &rate' of change, but also in the &path' taken by the change process. This is mainly due to the di!erences existing in the social and economic systems of these two territories. For example, all the telecommunications operators in Hong Kong are owned by the private sector, while in China competition is taking place between two state-owned operators. As the ownership is directly related to the composition and strength of individual interest groups, patterns of rivalry would undoubtedly be di!erent in Hong Kong and China. This paper, pre-empting the phrase &one country, two systems' as a main theme, will provide an overview of contemporary trends in telecommunications deregulation in Hong Kong and China. A parallel comparison will be drawn between the two systems in regard to the regulatory framework, ownership of operators, foreign direct investment and the government's perseverance in propelling deregulation. The study will con"rm Mesher and Zajac's model of the &rate of liberalisation', and, simultaneously, con"rm that the shared goal of deregulation can be achieved by di!erent policy paths which themselves are &situationally' located in a network of discrete institutional and political norms.
2. Antecedents of deregulation Hong Kong and China adopted the deregulatory mechanism in the telecommunications sector at almost the same time, i.e., in the early 1990s. Government in both territories clearly recognised For the sake of simplicity, China represents Mainland China throughout this paper.
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the advantages that had been conferred by deregulation in such early mover countries as the UK and the US. However, due to the di!erences existing in the social and economic systems, initial deregulatory forays adopted by the two Governments were self-evidently di!erent. Portraits of Hong Kong as an entrepreneurial &little dragon' have been frequently #attering viz. &Hong Kong's unique history and circumstances have fostered a vital economy characterised by openness, an international outlook and #exibility'. (Enright et al., 1997). Arguably such dynamism has, in part, been fostered by &an unfettered press, freedom of information #ows and an outstanding communications infrastructure'. (Enright et al., 1997). However, compared with early mover countries and regions, telecommunications deregulation started very late in Hong Kong. But if Hong Kong could be justi"ably portrayed as a deregulatory laggard, the 1990s have revealed an accelerating pace of deregulatory change. Under the terms of the license conferred by the Government, Hong Kong Telecom, the sole operator of telecommunications services, was granted exclusive franchise over local and international telecommunications, until respectively 1995 and 2006. In reality, franchises (for local and international services) were held respectively by Hong Kong Telephone Company (HKTC) and Hong Kong Telecom International (HKTI), both subsidiaries of Hong Kong Telecom with separated accounting systems. Government intentions to review telecommunications policy followed self-imposed expiry of its rate of return policy in March 1991 and the termination in June 1995 of HKTC's franchise over local telephone service. Following extensive consultation, deregulation was adopted as a policy stance in June 1992 with the government announcing abolition of HKTC's exclusive privilege in local telecommunications on its expiry in June 1995. In July 1992, the government o$cially published its guidelines for issuing new licenses for local telephone network operation. These could be unlimited in number, subject to an open and transparent application process and under the oversight of a new regulator. By the close of the bidding process on 1st February 1993, the Government had received seven applications and "nally decided to issue three licences to, respectively, Hutchison Communications, New World Telephone and New T&T in addition to that granted to HKTC in March 1995. July 1995 marked the advent of true deregulation in Hong Kong's domestic telephone market. In China, the development of telecommunications has been given high priority due to o$cial recognition that telecommunications was central to the modernisation ambitions of the Chinese government and a facilitator of economic growth. With generous investment and favourable policies from central and local governments, telecommunications has been the most rapidly developing industrial sector in China during the past decade. The annual average growth rate of telecommunications was 45% during the period of 1990 to 1995. (People1s Daily, 1995). This huge and highly pro"table market has attracted intentions of investment from other industrial sectors. All related ministries were eager to share a portion of this enlarged cake with the monopoly operator } the Ministry of Posts and Telecommunications (MPT) } by means of either integrating their self-manufactured equipment with the expanding network or diverting part of the tra$c to their formidable private networks. In 1993, the State Council agreed a joint proposal from several in#uential ministries for deregulating the Chinese telecommunications market. In July 1994, China Unicom, a joint venture with shareholders from the Ministry of Electronic Industry (MEI), Ministry of Railways (MOR), Ministry of Electrical Power (MEP) and thirteen other giant state-owned companies, was formally
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established. (Pitt et al., 1996). The establishment of China Unicom provided these ministries with a gateway to enter this huge market. Importantly, this heralded a process of policy discontinuity } a break with the orthodoxy of centralised monopoly provisioning in telecommunications. However, the adoption of a duopoly approach clearly re#ects the government's doubts and hesitations over this deregulatory policy experiment.
3. The regulatory framework To facilitate telecommunications deregulation, both Hong Kong and China restructured their regulatory framework in the initial stage of this &policy experiment'. In Hong Kong, a new regulatory agency } the O$ce of Telecommunications Authority (OFTA) } was established in 1993 clearly similar to the British OFTEL model. Headed by a Director General in turn reporting to the Secretary of the Economic Services Branch of government, it was to similarly enjoy independence from direct ministerial control. Armed with a wide remit extending to the entire telecommunications market, it would be responsible for oversight of strategic telecommunications development in Hong Kong. &Light rein' regulation was implicit in its choice of #exible regulatory instruments, most notably the &Littlechild' RPI-x price cap model. Clearly, the Director General has presided over a fast evolving policy process. The speed of change has encouraged the views that, while deregulation developed in Hong Kong almost a decade after it had become embedded in &"rst mover' countries, Hong Kong is currently (1999) at the deregulatory forefront. In many ways, Hong Kong has become a &test-bed' and showcase (or &policy laboratory') for later deregulators in the region (Ure, 1997). Examples of Hong Kong's policy pro-activism would include its status as the "rst city in the world to introduce full geographic and operator number portability which went into operation with the entry of new entrants in July 1995. Number portability for mobile phones would soon be available from March 1999. Also of signi"cance has been the policy innovation of incorporating payment schemes (in contrast to auctions) into the administration of spectrum management. The regulator has typically intervened to bring about a consensual approach to the solution of contentious issues. Such was evident in the case of interconnection. In September 1995 New T&T expressed dissatisfaction with the HKTC's announced interconnection charge of 9 cents per minute and took their complaint to the regulator. Following OFTA's intervention, access fees were signi"cantly reduced (6 cents per minute) and New T&T became the "rst operator to achieve agreement with the incumbent (Wong, 1997). In China, soon after the establishment of China Unicom, the Directorate General of Telecommunications } the telecommunications operating arm of the MPT } was separated out and was renamed as China Telecom. However, China Telecom was, in reality, at best a quasi-independent operator, as all key functions, including "nance and planning, remained under central MPT control, while networks in di!erent provinces were subject to the administration of individual provincial Posts and Telecommunication Administrations (PTAs). Ironically, despite this strong a$liation between the MPT and China Telecom, the MPT was designated as state regulator to supervise the duopoly competition between China Telecom and China Unicom. To some extent, the MPT enjoyed twin status as both referee and player. The
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MPT's close a$liation with China Telecom rendered China Unicom vulnerable to competitive discrimination. The ambiguities inherent in this regulatory framework also made such issues as network interconnection a hard and protracted process. Further impediments were injected into the process by the relative subordinate status of MPT to other agencies. For instance, it was through the intervention of the State Planning Committee that China Unicom eventually reached an agreement with China Telecom on network interconnection. (Li, 1997) Obviously, this is di!erent from the case in Hong Kong. Additionally, the crucial lack of a Telecommunications Act in China has made e!ective regulation even more intractable, con#ictual and complicated (Pitt et al., 1996). In Hong Kong, telecommunications is regulated according to a Telecommunications Ordinance, making the process of regulation more transparent and legitimate. In China, however, no such statutory document is available yet. Senior governmental o$cials typically settle disputes between the incumbent and new operators on such issues as spectrum allocation and network interconnection on an ad hoc basis through sporadic intervention (Xu et al., 1997). A clearly emergent #aw of this modus operandi is ensuing lack of consistency.
4. Restriction on foreign direct investment Telecommunications deregulation has provided important incentives for operators to accelerate their own development. Additionally, foreign direct investment is undoubtedly one of the most important "nancial resources for network upgrading and expansion. In Hong Kong, foreign investment has not been subjected to any restrictions. Hong Kong Telecom is primarily owned by Cable and Wireless } a British company. China Telecom also holds 13% shares of Hong Kong Telecom. Among the new entrants, Hutchison has 20% shares owned by Telstra, and New World has "ve per cent shares owned by US West } a baby Bell company. In China, as members of a capital-intensive industry, both China Telecom and China Unicom have potentially insatiable needs for "nancial investment. They have been quick to recognise the necessity of foreign investment. However, they have been forced to "nd methods of bypassing the regulation, as the government has very strict control over foreign direct investment in the indigenous telecommunications sector due to its concern over national sovereignty and security. In March 1997, China Telecom and Telpo } a corporation a$liated to the MPT } jointly opened a branch in Hong Kong } China Telecom (HK). Its main function is to absorb foreign investment, and re-invest it in the Chinese telecommunications market. Soon after its establishment, China Telecom (HK) took over the mobile communications system in Zhejiang and Guangdong provinces. In October 1997, China Telecom (HK) sold its 2.6 billion shares in Asia, Europe and North America, and has been listed on the Hong Kong and New York stock market. The capital thus collected will be used for development of its mobile communications system in the coming three years (Capital, 1997). To meet the requirements for share sale, China Telecom (HK) optimised its capital structure and management system according to international common standards and requirements. The sale was a great success, conferring considerable experience on China Telecom for attracting further foreign capital in the future. Until now (1999) China Unicom has not yet sold shares on the stock market. Its preferred strategy in recent years is summarised in its so-called &China-China-Foreign' (CCF) joint
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Fig. 1. CCF investment scheme of China Unicom (Soure: China Unicom).
investment scheme. According to this scheme, a company owned by local government or one of China Unicom's shareholders establishes a joint venture with foreign companies. The objective of this joint venture is similar to the strategy of China Telecom (HK), i.e., to attract necessary investment funds. It re-invests in the building of mobile communications infrastructure leaving China Unicom responsible for operational management. Cash-#ows are shared between the joint venture and China Unicom according to an agreed ratio. In this way, China Unicom has, indeed, bypassed government's restrictions on foreign direct ownership. By April 1998, China Unicom has invested in 23 projects with total investment of US$1.5 billion through the CCF scheme (Ming Pao Daily, 1998). Figure 1 illustrates how this system works. In spite of the government's strict control over foreign direct investment, China Telecom and China Unicom, as noted above, have managed to "nd ways to circumvent government restrictions, and, in consequence, have secured much sought after investment "nancing. Indeed, without such foreign direct investment and operation, competition between the two operators alone is unlikely to deliver the full potential bene"ts of a full-blown competitive regime.
5. Ownership of operator In Hong Kong, all operators are now under private ownership. In China, however, both China Telecom and China Unicom remain state owned. Competition without privatisation has been a unique path adopted by the Chinese government given the constraints of its traditional centrally planned economic system and Marxist ideological provenance. Di!erences in ownership might be the most essential di!erences between Hong Kong and China, because they are the basis, as will be suggested below, for the classi"cation of di!erent interest groups. They are also crucial in strengthening or weakening the relative power of individual interest groups. According to Mesher and Zajac (1998), it is the rivalry between interest groups that facilitates the deregulatory process, while the transition rate depends on each nation's speci"c political and
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economic circumstance. Regulatory framework restructuring in Hong Kong and China in early 1998, as stated below, provides strong supportive evidence for this conclusion. In Hong Kong, the Government is able to distance itself from all telecommunications operators' interest, especially that of the incumbent operator, due to the absence of public ownership in the telecommunications sector. Thus, government serves a broad public interest in favour of e$ciency and e!ectiveness, judged to be best served by deregulation. The newly established operators share with government the ambition of achieving a deregulated telecommunications marketplace o!ering an array of basic and value added services. Shareholders of the incumbent operator, i.e., Hong Kong Telecom, are undoubtedly in an opposing camp. The relative independent status of Hong Kong Government enables it to take a seemingly relentless pro-competitive stance, and policy making is based on such objective assessments as technological convergence only. The restructuring of telecommunications regulatory framework in early 1998, which was triggered o! by the issue of a licence to Hong Kong Telecom for its provision of Interactive TV (ITV) service, is an evident example. On 23 March 1998, after more than three-year-long trials and more than HK$1 billion investment, IMS (Interactive Multimedia Services), a wholly owned subsidiary of Hong Kong Telecom, o$cially launched the world's "rst full commercial ITV service. Services over ITV include Video On Demand, Music On Demand, Home Shopping, Home Banking and Network Games. Broadband Internet service has now also been made available (Hong Kong Telecom IMS, 1998). However, these latest e!orts by Hong Kong Telecom raised serious challenges to the pre-existing regulatory framework. As indicated below, the issuing of the ITV license triggered o! a round of controversial debates over Hong Kong's telecommunications policy. When Hong Kong Telecom indicated its intention of providing Video On Demand (VOD) service in December 1993, Wharf Cable Ltd., the sole operator of cable TV in Hong Kong, immediately charged Hong Kong Telecom with infringement of its exclusive franchise over TV broadcasting. The issue was raised to the Broadcasting, Culture and Sports Branch of the government. After several meetings between this Branch and the Economic Service Branch, it was commonly agreed that VOD is in the category of telecommunications, as it provides service in the form of point-to-point rather than point-to-multi-point. However, its contents should be subjected to the regulation of the Broadcasting Act. That is, Hong Kong Telecom should obtain two separate licences for its operation and contents from OFTA and the broadcasting regulator respectively. (Wong, 1997). After the protracted arguments, and in spite of fears that VOD might further enhance Hong Kong Telecom's dominant position in the telecommunications market, ITV has "nally become a reality. Controversies occurring during the debate have raised the necessity of restructuring the regulatory framework for the information and media sectors, where convergence has become an increasingly evident phenomenon. In April 1998, the government re-adjusted the organisation of its regulatory structure (Fig. 2) (Ming Pao Daily, 1998). This organisational recon"guration has given birth to a new department entitled Information Technology and Broadcasting Bureau. OFTA is now a subordinate branch of this new department, The worries were based on the fact that Hong Kong Telecom might charge outrageous price for competitors to use the VOD network and use set-top box to create interconnection barriers for other service providers. See Asia}Paci,c ¹elecoms Analyst, (1997).
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Fig. 2. Restructured regulatory framework.
and is no longer responsible to Economic Service. Broadcasting and information technology regulation falls under the same roof as telecommunications. The motivation of the Hong Kong Government behind these changes is clear: to facilitate future deregulation of information-related services. In China, similar regulatory restructure was witnessed in 1998, but the motivations of the government are not identical. In China, the public interest may be served by the new entrant } China Unicom } while the incumbent operator, China Telecom, is on the opposing side. However, state ownership of China Telecom lends ambiguity to the status of the central government, which is caught between the interest of two rival coalitions of interest. On the one hand, the government would like to achieve the bene"ts of competition by incorporating the deregulatory mechanisms into the telecommunications sector. On the other hand, however, it has no ambitions to invest in the construction of extra networks like that of broadcasting. In recent years, the broadcasting network of the Ministry of Radio, Film and Television has developed at an extraordinary velocity. The main driving forces are the extremely high rental fees and the notorious quality of services provided by the MPT. For example, it would cost 54 million Yuan for Shanghai Radio, Film and Television Bureau to rent network resources from the MPT for a period of three years, while it would cost only 20 million Yuan to build a private optical network with the same area coverage (Yun Tao, 1997). This kind of economically unsound deal has been the main reason for the Ministry of Radio, Film and Television and other ministries to reluctantly co-operate with the MPT, and, consequently, private networks have developed rapidly. These private networks have raised the concerns of government, as they threaten the public network on which the government has invested heavily in past twenty years with redundancy. Additionally, as all these private networks are owned by the state, the budget-strapped government has considered such duplicative investments to be a waste of public resources. In this case, preventing over-investment and improving the utilisation of the PSTN became one of the major incentives behind the regulatory framework restructuring in 1998 (Luo Gan, 1998). The integration of telecommunications, broadcasting and computing networks has been a major guideline behind this restructuring. Of course, pressures from shareholders of China Unicom on establishing an independent regulator is also one of the most powerful driving forces.
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Under this restructuring scheme, the Ministry of Posts and Telecommunications, the Ministry of Electronic Industry and Network Division of the Ministry of Radio, Film and Television have been merged into a new ministry named the Ministry of Information Industry (MII). Both China Telecom and China Unicom are now under the umbrella of the MII. Compared with the OFTA in Hong Kong, the independent status of the regulator comes "ve years late in China. Importantly, the rationales behind the integration of telecommunications and broadcasting regulator in 1998 are evidently dissimilar.
6. Perseverance in the government:s competitive stance Another important in#uence upon telecommunications deregulation is arguably perseverance in the Government's stance in embracing competitive schemes. In Hong Kong, the unbiased relationship of the government with all the operators enables it to take determined stance in strengthening Hong Kong's position as the information hub of Asia through a fully deregulatory policy approach. There are clear signs that the Hong Kong Special Administrative Region (SAR) Government is keen to promote new telecommunications developments in Hong Kong. Hong Kong Telecom's current trial of a new broadband digital service } &O$ce on Demand' } is a case in point. This service, having obtained encouragement and non-"nancial support from the government, is aimed at the SME sector (companies with fewer than 50 employees) which, amazingly, comprises 98% of the Hong Kong economy. This system will enable Hong Kong's SMEs to outsource their IT system to Hong Kong Telecom and enjoy, at reasonable cost, the latest information technology supplied by IT companies via the broadband platform provided by Hong Kong Telecom. This is a harbinger of other similar developments and signals, quite clearly, the SAR Government to both recognise the continuing economic potential of telecommunications and their determination to retain Hong Kong's position as a leading telecommunications hub in the new millennium. Simultaneously, the government has apparently not slowed down its relentless process of telecommunications deregulation. On 20 January 1998, the government concluded an agreement with Hong Kong Telecom for the early termination of the exclusive international license of Hong Kong Telecom International (HKTI). In return, Hong Kong Telecom obtained a package of compensation measures including HK$6,700 million in cash, net of tax. Key elements of this agreement include the surrender of HKTI licence in March 1998 and the introduction of competition in international telecommunications services with e!ect from January 1999 (Hong Kong Telecom, 1998). The licenses of the incumbent domestic service licensees were amended to allow the supply of non-exclusive international services from 1 January 1999 and international facility-based services from 1 January 2000. An important feature of the agreement is the intention to rebalance tari!s in order to remove the cross subsidisation of residential lines from international service revenue. Hong Kong Telecom is also committed to open 50% of its local network for type II interconnection } the company to make its local loop available to other "xed telephone network service (FTNS) licensees (Economic Service Bureau of Hong Kong SAR Government, 1998). This move was radical, exceeding as it did Hong Kong's WTO commitments. It clearly indicated the SAR Government's determination and consistence of deregulating telecommunications in
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Hong Kong. Notwithstanding the current economic di$culties being experienced in Hong Kong, the above brief account of the contemporary telecommunications scene in Hong Kong is suggestive of a dynamic and changing regulatory environment, increasing market contestability and determination on the part of the new government to both recognise and foster telecommunications as pivotal to the SAR's future. In contrast to the &fast track' deregulatory approach endorsed by the SAR government, examination of the Chinese experience reveals an alternative and conservative deregulatory stance. In China, telecommunications has developed at an extraordinary speed in recent years. The turnover of China Telecom has increased from 13.41 Billion Yuan in 1991 to 135.55 Billion Yuan in 1997, about 1.8% of the GNP (Annual Report of the Ministry of Posts and ¹elecommunications, 1998). Obviously, China Telecom is now one of the major sources of national income. This critical position of China Telecom leads to the Government's vague stance in implementing deregulation in telecommunications sector. For example, the government a$rms that it encourages the incorporation of competitive mechanisms into the telecommunications sector and at the same time claims that China Unicom is only a supplement to the public network of China Telecom (Document of the Chinese State Council, 1997). Additionally, telecommunications has heavily cross-subsidised the loss-making postal service in past years, as both telecommunications and postal service have been under the same MPT umbrella. In China, postal service is still regarded as a social obligation with appropriately low tari!s. De"cits from the postal service have been extremely high due to considerably increased transportation cost in recent years. As a result, the postal service sector lost three billion Yuan in 1994 and "ve billion Yuan in 1995 (China Daily, 1996). Since the central government is unwilling to take on this "nancial burden, it tacitly condones the MPT's a$liation with China Telecom in past years. Until the restructuring of regulatory framework in 1998, all the revenues of China Telecom have been handed out to the MPT, while the MPT reportedly re-allocated 0.5% of this revenues back to China Telecom for its expenditures (China ¹elecom Newsletter, 1995). The above analysis clearly indicates that the speci"c economic and political system in China has left the Government in a dilemma. Its interests are caught between the "nancial contribution of the dominant operator, i.e., China Telecom, and the potential bene"ts of a deregulated telecommunications market. It is clearly concerned about the negative e!ects of China Telecom's monopolised market power, and at the same time, exercised over the waste of public resource in the form of duplicative construction. It expects an e$cient regulatory system, but does not intend to assume the "nancial burden for turning this aspiration into reality. Unsurprisingly, in comparison with Hong Kong, the Chinese Government has shown weak perseverance in implementing a deregulatory policy in the telecommunications sector.
7. Deregulatory impact Although governments in Hong Kong and China have adopted distinct approaches, an indisputable fact is that both territories have bene"ted dramatically from telecommunications deregulation. Deregulation has had a major impact in Hong Kong albeit with occasional unintended consequences. For example, while the major intent of the deregulatory process was to open up the domestic market segment to competition, the full impact of deregulation has been in evidence in
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Table 1 Mobile phone market segmentation in Hong Kong as in May 1998 Operator
CSL
Hutchinson
Smarton
Mandarin
New World
People's Phone
Market share (%)
[39]
[35]
[16]
[5]
[3]
[2]
Source: OFTA
international service o!erings. Recent (February 1998) statistics revealed that 98.5% of local exchange lines continued to be provided by Hong Kong Telecom, while more than 30% of international tra$c had been siphoned away by new entrants (OFTA, 1998). The main hurdle deterring domestic market entrance, according to a government report issued in 1998, is the obvious fact that local tari!s are currently below costs (Technology and Broadcasting Bureau of Hong Kong SAR Government, 1998). Contestability in the international telecommunications sector of the market owes much to OFTA's interpretation of international call-back services as consistent with Hong Kong Telecom's mandate to provide international service emanating from Hong Kong. As interpreted in an OFTA statement, call-back voice service and international simple resale (ISR) via leased lines for international data and facsimile (no voice) communications are not included in Hong Kong Telecom's franchise (OFTA, 1996). The removal of regulatory barriers to call-back service has strongly stimulated the development of so-called indirect IDD services in Hong Kong. Asymmetry between monopolised international telephone services in Hong Kong and fully deregulated markets in the US and other "rst mover countries has acted as a propellant to bypass activity on the part of new entrants. They can earn high margins as a result of monopoly pricing in Hong Kong and relatively low tari!s in other deregulated countries. Ironically, this situation provides some comfort to Hong Kong Telecom due to high settlement prices obtained from foreign operators (Lam, 1997). Additionally, Hong Kong Telecom also acts as a call-back service provider for its own customers. Call-back service has developed at an extraordinary speed. As a result, there is a rising imbalance between incoming and outgoing tra$c. For example, the incoming to outgoing tra$c ratio between Hong Kong and US rose to 3 : 1 in 1995 and 7 : 1 by the end of 1996 (Lam, 1997). At the same time, rates for international calls have been reduced signi"cantly. The rate for a one minute international call from Hong Kong to the US, for instance, has reduced from HK$9.8 in March 1994 to around HK$2.00 in 1998. In Hong Kong, another highly competitive telecommunications market is mobile telephony. In 1985, Hutchison Communications began to provide mobile phone service in Hong Kong. In 1987, Paci"c Link and CSL (Customer Service Ltd., the subsidiary company of Hong Kong Telecom) entered this market as well. Since then, full-blown competition has developed. By the end of 1997, there were seven operators running 11 mobile cellular networks, including six recently launched low price PCS high frequency digital networks. Table 1 shows the market segmentation in the Hong Kong mobile phone players in May 1998.
The lowest rate in 1998 is HK$0.99 per minute o!ered by CTI.
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Fig. 3. Turnover of international telephone service against overall services (Source: Hong Kong Telecom Annual Report, 1998).
Increasingly relentless competition in traditional telecommunications market has exerted prodigious pressure on the incumbent operator. Hong Kong Telecom has lost considerable international market to its new rivals in past years (Hong Kong ¹elecom Annual Report, 1998). Fig. 3 shows that the proportion of international telephone service turnover expressed as a percentage of Hong Kong Telecom's overall turnover has reduced dramatically in recent "scal years. To defend its leading position in the market, Hong Kong Telecom swiftly reshaped its product structure. In April 1996, Interactive Multi-media Service (IMS) of Hong Kong Telecom launched its interactive Internet service } Netvigator. In addition to Internet access, Netvigator introduces its customers to "nancial information, interactive advertising and marketing, as well as on-line shopping. It turned Wellcom } a popular supermarket in Hong Kong } into the largest &CyberSupermarket' in Asia. By March 1998, Netvigator had attracted 235,000 customers, which is more than a 40% share of this highly competitive market. (Hong Kong Telecom IMS, 1998). Additionally, the Interactive TV of IMS has enabled Hong Kong become the "rst city in the world that provide commercial Video on Demand service. Competition has brought both economic and innovative services to Hong Kong. In China, although &enjoying', at best, a weak negotiating stance, the new entrant } China Unicom } has fully exploited its (mainly political) strengths. As a result, a protean contestable market has been formed. As summarised below, the telecommunications sector, especially mobile communications, has achieved bene"ts in the shape of three notable successes since the inception of deregulation in 1994. First, competition has acted as a strong propellant of telecommunications development. Fig. 4 shows the exponential growth of mobile subscribers in China since China Unicom entered the market. Secondly, customers have bene"ted from competition between China Telecom and China Unicom. Since deregulation and the introduction of competition, the customers' role in the telecommunications market has changed from a passive to an active stance. They have already
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257
Fig. 4. Mobile phone subscriber development in China (unit: thousand) (Source: Ministry of Information Industry).
Fig. 5. Price reduction of mobile phone handsets (including installation fee) (Unit: Yuan) (Source: China Unicom).
bene"ted from reduced tari!s and installation fees, shortened waiting lists and improved service quality. Fig. 5 illustrates the drastic reduction of mobile phone handset prices (including installation fees) since China Unicom entered the market. Thirdly, competition has advanced the technology level of the infrastructure. Before China Unicom entered the mobile communications market with the most advanced GSM system in 1995, the MPT had adopted the TACS system for eight years although GSM was available as early as 1991. The high quality of GSM di!erentiated China Unicom's service, which, consequently, exerted high pressure on China Telecom. As a result, China Telecom had to up-grade its own system from analogue to digital. In 1996, China Telecom declared that the GSM digital mobile phone roaming service was available in 23 out of the 29 provinces of China (People1s Daily, 1996). In 1997, China Telecom began to introduce CDMA technology to its mobile communications system. By 1997,
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more than 46% of the overall mobile communications system in China has been digitised. (China Telecom Newsletter, 1998).
8. Unity of objective, diversity of approach Both Hong Kong and Mainland China are late movers in telecommunications deregulation. However, as suggested above, approaches to deregulation have obviously di!ered, although they share common objectives: to fully propel the development of telecommunications with the help of competitive mechanisms. By 1 January 2000, all telecommunication sectors in Hong Kong will be fully opened for competition. From the experience of the past, competition in international telecommunications will be particularly "erce. Compared with China, Hong Kong will exemplify the &fast track' route to deregulation. However, China's bold policy experiment with telecommunications deregulation should not be lightly disregarded. The establishment of China Unicom was courageous and represented a discontinuous break with the past. Realistically it must be admitted though that while China Unicom was licensed for all telecommunications services, competition has only taken place to date mainly in mobile communications. The "ve per cent market share of China Unicom in mobile communications is admittedly small, although its activity in this "eld has contributed to the formation of a contestable market. The key problem lies less in the strategic competitive frailty of China Unicom but rather more in the somewhat immature and irregular regulatory framework which had e!ectively inhibited an aggressive and proactive stance on the part of the maturing company. Additionally, the existence of a duopoly system has also frustrated the development of a more comprehensive telecommunications competition policy. Compared with the current situation in Hong Kong, China still has to undertake an arduous deregulatory &long march'. The recent restructuring of regulatory framework is just a step next to the start. The experience of Hong Kong and China has strongly a$rmed Mesher and Zajac's conclusion that telecommunications deregulation is a process of political rivalry between powerful interest groups, and that the &rate' of deregulation varies from country to country due to di!erent political and economic systems in individual countries. Additionally, the di!erent approach adopted by Hong Kong and Chinese Governments have also clearly indicated that the common objective can, to some extent, be achieved by di!erent path. The key factor behind the policy option, as analysed above, is ownership of telecommunications operation. State ownership places the Chinese Government in an evidently di!erent stance in the telecommunications sector as compared with the Hong Kong Government. Although studies have shown that privatisation has many advantages over state ownership, including increased productivity (Kwoka, 1993) and rapid expansion of network (Ramaruti, 1996) its absence does not necessarily mean that deregulation is not applicable in countries where it cannot be taken for granted as a given in the policy process. The early achievement of telecommunications deregulation in China, as reviewed here, clearly indicates that the public is able to achieve bene"ts from competitions between state-owned operators, as long as determined schemes of organisational reform are rigorously pursued. Schemes adopted by the Chinese telecommunications sector include, in addition to the setting up of a duopoly competitive framework, a contractual
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responsibility system, an economic accounting system, material incentives and #exible "nancing policy (excluding foreign direct investment) (Xu et al., 1998). Bearing in mind that China is unlikely to jettison its socialist economic system in the near future, telecommunications deregulation will undoubtedly continue to display somewhat idiosyncratic characteristic.
9. Conclusion Hong Kong and China have now engaged in telecommunications deregulation in their respective telecommunications sectors for several years. Due to the existence of di!erent economic and political systems, each government has been forced to adopt di!erent deregulatory approaches. Evaluation of the putative superiority of a particular approach should be cautious } each is subject to the contingencies of the political economies and cultures of their host societies. In China, an irregular and contradictory regulatory framework developed in the telecommunications sector over the past four years emanating from the adoption of a &satisfying' decision making mode recognising that limited liberalisation was the only feasible policy alternative given the unique institutional provenance of Marxist ideology. In Hong Kong, innovation in the form of such new services as ITV and &O$ce on Demand' will undoubtedly continue to strain the deregulatory envelope suggesting a trajectory of &continuous deregulation' within a rapidly maturing deregulatory institutional fabric. Comparison of the Hong Kong and Chinese deregulatory policy paths suggests that development of telecommunications is a goal attainable by di!erent roads. Certainly it seems premature to conclude that in this case, the so-called &one country, two systems' approach to telecommunications deregulation in the China/Hong Kong dyad is merely a temporary phenomenon. While the Chinese government may be content, indeed enthusiastic, to view Hong Kong as a laboratory of telecommunications deregulation, the transfer of such policy experimentation to the mainland may be subject to obvious situational constraints. The search for the universal &one best way' approach to telecommunications deregulatory governance must remain a questionable and perhaps futile preoccupation.
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