Natural market monopoly no longer exists

PUBLISHED : Friday, 19 July, 1996, 12:00am
UPDATED : Friday, 19 July, 1996, 12:00am

Should Hongkong Telecom (HKT) be compensated for the loss of its monopoly of international telephone calls? I disagree with David Ibison's answer that HKT must be compensated simply because its right to monopolise international calls is enshrined in law, which must not be violated to hurt business confidence (Business Post, June 14).

His argument of paying HKT the lost opportunity cost resulting from a breached commercial contract ignores entirely the purpose of an outdated law.

The law granted HKT the monopoly for a guaranteed but reasonable return, because a phone service requires a massive investment which perhaps was, but no longer is, best served by a single firm.

Indeed, compensating HKT would be fair if the Government ended the monopoly and HKT had not recouped a reasonable return on investment. This is not the case. The international arm of HKT has annual profit close to asset, after paying 40 per cent of its revenue to the local service. HKT's 1995/96 profit was a whopping $11 billion out of a revenue of $29 billion.

Therefore, compensation is largely for perceived lost future profit. This perception was created because for decades the Government has failed to prevent HKT from making an excessive return on a trusted monopoly right. Rate of return far exceeds the 12 per cent cap for the US Bell System before its break-up, and the around 10 per cent for other utilities.

The problem therefore is not the law that enshrines the monopoly right, but the lack of complementary laws to enforce the obligations which come with such a right. There is no British-style monopoly division nor American-style anti-trust law to prevent HKT from unfairly crushing its competition. Should the Government and HKT decide not to end the monopoly right, legislative and executive oversight must be improved.

The better solution is to end the monopoly right. The Government should not interfere in a market where technological advances have greatly reduced the entry cost, and a natural monopoly no longer exists. Technological savings should be passed on to the consumer.

Compensation is unnecessary if HKT accepts the normal profit margin, which is attainable without a monopoly right. The perceived future profit based on current level is unsustainable and socially unacceptable. Call-back service has cut into profit margins, but HKT is still entitled to half of call-back revenue. Even this entitlement is fast eroding due to global competition. A strong-arm US administration will force an uneven split of toll favouring the calling country over the called country, giving the call-back operator an advantage. The use of Internet telephony will make a mockery of HKT's monopoly right. Traffic will be rerouted, since it is now cheaper to call China or England through the US. A more liberal Singapore will replace Hong Kong as a transit hub.

If the Government pays an excessive amount in compensation, Hongkong Telecom will have the last laugh, for giving up what it cannot keep to cash in on profit which will not be there.

JOSEPH Y. HUI Professor, Department of Information Engineering Chinese University of Hong Kong