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Address by Mrs Carrie Yau, Secretary for Information Technology and Broadcasting, at APEC TELMIN5 Plenary Session 2 : "Telecommunications Policy and Market Regulation"

30 May 2002

Mr Chairman, Honourable Ministers, Ladies and Gentlemen,

The past year or so has not been an easy time for the information and communications technology (ICT) industry. It has been severely affected by the global economic slowdown as well as the ongoing restructuring and consolidation within the industry.

However, in the midst of the difficult economic climate, demand for quality information and communications services remains strong. With the phenomenal growth in Internet usage as a business and communications medium, the demand for bandwidth and capacity to facilitate data communication grows voraciously to meet the need for timely information for work and for leisure. Businesses and consumers expect innovative content and multi-media applications. They also have a choice on the means of conveyance; it can be through wireline, wireless or satellite communications. I firmly believe that these developments drive the further growth of the ICT industry.

Policy-makers and regulators like us in Hong Kong have a firm mission to set the right telecommunications policy and regulatory framework to pave way for the healthy development of the ICT market, and induce private investment. I am pleased to share with fellow Ministers and regulators Hong Kong's vision and our experience.

Progress of Liberalization of the Telecommunications Market

Liberalization of the telecommunications market is an irreversible trend. After some years of experience in progressively liberalizing the telecommunications market, we are of the view that moving towards a fully liberalized market will best promote further market development. We started to liberalize the local fixed telecommunications network services (FTNS) market as early as in 1995. At present, Hong Kong has 10 local FTNS operators making use of different technologies to build their own network. Among them, 4 are wireline operators, one uses cable modem technology over its hybrid fibre coaxial cable whereas the remaining 5 use wireless solutions. In the external FTNS market, the competition is even keener with 27 operators using either cable or satellite means to construct their external telecom facilities, and the number is still rising.

Behind these impressive numbers are individual business plans, some of which are struggling, others are surviving, a few are surviving rather well. For the community as a whole, investment by operators in a competitive market has translated to real and substantial benefits :

  1. our broadband network reaches all commercial buildings and over 95% of households;

  2. with increased competition amongst the ten local FTNS operators and the 200 odd Internet Services Providers (ISPs), broadband service has improved and become all the more innovative. The number of broadband subscribers surges from 51,000 in February 2000 to 673,000 in February 2002, an increase of more than 13-fold in two years. Broadband services have also become one of the cheapest in the world. For dial up service, it costs less than US$12 (HK$95) per month; and for broadband service, it costs less than US $25 (HK$200) per month for unlimited usage;

  3. businesses benefit substantially in the leased circuit service. The monthly rental of an international private leased circuit between Hong Kong and China with a capacity of 2 Megabits per second, for example, has dropped from US$18,000 (HK$140,000) to about US$2,500 (HK$20,000) since 2000, which is a drop of 86%;

  4. with the increase in external capacity by new cables and satellite facilities, we are getting better and faster connection with the rest of the world. Since liberalization of the external facilities market in 2000, our external connectivity has increased from 44 Giga bits per second by more than 20-fold to about 900 Giga bits per second, which is one of the highest in Asia; and

  5. the effect of more choices at more competitive prices for individual consumers and the business sector is also shown in the considerable savings in IDD expenditure. We estimate that since the opening of the IDD market in early 1999, total savings in IDD charges amount to a remarkable US$1.2 billion (HK$9.4 billion) by end of 2000.

Telecommunications services underpin all business and commercial activities. The provision of quality telecommunications services at competitive prices helps enhance Hong Kong's overall competitiveness, which is crucial to us as an international financial and business center.

Our mobile market, on the other hand, is liberalized from the very beginning. We have six second generation (2G) operators running eleven networks. Our mobile penetration is at a high 86% and our mobile operators are renowned for their innovative services. They led in Asia in launching the Wireless Access Protocols (WAP) and General Packet Radio Services (GPRS), and have most recently launched the multi-media messaging services (MMS). Hong Kong is indeed very well-placed to reap the full benefits of the business opportunities arising from 3G.

We completed successfully the 3G licensing exercise in October 2001 by pre-qualification and spectrum auction. Four licences went to successful applicants. Under an innovative royalty payment scheme, each licensee will pay a flat payment of US$ 6.4 million (HK$50 million) for each of the first five years, and from year six onwards, the higher of a rising minimum guaranteed payments, or 5% of royalty based on network turnover for each year. Our royalty payment scheme eases the financial burden of the operators. The licensing process should be efficient, fair and transparent, and we have achieved our objectives.

A unique feature of our regulatory regime for 3G is that each 3G licensee is required under the licence conditions to open up at least 30% of its network capacity to non-affiliated service providers, including mobile virtual network operators (MVNOs). We believe that our 3G market will be vibrant and innovative, with 3G network operators and MVNOs offering cutting edge services and content. Moreover, the network operators may upgrade their technology during the licence period to 4G, 5G and so on. This will be conducive to developing a wireless hub in Hong Kong in the ever-changing technology and market environment.

A Policy and Regulatory Environment which Provides Transparency, Certainty and a Level Playing Field

What kind of regulatory regime would a multi-player, technology-neutral, fiercely competitive telecommunications market require? We follow a few guiding principles :

  1. First, the due process requirement. By due process we mean that all affected parties must be given a reasonable opportunity to have their representations heard before a regulatory decision is made. If a party is not satisfied with the decision, there is always an appeal channel to judicial review or an independent appeal board depending on the issue at stake.

  2. Second, full consultation with the industry and affected parties. In forming any important regulatory measure, we aim to closely involve the industry, academics and the general public in the process. By closely involving the industry and the public, we ensure that any decisions so formed are acceptable and welcome by the community.

  3. Third, transparency. In formulating all major policy or regulatory measures we consult the industry and the affected parties, and publish all the decisions and regulations thereafter. In terms of transparency, I can say that our regime is one of the most transparent in the world.

Let we explain what we have done in practice. In developing our liberalization policy, as well as the licensing and regulatory framework, such as the interconnection regime, we put great importance in having a consultative process to involve the industry and solicit their views. For the 3G licensing exercise, for example, we went through two extensive public consultations in 2000. The first one was conducted when the world was in the frenzy of the UK and German auctions, and the second one in October 2000 when sentiments began to change. Due to our open network requirement, we also conducted an industry workshop in January 2001. Having incorporated their invaluable input, we announced the licensing framework, with several important aspects of the regulatory framework in February 2001. The decision-making process, which invariably involves consultation, provides transparency, certainty and hence confidence to operators and investors. This is part of our best practice which has gained wide support from the industry and the public.

The same process applies in any determination process by the Telecommunications Authority as well. Before making a determination on say interconnection, the Telecommunications Authority would first hear representations from operators concerned. After considering their representations, he would issue a preliminary analysis where affected parties have a second opportunity to make representations again. Only after considering their representations would the Authority make a final decision. Once a decision is made, the Authority will publish the decision together with full justifications on the web site which is accessible by all members of the public. In case an operator concerned is not satisfied with the decision, he is free to lodge a judicial review against the Authority's decision. The whole process is open, transparent and fair.

We are keenly aware that our market liberalization policy will only be successful if we level the playing field so that no one player, be it an incumbent or a newcomer, enjoys advantage over others either by design or default. To this end, we have enshrined pro-competition provisions in the Telecommunications Ordinance to safeguard fair and effective competition in the market. We prohibit anti-competitive practices such as price-fixing which will adversely affect consumer interests and deal a blow to effective competition.

We will continue to update and develop our pro-competition regime for the telecommunications sector. The latest proposal is to enact a comprehensive and clear legislative framework for the regulation of merger and acquisition activities of the FTNS licensees (or carrier licensees). The proposal is, again, the outcome of industry consultation. We have accepted industry's views to adopt an ex post regulatory regime where regulatory review will be conducted after a merger and acquisition has been completed. A formal channel to allow the licensees to seek prior consent on a voluntary basis will give them a choice of action. The regulator will only intervene if the activity has, or is likely to have, the effect of substantially lessening competition in the relevant telecommunications market. If you take a look at our proposal, you will most likely find it familiar as we have considered overseas examples, especially Australia and the UK which also adopt an ex post regime. Our proposal is, after all, light-handed, and aims to help investors make informed decisions on mergers and acquisitions.

Regional / International Cooperation

Proactive participation in APEC and other international organizations allows us to learn from the rest of the world in formulating our policy and regulation, and in building our best practices. May I take this opportunity to congratulate the APEC economies for their work in TELMIN. Since we last met in TELMIN 4 in Mexico, the TEL Working Group has had four successful meetings, and pursued a wide range of issues and initiatives of common interest, from liberalization and convergence, e-commerce, to Mutual Recognition Arrangement for telecommunications equipment. TEL distinguishes itself in the APEC forum due to the highly successful tripartite cooperation between governments, businesses and the academia. Hong Kong, China is proud to contribute to the TEL process, and we always enjoy firm support from our private sector leaders. We hope to continue this strong alliance in APEC TEL and work on emerging issues, such as interoperability of emerging services like multi-media messaging services (MMS) which has been just introduced in Hong Kong, and I am sure, has been or will soon be introduced in your economies. We should continue to devote our efforts to tackle digital divide and build up human capacity through life-long education and re-training.

Conclusion

Mr Chairman, Ministers, Ladies and Gentlemen, when the only certainty is change in the highly challenging economic and market environment, I remain confident that the future of ICT industry is promising, full of vigor and vitality. As policy-makers and regulators, let us cooperate and create a favorable environment for the benefit of operators, investors and consumers. Thank you.