telecoms scenario

01 April 2000

Richard Fawcett

It is generally accepted that competition is good for consumers, good for businesses and good for the economy. More competition leads to greater efficiency, lower costs, lower prices and innovation. By way of example of the downward pressure which competition can exert on costs, compare IDD call charges today with those of one year ago. Markets which are competitive generate a higher level of consumer welfare than those which are not. Competition contributes to capital and other resources being allocated in the most productive way between markets and companies and leads to more efficient production in any particular market.

The Case for Competition

At the same time, it is recognised that the free play of market forces may not, by itself, always lead to a sufficiently competitive environment. Monopolies and businesses with a dominant market position are often bad news for consumers, and their dominance may not be eroded by the free play of the market particularly in the early years of competition).

This is obvious where a company has a legal monopoly, or a factual or natural monopoly in respect of scarce resources, but it may also apply to markets where there are high barriers to new entrants coming into the market. An example is the telecommunications market where, among other things, the high levels of investment required to build a network infrastructure and (in the case of mobile telephony) the fact that radio spectrum is a scarce resource, are significant barriers to entry into the market.

In such situations, it may be important to ensure that a monopolist does not exploit consumers, or that a dominant player does not unfairly use its strength to eliminate competition from the market, or to try to extend its market power into other downstream or neighbouring markets.

It is also recognised that certain forms of agreement may distort a market in a way which may prevent the market mechanism from operating freely. For example, cartels – agreements between competitors to fix prices, to share customers or to control production by the application of quotas – damage competition and have clearly negative consequences for consumers (for example, by requiring consumers to pay prices which are higher than those which would apply in a competitive market, or by restricting the quantities or choices which are available to consumers, and by discouraging innovation). The simultaneous price rises of mobile telephone operators in Hong Kong in January provided a dramatic example of this at work. The Telecommunications Authority concluded in its investigation that the mobile operators must have reached some kind of understanding which led to the simultaneous price adjustments.

The purpose of Competition Laws Competition laws usually contain provisions relating to different types of mechanism designed to combat distortions of competition. First of all, there is usually a general merger control law which prevents a change in the structure of the market through acquisition or merger, which would result in a business becoming too powerful and which would threaten to eliminate com- petition. For example, concerns have been voiced in connection with the takeover of Cable & Wireless HKT by Pacific Century Cyberworks that members of the Li family will between them control too much of Hong Kong's telecoms market.

There is, however, some degree of protection under General Condition Four of Cable &Wireless HKT's Fixed Telecommunications NetWork Services Licence. This requires the consent of the Telecommunications Authority to the transfer of the Licence. Under the Licence, the Telecommunications Authority will have regard to such matters as it thinks fit including, but not limited to, the effect which the transfer will have on market structure and the financial and technical competence and viability of the transferee.

Secondly, there are rules designed to prevent the abuse of monopoly power or a dominant position, such as the charging of excessive, discriminatory or predatory prices, other forms of discrimination or abusive tie-ins. Thirdly, there are rules designed to prevent restrictions or distortions of competition resulting from agreements between businesses, such as price- or quantity-fixing cartels, or agreements to share markets, and possibly other agreements which reduce competition between actual or potential competitors, or even in some cases between distributors of a particular product. Lastly, there may be provisions designed to control oligopoly power. It must be recognised, however, that not all competition policies have exactly me same form, or do not also pursue additional objectives.

It should be emphasised mat me proper objective of competition laws should be to protect competition, not competitors. Far too often, competition laws have sought to protect small or medium-sized market operators without properly examining whether intervention is justified in the interests of me market as a whole. On the other hand, competition policy is often used to pursue oilier goals, such as geographic market integration, as in me case of me European Union competition rules, or social or industrial policy. These other objectives may be less relevant in Hong Kong.

Sector-specific Regulation

It is often appropriate for specific, detailed rules to be applied to prevent competitive distortions in particular market sectors, especially where those sectors are fundamental to me economy. However, since the legislature cannot foresee all forms of anti-competitive behaviour, generalised rules are often appropriate. Such general rules are able to catch not only anti-competitive practices which me legislature has not foreseen, but also enable actions to be judged against a more general objective of promoting competition rather than a more specific sectoral requirement.

Competition regulation in Hong Kong is limited to sector specific regulation of me telecoms market. The Information Technology and Broadcasting Bureau's Legislative Council Brief on me 1998 Review of Fixed Telecommunications in February 1999 reported that ‘[Cable & Wireless] HKT's...point seemed to be...that me telecommunications sector had been unfairly singled out for the sectoral application of competition law’. A submission by Cable & Wireless HKT to the Bills Committee of the Legislative Council which is considering me Telecommunications (Amendment) Bill states Cable & Wireless HKT's belief that sections of the Telecommunications (Amendment) Bill which seek to introduce competition safeguards into the Telecommunications Ordinance are seriously flawed. The submission continues that Cable & Wireless HKT supports the introduction of a general competition law in Hong Kong which would encompass broad competition principles.

What form does the telecoms sector regulation take? The first point to note is that such regulation has, to date, been implemented through conditions included in the licences of telecoms operators (effectively by contractual agreement between the Telecommunications Authority and each licensee). The Telecommunications (Amendment) Bill proposes that this should change, with the introduction of the competition safeguards presently contained in licence conditions into the Telecommunications Ordinance.

More specifically, as mentioned above, General Condition Four of the Fixed Telecommunications Network Services Licence provides a certain degree of protection against mergers and acquisitions which would affect the structure of the telecommunications market.

General Condition 15(1) imposes a general prohibition on ‘conduct which, in the opinion of the [Telecommunications] Authority, has the purpose or effect of preventing or substantially restricting competition in the operation of the [licensed service], or in any market for the provision or acquisition of a telecoms installation, service or apparatus.’ Conduct which may be considered anti-competitive includes (but is not limited to) collusive price-fixing agreements, boycotting the supply of goods or services to competitors, entering into exclusive agreements which prevent competitors from having access to supplies or outlets, and agreements between licensees to share the available market between them along geographic or customer lines. Similar prohibitions on anti-competitive conduct appear in other telecoms licences issued by the Telecommunications Authority.

General Condition 15(2) goes on to prohibit licensees from entering into agreements, arrangements or understandings, whether legally enforceable or not, which have or are likely to have the purpose or effect of preventing or substantially restricting competition. This is the licence condition which the Telecommunications Authority decided had been breached by the mobile telephone licensees when it concluded they had entered into an anti-competitive arrangement to make simultaneous price increases in January this year.

General Condition 15(2) also prohibits licensees from tying or linking the provision of a product or service with any other product or service, and from giving any undue preference to, or from receiving any unfair advantage from, an associated business if competitors could be placed at a significant competitive disadvantage or competition would be prevented or substantially restricted.

General Condition 16 prohibits the abuse by an operator which is dominant in any market for a particular telecoms service of its dominant position. Factors which the Telecommunications Authority will take into account in considering whether a licensee is dominant in any particular market include (without being limited to) the market share of the licensee, its power to make pricing and other decisions, the height of barriers to entry into the particular market and the degree of product differentiation.

A dominant operator will be taken to have abused its position if it has engaged in any conduct which has the purpose of preventing or substantially restricting competition in any market. Such conduct will include predatory pricing, price discrimination, the imposition of contractual terms which are harsh or unrelated to the subject matter of the contract, tying arrangements and discrimination in the supply of services to competitors.

General Condition 20(4) prohibits the offering by a licensee of any discount to its published tariffs; for a particular telecoms service if the licensee is in a dominant position in any market for, or which includes, that telecoms service. Cable & Wireless HKT was found by the Telecommunications Authority to have breached this condition of its licence on two occasions in 1998 and were fined the maximum permissible amounts. The seemingly inadequate level of penalties, in view of their failure to act as a deterrent from future breaches, is one of the main areas of change proposed in the Telecommunications (Amendment) Bill.

The Telecommunications (Amendment) Bill

One of the main objectives of the Telecommunications (Amendment) Bill is to improve the competition safeguards presently contained in, and to strengthen the competition powers of the Telecommunications Authority presently derived from, conditions in telecoms licences. The Bill proposes that this objective should be achieved by including sum powers and safeguards in the principal statute, the Telecommunications Ordinance. The Bill also proposes a new provision (whim does not presently appear in any licence) whim would prohibit licensees from engaging in misleading or deceptive conduct in the provision of telecoms services and equipment, including the promotion, marketing and advertising of sum services and equipment.

The Telecommunications (Amendment) Bill also pro- poses significantly increased financial penalties for breaching licence conditions. As already mentioned, there has been serious concern that existing penalties are inadequate and insufficient to deter repeated breaches. Penalties are proposed to be increased 10 times, with the effect that the Telecommunications Authority will be empowered to impose a maximum penalty of HK$l,000,000 for third and subsequent breaches. Where the Telecommunications Authority considers that the maximum penalty whim it can impose is insufficient, the Telecommunications (Amendment) Bill proposes that it will be able to refer the case to the Court of First Instance for determination.

The Court of First Instance will have jurisdiction to impose a fine (per bream) of up to 10 per cent of the turnover of the company in the relevant market sector in the relevant period, or HK$l0million, whichever is higher. The Telecommunications Authority will also be empowered to suspend, for a period determined by it, that part of a licence to whim the breach relates.

Is Hong Kong a Special Case?

In recent years, more and more countries all over the world it have recognised the need to introduce or strengthen competition policy in their legislation. While the possibility of introducing general competition legislation in Hong Kong has been raised a number of times, such a proposal has to date been rejected. On the other hand, it has felt the need to have sector-specific regulation since the first steps were taken to liberalise the telecoms market.

The manner in whim sum sector-specific regulation has been implemented, is discussed above, but it is worth noting that Hong Kong's telecoms market is widely acknowledged as one of the most competitive in the world. It is also important to recognise that the regulation of competition in Hong Kong's telecoms market is similar in nature to the type of competition regulation which in many countries applies to the majority of industrial sectors.

Perhaps, at a time when Hong Kong's economy appears to be emerging from the Asian financial crisis, it is appropriate to question whether the reasons why the proposal for a general competition law framework in Hong Kong which has previously been rejected still hold true, and whether the continued lack of a competition policy is really in the best interests of businesses and consumers. Is there something about the size and nature of Hong Kong and its businesses which means that distortions of competition should not be seen as problematic? Might not the adoption of general competition regulation add substance to Hong Kong's economic recovery?

Even acknowledging the possibility of an argument that businesses in some sectors need to attain a certain size locally before they will be able to compete in larger markets outside Hong Kong, can mergers, agreements and other behaviour in Hong Kong, which would infringe competition law rules elsewhere, be justified by such objectives? Or has the time come for Hong Kong to recognise that high industrial concentration, abusive practices and ‘cosy’ competition are not in the best interests of consumer or business, and that it would be better for the long-term sustainability of Hong Kong's economy to adopt competition legislation, albeit competition legislation which is adapted to the particular circumstances of Hong Kong?

If the response from business to the above question is that Hong Kong’s markets are already competitive, then such businesses should have little to fear from extending the application of rules which are seen as necessary and desirable for the telecoms sector to other sectors of the business community.

First published in Company Secretary in April 2000. Volume 10 No. 4.