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Press Release
11 Nov 2003
"Type II Interconnection" An Essential Safeguard for Consumers' Right of Choice, Benefiting All in Hong Kong

As a strong supporter of the Government's policy on the liberalisation of the telecommunications market since 1995, Wharf T&T has actively offered greater choices to consumers by providing an extensive array of world-class, cost-effective telecom products and services.

Since the end of PCCW's monopoly, "Type II Interconnection" has been a key competitive factor in Hong Kong's telecommunications industry. Nevertheless, the market is still controlled by the incumbent. Worse still, some people have recently called for the abolishment of the "Type II Interconnection" policy. This not only runs in the face of market liberalisation, but also eliminates benefits to the consumer. For this reason, Wharf T&T reiterates its firm support for "Type II Interconnection" which is essential to Hong Kong consumers and the development of the local telecommunications sector.

"Type II Interconnection" Encourages Competition and Provides Choices for Consumers

The implementation of "Type II Interconnection" is a crucial step towards fully liberalising the telecommunications market and, in the case of some buildings, has proven to be the only viable way to provide competition. It provides more choice and benefits to consumers and businesses and in the Territory.

The chance to enjoy expanded benefits through competition would be eliminated if the Government were to remove "Type II Interconnection", which bridges the existing social and economic gap between those consumers who have a choice and those who do not.

We estimate that a typical consumer would by exercising his or her right to choose another service provider save approximately HK$456 per year or 35% on the telephone bill following the opening up of Hong Kong's telecom market, resulting in a total of HK$285 million overall. This clearly illustrates the benefits of "Type II Interconnection" to the public.

Consumers in Shau Kei Wan and Kennedy Town are in the best position to talk about the importance and effects of "Type II Interconnection". After the implementation of "Type II Interconnection" by the new FTNS, nearly 100% of residents in Shau Kei Wan are free to choose their preferred fixed-line service provider and half had already done so, at a cheaper rate. By contrast, Kennedy Town residents have virtually no choice at all because there is no "Type II Interconnection".

In 1995 the Government mandated "Type II Interconnection", to provide greater choice of fixed-line service provider to consumers. Today, nearly 1 million consumers are directly enjoying the benefits of choice of fixed-line service, made possible due to "Type II Interconnection", and many more are benefiting indirectly because of the availability of choice.

Wharf T&T recently conducted a survey on the network coverage of four new FTNS, namely Wharf T&T, Hutchison Global Communications, New World Telecommunications and Hong Kong Broadband Network with residential and commercial buildings in Hong Kong Island, Kowloon and the New Territories randomly selected for the study. The findings revealed that more than half of the consumers in Hong Kong (or close to 4 million people) will be deprived of their choice of fixed-line service operator if "Type II Interconnection" were abolished. Given that fact, if the Government were to abolish the "Type II interconnection" policy, many businesses and residential consumers will sadly lose their right to choose.

Ironically, the number of people that would be denied of their right to choose is more than the 2.4 million residents registered to vote in the upcoming District Council elections.

In addition to residential consumers, abolishing "Type II Interconnection" will also adversely affect SMEs. If the Government were to abolish "Type II interconnection" policy, over 90% of Kwun Tong's consumers who currently enjoy the fixed-line operator of their choice - Wharf T&T, will be deprived of their right to choose. Most of these consumers are SMEs, comprising 40% of all telephone lines in Kwun Tong.

"Type II Interconnection" Overcomes Geographical and Environmental Barriers and Increases Penetration Rates

It is a fact that Hong Kong is congested with so many buildings that often there is no lead-in space for telecom equipment or space for on-site cabling facilities. Many SMEs and residents living in older, smaller buildings and rural areas do not have the critical mass for alternative networks to be physically or commercially viable. For this reason, "Type II interconnection" represents the only viable way to bring about competition and benefits to consumers in these buildings. That is why many countries other than Hong Kong has introduced "Type II Interconnection".

Better Utilisation of Resources, Encourages Investment and Ensures Higher Cost-effectiveness

"Type II Interconnection" is not a re-sale, rather it enables new entrants to gain access to the "last mile" (the section of wire that connects directly to the customer's premises) to homes and businesses which is controlled by the incumbent.

In fact, breaking into the "Type II Interconnection" market creates heavy investment burdens for new entrants and collocates at the exchanges owned by incumbent as well as gaining a connection foothold to the "last mile". In the meantime, this situation has created a very significant revenue stream for the incumbent.

It is clear then that "Type II Interconnection" should be used to facilitate effective competition and promote continued investment in the telecom sector. It also allocates greater resources to remote areas or those in need in the most cost-effective way.

"Type II Interconnection" Provides Big Profit to the Incumbent

According to a 1998 framework agreement, the Government gave $6.7 billion to PCCW in return for an early termination of the international telecommunications monopoly. In return for allowing PCCW to increase local telecom charges by phases, PCCW agreed to open its exchanges for "Type II Interconnection" with the 3 new fixed line operators. PCCW subsequently raised their charges from $68.9 in August 1999 to the current $110. So PCCW has reaped windfall profits of up to an estimated amount of $900 million per year from the increase of charges, equivalent to 14% of their announced total turnover of local telephone services in 2003 and a much more significant proportion of their profitability. With this in mind, it is indeed disingenuous and unusual that the incumbent can enjoy such huge profits from high charge hikes and at the same time unreasonably cite "Type II Interconnection" policy as depriving its property rights.

The Government Asserts the Value of"Type II Interconnection"

The Government has emphasised its position that "Type II Interconnection" plays a key function in the telecom market by accelerating competition and market liberalization. The successful deployment of "Type II Interconnection" will require conscientious efforts of OFTA. So far industry benchmark charges have been determined and operational procedures established through various determinations and industry forums. If we falter now, all our efforts at expanding the industry will be completely wasted and the industry will regress to a more primitive unhealthy state.

Conclusion

The benefits of "Type II Interconnection" are clear in terms of choice, lower prices and range of services for the consumer. Wharf T&T fully supports the continued availability of "Type II Interconnection" policy without any sunset period, and urges the Government to actively support and facilitate the efficient and effective deployment of this policy to regulate and counter any challenges from the dominant player.

Furthermore, we hope that all relevant organisations will also seriously consider the rights of consumers and continue to make "Type II Interconnection" available on the market.

About Wharf T&T Limited

Wharf T&T, licensed in 1995, is the fastest growing network operator after the opening of Hong Kong's fixed telecommunication market, owning the second largest fully fibre-optic network in Hong Kong. Since its launch, Wharf T&T has continually sought to upgrade its services and deliver competitive products at competitive prices to Hong Kong businesses and consumers.

Wharf T&T is a member of The Wharf Group, one of the largest groups of companies in Hong Kong. The Wharf Group also owns i-CABLE Communications Limited, the No. 1 Television Station in Hong Kong for News, Movies and Sports, as well as a leading Internet access service provider.

For further information about both Wharf T&T and The Wharf Group, please visit the Wharf T&T website at www.wharftt.com.

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