Managing Telecom Market Liberalization and Privatization

in Taiwan

Lawrence S. Liu 1 2 in 1995 as a formal attempt to shift Taiwan's economy towards more private ordering. The APROC Plan bears the mark as a "cross century initiative" 3 with respect to seven areas of project implementation. 4 Among them, the three-phased Regional Telecom Center Program 5 was first on the ROC government's agenda for execution. 6

The purpose of this paper is to pinpoint and analyze the Program's recent development and implementation. This author believes the key to the Program's success lies in properly managing telecom market liberalization and privatization. The first part of this paper seeks to provide a synopsis of the pertinent historical background, inherent problems and potential economic impact. Second, this paper will examine the new regulatory regime and the telecom deregulation contemplated by the Program. In particular, the legal reforms necessary to implement the Program and the relevant issues stemming therefrom will be explored. Moreover, the deregulation of the satellite television industry, which is currently under implementation, will also be outlined.

  1. HISTORY OF TELECOM REFORM EFFORTS

2.1 TELECOM MARKET AND REGULATION BEFORE THE 1990s

Until its amendment in February 1996, Taiwan's Telecom Law 7 of 1958 maintained a bureaucratized and monopolized model for its Telecom market. 8 However, the monopoly arrangement in Taiwan became undesirable in light of global trends, 9 and the Directorate General of Telecom 10 together with other government agencies 11 began studies of liberalization in the early 1980's. As a result, domestic companies were allowed in the late 1980's to provide limited value-added services. However, liberalization did not begin quickly enough. 12 It was not until 1995 that the anti-competitive policy was re-examined by the Council of Economic Planning and Development 13 and was eventually discontinued in 1996.

2.2 TELECOM REFORM BILLS, APROC PLAN AND RENEWED IMPETUS

After various legislative attempts to amend the TL since the 90's, 14 the Executive Yuan 15 adopted an ambitious APROC Plan in early 1995 to engineer more economic liberalization and internationalization to enhance Taiwan's competitiveness. 16 The Plan, inter alia , contains a three-stage blueprint to facilitate the telecom market opening in Taiwan. First, the second generation cordless telephone business 17 was to be opened to the private sector. Second, four additional segments of the wireless telecom market would be opened for competition: cellular phone, paging, trunking radio, and mobile data. Third, competition in the wired/fixed line basic service market, including the previously deregulated satellite television industry, would be introduced within five years.

In a way, the telecom program within the APROC Plan added more impetus for telecom market reform in Taiwan as it represents the renewed commitment of the EY. However, it also highlighted the urgency for the passage of the three telecom reform bills 18 , because the second stage of the market opening could not be implemented successfully without having these bills passed first. 19 As such, in July 1995, the APROC Window/CEPD formally intervened to re-examine the three telecom reform bills pending in the Legislative Yuan. 20 The aftermath sees the much revised and improved bills with each adopted on January 16, 1996, but only after intensive debates and enduring consultation were made. 21

  1. NEW REGIME CONTEMPLATED BY THE THREE REFORM LAWS

3.1 BIFURCATION OF REGULATORY AND BUSINESS UNITS

As amended, the TL now requires the DGT to be a mere independent regulator. The DGT's business unit was to be privatized as Chunghwa Telecom Corporation, 22 which took place on July 1, 1996. Yet, due to a major compromise among political parties to placate the activist DGT union members, the amended TL provides that CHT will be a state-owned company. In other words, unless the LY gathers political support to amend the TL in the future, CHT will remain majority-owned by the government.

3.2 CLASSIFICATION OF TELECOM SERVICES

The TL also classifies Telecom industry into type I and type II 23 . Importantly, it follows a "negative listing" approach for this classification and provides that a type II business is whatever activity not canvassed by type I. The type II market is generally open to competition, and licensing would be based on a pro forma review. Foreign ownership in the type II industry is not limited. On the other hand, the type I industry is subject to an oligopolisic model; competition will be gradually introduced and segmentation within the basic service market will continue for some time.

In the next few years, the Type I and Type II stracture probably will remain. However, there is a trend to shift the regulatory focus on facilities-based competition. On the other hand, the advancement of technology will make it more difficult to maintain such a stracture.

In connection with this new TL regime, the government in Taiwan also determined to allow some competition in the mobile telecom sector. However, a formal policy decision was made by the EY in October 1995 to give CHT a five-year grace period to engage in the fixed-line telecom business beginning from its incorporation on July 1, 1996. In other words, licensing and review should occur before the end of this century to ensure that by July 1, 2001, new providers for fixed-line basic services will enter the market. 24 In fact, the EY has recently decreed the market opening schedule for fixed line Telecom business. 25

3.3 FOREIGN OWNERSHIP LIMITATION

To maintain the competition model for the type II industry, there is no foreign ownership restriction for equity investment. However, foreign ownership in a type I business is limited to 20% under Article 12 of the TL as newly amended. This is substantially lower than the one-third limit contemplated by the CEPD under the revised TL bill of 1995 but far better than the 1992 bill, which would have ruled out foreign ownership entirely. Essentially, the 1992 bill represented the old DGT's tactic of using foreclosure of foreign participation as leverage for Taiwan's bid to join the World Trade Organization 26 .

Importantly, under the revised 1995 TL bill as enacted, CHT would also enjoy this 20% foreign ownership quota. Moreover, the TL provides that a majority of the directors and supervisors of a type I telecom company have to be Taiwan nationals. This means that foreigners could fill up to slightly less than a majority of the board or supervisors, if agreed to by the local partners. This disproportionately larger quota for directors or supervisors was a deliberate attempt to permit international strategic alliances to be made in the future. 27

For comparative purposes, the Satellite Broadcast and Television Law bill 28 in Taiwan does not restrict foreign ownership. 29 The direct satellite television business is a new industry in Taiwan, however, certain laws already embody the regulatory policies in this area. 30 Initially, the Government Information Office 31 , the administrative agency vested with the power to oversee broadcasting and television activities, proposed a foreign ownership restriction of not exceeding 50%, a requirement which would essentially deter any serious foreign investors. The GIO then altered this position at the urging of the Council of Economic and Planning Development so that foreign ownership now may not exceed 51%. By doing so, the GIO adopted a different logic: that is, foreign investors could gain control as long as they take on minority local partners. The Council of Economic and Planning Development had argued that companies such as Asian Business News chose Singapore instead of Hong Kong because of a more relaxed ownership requirement. 32 Additionally, the EY ministers thought that foreign ownership restrictions would not make sense in the area of satellite broadcast and television, since airwaves do not recognize borders. Therefore, the final EY bill removed all restrictions on foreign ownership.

3.4 OTHER SALIENT FEATURES OF THE AMENDED TL

By like token, the ramification of the TL is widespread and raises other contentious issues especially in the following areas:

  1. The equal access rule and the specific obligations of type I telecom companies to provide interconnection to other telecom companies; 33

  2. The universal service fund obligation; 34

  3. Rules against discrimination; 35

  4. Tariff liberalization; 36 and

  5. Fees for frequencies; 37

  1. TRANSFORMING THE CHT

4.1 CORPORATIZATION OF CHT

One important feature of the Program is to corporatize the CHT. It would have made some economic and political sense to break up the business arm of the DGT into several operating companies, much like the involuntary divestiture of AT&T in 1984, so as to generate more competition in the Taiwanese telecom market. However, this alternative was quickly ruled out because of the high political cost and low political will of such an action. Although privatization has not been completely ruled out, it is not a short-term solution either. Corporatization of the DGT's business unit, therefore, was the only remaining politically feasible solution. In addition, the old DGT and its activist union members thought it was not sufficient to just rely on general corporate laws for such corporatization. The political commitment of granting job security to DGT employees necessitated that a political promise be permanently enshrined in some legislation. Hence, the CHT Law.

However, the process of corporation was not smooth, and the CHT Law was only put into effect after the following competing interests were reconciled and issues resolved: 38

  1. Job security of CHT employees and their labor participation in management; 39

  2. Board and management qualifications, civil servant status; 40

  3. Ownership diversification in lieu of privatization, strategic sale; 41

  4. More autonomy and restructuring at CHT; 42

  5. Fair competition in the new market; 43 and

    1. Re-licensing. 44

    4.2. PROSPECT FOR PRIVATIZING CHT

    At the end of 1996, major political parties in Taiwan held a National Development Conference. A major division of this conference is that as a principle all state-owned enterprises should be "privatized" within five years. Under the Privatization Statute, an SOE is privatized if the government ownership falls below 50%. As mentioned earlier, the CHT Statute enacted in early 1996, which led to the corporatization of the business unit of the old DGT, contains a requirement that CHT be maintained as an SOE. A similar provision can be found in the TL.

    Privatizing the CHT would involve the following major issues. First, amendments to the TL and CHT Statute to permit CHT's privatization are necessary. These amendments require a significant political commitment. Taiwan's rapid democratization in the last 12 years has transformed the authority-controlled sleepy society into a plurostic, contentious and precocious society. Legislators are not beyond party politics and money politics.

    Second, the five year grace period for privatizing all SOEs, including CHT, matches the five year market opening schedule for the telecom sector. This makes managing the privatization and liberalization difficult. There may be an inherent conflict of interest of the government.

    Third, unless the foregoing amendments are adopted, CHT will remain as a single entity. Empirical evidence abroad suggests that a voluntary and involuntary break up of the SOE teleco or monopoly is helpful in unlocking the internal enertia and increasing efficiency in and competition among the divested entities.

    Fourth, the interconnection and facilities sharing issues will continue to be thorny for both privatization and liberalization. This is one aspect of telecom market opening and privatization which is different from other sectors. Telecom reform would involve more interactions between members, state-owned or otherwise, of the same industry.

    Fifth, CHT has a very strong union. As a result of union lobbying, the CHT Statute contains an ambiguous provision on representation of the board of directors by "experts". In time in the future the CHT union may demand that union representatives sit on the board as such experts. This would be following the footsteps of Germany and other "socialist" market economies on co-determination and labor participation.

    1. RECONSTITUTING THE DGT

    The DGT Law seeks to reconstitute the new DGT as a mere professional regulator within the Ministry of Transportation and Communications. However, during the legislative debates for adopting the three telecom reform laws, there had been some proposals for having a more independent and powerful regulator such as the United States' FCC. As a result, some compromise had to be made. In other words, some independent and even adversarial mechanisms had to be built into the architectural design for the new DGT.

    5.1 DISPUTE RESOLUTION COMMITTEE

    Specifically, the DGT Law mandates that a Dispute Resolution Committee be set up within the DGT. This model reflects a compromise between two proposals: having an independent regulatory body like the U.S. Federal Commincations Commission, or having an agency which is accountable to the minister of communications who is in turn subject to political oversight. The committee is to be composed of representatives from political parties, agencies, academics, experts and consumer groups. Proportionate representation is required; representatives from the same category may not exceed one-third of the total, and representatives belonging to the same political party may not exceed half of the total. More importantly, even though the DGT is only a subordinate agency of the MOTC, which is supervised by the EY, members of this committee should be directly appointed by the EY.

    The Dispute Resolution Committee, therefore, is a potentially powerful check on the DGT. However, preparations for implementation and supporting staff work must come from the DGT itself. In Taiwan, it is also possible to seek administrative relief by appealing to the supervisory authority 45 of the agency 46 , rendering an adverse adjudication before judicial review is sought. So should decisions by the DGT be first referred to this committee or directly appealed to the MOTC and EY? How should decisions of this committee 47 be handled by the EY if it receives an administrative re-appeal? In real politics, how should such dispute proceedings interact with possible parallel dispute proceedings before the Fair Trade Commission alleging Fair Trade Law violations? These are all new issues brought about by the DGT Law amendment. Unfortunately, at this point the Committee has not been functional.

    5.2 POLITICAL IMPACT AND CHALLENGE

    The requirement of political party representatives in this committee introduces the possibility of politicking for their nomination and the work of the committee. While this may be a necessary evil to ensure that the DGT will not favor CHT, the cost of maintaining such political elements in dispute resolutions will not be insignificant. How to enhance the size, professionalism and morale of the DGT staff is also an imperative issue. Unless the DGT develops a highly motivated atructure having adequate staff imbued with professional esteem and expertise, efforts to liberalize the telecom market in Taiwan may not see optimal results.

    1. MARKET OPENING

    6.1 MOBILE TELECOM

    As referred to above, there are three main phases of the Telecom market opening 48 for the coming decade. In this connection, MOTC/DGT have proceeded to entertain applications for mobile telecom operations in the four segments. Thus far, 17 international consortiums have filed 42 applications for 8 mobile phone operator licenses. In addition, 32 applications have been made for 8 paging operator licenses, 31 applications for 17 mobile data operator licenses, and 98 applications for 20 trunking radio operator licenses. In total, 102 groups have filed 203 applications for 53 licenses in connection with the mobile telecom market opening program. Recent statistics 49 and the recent award of trunking radio licenses 50 show that further deregulation is likely to continue.

    6.2 INTERNATIONAL INTEREST

    There has been much international interest in the ROC telecom market contest. The heavyweight participants reportedly include AT&T Wireless, AirTouch, Southwestern Bell Corporation, Mitsubishi, Nynex, France Telecom, Telia, First Pacific, Sprint, GTE, Telstra, Sumitomo and Ameritech. Similarly rigorous competition is also foreseen in the satellite television market. According to the local press 51 , foreign companies such as MCI, AT&T and Sprint have revealed deep interests to set foot in the local satellite industry, and numerous negotiations for joint venture projects are underway. A notable example is the cooperative arrangement consolidated between AT&T and two local companies, TTN and the Far East Group. The current picture appears that even though the local market is still inchoate and unpredictable, rapid progress is expected on these fronts. However, the unique political, social and economic background of the telecom market opening in Taiwan promises to be challenging for these international firms and their Taiwan partners, as well as regulators.

    6.3 FOREIGN OWNERSHIP LIMITATION REVISITED

    Several challenges have surfaced, while others have loomed ever larger on the near horizon. First, a method to compute the 20% foreign ownership limitation in mobile telecom operators already requires some clarification. Frankly, the TL is unclear on this issue. The controversy came about because even local companies taking the lead to form such international consortiums may already have foreign shareholders as a result of Taiwan's trade and investment liberalization program of the past decades. For example, some of such foreign investors in leading Taiwan companies are strategic investors, while others are portfolio investors who invest in listed Taiwanese companies under the government Qualified Foreign Institutional Investment 52 program. Currently, aggregate QFII ownership in any publicly listed or quoted company may reach 20%, the same level as under the TL. This portfolio foreign investment quota, however, will increase over time as Taiwan further internationalizes its capital market.

    Therefore, would such indirect foreign ownership reduce the quota for direct foreign ownership in the new telecom companies to operate any of the four new mobile businesses? A literal interpretation suggests that it would, which means that all indirect foreign ownership should be summed up under a "vertical dilution computation" principle so as to scrutinize whether the 20% quota has been filled. This could be an administrative nightmare for both the consortiums and regulators because of the high cost of constantly monitoring share transfers. Where the Taiwanese companies involved in the chain of corporate ownership are publicly listed companies whose shares change hands every trading day, monitoring is particularly difficult.

    A more thoughtful interpretation would suggest that the computation of foreign ownership should follow the "control" test. In other words, if any constituent companies are controlled by foreign owners or corporations, their share-holding should be attributed towards the 20% quota. Control could follow the more rigorous majority ownership test or the more flexible "effective control" test, which is not unheard of. When the Taiwan Securities and Exchange Commission 53 liberalized the securities brokerage market, subject to some foreign ownership limitation, it was exactly what the SEC had done in 1989. The SEC liberally interpreted the 10% per foreign shareholder requirement under the 40% aggregate ownership limit; four foreign holding companies held by the same group could invest in a local securities firm without violating the 10% quota for single foreign shareholders.

    Either the majority control test or the effective control test for this alternative interpretation would ensure more robust competition, because the incentive for foreign telecom companies to participate in the mobile telecom market would be significant. Following either test, however, this interpretation could lead to indirect, beneficial ownership exceeding the nominal 20% quota. It would also suggest that foreign shareholders as a group, rather than local shareholders as a group, could become the dominant voice in such international telecom joint venture companies.

    In the midst of highly contentious democratization and following a cabinet change in mid-1996, the MOTC/DGT position took a predictable turn for conservatism. The strict, literal interpretation requiring vertical computation of all indirect foreign ownership was taken up. Under this conservative approach, there would not be any challenges by legislators or local companies who would be able to maintain dominant ownership. All applicants were asked to submit their application documents and business plans on the basis of this interpretation. On the other hand, the problem with monitoring change in foreign ownership in the future has been temporarily swept under the rug.

    The 20% foreign ownership restriction is now generally believed to be too restrictive. In its WTO accession consultations with the U.S., Taiwan now has agreed to an increase of the foreign ownership level so that, in addition to 20% of direct foreign ownership, the total direct and indirect foreign ownership may reach 60%. However, CHT will continue to have a total (that is, direct and indirect) foreign ownership limit of 20%. This is intended to "protect" CHT and the natural telecom assets under it. However, in light of the global strategic alliances and technology development brought on by telecos in the West, such a limitation may actually hurt CHT over the long run.

    The 20% and 60% foreign ownership limitations have not been settled completely. An alternative proposal calls for a 30% (direct) and 50% (indirect) formula. A related issue is whether the Constitution allows telecos to be majority owned by foreign interest. A provision of the Constitution sets forth the general principle that natural monopolies be owned and operated by "nationals".

    6.4 PRICE CAPPING OR RATE OF RETURN REGULATION

    Another issue which has cropped up is the rate-of-return rules for tariff regulation. The TL of 1958 had contemplated a rate-of-return pricing model for a public utilities monopoly and required a pricing formula for such tariff to be approved by the LY. The 1996 amendment to the TL has not changed this aspect, even though competition will gradually be introduced in the telecom market. This rate-of-return regime claimed that mobile telecom applicants would create an anomaly, at least in so far as the mobile telecom market is concerned. Instead, it was argued that a price capping approach should be adopted for a market gravitating towards a competition model.

    In the bilateral trade consultations with the United States' negotiators in mid-1996, the DGT reportedly was open to making some changes in this regime, subject to further studies to confirm the merits of price capping arrangements and the legislative approval to amend the pricing formula for the tariff. Assuming such willingness, how a price capping formula would work in a dual regulatory regime is an issue worth some serious consideration. Presumably, only one price cap tariff can be adopted for both sectors since it must be a "one size fits all" regulation. In a dual regime, although the private-sector mobile telecom operators will have a strong profit motivation, CHT as a state-owned enterprise may not be so motivated to improve upon its efficiency. The CHT Law has guaranteed the remuneration of most of its employees as civil servants. Therefore, even within CHT itself, this dualism adds complications to any price capping proposal.

    6.5 RATE RE-BALANCING

    Another issue relating to the tariff pricing regulation is the rate re-balancing program. In the past, the DGT has resorted to higher profits from long distance and international calls to subsidize local calls. In connection with introducing competition in the telecom market, rate re-balancing would be necessary to prevent market distortion which otherwise would follow, as new entrants in a cross-subsidized market would choose to "skim the cream" if such an opportunistic option was available. While the 1995 rate re-balancing program by the DGT in anticipation of the passage of the telecom reform legislation proceeded uneventfully, the 1996 rate re-balancing program by CHT, in the midst of mobile telecom market opening, drew much criticism and concern that this could be a predatory ploy.

    6.6 SATELLITE TELEVISION

    The opening of the four segments of the wireless market has triggered the third phase of Telecom Deregulation. The viability of the government's undertaking to liberalize may once again be tested in this unfamiliar environment. In this regard, MOTC has devised a plan to launch direct satellite television business in Taiwan and 25 licenses will be released for the operation of satellite television operations by the end of 1999. This plan is classified as urgent and is high on the MOTC's agenda. MOTC has drafted and submitted the relevant proposals for liberalization at the end of 1996 and the precise ambit of permissible satellite televisions operations was delineated in May of 1998. Interested parties may tender open bids for a license(s) in August of 1998. Permits will be awarded by the end of 1998 and the operational license will be issued by the end of 1999, to render a one full year service preparation period for the awarded operators. 54

    Direct Satellite Television Business in Taiwan is virtually non-existent. Therefore, issues of its regulation arise from the cable television business in Taiwan, one of the most dynamic markets in the APEC region. Because of the density of communities in Taiwan 55 consumer behavior, the perceived inadequacy of the oligopolistic government and KMT-linked terrestrial television stations, cable television has become the alternative television industry. Currently, Satellite signals are down-linked only to be transmitted through the CATV systems. 56

    Even though direct satellite television is a way of the future, several of the legislation - not entirely consistent among themselves - already embody Taiwan's regulatory policies in this area. 57 The Satellite Broadcast and Television Law bill was drafted by the GIO facing these circumstances. It was approved by the Executive Yuan in September of 1995 and sent to the LY for deliberation. 58

6.6.1 SALIENT FEATURES OF THE SBTL BILL

SBTL was introduced by the EY to redress the inadequacy of various legislation 59 in dealing with television and broadcasting issues. The bill is policy oriented and seeks to maintain the public interest with the following stipulation.

First, offshore program providers may not supply programs or advertisements in Taiwan unless they set up a branch or appoint an agent in Taiwan and have reported such arrangements to the GIO for recordation. As a result, system providers, cable television system operators, and radio and television stations may not air such programs or advertisements of non complying offshore program providers. 60 Offshore program providers airing programs or advertisements violating the SBTL provisions 61 could lead to vicarious administrative penalties 62 levied on their Taiwan branch or agent. 63

Second, substantive regulation under the SBTL does not appear to be cumbersome. It sets forth application procedures, qualifications, requirements for business plans, license duration 64 and review standards for such applications. 65 A name change or change in the responsible persons 66 would require the GIO's approval, whereas share transfers, suspension of business and termination of operations have to be reported to the GIO within 15 days. 67

Third, regulation of programs and advertisements under this bill is essentially a repetition of similar provisions in the Cable Television Law. An exorbitant provision encourages the export of locally made programs to facilitate cultural exchange and requires compliance with international treaties and practices concerning satellite broadcast and television. 68

Fourth, what the SBTL bill does not require is also worth noting. For example, as referred to before, it does not restrict foreign ownership.

Fifth, the SBTL bill does not contain any local program/contents requirements either. This has been a traditionally sensitive area; academics in Taiwan are often divided on this issue. On the other hand, Taiwan-made programs such as the highly successful Judge Bao soap opera television series demonstrate - for lack of a better characterization - the nature of competitiveness in the Chinese culture. Indeed, there have been reports and assertions that, if cultural aggression is a real threat, elsewhere in Asia the Chinese culture 69 is deemed to be threatening to other cultures. 70

Sixth, the SBTL bill is fairly open about entry by those media firms which are already well entrenched. Therefore, it does not prevent the three terrestrial television stations in Taiwan from entering this market segment. Again, this is a very controversial issue, particularly to the opposition parties. On the other hand, these three stations do have some competitive strengths if one views the market as larger than Taiwan itself. 71

6.6.2 CURRENT STATUS OF THE SBTL BILL

The SBTL bill seems to be at a stalemate at this point. Meanwhile, some DPP Legislators have tabled a competing bill. For example, this competing bill would limit foreign ownership in a direct satellite broadcast television system operator to 20%. Foreign ownership in a satellite broadcast television channel operator would be limited to 50%. Also, under this bill the three KMT or government-affiliated terrestrial television stations will be locked out of this market as it would prohibit investment by such stations that have more than 30% of their shares held by the government or a political party. In addition, this bill would prohibit direct broadcast satellite. Offshore channel operators would be required to apply for a down link permit and would have to contribute to a fund. 72

The requirement that offshore program providers must set up a branch or appoint an agent is also controversial. Free traders argue that this is an anti-trade measure; certainly where international trade in goods is concerned, there has been no such requirement. Proponents, essentially the GIO itself, believe that without this provision they would not be able to control the legality of programs and advertisements. Indeed, in October 1995 the GIO had sanctioned 92 CATV system operators for airing non complying programs supplied by offshore program providers. However, this decision was quashed by its own Administrative Appeals Committee, which held that the local operators had no way of controlling the programs or advertisements and thus could not be fined. 73

Arguably, the GIO could resort to another statute without having this provision in the SBTL bill. In other words, the Broadcast and Television Law already provides some authority for sanctions. Article 2 of that law arguably defines television broadly enough to include satellite television. 74

Another interesting twist to this requirement is found, surprisingly, in the interpretation of Taiwan's income tax law and regulations. Without a branch or agent, offshore program providers would incur a flat 20% withholding tax on the income generated from licensing the programs. Because of disproportionate bargaining positions, they would ask local operators to absorb such tax, thereby increasing the royalty. Even so, the proposed requirement of setting up a branch or appointing an agent will test the strength of Taiwan's long reaching laws. 75

Some Legislators are involved in the CATV business themselves or closely associated with CATV operators. To some of them, the branch/agent requirement for offshore operators could solve this industry problem. Satellite channel operators in Taiwan and abroad are generally lukewarm about the SBTL bill; they view it as regulatory. Those who are interested in the direct broadcast television systems, however, view this bill as enabling; without it, they are afraid the GIO cannot find other legal authority to allow such business to exist. 76

The LY's current session promises to be as politically charged as the one before. Unlike other economic regulatory legislation, the SBTL bill involves significant cultural and political issues. As a result, its passage (and if so, the compromises made) is subject to various competing forces.

  1. PROSPECT AND IMPACT

Through the lens of the 1995-96 telecom reform program in Taiwan under its APROC Plan, one is offered a glimpse of the complicated political, economic, legal and social issues affecting Taiwan's efforts to embrace the information age. In retrospect, it was even amazing that a package of reform legislation as politically sensitive as the TL, DGT Law, CHT Law and SBTL could receive passage by the contentious LY. But, the pressure for more ambitious reform is mounting as several international developments take shape. First, the European Union has began the onslaught of free and full competition in basic service among its members in 1998. Second, the WTO has completed the negotiations on basic telecom services in February 1997.

Telecom reform is a topic both subject to significant domestic pressure and gives rise to serious inquiries of the quality of Taiwan's political system. Will Taiwan's complicated constitutional system stifle the competitiveness of its state-owned enterprises such as CHT? Will CHT fall prey to pressures and undue influence of local governments as now it has to pay value-added tax, a form of local taxes? Will it succumb to employee pressure to have labor representation in the board of directors? If this should happen, what would be the spoiled over effect on the private sector? Will CHT pre-empt or stonewall competition by private operators, either consciously as a monopoly facing decreasing market share, or vicariously through government policies artificially resisting market mechanisms to allow a longer grace period for the state-owned telecom company to catch up?

Policy issues aside, at the practitioners' level, the telecom reform will lead to a new area of practice for telecom industry managers, consultants, lawyers, bankers and investors. The three telecom reform laws now have forced the government to rethink-reassess policy issues relating to the Cable Television Law, Broadcasting and Television Law, Satellite Broadcast and Television Law bill and even the outdated Publication Law. Also, how will these reform laws interact with the FTL and Consumer Protection Law, which stress competition policy, and the Statute Governing Privately Owned Public Utilities, which stresses economic regulation? How would the operational provisions of these reform laws interface with other laws relating to land use such as the Land Law and Building and Apartments Law? Even among government officials, how would these reform laws interact with the more traditional laws and rules governing civil servants, government procurement, administrative relief and judicial review of agency actions?

I surmise that much trial and error will occur in the five-year period leading up to July 1, 2001 when competition for fixed line basic Telecom service will ultimately be introduced. Undesirable as such a hazardous approach is, unfortunately there may not be a way around it. As a byproduct of the precocious democracy in Taiwan and its unique international status, political factors will spice up further telecom market reform initiatives in this dynamic economy.

End notes

TABLE I TELECOM MARKET OPENING TIMETABLE

Fixed Network Service
Business Timetable Note
Local Telephone July 2001 Including the opening of digital communication business;
Domestic Toll Telephone July 2001 Including the opening of digital communication business.*
International Telephone July 2001 Including the opening of digital communication business.*
Leased Circuit Service July 2001 Lessee can not merely act as the agent for recording services.*
Wide-band Service July 2001 For digital operation, Operators without unified transmission network equipment and establishment are classified as Type II operators.*
Data Transmission Service July 2001 Operators without unified transmission network equipment and establishment are classified as Type II operators.*

  • the actual number of operators permitted is TBD depending on market demand.

    Satellite Communication Service

    Business Timetable Note
    Satellite TV Broadcasting Links Service Dec. 1996 25 Operators
    Mobile Satellite Service Dec. 1999 The number of Operators is TBD
    Fixed Satellite Service

    Wireless Communication Service

    Business Timetable
    Public CT-2 Nov. 1994 900 MHz:

    		Northern: 3

    Central: 3

    Southern: 3

    Cellular Mobile Phone Jan. 1997 900 MHz:

    1800 MHz:

    		Northern: 1

    Central: 1

    Southern: 1

    Northern: 1

    Central: 1

    Southern: 1

    Island-wide: 2

    Radio Paging Jan. 1997 285 MHz:

    		Northern: 2

    Central: 2

    Southern: 2

    Island-wide: 2

    Trunking Radio Mar. 1997 500 MHz:

    1800 MHz:

    		Northern: 4

    Central: 4

    Southern: 4

    Island-wide: 1

    Northern: 2

    Central: 2

    Southern: 2

    Island-wide: 1

    Mobile Data Mar. 1997 500 MHz:

    800 MHz:

    		Northern: 4

    Central: 4

    Southern: 4

    Island-wide: 1

    Northern: 1

    Central: 1

    Southern: 1

    Island-wide: 1

Source: Execution Yuan Gazette, Volume 2 ,Issue 51

TABLE II MOBILE PHONE LICENSEES, 1997

Type Area Winner of the license Foreign partners
Nation wide Pacific Communications System

(Pacific Electric Wire & Cable Group)

GTE
Nation wide Far Eastern Telecom Co., Ltd.

(Far Eastern Group)

AT&T
DCS Northern Taiwan KG Telecom Preparatory office

(Koo's Group)

Sprint
Central Taiwan Smark Link (Tuntex Group) First Pacific
Southern Taiwan Smark Link (Tuntex Group) First Pacific
Northern Taiwan Far Eastern Telecom Co., Ltd.

(Far Eastern Group)

AT&T
GSM Central Taiwan Mobitai Co.

( TECO Electric & Machinery Group)

De-Te-mobile

Sumitomo
Southern Taiwan TransAsia Telecom (TAT)

(Asia Pacific Investment Co.)

Southwestern Bell Co.

Source: compiled by the author from various sources.

TABLE III PAGING LICENSEES 1997

Area Winner of the license Foreign partners
All distance First International Pager Service Corp.
Chung Hwa International Paging Co., Ltd.
Northern Taiwan Express Link Ltd. HK ABC
Taiwan Mobile Communication IWC
Central Taiwan Hsun Ta Telecom
Taiwan Mobile Communication IWC
Southern Taiwan Southern Telecommunications Telia

Ucom
Chang Jung Telecom

Source: compiled by the author from various sources.

TABLE IV TRUNKING RADIO LICENSEES

Frequency Licensee Major Shareholders Facility
All Areas Lianbang Co., Ltd. Chunglien Transportation Co., Ltd. Telecom Co., Ltd.
Advanced Telecommunication, Inc. Advanced Scientific Corp. Tait
800 Northern ADI Communications Corporation Meng Chaonien ADI
MHz
Advanced Telecommunication, Inc. Advanced Scientific Corp. Tait
Central ADI Communications Corporation Lia Chicheng ADI
Huawei Telecommunication Co., Ltd. Huang Peiyuan Tait
Southern Data Telecommunication Co., Ltd.

Sugui Telecom.

Kaohsiung Bus Co., Ltd. CKT

All Areas

Freedom Telecommunication Ltd. Tajung Transport Co. Tait
Taichong Telecom. MSI International Corp. Nokia
Fleetpro Telecommunications, Inc. Hsinchu Trucking Co., Ltd. Tait
Northern Simple Telecommunications Corporation Preparatory Office Prince Motor Ltd. JRC
Beiyun Telecom. Micro Electronics Motorola
Fleetpro Telecommunications, Inc. Hsinchu Trucking Co., Ltd. Tait
500
Simple Telecommunications Corporation Preparatory Office Prince Motor Ltd. JRC
MHz Central Bestway Technology Co, Ltd. Hsinke Telecommunications Nokia
Leephone Telecommunications Inc. Leephone Transportation Co. Motorola
Fleetpro Telecommunications, Inc. Hsinchu Trucking Co., Ltd. Tait
Simple Telecommunications Corporation Preparatory Office Prince Motor Ltd. JRC
Southern ADI Communications Corporation Lia Chicheng ADI
Phantai Telecommunication Inc. Chiehfu Co. Nokia

Source: MOTC

1

The author is also concurrently an Advisor to the Coordination and Service Office for the Asia-Pacific Regional Operations Center (that is, the "APROC Window"), Council of Economic Planning and Development (that is, the CEPD), a council of ministers for the Executive Yuan (that is, the cabinet). During 1995 he was Executive Director of the APROC Window/CEPD and was in charge of inter-ministry coordination efforts for telecom reform legislation. This paper, however, represents his own opinion which should not be attributed to institutions with which he is affiliated. The author gratefully acknowledges the assistance of Jack Wu and Paul Wu, Lee and Li, for the completion of this paper.

Lee and Li, Attorneys-at-Law

Taipei, Taiwan

at

Columbia Institute for Tele-Information

New York, NY

June 12, 1998

  1. ABSTRACT

The Cabinet in Taiwan launched the Asia-Pacific Regional Operations Center Plan
2 Hereinafter referred to as "APROC Plan".

3 The Plan manifests an intention to assist Taiwan to, inter alia, (1) better meet the global political and economic challenges of tomorrow; (2) rapidly integrate with regional nations, in particular, to enable Taiwan to cooperate with regional states, such as Hong Kong and Singapore, rather than to compete with them; (3) entrench Taiwan's international status; and (4) arguably, to strengthen the ties across the Taiwan straits.

4 Remark made by Premier Lien Chan, the seven areas include the (1) macroeconomics adjustment program, under the Council of Economic Planning and Development; (2) regional manufacturing center program, under the Ministry of Economic Affairs; (3) regional sea transportation center program, under the Ministry of Transportation and Communications ("MOTC"); (4) regional air transportation center program, under the MOTC; (5) regional financial center program, primarily under the Central Bank of China ("CBC") and secondarily under the Ministry of Finance; (6) regional Telecom center program, under the MOTC; and (7) regional media center program, under the Government Information Office.

For more discussion in this respect, please refer to Lawrence S. Liu, Aspiring to Excel - The Uneasy Case of Implementing Taiwan's Asia-Pacific Regional Operations Center Plan , 10 Columbia Journal of Asian Law 199 (1996).

5 Hereinafter referred to as "Program".

6 The Telecom implementation program is 3-tiered. Please refer to part 2 below for more detail.

7 Hereinafter referred to as "the TL".

8 Under this regime, the MOTC was responsible, through its Directorate General of Telecom, to implement Telecom policy and operate the only Telecom business in Taiwan.

9 1980's saw the gradual privatization of state-owned Telecom companies and liberalization of the Telecom market in North America and Europe in light of technological advances.

10 Hereinafter referred to as "DGT".

11 At the same time, the Council of Economic Planning and Development, a council for ministers within the Executive Yuan, also began to research telecom market reform measures abroad.

12 In the area of the procurement of switching equipment, a decision in the mid-1980's under foreign trade pressure actually led to a three-way oligopoly. Each equipment supplier (one each for northern, central and southern Taiwan) was set up as an international joint venture affiliated with the DGT.

13 Hereinafter referred to as "CEPD".

14 In April 1992, a bill to amend the TL as drafted by the DGT was submitted by the EY to the Legislative Yuan (hereinafter referred to as the "LY"). However, this bill, even though a good cornerstone for future development, was perceived by many LY members to be lacking both in scope and substance for sufficient competition. Consequently, the LY demanded the submission of two additional bills to amend the Organic Statute of the DGT (hereinafter referred to as the "DGT Law") and to enact an Organic Statute for Chunghwa Telecom Corporation (hereinafter referred to as the "CHT Law") so as to privatize the business unit of the DGT. Even though these two bills were submitted by the EY in December 1994 for the LY's deliberation, the controversies surrounding market opening and boycotting by the DGT employees had led to a stalemate. Moreover, about nine competing bills were initiated by various LY members on their own. The efforts to open the Telecom market were stranded.

15 Hereinafter referred to as the "EY".

16 The APROC Plan was drafted by the CEPD, and a Coordination and Service Office for the Asia-Pacific Regional Operations Center (hereinafter referred to as the "APROC Window") was set up to implement this initiative and coordinate the inter-ministry efforts towards its fruition.

17 Hereinafter referred to as "CT2". Please also refer to Table I.

18 Refers to the TL, DGT Law, and the CHT Law bills.

19 One important element of this second-stage market opening was foreign participation, which would have been blocked by the TL of 1958.

20 Supra n. 3, "LY".

21 After intervention, intensive consultation ensued with the relevant ministries to substantially improve the three bills. Fundamental principles governing the revised telecom reform bills were adopted by the EY in early October 1995, along with the APROC Window/CEPD's recommendation that the revised bills be initiated by ruling party LY members. However, the ruling LY party lost the early December 1995 election in the sense that its majority status in the new LY, to begin in February 1996, would consist of a razor-thin margin of only a one-vote advantage. The possibility for enacting the revised telecom reform bills was slim, and the consequences of this prospect were dire. However, after more than one hundred briefings by the core CEPD/MOTC team to the LY, various political parties, the industry, academic and consumer groups, and the media, and despite contentious opposition by DGT union activists, the three telecom reform bills as revised were adopted on January l 6, 1996, just before the 1995 LY session ended.

22 Hereinafter referred to as the "CHT".

23 Type I refers to the basic Telecom services, and type II refers to value added or enhanced services.

24 For more details, please refer to Table I.

25 In January 1998 the DGT began a formal consultation process on the Fixed Network Market Opening Task Force. This Task Force is composed of regulators, academics, experts, industry representatives (foreign telecos can only attend as observers), and the entire group has more than 100 members. The Task Force is broken up in three subgroups: Group I deals with market opening strategies. Group II deals with competition issues. Group III deals with engineering and technical issues.

As of this writing, the Task Force has reached some preliminary results. Tendering for the fixed network business will be set for February through June of 1999. The results will be announced by the end of the third quarter (and certainly before the end) of 1999. The licenses to be awarded in this process are: two comprehensive licenses (for local, long-distance, international, circuit leasing), two long-distance licenses, three international licenses, and unspecified licenses for leasing circuits so as to maximize the use of alternative infrastructure.

It is now clear that the new policy is to allow alternative infrastructure to be leased for Type I business and to allow CATV operators to bid for the operating licenses mentioned above. However, there are some provisions in the current CATV Law which prohibit CATV operators to engage in the telecom business or lease their equipment and facilities to others for this purpose. These restrictions will be eliminated by an amendment to the CATV.

26 Hereinafter referred to as "WTO".

27 Recently, CEPD/MOTC were involved in a discussion in May of 1997 seeking to present a bill to the EY for raising the investment restriction from 20% to not exceeding 50%. This would be a substantial increase from the original benchmark, and would allow more leverage for foreign involvement in the local market. However, this not exceeding 50% ratio was not easily agreed upon by both CEPD and MOTC as the contentious issue regarding whether protection should be afforded for Type I business resurfaced. CEPD seemed to be a strong proponent for the Telecom market liberalization as it preferred the relaxation of the current foreign investment restriction. According to CEPD's method of calculating foreign equity for investment, the highest foreign holding permitted could amount to 60%, including both direct and indirect investments.

The MOTC, however, held a different stance. Despite its willingness to cooperate for deregulating the local telecom market ,

the MOTC preferred that the foreign share-holdings in aggregate of a telecom entity must remain as minority. The MOTC insisted on local shareholders to remain in control of the management of a Taiwanese telecom company. Based on this rationale, MOTC's view prevailed, and the proposed equity restriction ratio was tentatively set at 50%.

Under the proposed legislative framework stemming from the Discussion, a foreigner is permitted to have a less than 50% share-holding in a type I Telecom business. However, the less than 50% equity investment limit does not solely represent direct investments. Foreigners are only allowed to make 30% in direct investments and 20% in indirect investments through a third company or a subsidiary. The rationale for this imposition is unclear, and, in practice, distinguishing between direct and indirect investments in this manner may hinder a foreign entity's willingness to invest because the transactional costs involved will be increased.

Viewing the above, the no-restriction approach may not be appropriate in the case of Telecom industry. Rather, a foreign ownership limit of just less than a majority is preferred to ensure adequate competition in the liberalized segment of Taiwan's telecom market through new foreign ownership in market entrants. A higher foreign ownership limit would not have been politically correct. Many LY members and policy makers supported this contention and their logic was that, due to the diffusion of government monopoly, the local firms should have the first, or at least a larger, bite at each liberalized segment. Foreign ownership in Telecom is welcomed under their proposition, but only to the extent necessary to induce foreign shareholders to supply the needed technology and capital. Further, many members of both the ruling party and the opposition party contemplate that Telecom is too much of a strategic industry. Hence, a higher foreign ownership limit should not be permitted. This writer endorses this view, as limited protection must be in place to achieve two ends, i.e., any new bill must concurrently promote the local Telecom industry and to maintain sufficient local interests until the local contingency has sufficient strength and know how for complete liberalization.

28 Hereinafter referred to as "SBTL". The SBTL was drafted and tendered to the EY for deliberation in September 1995.

29 See Lawrence S. Liu, Issues in Debate on Regulating Satellite Television in Taiwan , 18 East Asian Executive Reports 8 (1996).

30 Please refer to part 6.6 for a more detailed discussion on SBTL, relevant laws and related issues.

31 Hereinafter referred to as the "GIO".

32 Remarks by Paul France of ABA at a seminar on Telecom liberalization in the Asia-Pacific region, held in Taipei on November 23, 1995. According to him, the ABN would have chosen Hong Kong, but for its prohibition of majority foreign ownership in satellite broadcast and television.

33 At this point, it seems that CHT takes the position of one-way interconnection with CHT for pricing/billing purposes. In addition, how would CHT reconcile its interconnection obligations with its pronounced profit-making objectives is another important competitive parity issue. Two observations are relevant. First, even though the new DGT should play the role of an independent arbiter, this would be easier said than done. Some adversarial proceedings involving the MOTC or the Fair Trade Commission (hereinafter referred to as the "FTC") may be necessary. Second, in addition to the general obligations governing interconnections under the amended TL, the CHT Law also provides that CHT shall maintain reasonable tariffs. This CHT-specific requirement is compatible with the argument of a cost-based, non-biased interconnection principle. Similarly, a type I operator under the TL is prohibited from subsidizing its type II business. Less clear is whether a type I operator may cross-subsidize different (Such as fixed line versus mobile communication devices) services which are all type I businesses. However, such cross subsidization should not be allowed for three reasons. First, the spirit of the 1995 revised bill that led to the TL amendment suggests that such cross-subsidization should be prohibited. Second, support can also be drawn from the policy underpinning the TL amendment, which is the APROC Plan. The Plan certainly would support a pro-competitive approach and therefore, would not accept predatory practices. Third, the Fair Trade Law (hereinafter referred to as the "FTL"), which has yet to apply to the telecom market, suggests that such cross-subsidization could constitute predatory action by the dominant firm.

34 Details on how contributions to this fund should be made will be developed after the mobile telecom market opening program, as discussed below.

35 The amended TL also specifically prohibits telecom companies from discriminating against their customers. This anti-discrimination requirement could be interpreted literally. However, a more enlightened interpretation would be to follow the same prohibition in the FTL, which requires such differentiated treatment to be justifiable, thereby allowing a "rule of reason" line of defenses for telecom companies.

36 The TL also contemplates some liberalization in the tariff. First, for type II telecom businesses, the tariff is completely deregulated as this segment follows the competition policy. For the type I industry, a major tariff will be adopted by the DGT subject to the MOTC's concurrence. A secondary tariff for type I businesses will be determined by the DGT itself. Importantly, the TL, even as amended, still provides that the tariff formula should be approved by the LY. In other words, even though some competition will be introduced into the type I industry, there will still be some legislative oversight as if the natural monopoly utilities model still applied. The LY review of the tariff formula promises to be a politicized process and as will be discussed below, the imminent entry of new mobile telecom operators already presents some policy issues in this area.

37 The TL also provides DGT with the authority to collect fees for assigning radio frequencies. In other words, the auctioning-off of frequencies is a possibility in the future. However, because there has not be an assessment of the aggregate use of frequencies (particularly where the frequencies are deployed for military uses) and the intricacy of such an exercise, the MOTC/DGT has opted for the traditional merit-review licensing approach for the mobile telecom market opening program of 1996.

38 The CHT Law bill was the most contentious of the three telecom reform laws adopted in 1996, because its implementation would have a major impact on the autonomy of CHT and the job security of its employees. Indeed, not only were the unions of CHT becoming vocal; so were the unions of other state-owned enterprises such as Chinese Petroleum Corporation and some state-owned banks.

39 One of the demands of the DGT employees was that their representatives should become members of the board of directors or supervisors. To support their contentions, the DGT employees cited the German co-determination, labor participation legislation for large enterprises and a similar arrangement at France Telecom, which was also undergoing privatization at the time. During the final LY negotiations in mid-January 1996, a compromise-albeit what it meant was less than clear-was reached so that under the CHT Law, one-fifth of CHT's board of directors would be "experts." Presumably, labor representatives were considered "experts." However, the ruling party and MOTC/DGT have resisted such an interpretation of this provision. Since the corporatization of CHT, all its board directors have been appointed by the government, and there has been no labor representation. However, in the re-election for CHT's union leadership in October 1996, those that strongly opposed management received more support. The increasingly vocal CHT union leadership will make transformation of the CHT more difficult and could affect its behavior in the marketplace. Even though the business and regulatory functions of the new DGT and CHT now have been divided, policy makers still serve on the CHT's board of directors. This situation makes avoiding conflict of interest more difficult. On the other hand, the presence of policy makers on CHT's board of directors would ensure more direct influence over its various constituents within the CHT, such as senior management and union leadership.

40 The chairman of CHT's board of directors and other directors nominated by the government as owner, must be civil servants. This requirement could preclude CHT from recruiting experienced business leaders to serve on its board, a reality for state-owned enterprises. The original CHT bill of 1994 had provided that the chairman would have to be experienced in the telecom business. This requirement was eliminated in the final negotiations as some LY members thought the experience requirement was unnecessary and even potentially abusive as it would have favored incumbents. The CHT Law provides for significant protection of employee welfare, as employees' civil servant status has been maintained. Meanwhile, this law also allows CHT to recruit new employees who would not be civil servants, so that hopefully the corporate culture at CHT will gradually reflect its status as a semi-privatized entity. This dual personnel system is a breakthrough for state-owned enterprises in Taiwan. Indeed, when the provision was proposed originally in 1994, it was vehemently opposed by the Examination Yuan.

41 In addition to job security, under the CHT Law employees at CHT are given preference in the offering of any ownership diversification program that the government conducts for its holdings in CHT or for the issuance of new shares. This treatment is similar to that under the Statute for Privatizing State-Owned Enterprises (hereinafter referred to as the "Privatization Statute"), which was amended in 1990 as a result of lobbying by employees of state-owned enterprises. The Privatization Statute, however, may not adequately address issues arising from massive share diversification programs such as those involving CHT, Taipower, and Chinese Petroleum Corporation. There is now a new thinking among policy makers and advisors to the Taiwan government that a much wider distribution of shares of telecom companies to citizens would be advisable for efficiency as well as social justice reasons. Union activists at CHT do not believe the state is a legitimate shareholder. To the contrary, their demand for board representation belies their conviction that the employees of CHT are the driving force behind CHT's success and as such, are the true "stockholders" at CHT. Therefore, it would behoove policy makers in Taiwan to create legitimate ownership, by allowing its millions of telephone users, who have paid hefty installation fees over decades, to be shareholders of record. However, mere diversification of ownership through underwritten offerings may not be enough to galvanize CHT. As indicated above, outright privatization as a shock treatment has been ruled out as a politically unpalatable proposition. In the alternative, perhaps some thought should be given to transforming the bureaucratic culture at CHT. This may be achieved by arranging for a strategic sale to one or several international telecom companies.

42 Another important breakthrough in the CHT Law was the provision adopted to unshackle CHT from the "prior audit" requirement imposed upon the old DGT. This requirement of the Control Yuan (hereinafter referred to as the "CY") is rather unique in that audits by definition should occur after the closure of the fiscal year. However, the CY, as one of the five branches of government in Taiwan that exercises oversight and impeachment power over activities of agencies and state-owned enterprises, administers the Audit Statute which contemplates such prior audits. Despite this legislative reform, old habits promise to persist. However, CHT still seems inclined to submit to prior audits in order to prevent their procurement procedures and other similar decisions from being second guessed by the Audit Ministry of the CY. Although some policy makers and indeed, employees of the old DGT had argued that CHT should be freed from all government oversight, and from budget review in particular, this argument was not accepted and did not even make its way into the original CHT bill. Under the Taiwan's Constitution, the Budget Law, and related legislative practice, the LY's budget review power has always extended to state-owned enterprises. The LY's power to review, though, occasionally runs counter to the public corporation's best interests. For example, the new LY session for the first half of 1996 did not approve the budget of state-owned enterprises in time. As a result, all state-owned enterprises ran on the basis of the previous year's budget. In an effort to maintain stability, CHT has only made cosmetic internal changes thus far. Its corporate management structure still has too many layers, and streamlining would create internal personnel problems. Its budget for fiscal year 1997 does not distinguish between type I and type II business costs and revenues, nullifying the TL prohibition against cross-subsidization. Although CHT claims that it only had a few months to prepare this budget between the enactment of the three telecom reform bills and its incorporation, whether a better job at preparing the fiscal year 1998 budget will be made remains to be seen. The prospect for tightening up CHT's capital budgeting and financial management is not promising. Such inadequacies will have a significant impact on its competitive behavior and the government policy for further opening the telecom market. For example, as a state-owned enterprise, CHT is not subject to generally accepted accounting principles or auditing standards applicable to private companies in Taiwan. Therefore, the integrity of its accounting system and transparency of its cost structure is questionable. CHT has virtually no debt, but is unlikely to be able to maintain its debt-free status for long. In the future, CHT will come under constant pressure to better use its borrowing capacity. In addition, as the burden on the Taiwan government to fund welfare programs increases, there is even more pressure to siphon off after-tax earnings from CHT. Finally, CHT's capital account has relatively low paid-in capital and but a bloated capital surplus, all on a historical basis even though an asset revaluation would increase its net worth several time s. The relatively smaller paid-in capital was designed in a way to circumvent a statute adopted in the 1930's governing contributions to employee welfare funds, which would require a significant initial contribution on the basis of the paid-in capital. This artificially low paid-in capitalization will not be conducive to any massive public offering in the future as the offering price per share would be too expensive.

43 The CHT Law allows CHT to enter into other businesses as approved by the MOTC. This provision represents an acknowledgment by the old DGT that its successor corporation would have to diversify. However, this provision signals potential threats to companies in other markets. Where the boundaries between traditional markets such as cable television and Telecom are becoming less and less easy to distinguish, the concern for competition, and indeed fair competition, has increased.

One concern of CATV operators in Taiwan is that CHT is permitted to enter the cable television market, but the CATV operators are not allowed to enter the Telecom market. Their fears may be justified because a unique provision was inserted by the DGT into the Cable Television Law. (The Cable Television Law was adopted in 1993 to legalize the CATV industry, also know as the "Fourth Station" because they operated illegally in competition with the three legal terrestrial television stations owned by or affiliated with the government). Amazingly, this provision would disqualify any applicants seeking a CATV operator's license if it engages in "the business of the DGT."

Clearly such a provision was not necessary even under the TL of 1958, because it had contemplated a government monopoly such as the DGT. The intention of this provision, therefore, was plainly anti-competitive; it appears to block future entry into the Telecom market by CATV operators. Interestingly, now that the business unit of the DGT has been privatized as CHT, and the DGT is only a regulatory agency after the TL amendment in 1996, the disqualification in the Cable Television Law based on engaging in "the business of the DGT" does not make any sense. Whether it is prudent to reinterpret this provision in light of the gradual market opening or repeal it outright requires some thoughtful policy formulation.

In any event, the MOTC should be circumspect in allowing CHT, a formidable player in any new market despite its constraints as a state-owned enterprise, to enter any new market. From a national policy perspective, the CEPD should not be stagnant while the MOTC makes up its mind on this issue. To be sure, the LY will also use its budget-review power to monitor CHT's competitive strategies in new markets.

44 Another regulatory and competitive parity issue relating to CHT is whether it had to be re-licensed to engage in the telecom business. As a state-owned enterprise, it would be in the public interest to re-license CHT to continue the business of the pre-corporatized DGT. Thus, CHT was re-licensed. However, what should have been addressed was the broader issue of whether any constraints should be imposed on CHT in connection with such re-licensing to provide a fair chance for the private-sector entrants to compete.

45 Such as the MOTC and then the EY.

46 Such as the DGT.

47 Members of the committee are appointed by the EY.

48 Supra p.3.

49 As of 13 January 1997, eight licenses were granted for the operation of two types of mobile phone service, i.e. DCS and GSM. Six winners were selected by MOTC from 29 contending companies. Most of the 29 companies are joint-ventures between local groups and foreign companies from Europe, Asia and North America. For more details, please refer to Table II. Regarding the licenses of the paging service, 32 applications were filed by 19 companies and MOTC granted 8 licenses to the 8 private winners on 30 January 1997. For details, please refer to Table III.

50 The award of trunking radio licenses was announced through open bidding on 20 May 1997 and 20 licenses were awarded to 14 business operators. Please also refer to Table IV for details. The trunking radio license award concludes the prelude of Telecom liberalization in Taiwan and arguably the experience derived may be beneficial for further deregulation.

51 See "Kon Shan Hourly News", May, 20th, 1997, page 21.

52 Hereinafter referred to as "QFII".

53 Hereinafter referred to as "SEC".

54 Supra note 23, page 8.

55 Taiwan is an island of which 75% is covered by mountains and hillsides.

56 Supra note 23 page 9.

57 Applicable legislation include:

  1. Broadcast and Television Law, which regulates broadcasting and television in general and is enforced by the Government Information Office;

  2. Cable Television Law, whose enactment was sponsored by the GIO to legalize the de facto CATV industry that mushroomed after 1988;

  3. Telecom Law;

  4. Publication Law, which is an older statu t e that applies to print media; and

  5. Fair Trade Law, adopted in the early 1990's, embodies Taiwan's recent policy shift towards competition policy and competition rules, although its application in this field is still largely untested.

58 Supra note 23 page 21.

59 Such as the Broadcast and Television Law, Cable Television Law or Telecom Law.

60 Article 4 of the SBTL.

61 Such as programs which violate laws or regulations detrimental to the welfare of minors or contravene public order and good morals as stipulated in Article 15 of the SBTL.

62 Penalties in the form of pecuniary fines are most often imposed.

63 Article 28 of the SBTL.

64 The license duration is sex years and renewable.

65 Article 6-14 of the SBTL.

66 Responsible persons in Taiwan usually refer to as the managing director.

67 Article 13 of the SBTL.

68 Article 18 of the SBTL.

69 Which also includes the Taiwan strand.

70 See "Judging the Judge", Asian Wall Street Journal (October 12, 1995).

71 Supra note 23 page 22.

72 Ibid .

73 Ibid .

74 Ibid .

75 Ibid.

76 Ibid.