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A substantial breakthrough has been made to crack the monopolies in China's service sector and boost the efficiency of the market players. The change came with the State Council's new guideline promoting the development of the service sector.

The guideline calls for encouraging competition and investment in telecommunications, railways and airlines.

Monopolies do severe damage to the economy. They can manipulate prices for higher profits, hurting the public.

Since the basic service sectors, including transportation, telecommunications and information technology, involve huge start-up and equipment investments, they are susceptible to the control of monopoly players. In China's fledgling market, a natural solution is for the State to make the investment and entrust the business to management of its choice.

Admittedly, such a mode has its advantages, but these advantages do not justify the limits on sector access.

First of all, the limits or even bans on market access to other players have directly led to shortages in basic services. The railways in China have been run by the State for decades. Supply has fallen far behind demand despite rapid development of the railways in recent years.

Analysts estimate that a total investment of 2 trillion yuan (US$256.4 billion) is needed for railway construction between now and 2020. The State and the banks cannot possibly support such rocketing growth.

If access limits for railway investors and managers are lifted, investors would be ready to put their money on the tracks. The long-criticized telecommunication service suppliers set sky-high prices for international phone calls, so few consumers call out of the country. Many ask their contacts to call from other countries with relatively low international charges.

A consequence of the monopolies is that Chinese have to pay fairly high charges from their modest incomes. Meanwhile, the telecommunication suppliers in other countries have greater profits from the full usage of their equipment while a good portion of the Chinese telecommunication suppliers' equipment goes unused.

The monopoly players frequently give poor service. Their dominant position and monopoly profits may discourage them from innovations.

Since basic services play a key role in the economy with their support for other sectors, it has been well accepted by the authorities, academia and the public that efforts must be made to expand the development of basic service as an important part of stimulating economic growth.

As to the methods of propelling the development of basic services, most of which are controlled by monopolies, there are two options.

The first is to raise service prices. The monopoly players would be better rewarded and would have a greater chance to earmark part of the profits for research and development. This would ultimately benefit the development of the sector.

However, this method does not necessarily guarantee greater efficiency. It would also damage the public interest because the higher monopoly profits would be totally at the expense of the public. Worse, the monopoly players might resort to price hikes every time they wanted to advance business performance, rather than seek better solutions.

The second option is to drop the limits on market access. Intensive competition in a free market would be the strongest stimulus to service suppliers to improve efficiency and adapt to customers' needs.

When access limits are dropped and investors of different kinds are allowed, the thirst for capital for development will be eased. Competitive players will be able to drive noncompetitive ones out of the market.

With competition, the public will be able to enjoy services at fair prices. The players will have to focus on management, research and development and technological innovation to compete in the market place.

As a result, easing market access limits is a better solution for developing basic services.

The authorities obviously understand this. The State Council's guideline marks an enormous opportunity for expansion of the basic services.

Yet, supplemental arrangements from the government are necessary.

The authorities should speed up their reform in telecommunications, railways, airlines and other basic services to establish clear lines between the functions of government and business.

Administrative focus needs to be placed on the necessary rules and regulations, maintaining market order, ensuring fair competition and keeping a close watch on the market players. Administrative institutions should not interfere in the commercial decisions of the businesses or offer favorable treatment to any players.

The government also needs to release market information on a timely and regular base as a guide for investors. This information can serve as a roadmap for investment in the basic services.

Last, but not the least, legislators should establish an anti-monopoly law for the country as soon as possible. This will enable efforts against commercial monopolies and monopoly players to be backed by law.

The author is a researcher with the Institute of Industrial Economics under the Chinese Academy of Social Sciences

(China Daily April 5, 2007)