INTERNATIONAL TELECOMMUNICATION UNION

Reforming the international accounting rate system:
Current regulatory initiatives and their practical business impact

Opening Remarks

Dr. Pekka TARJANNE
Secretary-General
 International Telecommunication Union (ITU)

Honolulu, 11 January 1998.

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Honourable Guests,
Ladies and Gentlemen,

It is a pleasure for me to introduce the topic of reform of the international accounting rate system, which we will be discussing over the next two hours or so. As many of you will know, it is a subject of great importance, not only to the ITU but to the international telecommunications community as a whole. I have made accounting rate reform one of the top priorities for the remaining months of my mandate as Secretary-General of the ITU, and I have made a public commitment to working towards a multilateral agreement in this area. In my presentation later today at the Opening Plenary Session of PTC’98, I have adopted the approach of looking at the current debate from the perspective of 2008. Being realistic, we do not have the benefit of hindsight to guide us, only the conviction of experience.

I would like, today, to deliver three brief messages:

•	Why accounting rate reform is so important;
•	What the ITU, among many other actors, is doing to try to hasten the process;
•	What it means for businesses, large and small.

Beginning with the easiest question: why is accounting rate reform so important? The answer is: “because that’s where the money is!” Global revenues from international telecommunication services in 1996 amounted to around US$ 65 billion, of which a significant proportion was traded between countries under the accounting rate system. The accounting rate system provides a framework for a transfer of resources from the developed North to the developing South of around US$ 10 billion per year. To put that into perspective, if you add together all the lending programmes in telecommunications of all the development banks around the world—the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and so on—the total sum they invested during the first half of the 1990s would still amount to less than is generated in just one year under the accounting rate system. To put it another way, if that US$ 10 billion per year were to disappear overnight, it could conceivably bankrupt most major telecommunication equipment manufacturers.

But just because the sums involved are very big does not mean they are justified. It is widely recognised that settlement rates are significantly out of line with the true cost of providing termination for international calls. Despite the fact that settlement rates have been falling—on average by 9 per cent per year since the ITU Membership approved ITU-T Recommendation D.140 in 1992—these falls have not been sufficient to achieve cost-orientation, because the costs of international transmission has been falling even faster. The ITU estimates that few settlement rates should be in excess of 25 US cents per minute and that the majority should be significantly below this. The few exceptions would denerally be limited to routes involving the Least Developed Countries or those which have significant transit costs.

What has the ITU been doing to bring about more rational economic relationships between its members:

•	One action has been to carry out and publish studies of international telecommunication services, notably the “Direction of Traffic” report and the “World Telecommunication Development Report”. In conjunction with the Commonwealth Telecommunication Organisation, the ITU has commissioned eight case studies of the changing international telecommunications environment which will be published later this year. 

•	The ITU has also hosted a number of expert seminars, notably the Informal Expert group, chaired by the Bob Bruce, and the Regulatory Colloquium, which took place before Christmas, on the topic of accounting rate reform. Much of this information has been published on our website.

•	Through the actions of the ITU-D sector, we have been assisting our membership to conduct cost studies, to carry out tariff rebalancing programmes, and to implement their commitments under the WTO basic telecommunications agreement;

•	Through the ITU-T Study Group 3, we have been working on adapting the current bilateral settlements regime to a more competitive environment. The latest meeting, which concluded on December 11th 1997, proposed a revision to ITU-T Recommendation D.150, which recognises that, in a liberalised environment, Operators may, by bilateral agreement, choose from an expanded menu of options, including settlement rates and termination charges, or any other commercial arrangement more suited to their relationship. In a ground-breaking move, the Study Group proposed transitional arrangements towards the new regime which would commit members to a target of reducing settlement rates to below 0.5 SDR (excluding transit arrangements) by the end of this year. The significance of this is not the precise figure, which is still significantly above cost for most relations, but the fact that it has been adopted as a formal target. It provides a base line from which further reductions can now be negotiated.

Over the coming months, the main focus of ITU’s activities in this field will be in the preparations for, and hosting of, the World Telecommunication Policy Forum, due to take place on 16-18 March 1998, in Geneva, on the topic of trade in telecommunication services. This meeting provides a forum to move forward, in a multilateral way, on accounting rate reform. It may be desirable, for instance, to establish a voluntary memorandum of understanding between a group of like-minded countries, who would offer each other a non-discriminatory, unbundled cost-oriented termination charge which is substantially below the 0.5 SDR which is being proposed for the world as a whole. Developing countries would offer cost-oriented rates for call termination in return for lower cost, and therefore asymmetric, access to developed country markets. 

Finally, what does all this mean for businesses that use telecommunications? The most visible impact will be that the price of an international call will, in the future, be much closer to that of a domestic call. At the moment, the ratio is at least three to one and, in many cases, closer to ten to one. I expect that ratio to diminish significantly. It will take time to achieve, but it has already been realised on the Internet where call costs are largely independent of distance. The existing “club” of major telecommunication operators will not willingly surrender their generous profit margins on international calls, but the direction of change is clear. When reform does occur, it will mean that, for telecommunication users, the overhead involved in doing business with a foreign supplier will be little different from that of doing business with a local supplier. That is the key element in the process of globalisation of markets that we hear so much about. Telecommunications is arguably one of the last major markets to undergo this globalisation process—international telecommunication traffic amounts to a tiny percentage of total telecommunication traffic—but when it does so, it will have a profound effect on all other business sectors. The goal of the ITU, as stated in its Constitution, is to work towards “the establishment of rates at levels as low as possible consistent with the operation of an efficient service”. For telecommunication users, that can not come soon enough.

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