Are poor countries subsidizing the rich?

Framing the issues

When an international telephone call is routed from one country to an other, the operator in the country that originates the call has traditionally made a compensatory payment to the operator in the country that terminates the call. These payments usually cancel each other out, if traffic is balanced, but they become more significant when traffic in one direction is higher than that in the return direction. This system — also called the “half-circuit model” — was traditionally based on “accounting rates” that were negotiated bilaterally. ITU estimates that, between 1993 and 1998 when the uneven pace of telecommunications liberalization generated large traffic imbalances, net flows of settlement payments from developed countries to developing ones amounted to some USD 40 billion. But since the late 1990s, these payments have declined and, as a greater share of traffic shifts to the Internet, may even have reversed.

The high cost of Internet connectivity and bandwidth in developing countries

For international Internet charging, the system is quite different, based on a so-called “full-circuit” model. According to a discussion paper published in January 2005 by ITU and the International Development Research Centre (IDRC): “Developing countries wishing to connect to the global Internet backbone must pay for the full costs of the international leased line to the country providing the hub. More than 90 per cent of international IP connectivity passes through North America. Once a leased line is established, traffic passes in both directions, benefiting the customers in the hub country as well as the developing country, though the costs are primarily borne by the latter. These higher costs are passed on to customers in developing countries. On the Internet, the net cash flow is from the developing South to the developed North.”¹

The authors of the paper argue that the high cost of Internet connectivity and bandwidth inhibits the growth of Internet usage in much of the developing world, especially the least developed countries (LDC). One reason for this high cost is that most developing countries use international bandwidth to exchange data at a local level. “When an African Internet user sends a message to a friend in the same city or a nearby country, that data travels all the way to London or New York before going back to that city or the nearby country.” It has been estimated that this use of international bandwidth for national or regional data costs Africa, for example, some USD 400 million a year. When the North-South imbalance in telephone traffic was no longer acceptable by the North, a reform was launched to redress it. Now there is a similar imbalance for Internet traffic.

However, Internet backbone providers in the developed world respond that they do not charge developing-country Internet service providers (ISP) any more than their other customers.

They believe that the majority of international costs are incurred for a number of reasons, such as poor telecommunication infrastructure at national and regional levels, fewer peering and exchange points than elsewhere, and a genuine lack of competition in many developing countries.

These problems afflicting small developing economies have been the subject of research in a number of ITU Internet Case Studies (see http://www.itu.int/ITU-D/ict/cs/). For most African countries, for example, the international gateway that would be used to carry data to other African countries remains in the hands of monopolies with no competition on rates. Consequently, prices remain artificially high. The good news is that this is beginning to change as exclusivities granted to incumbents in many countries come to an end — and as these countries revise their competition frameworks.

Uganda, as one of the early adopters of innovative communication policies in Africa, provides a valuable example of what a competitive market can help achieve. Since the liberalization of the Ugandan telecommunication market in 1997, there has been a dramatic growth in Internet users with estimates increasing from less than 5000 in 1996 to more than 125 000 at year-end 2003, according to ITU indicators. In Nepal, prices dropped to the lowest level in the South Asia region, when the country liberalized its market for very small aperture terminals (VSAT) in 2000.

If the rapid uptake of mobile phones is anything to go by, developing-country users have demonstrated a willingness to pay for information and communication technology (ICT) services when provided in a way they can afford.

However, some of the problems are structural and largely unavoidable, such as the low level of demand in LDCs and Small Island Developing States, which tends to push up unit costs. Some countries and regions are not served by undersea cables, and have to rely on highpriced satellite access. There is also a nagging suspicion that the international bandwidth market is not as competitive as might be expected, especially since the consolidation of recent years. Thus, there is evidence of market failure that liberal telecommunication policies cannot fully address.

The peering/transit dichotomy

If developing countries had a greater ability to exchange traffic locally at a national level and regionally, they would not be paying for expensive international bandwidth for their connections. Similarly, if these countries had more outgoing traffic and more regional carriers, these carriers would be able to peer with their international counterparts and lower the costs of international bandwidth (see box on “What is peering”?).

An Internet exchange point (IXP) interconnects ISPs in a country or region, allowing them to exchange domestic Internet traffic locally without having to send that traffic (for example, e-mail messages or Web traffic) across several international hops to reach their destination. But, the reality today is that most developing countries lack local IXPs.

For now, the most promising option for most developing-country ISPs to connect to the global Internet is via a transit agreement signed with their upstream providers. However, because developing-country ISPs have a small customer base, the international Tier-1 and Tier-2 providers have no business incentive to enter shared-cost peering agreements with them. As a result, these ISPs have to bear the full costs of both outbound and inbound traffic exchange under the terms of the transit agreement, in addition to the leased line costs. The ISP on the other end of the international link does not share the cost of exchanged traffic. This means that the developing-country ISP has to pay 100 per cent of the international transit costs for all packet traffic (e-mail, Web pages, file transfers and so on) that originates and terminates with its customers.

Take the example of a customer of a Mozambican ISP. When that customer sends an e-mail message to a friend in the United States, it is the Mozambican ISP which bears the full cost of the packets’ outbound transmission over its international link. Neither the recipient’s ISP nor intermediate upstream carriers bear any of the transit cost. Conversely, when that friend in the United States replies back by e-mail to Mozambique, or makes a voice call routed over the Internet, it is still the Mozambican ISP who again bears the full cost of inbound transmission over its international link². And so, in the process, the Mozambican ISP’s customer bears the brunt by paying higher subscriptions.

Internet exchange points:

A possible way forward

In Asia, IXPs have been established since 1996 in a number of the more developed countries across the region. The largest IXPs are in Seoul (Republic of Korea); Tokyo (Japan); Perth (Australia); Singapore; Wellington (New Zealand); and Hong Kong, China. But developing countries, too, in Asia-Pacific are now playing catch-up, and the number of IXPs is growing in Cambodia, Mongolia (see box) and Nepal.

For Africa, more continental interconnection would enable African ISPs to aggregate intra-African traffic and negotiate better transit prices from the global backbone providers. With the exception of countries of the Southern African Development Community (SADC), there are very few intercountry links and only a minority of African countries are linked by fibre. Even where fibre exists, as in the case of the SAT-3 cable, the international gateway of a particular country may be in the hands of a monopoly incumbent telecommunication company, with no competitive pressure on prices.

The African Internet Service Provider Association (AfrISPA) has played a key role in setting up IXPs with support from a variety of public and private partners. In October 2002, AfrISPA published a policy paper entitled “Halfway Proposition”. The paper pointed to the high cost of international bandwidth as one of the causes of high prices for African Internet users. AfrISPA proposed the creation of traffic aggregation within Africa as an approach that would help avoid the need to invest in expensive additional capacity between Europe or North America and African countries. By September 2004, there were ten national IXPs in Africa: Democratic Republic of Congo, Egypt, Kenya, Mozambique, Nigeria, Rwanda, South Africa, Tanzania, Uganda and Zimbabwe. There are no IXPs in French-speaking West Africa today, but talks are under way.

While examples have focused on the challenges and opportunities for IXP deployment in Africa and Asia, the lessons and strategies are relevant to the rest of the developing world. The ITU/IDRC paper concludes that if the level of traffic is high enough to be exchanged locally, then the IXP concept represents a rational solution for the developing countries.