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Reforming the international
accounting rate system

by Pekka Tarjanne
ITU Secretary-General

The question of reforming the international accounting rate system is a subject of great importance, not only to the ITU but to the international telecommunications community.

As a whole in recent times, ITU Secretary General, Pekka Tarjanne, has made accounting rate reform one of his top priorities. He has even made a public commitment to working towards a  multilateral agreement in this area. In this article the Secretary General answers three questions.

Why is the accounting rate reform so important?

That is where the money is — would be one simple answer to this question. Global revenues from international telecommunication services in 1996 amounted to some USD 65 billion, of which a significant proportion was traded between countries under the accounting rate system. This system provides a framework for a transfer of resources from the developed north to the developing south of around USD 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. In other words, if that USD 10 billion per year were to disappear overnight, it could conceivably make bankrupt most major telecommunication equipment manufacturers.

But just because the sums involved are very big does not mean they are justified. It is widely recognized 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 year since ITU Members approved ITU–T Recommendation D.140 in 1992 — these falls have not been sufficient to achieve cost-orientation, because the cost of international transmission has been falling even faster. The ITU estimates that few settlement rates should be in excess of USD 0.25 per minute and that the majority should be significantly below this. The few exceptions would generally be limited to routes involving the least developed countries or those which have significant transit costs.

What is the ITU doing to hasten the process?

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 Telecommunications Organisation (CTO), the ITU has commissioned nine case studies on the changing international telecommunications environment which will be published to coincide with the Second World Telecommunication Policy Forum.

The ITU has also hosted a number of expert seminars, notably the Informal Group of Experts on the topic of accounting rate reform and the Seventh Regulatory Colloquium (see David Leive’s article on page 28). Much of this information is available on ITU’s Web site at: http://www.itu.int/wtpf98.

Through the actions of our Telecommunication Development Sector (ITU–D), we have been assisting our Members to carry out cost studies, implement tariff rebalancing programmes, and implement their commitments under the World Trade Organization (WTO) Agreement on Basic Telecommunication Services.

Through Study Group 3 of the Telecommunication Standardization Sector (ITU–T), we have been working on adapting the current bilateral settlements regime to a more competitive environment. The latest meeting, which ended on 11 December 1997, proposed a revision to ITU–T Recommendation D.150, which recognizes that, in a liberalized 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 1998. The significance of this is not the precise figure, which is still well 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.

In the last few months, the main focus of ITU’s activities in this field has been in the preparations for, and hosting of, the Second World Telecommunication Policy Forum on the topic of trade in telecommunication services. This meeting provides a forum to discuss how the ITU membership can move forward, in a multilateral way, on accounting rate reform as well as on the more general subject of adapting to the new environment resulting from the WTO Agreement on Trade in Telecommunication Services.

What does all this mean for businesses, large and small?

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 realized 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 overheads 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 globalization of markets that we hear so much about today.

Telecommunications is arguably one of the last major markets to undergo this globalization 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!

This text is an extract from ITU News 2/98