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WTPF Backgrounder

The ITU’s second World Telecommunication Policy Forum will take place at the Geneva International Conference Centre from March 16-18. Organized by the ITU to address urgent and important issues facing the telecoms industry, this year’s Forum will look at the changing telecommunications environment in the light of the World Trade Organization's (WTO) basic telecommunications agreement, which entered into force on 5th February 1998. This new agreement will transform the telecommunications sector as we now know it, opening up markets to global competition and expanding the types of services on offer. For operators, resellers and customers, only one thing is certain – the world of telecommunications will never be the same again.

So what happened?

While the telecommunications industry has experienced a great many upheavals in the 150 or so years it has been in existence, these have, for the most part, related to technological change – the invention of the telephone and discovery of radiocommunications, for example, and developments in telecoms network equipment and satellite technology.

Today, the changes transforming the industry are taking place at a more fundamental level, and relate to the economic foundations on which global telecommunications systems are based. The breakdown of old structures reflects changes which have already taken place at a national level in many parts of the world. Some 72 countries have made commitments to progressively open their telecommunication markets under the basic telecommunications agreement. Although the agreement was concluded last year, it is really a formal acknowledgment of forces that began making their influence felt around the world since the mid-to-late 1980s. The agreement is creating a new telecommunications landscape, much of which will consist of ‘uncharted territory’ for operators, regulators and telecommunications users.

The Old and The New

To examine exactly what is changing, let’s start way back in the earliest days of telecommunications. In the 1860s, when the ITU was founded, telecommunications consisted only of telegraph traffic, which was painstakingly sent, received and retransmitted by pools of operators dotted along the first international telegraph routes. In those earliest years, national lines existed in isolation, and messengers were obliged to physically carry messages from the last station on the frontier, across the border to the operator in the neighbouring country, who would then re-transmit it.

Slowly, as technology improved and inter-connection of lines became possible, regional agreements covering cross-border telegraph traffic were concluded. Nevertheless, the system was still cumbersome, and entailed much unnecessary re-transmitting, as well as delays and an increased incidence of errors due to frequent duplication of a piece of text. Eventually, an international group led by the French resolved to consolidate the many different regional agreements, and the first International Telegraph Convention was signed on 17 May, 1865.

On that historic day more than 130 years ago, the original 20 signatories to the convention developed an economic basis whereby charges and fees for international telegraph transmission could be fairly shared between countries initiating and terminating traffic. Interestingly, although quite a few of those first signatories have themselves ceased to exist as sovereign states, the system they put in place to regulate the exchange of international traffic is still in place today, albeit modified somewhat from its original form.

This system, which is known in the industry as the international accounting rate system, has served telecommunications carriers relatively well during its lifetime. Now, though, new ways of delivering telecommunications services have put the system on the ‘endangered species’ list.

Ringing in the Changes

The old accounting rate system functioned well in the past because telecommunications services were almost exclusively provided by monopoly carriers who operated in a relatively stable and homogeneous environment. The method of sharing the revenue from an international call, therefore, was fairly straightforward: the monopoly carrier initiating the call shared half the revenue of the call with the monopoly carrier completing the call, and vice versa. Frequently, it more or less came out even in the end, because the volume of calls in both directions was about the same, and the per-minute pricing of calls was also fairly consistent across different carriers.

Today, however, the criteria on which the accounting rate system was based have largely evaporated. The uneven pace of liberalization of telecommunications in certain markets, combined with a growing imbalance in the traffic flow between countries and more competitive pricing has led to a slow erosion of the system’s foundations. More recently, some players – most notably the US Federal Communications Commission – have been lobbying hard to reform the system, claiming it penalizes carriers and countries which generate far more outbound traffic than they receive, and thus pay hefty settlement rates to other countries for call termination services. Others argue that recent imbalances in traffic flows are the result of alternative calling practices, such as international refile and call-back, which artificially route traffic through transit countries to take advantage of cheaper calling rates. This effectively reverses the traffic flow, turning traffic which would have generated an inpayment for a carrier, into out-bound traffic for which that carrier must make a settlement payment. Call-back and refile operators are predominantly based in the United States.

Fair Play?

Whether the existing accounting rate system is really unfair to some operators is a moot point. Certainly, large telecommunications ‘exporters’ of calls such as the United States are obliged to pay out much more than they receive back in order to terminate their international calls. And it’s also true that the settlement rate charged by some countries is well above the actual costs of completing the call.

However, it’s important to remember, as industrialized countries lead the call for so-called ‘cost-oriented’ accounting rates that would bring down international call charges, that there are frequently good reasons for different call pricing structures between countries.

At present, it would probably be true to say that many countries with high international settlement rates are developing nations with relatively small domestic telecoms markets. These countries, frequently found in Africa or remote regions like the Pacific Islands, are forced to operate their telecommunications networks in a very different manner from their richer cousins.

For a start, the cost of network equipment in many of these countries is exorbitant. Almost all telecommunications equipment has to be imported, and paid for in scarce foreign currency. In addition, the isolated or geographically difficult terrain in many developing countries means that the cost of laying land lines is far beyond what the telecoms administration could ever hope to recoup from call revenues, because subscribers are frequently sparsely distributed, low-income communities. Finally, revenue from international calls is often one of the few sources of hard currency for these countries, who use the income from telecommunications to finance their burdensome network maintenance and expansion programmes as well as to support other public services like health or transport. Since international calls are usually made by business, or by the relatively well-off, it has long been considered practical to charge these subscribers a little more to help subsidize the operation of the local network, which is more frequently used by low income subscribers. Developing countries fear that tariff rebalancing would effectively remove the already limited access to telecommunications experienced by much of the population, who would not be able to bear higher costs for domestic calls.

At present, the accounting rate system provides a framework for payments 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.

Given all these factors, it is perhaps understandable why developing nations feel at a disadvantage in the face of richer countries like the US, which benefit from relatively cheap equipment, a large market of consumers with the resources to pay for telecoms services, and domestic carriers large enough to be able to fight hard to win consumer favour with cheap prices and special deals. On the other hand, it is also true that the current system, as it stands, favours high prices and rewards inefficiency. The number of carriers now dissatisfied with current arrangements, combined with the fact that these carriers are generally operators with a great deal of economic clout, means that the old system will undoubtedly soon find itself on the scrap heap.

The ITU’s 188 Member States recognized several years ago that a new system better suited to new telecommunications market conditions would be needed. To this end, work has been underway through Study Group 3 of the Union’s Telecommunication Standardization Sector to formulate new arrangements which would benefit all players. The Group’s most recent meeting, which wound up early last December, made some encouraging progress in determining flexible arrangements which would advance the move towards cost-based accounting rates, while at the same time maintaining a balance which would protect those nations which would suffer from a too-rapid change to the existing system. In particular, the group approved a new text (proposed as an annex to ITU-T Recommendation D.140, Accounting rate principles for international telephone services), which recommends bringing rates down to a target of below 1SDR (see glossary) by the end of 1998. Study Group 3 is also working on new remuneration systems, such as termination charges which would be added to ITU-T Recommendation D.150 (New system for accounting in international telephony. Work in this Study Group will continue, and should be given much impetus by the World Telecommunication Policy Forum.

This Forum will bring together carriers, policy makers and regulators from around the world, who will be able to air their views and openly discuss the problems and options available for the future. As a facilitator of communication between different sides of the fence, the ITU has the unique and advantageous position of having most of the world’s telecommunications administrations as its members. Furthermore, as specialized agency of the United Nations, it is widely recognized and accepted as an impartial body which aims to help members arrive at fair and balanced decisions that take every country’s point of view into account. Finally, the Union boasts an impressive track record for achieving tangible results: the first WTPF in 1996, for example, resulted in an important Memorandum of Understanding on new types of mobile satellite systems, while last year’s World Radiocommunication Conference took important measures to ensure that deployment of these new systems will be open to a range of different operators, and different types of systems.

At this year’s Forum, the ITU, its Member States and Sector Members will be looking for a solution to a very complex problem. There is, however, every reason to expect that real progress can be made, if participants show the same spirit of cooperation which led to the successful outcome of the last Forum. For the ITU, which has as its mandates the promotion of lower prices for telecommunications worldwide and the provision of telecommunications services to as many of the world’s people as possible, the best outcome of all will be a system that ultimately benefits the consumer, and brings cheaper and better telecoms services within the reach of everyone.