Issues in Accounting Rate Reform

This article is the second of two features discussing the implications of the new WTO agreement on trade in basic telecommunications, due to come into effect this year. In this second piece, we look at how changes to the accounting rate system might affect carriers, particularly those in developing countries, and how the ITU’s World Telecommunication Policy Forum on Trade in Telecommunications might address these issues.

On March 16, the telecommunications industry’s leading players will gather in Geneva with the purpose, among other things, of working out a new way of structuring the system whereby international operators share the costs of international calling. No mean feat, since the current system, known as the international accounting rate system, has been in place nearly as long as the telecommunications industry itself. It has served its purpose well, but as the industry restructures itself to meet new technical and commercial challenges, this old reciprocal billing system is beginning to look rather outmoded. It needs to be replaced: the big question facing delegates at this year’s WTPF is "with what?"

A Brief History

When telecommunications (in the form of the telegraph) was first developed, systems operated on a very small scale – between distant buildings in the same city, or neighbouring towns. But improvements in technology soon increased the distances over which messages could be sent and received, and eventually, it became possible to send telegraph messages over international borders. The first international telegraph systems required operators to accept messages at the frontier of the country in which they were sent, then pass them on to operators stationed on the other side of the frontier, who would re-transmit them to their destination. This slow and cumbersome system was necessary because telegraph lines in different countries were not interconnected and were frequently technically incompatible with one another.

The situation finally became such an impediment to speedy delivery of telegraph messages that 20 countries banded together to form the International Telegraph Union (ITU), which later became the International Telecommunication Union. The Union set about standardizing equipment and ensuring interconnection of different national systems, and at the same time devised a system whereby telecommunication operators paid one another "compensation payments" for carrying international traffic generated by a caller in a different country. This rate of payment was bilaterally negotiated between operators, and so was not the same for each country. For example, Country A might charge Country B $1 to land its international traffic, but may offer the same service to Country C for 80 cents. The system, based as it was on a network of inter-country agreements, was generally considered fair by all, and has remained, albeit with some adjustment, at the cornerstone of international telecommunications service provision for more than 100 years.

Winds of Change

The first creaks and cracks in the foundations of the accounting rate system became apparent in the 1980s, as small but profound changes began to take place in the telecoms industry. The liberalization of some telecommunications markets – notably the United States, the world’s largest generator of international telecommunications traffic – combined with the privatization of state-owned telecoms carriers and the growth of telecommunications-based technologies such as computer networks, electronic mail systems and the Internet began to shape a new operating environment very different from the old monopoly-based system. Competition in some markets resulted in cheaper calls, in turn spurring the evolution of a range of so-called ‘alternative calling practices’ such as refile, callback, and direct-to-home services. Such services effectively redirect traffic from Country A destined for Country B through a third country, Country C, which has cheaper accounting rates. This enables operators to take advantage of cheaper prices, increasing their profits and allowing them to offer discounted and specialized services to consumers. These alternative calling practices have led to substantial changes in international calling patterns.

The imbalances in the flow of international traffic which have been the result of such practices and other factors, are having the effect of requiring operators in ‘telecoms exporting countries’ – that is, those countries that make more international calls than they receive – to pay out substantial sums to other countries for call termination. And since termination charges have traditionally been considerably higher than the actual costs incurred by the terminating operator, this has led to complaints by some operators, who feel the system is unfairly stacked against them.

A contrary argument runs that since operators themselves promote alternative calling practices which reverse the flow of traffic and require settlement payments on calls that would once have generated incoming revenue, business sense dictates that they must be making a profit on the arrangement, however much they may complain about their over-burdensome international settlements.

North versus South?

The international telecommunications community recognizes that changes in the way telecommunications are used, as well as bought and sold, requires the development of a new system to replace the old accounting rate system. The ITU, in particular, has been working on the problem for several years, through the efforts of Study Group 3 of the Telecommunications Standardization Sector (ITU-T). At present, the greatest stumbling block to development of new arrangements is the seemingly conflicting interests of the industrialized nations, which often have competitive carriers and which make a large volume of international calls, and the developing nations, which generally still provide telecommunications through monopoly carriers and which generate low volumes of international calls.

It is not the fact of being state-owned, or operating in a monopoly environment, that keeps costs and accounting rates high in the developing world. There are numerous examples of monopoly carriers which have accounting rates lower than similar carriers operating in competitive markets – Singapore and Hong Kong being two prominent cases in point.

Instead, the problem stems from a complex combination of conditions that prevail throughout most of the developing world. For a start, developing nations almost always have to pay much more for their network equipment and line installation, because of difficult geographic and climatic conditions, a lack of locally manufactured materials, and an inability to take advantage of economies of scale.

Secondly, the increased volume of calls which price cuts could stimulate in these countries would not usually be sufficient to offset the loss of income they would incur from reductions in inter-carrier settlement rates. Most do not benefit from a large, ‘telecommunications friendly’ population with the need and economic means to generate a great deal of additional international traffic, even if tariffs were significantly lower.

Thirdly, developing nations frequently rely heavily on incoming hard currency in the form of settlement payments to fund their own network maintenance and development, because domestic call volume and revenues are simply not sufficient to meet these costs, and in any case are not made in convertible currency.

Hence, from the perspective of many developing nations, abolition of the current accounting rate system would spell disaster for the limited communications capabilities they currently have, and would distance them ever-further from participation in a new Global Information Infrastructure. With telecommunications capability more and more closely linked to economic prosperity, the developing world, already wary of the motives of large, global carriers and fearing a ‘lose-lose’ scenario, has until now been unwilling to come to the negotiating table.

Consensus Building

The World Telecommunication Policy Forum has been convened with a view to overcoming this impasse and arriving at a solution which would address the need for timely reform, while protecting those carriers likely to be hardest hit by the changes. It is clear that, as net recipients of settlement payments – in 1996, some US$10 billion – developing countries have real and legitimate fears. For some, incoming settlement payments account for around half the country’s total telecommunications revenue, and represents the major source of foreign exchange.

To better understand the real-life situation of operators managing networks in emerging markets, the World Telecommunication Policy Forum will examine nine case studies specially commissioned for the Forum by the ITU. These studies, undertaken by leading telecommunications consultants, outline the existing situation in each country, and propose possible measures which could be adopted to facilitate a transition to a new system of international settlement arrangements.

The Forum will also consider scenarios where a move to cost-based accounting rates could result in asymmetric termination charges. These different termination rates would apply to countries which could demonstrate higher termination costs, because of an inability to achieve economies of scale in their equipment purchases, higher maintenance and development costs, or other factors such as a high level of indebtedness. A longer transition period for developing nations will be another option on the table for consideration during the March conference.

New Approaches

Despite the difficulties ahead, the future looks bright for many carriers in the developing world, especially those prepared to be innovative and flexible. ITU research shows that emerging economies which have introduced a degree of national competition are now experiencing higher rates of growth in international traffic per subscriber line than those which have remained firmly stuck in a ‘monopoly-provides-all’ operating environment. Far from endangering network building programmes, figures show that liberalization and private sector participation in these countries’ telecommunications networks has resulted in accelerated network roll-out programmes and better quality of service.

Generally, governments seem to be finding that planned liberalization can help them achieve their development objectives, and can do so more quickly than if monopoly provision had been maintained. Private sector participation certainly channels some of the income from telecommunications away from the purse of the incumbent operator and into the coffers of the new entrants. But it also brings in foreign capital, technology and skills, and helps develop other sectors of the economy which are highly dependent on telecommunications, such as travel and tourism, information technology, transport, and banking and financial services.

Creating a New Playing Field

As the world’s telecommunications markets continue to evolve, the structures governing them will also need to be adaptable to new operating environments and new rules. The international accounting rate system is one such structure, and it will need to change, and change quickly, if it is to remain relevant to telecoms provision in the next millennium.

For the developing world, participation in the development of a new or modified system of inter-carrier charging is vital if their interests are to be fully taken into account. The ITU’s World Telecommunication Policy Forum represents the industry’s best chance yet for a broad consensus on this matter, bringing together delegates from the private and public sectors, from the North, and from the South, for three days of informal and frank discussions. At the end of the conference, it is hoped that the industry will have forged an agreement on a new basis for trade in telecommunications which will foster growth and prosperity for all, and help to develop the networks which will provide for truly global communications for people all around the world.