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Geneva & London 9th April 1997
RECOMMENDATIONS OF THE
INFORMAL EXPERT GROUP ON INTERNATIONAL TELECOMMUNICATION
SETTLEMENTS
INTRODUCTION
At the invitation of the Secretary-General of
the International Telecommunication Union (ITU), an Informal
Expert Group met in Geneva from March 24 to 26, 1997, to assist
him in providing the ITU membership and ITU-T Study Group 3 with
independent advice on reform of the existing international
settlements system, and to suggest ways that the ITU can help
countries to make necessary adjustments.
The Group noted that many countries have
liberalized their telecommunication markets which has led to
lower settlement rates and facilitated reform of international
settlements arrangements. This movement is evolving through
unilateral, bilateral and multilateral decisions frequently made
outside the framework of the ITU. Important market liberalization
decisions such as increased regulatory approval of international
simple resale; the liberalization of telecommunication markets in
the European Union and elsewhere; and the implementation of the
recent World Trade Organization (WTO) basic telecommunications
agreement may, unless there is adequate price reform, result in
an increasing proportion of the world's international traffic
flowing outside the traditional international settlements system.
At a minimum, a significant volume of traffic will flow between
nations which permit the use of alternatives to the traditional
settlement rates for the termination of international traffic.
The Group believes that the ITU's pursuit of
international settlements reform should proceed on the assumption
that settlement rates between liberalized and non-liberalized
markets will inevitably move towards levels dictated by
effectively competitive markets.
The Group believes that the various
interconnect regimes and call termination charges which actually
develop in competitive markets worldwide are likely to produce
valuable information. This information can assist the ITU in
identifying an appropriate price range for cost-oriented
settlement payments (implementation of ITU-T Recommendation
D.140) on international routes where the market remains closed to
competition on one or both sides.
The Group notes that the ITU Constitution
commits its membership to work together for "the
establishment of rates at levels as low as possible consistent
with efficient service" (Article 1, 2f), and
notes the principles contained in ITU-T Recommendations D.140,
D.150 and D.155 to move towards a cost-oriented, transparent and
non-discriminatory settlement system.
The Group wishes to submit to the
Secretary-General a set of Guiding Principles, along with an
action plan of specific recommendations.
GUIDING PRINCIPLES
The Group proposes that the following six
principles govern the position of the Secretary-General and the
ITU in the area of international settlements reform.
- The ITU should support the introduction of
liberalization and competition in telecommunications
markets, at national and international levels, by means
of both national and, more particularly, multilateral
initiatives such as the recent WTO Agreement. In this
context the ITU should accelerate and facilitate the
evolution of current settlement arrangements to
transparent, non-discriminatory and cost-oriented rates,
consistent with this new environment and with
technological and economic changes in the industry.
- While the financial arrangements regarding
trade in international services between liberalized parts
of the world can largely be left to market participants,
national regulators and competition law in those
countries, settlement arrangements involving
non-liberalizing country operators, on one or both ends
of a relationship, will require ITU initiatives.
Therefore, the ITU should structure "new cooperative
relationships" with all stakeholders: its
membership, national regulatory bodies,
telecommunications operators, and multilateral
institutions including the World Bank and the WTO. These
"new cooperative relationships" should include
reciprocal commitments by national regulators with
respect to the multilateral dimension of regulatory
initiatives, inter alia those affecting future
international settlement arrangements.
- To facilitate decision-making and
mobilizing political support at the national level, the
ITU has an important role in providing accurate and
timely data. It should ensure effective collection and
dissemination of data from all sources, especially with
respect to settlement rate levels and trends, and issues
relating to tariff rebalancing, price reform,
interconnection, and their impact on universal service
obligations. The ITU should encourage countries to make
available their settlement rates to the ITU on a
confidential basis.
- Considering the relevance of economically
rational price levels for the efficient provision of
services, the ITU should assist its membership, national
regulatory bodies, telecommunications operators, and
multilateral institutions in developing costing
methodologies and pricing principles, implementing the
WTO agreement, and dealing with universal service issues.
- Specifically, the ITU should help
articulate the general range of international settlement
rates toward which current rates are likely to evolve
given competitive pressures. Such a range would form a
practical and useful basis which the ITU membership could
utilize in a multilateral framework. Specifically, it
should assist them in preparing for the transition to
economically efficient international settlement
arrangements, in the context of a changing industry
structure which will be driven by market forces and
principles of economic efficiency.
- The Secretary-General should mobilize
support, together with international development banks,
and in co-operation with other multilateral institutions,
for the transitional steps necessary to ensure the
economic viability and future financing requirements of
telecommunications operators in those countries hardest
hit by the reform of international settlements
arrangements.
In essence, the Secretary-General should
position himself as the key advocate for reform of the
international telecommunications sector, and the champion of more
efficient, low cost telecommunications services for consumers.
URGENCY OF ADDRESSING SETTLEMENT REFORM ON A
MULTILATERAL BASIS
The Group is convinced that settlement rates
will be reduced towards costs and is persuaded of the urgency of
the steps which will be required as countries move ever more
rapidly toward more competitive environments. It is likely that,
in relationships between competitive markets, settlement rates
will quickly be supplemented by alternative financial
arrangements. This transition does not require intervention by
the ITU. However, there will continue to be a number of
relationships between competitive and non-competitive markets. It
is desirable that settlement rate reductions, which are already
planned by some countries, be coordinated on a multilateral
basis, in order that the benefits be shared by the membership as
a whole.
Based on this assessment of the issues, the
Group recommends that the ITU Secretary General propose an
immediate, global reduction in settlement rates of the order of
5 to 10 per cent during 1997 followed by a similar
reduction in the first half of 1998 1). On the basis
of cost studies carried out by the ITU Secretariat 2)
it is estimated that, in all but a few cases, settlement rates
should be priced below 25 US cents per minute. However, it is
recognized that for some developing countries, there will need to
be provision for a transition period before cost-based financial
arrangements can be achieved.
The ITU has an essential role to play as the
bridge between national requirements and action that can be
organized on a multilateral basis. In order to mitigate the
effects of a reduction in revenues from international
settlements, the Group recommends four specific compensatory
steps:
- Commitments by the ITU, the World Bank and
others to assist those economies likely to be hardest hit
in the process of reform;
- An acceleration of work by ITU-T Study
Group 3 on reform of international settlements
arrangements;
- The commissioning of a series of case
studies on the impact of lower international settlement
revenues;
- An enhanced role for the ITU in data
collection and dissemination of policy-relevant
information on settlements, and more generally
telecommunication sector reform.
These are discussed below.
FINANCING THE TRANSITION TO RATIONAL
SETTLEMENT RATES
The historical level of settlement rates is
unsustainable in a competitive environment. Economic rationality
means that transmission and termination rates of international
voice traffic will decline toward a level dictated by effective
competition. This movement is accelerating as a result of a
number of factors stated above and is expected to bring
significant reductions in prices of international services for
consumers.
The transition may mean a decline in incoming
foreign settlement revenues for a number of operators. Different
countries have differing needs and abilities to make the
necessary adjustment. Specifically, the Least Developed Countries
and other low income small economies with, say, less than
one million inhabitants, are likely to be hardest hit. Some
countries have seen more progress than others in reducing
settlement rates to levels close to cost. However, the revenue
shortfall is mainly a transitional problem. Any potential loss in
settlement payments should, over time, be replaced by increased
local revenue generation, as national tariffs move toward more
efficient levels, as new customers are added, as new services and
innovative ways of pricing are developed, and as steps are taken
to increase the efficiency of the network.
There was substantial agreement within the
Group about the importance of maintaining a commitment to the
provision of services on a universal basis; however, many
differing views were expressed about how this important policy
objective could best be pursued in the new competitive
environment now emerging in the international telecommunications
area.
Key measures making up an
orderly transition
Cushioning the transition problem (providing a
"soft landing") will require implementation of five key
measures:
- Downside risk related to revenue flows
needs to be mitigated for those countries likely to be
the hardest hit.
- Some form of burden sharing needs to be
developed between international carriers and national
authorities in the most vulnerable, least developed
countries.
- In fully competitive markets,
interconnection charges are dictated by rational economic
principles. In those countries where effective
competition has not yet been achieved, a general range of
charges will have to be used as proxies for such rational
pricing. The establishment of a commonly agreed upon
range of charges will require significant work.
- The transition process for the countries
which are hardest hit must be time-bound, e.g., it should
not be in excess of five years.
- A review of how the adjustment to
economically efficient pricing regimes may impact
universal service obligations.
An approach to handling
the transition
- International carriers should guarantee
certainty over the transition period for those countries
likely to be the hardest hit (e.g., total settlement
payments maintained at some predetermined level, in
exchange for shared risk and staged reductions of the
unit settlement rate from current levels to those
consistent with effective competition).
- The ITU should commit to assisting
countries in any way possible in regard to sector
restructuring, settlement rate reductions, and tariff
rebalancing. It should play a role of information
dissemination and, where requested, could act as honest
broker in assisting the parties concerned to negotiate
the guarantee mechanism outlined above, and in resolving
any disputes that may arise between the parties.
- For its part, the World Bank would be
prepared to provide assistance at three levels, within
the framework of its Country Assistance Strategy
discussions with national governments:
- first, advice and assistance in handling
the transition (e.g., with technical assistance),
financed either directly through technical assistance
loans or grants, or through its infoDev Program;
- second, assistance in offsetting the
macro-economic costs of transition in those countries
hardest hit, as part of its regular macro adjustment
programs; and
- providing assistance with network roll-out
by means of loans and guarantees, within the framework of
its current telecommunications sector policies which
promote private investment in a competitive framework.
ACCELERATING THE WORK OF ITU STUDY GROUP 3
As noted above, in relations between
competitive markets, the settlement rate system will be
supplemented by alternative financial arrangements that are
closer to the cost of providing service. However, during the
transition to effective competition, there will be many
asymmetric relations between markets with differing degrees of
liberalization and increasing opportunities for bypass. The Group
recognizes that multiple systems would co-exist in an environment
of increasing liberalization. The Group recommends to the
Secretary-General that ITU-T Study Group 3 accelerate its efforts
to reform the present international settlement arrangements by
focusing its work on facilitating the transition to arrangements
which are more compatible with a competitive and liberalized
marketplace.
In addition, the ITU-T Study Group 3 should
accelerate its work on reviewing the likely impact of the
Internet on the evolution of international telephony.
CASE STUDIES
In order to gain a more realistic picture of
the effect of new international settlements arrangements, it is
recommended that the ITU co-ordinate a series of case studies on
the impact of reduced international settlements (foreign
exchange) earnings on the operation and development of a selected
number (say six) of network operators in low income countries who
will be most affected. The selection of those operators to be
studied should ensure a representative cross-section of economic,
regional and sector structure situations to serve as models for
similar assessments in other countries.
The studies would look at key parameters such
as settlement rate levels, traffic flows, price elasticities of
demand, cost components of the network, national economic data,
and other sources of income and expenses. The studies would aim
to determine the sensitivity of the operator to a reduction in
international settlements in relation to income, to network
capacity, to investment, to network development plans, to
universal services obligations, to the provision of various
services, to quality of service, to debt servicing, to
maintenance, to employment and, to tax payments.
A general model for the case studies should be
developed prior to the start of the exercise and could be based
on similar studies carried out in countries such as El Salvador
and Mexico.
The purpose of the exercise would also be to
recommend steps that need to be taken to mitigate the effect of a
reduction in international settlements, including the time
required for adjustment. The work would be undertaken in
conjunction with the transition financing mechanisms outlined
above. The work would be carried out under the aegis of the ITU
and could be financed by voluntary contributions and funds from
the ITU Development Sector, for example.
DATA GATHERING AND DISSEMINATION
The ITU has a mandate, according to its
Constitution, to "undertake studies, ... and collect and
publish information concerning telecommunication matters".
The collection and dissemination of data relevant for
telecommunication policy-makers can assist them greatly in the
transition process towards achieving transparent,
non-discriminatory and cost-oriented tariff structures. In the
context of accounting rate reform, the ITU should also make
widely available data on benchmarks, collection charges, cost
studies and trends, as well as actual settlement rates where
these are published, in order to facilitate the reform process.
Given the urgency of reform, it is proposed
that the ITU undertake the following actions in the short and
medium-term:
Short term (by May 1997):
- Make available, via a public website 3)
, a structured collection of documents, ITU-T
Recommendations, statements, studies and links to other
sites that are relevant to the topic of international
settlements reform, including the Issues Paper prepared
for the work of the Expert Group;
- Publish the data already collected on an
annual basis by ITU-T Study Group 3 on settlement rate
movement between set ranges of levels, without
identifying specific countries;
- Undertake additional analysis of input
data that would illustrate relative levels and
distribution of ranges of settlement rates among
respondents.
Medium-term:
- Encourage the ITU membership to make
available their settlement rates to the ITU. Where
members do not feel able to do this, to encourage them to
make this information available to the ITU on a
confidential basis, or alternatively, publish indicative
ranges of settlement rates and trends over time;
- Continue gathering data on current
collection charges for international services to major
calling partners, in conjunction with specialist tariff
consultancies, and to make this data available as an ITU
publication;
- Continue the analysis of data on traffic
flows and their relationship to price, and to publish
these studies on a regular basis. 4)
In addition, the ITU should continue to gather
and disseminate information of a more general nature on
telecommunication sector reform in order to assist policy-makers
and regulators involved in the transition process. This would
include, but not be limited to, information on meeting Universal
Service Obligations, interconnection, costing of network elements
and services, establishing a regulator and a regulatory
mechanism, managing scarce resources etc.
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