Accounting Rate Reform: The current debate

Opening remarks prepared for Dr. Henry Chasia, ITU Deputy Secretary-General
Annual Council of the Commonwealth Telecommunication Organization,
Trinidad & Tobago, September 29^th 1998.

Ladies and Gentlemen,

Colleagues,

It is my pleasure here today to preside over a debate on accounting rate reform which is one of the key issues facing the international telecommunications community in the closing years of the 20^th Century, particularly for those developing countries faced with the task of adapting their market structures to the changing international telecommunications environment.

Before introducing the panelist in this debate, I would like to offer a few personal remarks on the forces that are shaping this debate and what the ITU can do, and is doing, to bring about a speedy resolution of the reform process to the satisfaction of all parties. The strongest pressure for change is coming from telecommunication consumers, both at home and at work, who want lower international telephone bills. As I argued in my keynote address on Monday, we currently stand on the threshold of a bright new dawn, in which a cornucopia of new telecommunication services and applications will become available, many of them based on data and video, rather than voice. The single most important barrier which is holding up the realization of these new services is not technical, or even regulatory, but it is to do with the basic price charged to the consumer, which is too often prohibitive. The reform process will be judged a success only if prices paid by consumers are significantly reduced.

There is no longer a defensible logic to the argument that the price of making an international telephone call should be any higher than the price of a domestic telephone call. At a minimum, the price of an international call between the large business centres of, say, New York, London, Frankfurt or Tokyo, should be no more expensive, or even cheaper, than a domestic telephone call. This is already the case on the Internet where the element of distance and national borders has been eliminated for all practical purposes. If the reform of the accounting rate system is not achieved soon, then more and more of the traffic currently carried over the public telephone system will simply shift to the Internet, where there is no formal settlements system.

The second most significant force for change, after user pressure, comes from within the industry itself, particularly from the new market entrants who are appearing in increasing large numbers, notably in Europe and Asia Pacific. These new players are not willing to continue with the current revenue-sharing system which, in their eyes, obliges them to share the burden of the inefficiencies and high cost structures of those incumbent players they are supposed to be competing against. What these new players want is a shift away from a revenue-sharing regime to a cost-based regime in which the price they pay for their international calls to be terminated is closely related to the cost of providing that service. In their early years at least, new market entrants will inevitably originate much more traffic than they terminate. Thus the price they pay for call termination is a critical factor in their likely success or failure.

The pressure for reform—which is coming from rapid technological change and regulatory reform as well as from consumers and new market players—is probably irreversible. But in any dramatic shift in the terms of trade between countries, there is inevitably the fear that there will be winners and losers. These fears are compounded by the fact that many network operators have traditionally used net settlement payments from abroad to cross-subsides their domestic national network build-out and, in some cases, to keep the price of telephone access and local calls at an unrealistically low level. By some estimates, the magnitude of the capital transfers from the developed North to the developing South which is effected under the accounting rate system is of the order of US$ 7-10 billion per year. There is little evidence to suggest that these capital transfers will diminish as a result of accounting rate reform. That is because the determining factor is the direction and volume of traffic rather than its unit cost. But the lack of evidence does not mean that the fears of developing countries are unfounded.

In the ITU, the main focus of our reform efforts has been on the relationships between developed and developing markets, and between liberalized and monopolistic markets, rather than among those developed markets which have already opened to competition. Among liberalised markets, which account for some three quarters of international telephone traffic, the trend towards interconnection at cost oriented rates is already well established. But the gap between these cost-oriented rates, and the prices charged for call termination in monopoly markets is growing.

One of the main research tasks ITU has undertaken over the past year, in conjunction with our development partners such as the CTO, the EU, and the World Bank, has been the country case studies programme which we heard about earlier today. These studies help our Member States to understand and to anticipate the impact of the changes that are occurring in the accounting rate system.

As well as conducting research and information gathering, ITU has also been playing a role in bringing together the full range of players—service providers, governments, regulators and users—to debate accounting rate reform, notably in the context of ITU-T Study Group3, but also through the World Telecommunication Policy Forum and the Focus Group which the Policy Forum instigated. One of the early successes of this reform process was the agreement, reached earlier this summer, to establish a global limit on the total accounting rate of one SDR per minute. This implies a settlement rate of below 66 US cents per minute, excluding transit charges, to be achieved by the end of 1998. The significance of this agreement is that it provides a common point of departure for the on-going transition phase. We anticipate that the transition should be largely complete by the end of the year 2001.

The work of the Focus Group is due to be concluded in six week’s time. At the plenary meeting of the Group, which was held in Geneva from 1-3 September, a Chairman’s Working Document was presented which put forward an approach to establishing target rates for the transition towards cost-orientation which is based on the analysis of existing published settlement rates. The proposed approach subdivides different countries according to their teledensity, and establishes target rates for each of six teledensity bands which are based on the lowest settlement rates—"best practice" rates, if you like—within each. The Chairman’s Working Document defines best practice as the average of the lowest five settlement rates in each of the six teledensity bands. This methodology can of course be modified, for instance to use different teledensity bands or a different definition of the best practice rates. But it provides a simple, objective and flexible means of establishing target rates in a way which is tailored to the specific situations of individual countries.

The Focus Group Chairman’s Working Document also proposes target rates for transit shares, which range between SDR 0.03 and 0.06 (4-8 US cents) per minute. If implemented, this would bring significant benefits for the Least Developed Countries and other land-locked, small, or low teledensity economies.

There are a number of areas where the Focus Group’s work is incomplete, particularly relating to the use of asymmetric arrangements during the transition period, and the handling of universal service obligations. Many of you have participated in the work of the Focus Group, both through its e-mail reflector and through its Plenary Sessions. Trinidad and Tobago, in particular, has played a full and active role and the Focus Group chairman, Ambassador Anthony Hill, is also from this region. I would urge you to engage in the work of the Group, particularly in the critical next few weeks before the final draft is delivered to Study Group 3.

************

In conclusion, the reform of the accounting rate system is overdue, and it is imperative that both developed and developing nations engage in the debate. I look forward to the presentations and debate among the panelists today and I will undertake to feed back the results to my colleagues in Geneva..

Thank you.