INTERNATIONAL TELECOMMUNICATION UNION

THE REVOLUTION IN INTERNATIONAL TELECOMMUNICATIONS AND THE ROLE OF THE ITU

Dr Pekka Tarjanne

Secretary-General, International Telecommunication Union
Presentation to the Ministry of Information and Communication and representatives of the Korean telecommunications industry, Seoul, Republic of Korea, 16 January 1998

Mr Chairman
Ladies and gentlemen

It is a great pleasure to for me to be with you today - at the kind invitation of Mr Leem Jong-Tae - to talk about some of the main challenges facing the global telecommunications community today.  Before I begin, I would just like to thank Mr Leem and his colleagues for their hospitality.  My visit to Seoul on this occasion is fairly fleeting but I am looking forward to learning more about the particular concerns of the Ministry of Information and Communication and the Korean telecommunications industry.
The 1998 revolution
Let me begin my presentation with a date - the first of January 1998.  As I am sure all of you know, the beginning of this year saw the implementation of the landmark agreement on basic telecommunications concluded last February within the World Trade Organization.  Coincidentally, it also marked the opening up of telecommunications markets within most Member States of the European Union.  In the years to come I am sure that we will look back to this date as marking the beginning of a revolution in telecommunications.  Let me explain why.
The telecommunication sector is one of the major components of the world's economy. The value of telecommunication sales (equipment and services combined) is expected to exceed $US 1 trillion in 1998. Furthermore, telecommunication networks are a major facilitator of trade in other goods and other services. For instance, the value of financial services transferred over the SWIFT international telecommunication network exceeds $US 1 trillion each day.
Even so, the level of telecommunication services which are currently traded between countries is low. International telecommunication traffic accounts for less than ten per cent by value and below five per cent by volume of global telecommunications. Comparisons with other sectors of the economy suggest that these figures should be closer to 30 per cent by value.
The two main, interrelated reasons why comparatively little international telecommunication traffic is traded across borders are high prices for users and restricted market access for service providers:
•	Consumers pay at least three times more for each minute of international telecommunication traffic than they do for domestic telecommunication traffic, even though the costs of service provision may be quite similar
•	Until the start of 1998, only a handful of countries permitted competitive provision of international telecommunication services.
Scope and significance of the WTO agreement
So what is the significance of the WTO agreement and how exactly does the telecommunications world of 1998 differ from the past?  The first point to note about the WTO agreement is its wide coverage.  The sixty-nine signatories, which includes the Republic of Korea, account for more than 90 per cent of international telecommunications traffic. In many cases the commitments made by the signatories represent significant departures that should expand competition beyond previous liberalization programmes.  The second significant feature of the agreement is its binding nature.  Of course not all signatories are committed to moving ahead with their liberalization programmes at the same pace but, nevertheless, the commitments they have made cannot be easily withdrawn or modified and are binding. 
In addition to commitments made in individual country schedules, 63 of the signatories made at least a partial commitment to the so-called Reference Paper on regulatory principles (57 made full commitment).  The Reference Paper commits those Members who signed to:
•	establish competitive safeguards to prevent anti-competitive practices, 
•	provide for interconnection, 
•	apply universal service obligations in a neutral and transparent way, 
•	make licensing criteria publicly available, 
•	establish an independent regulator, and
•	allocate scarce resources fairly. 
WTO Members which have signed the WTO telecommunications agreement must now put in place the regulatory structures and procedures to meet their obligations and specific commitments, according to the negotiated deadlines. They may need to modify existing laws, regulations and administrative guidelines to bring them in line with these obligations and commitments and to benefit from the new environment that this agreement creates, or they may need to draft new laws and regulations where these do not exist. Some of these will be in areas such as competition policy, price regulation, interconnection and consumer protection in which the country may not traditionally have had any significant legislation and procedures. 
The General Agreement on Trade in Services (GATS), together with each country's schedule of commitments, specifies in considerable detail the regulatory framework that each WTO Member country has to put into place, depending on its level of commitment: 
All WTO members, regardless of whether they made commitments in basic telecommunications, are bound under their general GATT commitment not to discriminate against any WTO Member (MFN obligation) in providing access to telecommunications services and must make available information on the country’s laws, regulations, administrative procedures, and so on.
WTO Members who made commitments in basic telecommunications will need to put in place the structures and procedures to allow new operators and service providers to enter those segments of their telecommunication markets which they have committed to open. In the specific field of international telecommunications, it may involve permitting foreign-owned telecommunication service providers to establish a point of presence for purposes of direct interconnection with the network of the incumbent major supplier. 
WTO Members that also committed to abide by the Reference Paper need to establish regulatory agencies that are independent of operating companies and services providers (if not already in place), and establish a dispute settlement mechanism to resolve interconnection disputes between the incumbent operator and new entrants.  They must also publish a description of the procedures applicable for interconnection to a major supplier and publish actual interconnection agreements or a reference interconnection offer. 
The principles of the Telecommunications Annex, which supplements the GATS, require the country to allow access to and use of its public telecommunication transport network and services (PTTNS) on reasonable and non-discriminatory terms for the supply of any service in respect of which the country has made a commitment. Therefore, if the country has undertaken a commitment to allow entry into its financial services, insurance and tourism markets, suppliers of these services must be given access to and use of the PTTNS on reasonable and non-discriminatory terms and conditions in order to supply these services. 
Impact of the WTO agreement
So, these are the mechanics associated with the implementation of the WTO agreement.  But we should not lose sight of its real significance and its likely impact. The WTO agreement is the stepping stone that takes us from a one country-one carrier world, in which political and network boundaries largely coincide, to a world where networks will extend as a matter of course across a vast new borderless telecontinent comprising almost 70 WTO member countries.  
Most of the nations that signed up to the WTO agreement did so because they expect significant gains.  These include increased efficiency, availability of a wider range of services and improved quality, greater opportunities for the rapid introduction of new services and technologies and, most importantly, lower costs for the end user.  All of this translates into benefits for the economy as a whole.  The agreement is widely expected to boost growth in the global telecommunication market, some analysts putting the figure as high as one trillion dollars over the coming decade.
In spite of the likely positive outcomes of the WTO agreement, some participants fear that their commitments under the WTO framework will have a downside. These concerns include the possibility of a decline in telecommunication revenue, an infringement of national sovereignty and loss of control over basic telecommunication infrastructure. Some also fear that their own telecommunication operators will not be able to benefit from the market access commitments resulting from the agreement, while at the same time having to face harsh competition domestically. 
It is likely that a commitment to liberalize in the context of the WTO will have an impact on the revenue stream of most incumbent national operators - undoubtedly there will be winners and losers. Telecommunication liberalization around the world, with or without a WTO telecommunication agreement, will place immense pressure on monopoly-determined pricing of telecommunication services and on the international accounting rate system. On the other hand, with the market set to grow, the opportunities to increase revenue will also be great.  I will return to the issue of accounting rates in a moment.
Something similar can be said for the concerns about infringement of national sovereignty. Under the terms of the GATS, participating governments will have to give up future arbitrary and discretionary decisions over areas committed during the negotiations. That is, they will not be able to “backslide” on their market access or regulatory commitments. Governments, however, retain full sovereignty over the extent and scheduling of their commitments. In fact, the GATS is structured to allow for the primacy of governments’ decisions on the pace of liberalization. Participants can commit to different levels of market opening, depending on the stage of development of their telecommunication sector, their current state of sectoral reform, and the government’s assessment of its national interests. Therefore, not all WTO Members are expected to adopt the same level of market access at the same time. 
Similarly, the agreement leaves governments a great deal of latitude with respect to the types of regulatory regimes they will apply. The Reference Paper I mentioned earlier allows governments to design their own licensing policies, procedures and requirements affecting this and other sectors. In fact, even among the most liberalized telecommunication regimes there are and will remain, after basic telecommunication commitments enter into force, substantial differences in the regulatory structures of different countries. Some liberal regimes will apply much more light-handed regulation of telecommunication service providers than others, and the way competitive safeguards are drafted into law or implemented will depend upon each country’s competition regime.
From a bilateral to a multilateral trade framework
The WTO agreement also highlights the fact that telecommunications trade is now a multilateral not a bilateral affair. It represents a significant deepening of the institutional reorganization of telecommunications governance.  At both the national and multilateral levels, governments will have to redefine their policy mechanisms and conceptual frameworks in ways that are more significant than the immediate market access concessions.  Take the issue of accounting rates, for instance.
The system of bilateral, correspondent agreements between operators to establish accounting rates for the joint-provision of service, which has served the telecommunications industry well, is now under severe pressure.  That pressure is mainly being applied by operators in those countries which make large net outpayments.  Settlement payments have become unbalanced for a variety of reasons, including the different pace of network modernization, exchange rates and traffic flows.  It is understandable that the US government, for instance, should want change since the US settlement payment deficit reached US$5.1 billion in 1995. 
On the other hand, it could be said that US companies are largely responsible for engineering this deficit because of their pioneering use of calling cards, country direct services and callback services. In each of these cases, the traffic looks as if it is originating in the United States whereas it is actually originating in the partner country.
The good news is that accounting rates are coming down. Since 1990, average accounting rates have fallen by some 9 per cent per year with particularly dramatic falls in relations with Western European countries (19 per cent per year). Over the same period, average international telephone charges have fallen by just 3 per cent per year. 
Nevertheless, it is clear that the system must change, primarily because it is inefficient and acts as a brake on price reductions.  More fundamentally, a bilateral system of agreements is no longer appropriate in a world based on many-to-many rather than one-to-one relationships.  In such a world, multilateral agreement is essential.  Thus, it is disappointing that the United States should feel it necessary to take unilateral action by imposing “benchmarks” or price caps on US settlement rates.
Rather than reduce accounting rates, as the United States is trying to do, replacing it with a system that provides genuine incentives for price-cutting is likely to be a more fruitful approach.  A number of alternative revenue-division mechanisms already exist - such as call termination charges, facilities-based interconnection payments and sender keeps all.  The international telecommunications community needs to work together to find solutions appropriate to the new telecommunications environment heralded by the WTO agreement.   
Some have argued that the WTO agreement is really not that significant, that the changes in market conditions were coming about anyway.  Moreover, the spread of de facto competition in international telecommunication services - for instance from call-back, calling cards or other types of call-turnaround - means that no market is truly “closed” any longer.  To some extent this is true, but it misses the real importance of the agreement. 
The new telecommunications landscape
The WTO agreement means that we are faced with a new telecommunications landscape.  In the past, almost every international carrier was largely sovereign in its own country.  International services were provided by connecting the national half-circuits of one carrier with the matching half-circuits of another. National carriers compensated each other for carrying telephone calls on an end-to-end basis through a system of bilaterally negotiated settlement payments; routing and pricing arrangements were mutually agreed.
Now, however, carriers from most of the world's largest telecommunications markets will be able to build or lease their own circuits in the home countries of their current correspondents.  This will be the case throughout most of Europe, the Americas and, apart from China and India, in key markets in Asia.  At the same time, foreign carriers will be allowed to acquire a controlling interest in domestic telephone companies in at least 47 countries.  The net effect is that most of the world's largest carriers will be able to provide end-to-end international services and will also be able to own a domestic carrier at each end of the circuit. 
The creation of this new single telecommunications market will have a sweeping impact for those both inside and outside of it. The most visible and immediate effect will be a shrinking of the ratio between the price of international and domestic long distance telephone calls.  At the moment, that ratio is at least three to one; that is international calls are on average three times more expensive than national ones.  I expect that ratio to diminish significantly in the near future.  Indeed it is already happening.  Within the European Union, many of the major carriers have seen a decease in their US dollar revenues from international services over the past year at the same time as their traffic volumes have continued to grow.  This shows the impact of price cutting.
With carriers able to establish their own end-to-end facilities for international service, accounting rates are likely to become less and less important.  In the future payments for terminating traffic - especially for those inside the single telecommunications market - will not be based on accounting rates, but upon the interconnection charges offered by domestic carriers to carry traffic to its final destination.  Again, this is already happening in the European Union.  
This new landscape is likely to provide further stimulus to the wave of mergers and acquisitions between telecommunication operators.  And we should not be surprised if domestic access charges, not accounting rates, become the next battlefield for trade disputes.
The role of the ITU
Of course, the existing bilateral regime of correspondent relations will continue but reform is needed if it is to co-exist with the new multilateral arrangements. The ITU is working hard for reform and is tasked with creating a framework within which the international carriers can establish revenue-sharing mechanisms. Study Group 3 continues to be the main forum for this work. ITU members have already agreed to a timetable of five years for bringing accounting rates closer to costs, and are continuing their work to find ways to allow the newly emerging multilateral regime to co-exist with a reformed bilateral system. In December 1997, some 80 countries attended the Study Group 3 meeting on reform of the accounting rate system. The group agreed that a new remuneration system regime could include a bilaterally-negotiated cost-oriented asymmetric rate, a termination charge, or another appropriate commercial arrangement in the case of liberalized multicarrier environments.
Additionally, Study Group 3 agreed to a document outlining transitional arrangements to cost-oriented mechanisms. These included the achievement of an accounting rate level of less than 1 SDR per minute by the end of 1998, and provisions to aid developing countries in the transition process. The document, which will be submitted to ITU Members for approval as part of a revised Recommendation D-140, is an important step toward multilateral agreement on accounting rate reform. And you can be sure that we will continue to work with our Members, the FCC, the WTO and others in search of consensus.
Ladies and gentlemen, as I have acknowledged, the telecommunications sector is undergoing a transition from a global trading system for telecommunication services based on bilateral arrangements to one which is multilateral in nature. The ITU is fully supportive of this process as it can provide great benefits in terms of infrastructure construction and the development of information processing industries.  We intend to do our part in supporting the creation of a multilateral framework for trade in telecommunication services, and open competitive markets.
There are several ways the ITU can help do this.  As the Telecommunications Annex to the GATS agreement recognizes, global standards are essential to the efficient, non-discriminatory operation of global markets, and the ITU has a vital role to play in developing these standards.  The development of global markets will also be facilitated, particularly in the area of satellite services, if there are global allocations of spectrum to particular services.  The whole question of how countries manage spectrum and other scarce communications resources is a very important element of trade liberalization and the prevention of discrimination between domestic and foreign suppliers.  
We are conscious that many of the ITU’s 188 Member States are not members of the World Trade Organization. Developing countries - including those who did not take part in the negotiations on basic telecommunications - need to understand the benefits that trade in telecommunications can bring, and the measures necessary to protect their national interest.  The ITU Development Sector has a role to play in providing this information and in helping governments to use the process of progressive liberalization under the GATS to strengthen telecommunications reforms in their countries. Furthermore, none of the ITU’s 400 or so Sector Members—private network operators, equipment manufacturers and the like—are represented directly in the WTO. Consequently, the ITU can act as a bridge between the WTO and the wider telecommunications community.
We will endeavour to respond positively to requests for assistance from countries in interpreting the significance of the WTO agreement and in implementing the commitments that governments may have made as part of the agreement. In the areas in which ITU has competence, for instance accounting rates, we will continue to push for a framework which is non-discriminatory, cost-based, transparent and consistent with the principle of voluntary multilateralism. 
I would also like to take this opportunity to inform you about our preparations for the second World Telecommunication Policy Forum (WTPF), which will be held between the 16th and 18th of March 1998, on the topic of trade in telecommunications. The general purpose of the WTPF is to provide a forum where ITU Member States and Sector Members can discuss and exchange views and information on emerging telecommunication policy and regulatory matters. Although the WTPF does not produce prescriptive regulatory outcomes or outputs with binding force, it does prepare reports and, where appropriate, opinions for consideration by Members and relevant ITU meetings.
As part of the preparations for the WTPF, I have assembled an informal group of experts who have assisted me in putting together a report for consideration by the Forum.  The second draft of the report was released on 15 December and has been posted on the WTPF98 website.
In order to assist the deliberations of the Forum, we have also commissioned a series of eight country case studies of the changing telecommunications environment, in conjunction with the Commonwealth Telecommunications Organisation.  The case studies, which cover the Bahamas, Colombia, India, Lesotho, Mauritania, Senegal, Sri Lanka and Uganda, will be completed shortly and will be posted, along with other relevant information and a similar case study of Samoa, undertaken by an ITU regional office, on the website.
Early results from these country case studies highlight the specific problems of the Least Developed Countries in adapting to the new international telecommunications environment.  They are more dependent on international revenues than developed countries, have further to go in rebalancing their tariffs, and have yet to experience the forces of competition.  Most of them have not signed the WTO agreement but will surely feel its impact.  The ITU is conscious that the Least Developed Countries deserve special consideration in the reform process. 
Also within the ITU, other related activities have been taking place, for example, in the World Telecommunication Advisory Council and the Regulatory Colloquium.  The seventh Regulatory Colloquium met in early December last year and the Briefing Report and Chairman’s Report on Transforming Economic Relationships in International Telecommunications will be published shortly.
Building the Information Society
Ladies and gentlemen, I began my presentation by remarking on the significance of the first of January. Of course, here we are in the middle of January 1998 and we are still going about our daily lives pretty much as before.  The world did not end on the first of January after all - but that does not mean that nothing has changed. Make no mistake - life in the telecommunication world has changed for good.  The first of January signalled the beginning of a new era for international telecommunications and there can be no going back.  Nor should we want to, for I firmly believe that we are standing on the threshold of a new global information society with all of the benefits that that has to offer all the people of the world.  
But we will never achieve the global information society that has been dreamed of for so many years until we have a global information economy. And we will never have a global information economy until we have free trade in telecommunications and information services, for the simple reason that telecommunication services are essential to all forms of economic activity.  The WTO agreement, therefore, represents a bold and necessary step towards building the global information society.