Trade in telecommunications & accounting rate reform Dr Tim Kelly *, Head, Strategy and Policy Unit,...

Trade in telecommunicationsTrade in telecommunications& accounting rate reform& accounting rate reform

Dr Tim Kelly *,

Head, Strategy and Policy Unit,

International Telecommunication Union,

30 April, 2001

* The views expressed in this presentation are those of the author, and do not necessarily reflect the opinions of the ITU or its membership. Tim Kelly can be contacted at [email protected].

Trade in telecommunications

AgendaAgenda Trends in telecoms worldwide Trade in telecommunications

The GATS and the WTO Basic Telecoms Agreement

The stakes: Market liberalisation Shift from a bilateral to a multilateral trade regime

Reform of the accounting rate system What is the accounting rate system? What are the problems? What are the possible solutions?

ITU/WTO co-operation What does it all add up to?

Projection of growth trends, Projection of growth trends, fixed and fixed and cellular subscribers and int’l traffic, 1995-2005cellular subscribers and int’l traffic, 1995-2005

Source: ITU.

0

500

1'000

1'500

2'000

2'500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fix

ed li

nes

an

d m

ob

ile s

ub

scri

ber

s w

orl

dw

ide

(mill

ion

s)

0

50

100

150

200

250

Bill

ion

s o

f m

inu

tes

of

inte

rnat

ion

al t

elep

ho

ne

traf

fic

Fixed lines

Mobile subscribers

International traffic

Actual Projected

0

100

200

300

400

500

600

700

800

900

1000

90 91 92 93 94 95 96 97 98 99 00 01 02

Ser

vice

rev

enu

e (U

S$

bn

)

Actual Projected

Domestic Telephone/fax

Int'l

Mobile

Other: Data, Internet, Leased lines, telex, etc

Projection of revenue growth (US$bn)Projection of revenue growth (US$bn)

Source: ITU.

Increasing involvement of private Increasing involvement of private sector in supply of servicessector in supply of services

Source: ITU Telecommunication Regulatory Database.

Status of Incumbent operator

0

20

40

60

80

100

120

140

160

180

1991 1993 1995 1999 2000

Private

State-owned

Countries

Countries with Separate Regulatory Body

Role of government shifting from Role of government shifting from participation to regulationparticipation to regulation

Source: ITU Telecom Regulatory Database.


Trade in telecomsTrade in telecomsDual role of telecommunications

As a facilitator of trade in other sectors (GATS) As a directly traded product and service (BTA)

How can telecom services be traded? Modes of delivery Cross-border (e.g., call re-origination) Commercial presence (e.g., Foreign Direct

Investment) Consumption abroad (e.g., calling cards) Movement of staff (e.g., consultancy services)

Global Telecom Trade, US$ billionGlobal Telecom Trade, US$ billion

0

20

40

60

80

100

1990 1991 1992 1993 1994 1995

Other

Settlement payments

Telecom equipment

Note: “Other” includes privatisation receipts, cross-border roaming of mobiles, consultancy, FDI, foreign aid etc.Source: ITU “World Telecommunication Development Report, 1996/97”

Countries permitting competition in Countries permitting competition in basic telecoms:basic telecoms:1990 1995 1998JapanUnited KingdomUnited States

AustraliaCanadaChileFinlandJapanKorea (Rep.)New ZealandPhilippinesSwedenUnited KingdomUnited States

AustraliaAustriaBelgiumCanadaChileChinaDenmarkEl SalvadorFinlandFranceGermanyGhanaHongkong SARIsraelItalyIreland (Dec 98)

Japan Korea (Rep.)MexicoNew ZealandNetherlandsNorwayPhilippinesRussiaSpain (Dec 98)SwedenSwitzerlandUgandaUKUSA

plus others ....

35%46%

74% 85%

1990 1995 1998 2005

Mono-poly

Compe-tition

4 14 29 48

Number of countries permitting more than one operator for international

telephony

Percentage of outgoing international Percentage of outgoing international traffic open to competitiontraffic open to competition

Note: Analysis is based on WTO Basic Telecommunications Commitments and thus presents a minimum level of traffic likely to be open to competitive service provision. Source: ITU, WTO.


WhatWhat’’s covered, whats covered, what’’s not?s not?

Covered in WTO telecoms agreementsGovernment measuresIndividual country commitments (schedules) providing market access to stated markets in telecom servicesRelated agreements (GATS, Information Technology)Regulatory principlesCommercial presence (foreign direct investment)

Not covered in WTO basic telecoms agreementNon-government measures (e.g., commercial contracts)Market areas not covered in individual commitments or stated as exemptionsRest of world (including China, Russia etc)Accounting rates and settlementsBroadcasting and audiovisual industry


General Agreement on Trade General Agreement on Trade in Services (GATS) principlesin Services (GATS) principles Most-favoured nation (MFN), Article II Transparency, Article III Domestic regulation, Article VI:

qualification requirements and procedures technical standards licensing requirements

Monopolies and exclusive service supply (Article VIII)

Market access (Article XVI) National Treatment (Article XVII)


Basic Telecom AgreementBasic Telecom Agreement Process initiated in 1994 to extend GATS

commitments to basic telecoms (i.e., voice) Process reached “standstill” in April ‘96. Sticking

points: Reaching Critical Mass of countries “One-way by-pass” of accounting rate system Status of mobile satellite services

Negotiations re-opened, 15 Jan-15 Feb 1997 Successful conclusion on 15th February

69 countries signed agreement 61 countries committed to Regulatory Reference Paper,

in whole or in part


Regulatory Reference Paper (1)Regulatory Reference Paper (1) Competitive safeguards

prevention of anti-competitive practices engaging in anti-competitive cross-subsidisation withholding information

Interconnection provided under non-discriminatory terms cost-oriented, transparent and timely additional network termination points on request at

cost-oriented rates Published terms and rates Disputes procedure


Universal Service Obligations at discretion of Member State no more burdensome than necessary

Licensing criteria publicly available transparent process

Independent regulatory authority Allocation and use of scarce resources

objective, timely, transparent and non-discriminatory procedures for allocation

Regulatory Reference Paper (2)Regulatory Reference Paper (2)

The International Telecom Traffic The International Telecom Traffic Roller-coasterRoller-coaster

Global international telephone callsBillions of minutes

4 5 5 6 8 9 10 11 13 14 16 1821

2428

3338

4349

57

64

71

79

86

94

101

8%8%9%

12%12%12%

15%15%

13%14%

17%17%17%

15%15%

11%11%

13%12%

16%

15%

19%18%

17%

15%

18%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

Annual change

Source: ITU “Trends in Telecom Reform, 2000/01”


What are accounting and settlement What are accounting and settlement rates?rates?

Collection chargeThe amount charged to the customer by the Public Telecommunication Operator(PTO)

Accounting rateInternal price between PTOs fora jointly-providedservice

Settlement ratePayment from one PTOto another. Normally, half the accounting rate

X

International Transmission Facility

International Switching Facility (Gateway)

Call Termination

Country

What the accounting rate coversWhat the accounting rate covers

X X

Traditional regime:Traditional regime:Joint provision of serviceJoint provision of service

X

Emerging regime:Emerging regime:Market entry and interconnectionMarket entry and interconnection

XX


Accounting rate reformAccounting rate reformAccounting rates are traditional way of sharing revenues

from int’l services BUT, creates incentives among recipient countries to sustain

rates at high level Accounting rate system not well-adapted to competitive market

environment Large imbalances in traffic and settlement payments

Strong pressure to move towards a cost-oriented system BUT, many developing countries are heavily dependent on net

settlement payments Transition may be quicker for some than others Cost-oriented system may well be asymmetric


The international call price squeezeThe international call price squeeze

7

28

43

5858

74

444455

95 96 97 98 99 00

Swiss call prices. US cents per minute.

Call to USA

Local call


Increasingly competitive marketsIncreasingly competitive marketsInternational traffic by carrier type, in International traffic by carrier type, in billions of minutesbillions of minutes

0

20

40

60

80

100

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

New carrier incompetitive market

Incumbent carrier incompetitive market

Monopoly

Source: TeleGeography, 2001.

The accounting rate regime The accounting rate regime unravelsunravels

The bilateral accounting rate regime More than 100 years old Rates negotiated and accounts settled bilaterally Worked well in time of monopolies, state control and

balanced traffic flowsAs market liberalisation increases …

Price imbalances and traffic imbalances grow Net settlements increase, creating incentives for

operators receiving more traffic than they send to keep prices high

… pressure for a multilateral agreement grows WTO basic telecommunications agreement creates

possibility for direct interconnection, but agreement avoids discussing accounting rates

Accounting rates are falling; Accounting rates are falling; but but not fast enough to avoid by-pass?not fast enough to avoid by-pass?

1.01 1.00 0.98 0.950.91

0.87 0.850.81

0.670.60

0.450.40 0.37 0.35

0.31 0.27 0.25 0.230.20

0.15

0.49 0.470.42

0.370.32

0.580.54

0.64

0.49

0.39

0.54

0.14

0.29

0.39

0

0.2

0.4

0.6

0.8

1

1.2

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

World

USA

Asia-Pacific

Africa

LAC

Settlement rate trends, in SDRs



Accounting rates and termination Accounting rates and termination charges: charges: What differences?What differences?

Accounting rates Termination charges

Normally symmetric (accounting rate split 50/50)

Not necessarily symmetric (if costs differ)

Bilaterally negotiated In theory, set unilaterally (though D.150 requires bilateral negotiation)

Discriminatory (different rates with different correspondents)

Non-discriminatory (same interconnect schedule offered to all carriers)

Half-circuit regime (not normally unbundled)

Full-circuit regime (can be unbundled)


Two-track approachTwo-track approach At conclusion of WTO negotiations on basic telecoms,

Agreement for a moratorium on disputes related to accounting rates until 2000

That moratorium now being discussed by Trade in Services Council

At conclusion of ITU World Telecom Policy Forum, Agreement to establish a Focus Group to establish “indicative target rates” for settlement rates in the transition to cost-orientation

A range of rates, of between 6 – 44 US cents per minute established, for countries with differing teledensity, despite strong opposition from the United States

Two alternative scenarios:Two alternative scenarios:

T < 1 1<T<5 5<T<10 10<T<20 20<T<35 35<T<50 T>50

$0.45 $0.35 $0.29 $0.23 $0.16 $0.12 $0.06

Source: ITU Focus Group Report, FCC.

ITU Focus Group targets, by teledensity ITU Focus Group targets, by teledensity (T), to be achieved by 2001 (2004)(T), to be achieved by 2001 (2004)

FCC Benchmarks, by income groupFCC Benchmarks, by income groupLow income,

T<1Low

incomeLow-midincome

Upper-mid

income

Highincome

$0.23 $0.23 $0.19 $0.19 $0.15

2002 2001 2000 1999 1998

Focus Group Final Report and Focus Group Final Report and FCC Benchmarks comparedFCC Benchmarks compared

FCCBenchmarks

ITU FocusGroup

Coverage ofanalysis

72 countries 224 countries /territories

Range of rates(direct relations)

0.11-0.16 SDR 0.043-0.327SDR

Transit shares Not covered 0.03-0.06 SDR

Groups 4 by income +1 by teledensity

7 by teledensity+ 2 others

Target years Multi-year: 1998, -99, 2000, -01, -02

Year-end 2001(2004)

Dependency onnet settlements

Not covered Extendedtransition

29

Potential impact of Focus Group Targets & Potential impact of Focus Group Targets & FCC Benchmarks on Case Study CountriesFCC Benchmarks on Case Study Countries

Country Lowestsettlement

rate

Targetrate/year

ITU FGchange %

FCC %change

Bahamas 0.225 0.118 (2001) -18.1% -93.9%Colombia 0.375 0.162 (2001) -22.7% -35.1%India 0.592 0.251 (2002) -18.3% -31.5%Lesotho 0.300 0.327 (2001) -5.0% -12.2%Mauritania 0.622 0.327 (2001) -17.9% -26.0%Samoa 0.300 0.312 (2001) -5.0% -28.3%Senegal 0.633 0.312 (2003) -12.6% -48.5%Sri Lanka 0.550 0.251 (2004) -11.8% -29.9%Uganda 0.337 0.327 (2001) -5.0% -14.5%

1

10

100

1'000

10'000

100'000

TAT-7

1983

TAT-8

1988

TAT-9

1991

TAT-10

1992

T-11

1993

T-12/13

1995

Gemini

1998

TAT-14

2000

Co

st p

er v

oic

e p

ath

(U

S$)

1

10

100

1'000

10'000

100'000

1'000'000

100'000'000

Cap

acit

y (v

oic

e p

ath

s)

Cost per voice path (US$), declining by

41% p.a.

The future (1): Will traffic be “too cheap The future (1): Will traffic be “too cheap to meter”? to meter”? TransAtlantic cables, 1983-2000TransAtlantic cables, 1983-2000

Source: ITU, TeleGeography Inc., FCC.Note: Voice-path numbers assume a compression ratio of 5:1 to number of circuits.

10'000'000

Capacity (voice

64% p.a.paths), growing by

The future (2): Will IP render PSTN circuits The future (2): Will IP render PSTN circuits obsolete?obsolete? International circuit usageInternational circuit usage

Note: Based on usage of circuits between the US and the rest of the world. Source: FCC.

0

50

100

150

200

250

1996 1997 1998

Public Switched TelephoneNetwork circuits

Int'l Private Line circuits (Internet)


ITU/WTO Co-operationITU/WTO Co-operationOpinion A of 1998 World Telecom Policy Forum

Recommends applying the WTO Regulatory Reference Principles in ITU Member States Competitive safeguards Interconnection Universal service Licensing Independent regulators Allocation and use of scarce resources

Co-operation agreement between ITU and WTO considered by ITU Plenipotentiary and WTO Trade in Services Council and signed on 22 Nov. 2000

International interconnection:International interconnection:Issues for regulatorsIssues for regulators

Transparency: Should regulators require the publication or disclosure of settlement rates and/or interconnection rates?

Intervention: What circumstances might justify intervention in negotiation of accounting rates or establishment of interconnect rates?

Unilateral action: How should regulators respond to possible unilateral action by foreign regulators in setting benchmark rates?

Mobile international connection: Does the development of 3G services require special attention from regulators?


What does it all add up to?What does it all add up to?Philosophical

Facilitating the transition to a competitive market environment

Birth of a global information society Telecommunications as a traded service

Practical Shift from a revenue-sharing to a cost-oriented regime

for international telecommunications Market liberalisation now the dominant paradigm Efforts to provide a “soft landing” for those countries

likely to be hardest hit by changes

Trade in telecommunications & accounting rate reform Dr Tim Kelly *, Head, Strategy and Policy Unit,...

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