Telecoms Infrastructures: The Famines of the New Millennium?

Jean-Louis TERTIAN <>
Autorité de Régulation des Télécommunications


1. Understanding historical context

1.1. The monopolistic context

1.1.1. The accounting rates regime

The international accounting rates regime can be traced back to the establishment of the International Telecommunications Union (ITU) in 1865 and the need to develop a simple mechanism for compensating international operators (mostly Administrations) for delivering international calls from their point of origin to their destination.

The accounting rates system worked relatively well when international services were jointly provided by monopoly service providers and without significant imbalances between countries. Based more on negotiating abilities than on relation to costs, the artificially high rates imposed high prices on consumers.

1.1.2. Regulatory and technical changes

But regulatory and technical changes in the early 1990's have initiated the bypass of the accounting rates regime.

First, the development of competition allowed operators to provide resale facilities of leased lines, via submarine cables or satellite networks. This traffic is not subject to settlement under the accounting rates regime. In the same way, Internet telephony as well as voice-over Internet Protocol (VoIP) bypass the accounting rates regime and allow providers to undercut operators of conventional networks.

Second, practices like call-back distort the traffic flow. Thus, net settlement payments become a major threat for operators, particularly in the United States. For example, the U.S. net settlement payment increased from 1.1 billion dollars in 1985 to 5.5 billion dollars in 1997. This growing distortion has been an important driver of the demands for change in the regime.

Despite renegotiations of the settlement rates, the growth of telephone traffic has led outpayments to continue to rise. As a result, U.S. international operators have been looking for other ways to reduce accounting rates.

1.2. The FCC policy

Considering the growing burden of net settlement payments on U.S. operators, the Federal Communications Commission (FCC) decided to tackle this issue. The result was the 1997 unilateral decision directing U.S. licensed international operators to agree on Benchmarks settlements rates, determined by the FCC, with their international partners over the next four years.

From the United States, almost 70 percent of the settlement payments go to developing countries. The top four net receivers (Mexico, China, India and the Philippines) accounted for 30 percent of the U.S. deficit in 1995, while Sub-Saharan Africa (50 countries) accounted for only 2.5 percent (according to the FCC).

Such countries are particularly vulnerable to such shifts in the settlements policy. For the most dependent countries, this revenue can account for more than 50% of telecommunications revenues. Moreover, settlement payments are a major source of hard currency.

Even the FCC has stated that it would prefer to achieve a multilateral solution to the accounting rates problem.

1.3. The ITU work

ITU has been working on the issue of international settlement and accounting rates for about 10 years.

The conventional system of telephone accounting rates is defined in ITU-T Recommendation D-150 "Accounting revenue division procedure." As we can see, the international service has been determined as one jointly provided by two terminal administrations so that the revenue from such service should be shared.

The element of cost was first recognized officially in the International telecommunications Regulation (ITR, Melbourne 1988). Argument towards cost-based accounting rates became stronger within ITU-T Study Group 3 from the beginning of the 1990's and resulted in the adoption of Recommendation D140 "Accounting rates principles for international telephone services" in 1992.

The World Telecommunication Policy Forum (WTPF, March 1998) adopted an opinion setting up a Focus Group to make headway in the study of transitional arrangements towards cost orientation for the period 1999-2001. The report of the Focus Group took the form of a draft Annex E to Recommendation D140. This annex included indicative target settlement and transit rates to be attained by end-2001.

But the Recommendations approval procedures require no opposition (reserves can be taken) from Member States. During the final vote for approval in December 1999, the United States opposed the adoption of draft Annex E. Then, the approval was postponed to the World Telecommunication Standardization Assembly (Montreal, October 2000) where a majority will be enough to approve the text.

2. A liberalized environment

As more and more countries liberalize and introduce competition, ITU could have less and less of a role to play in this area. In most liberalized countries, international telephone traffic is becoming a commodity. Like any other commodity which is freely traded in the market, there will not be the same need for international standards.

However, for still some time to come, a majority of international traffic is expected to be settled in the traditional manner along the guidelines set in Recommendation D140. ITU-T Study Group 3 will more and more shift to the study of costing methodologies.

In the meantime, the world moves on. The speed of development in information technology goes faster than calendar years. It is crucial for all international telephone companies in the world to adapt themselves to this shift of paradigm. In the area of telephone accounting rates, this means that all carriers, irrespective of whether they belong to a developed or a developing economy, will feel stronger and stronger pressure to achieve cost-orientated and market-driven levels as quickly as possible.

2.1. Moving towards VoIP

Reform efforts notwithstanding, settlement rates are of declining importance to many carriers because competitive markets offer the option of obtaining access to the "foreign" phone network directly. Where market entry has been liberalized, instead of paying settlement charges, many carriers (particularly new entrants) prefer to acquire a whole circuit to the destination country and pay a domestic interconnection fee. If fees are unbundled, the more facilities a foreign carrier owns, the less it has to pay for the last mile.

Although the vast majority of international voice and fax traffic is still carried over the public switched telephone network (PSTN) and subject to per-minute settlement payments between carriers, the rapid spread of IP-based networks has opened up new methods for transmitting international calls. VoIP carriers are actively seeking new rules to provide a stable service and compensation scheme. The need for new standards is being driven largely by two factors.

First, as with the international PSTN, VoIP carriers typically must rely upon other networks to complete a call. But on the Internet, the number of potential correspondents may number in the thousands. Thus, a common set of ground rules is required for handing-off and metering traffic as well as for distributing revenues. Designing a viable method for sharing revenues presents a special challenge on the Internet, because large Internet service providers (ISPs) currently exchange traffic on a sender-keeps-all or a peering basis, and smaller ISPs generally pay larger ISPs for carrying their traffic by volume. As well, because most Internet phone calls terminate on the PSTN, the terminating ISP may need to pay local access charges to complete a VoIP call. Thus, to provide VoIP carriers with an incentive to carry Internet calls and cover their PSTN termination costs, new Internet-based compensation schemes are needed.

The second driver of VoIP standards is related to the first: Quality of Service (QoS). To compete with the switched network, VoIP carriers must offer comparable service in the long run, which requires cooperation.

One solution to the call termination problem was to create a self-contained, privately managed IP network which looks and acts like the public Internet but is capable of high-quality voice transmission. Traditionally, long distance service providers have defined call rating within the terms of usage and distance. In order for larger volumes of voice traffic to move on to IP networks, a call rating system that takes QoS into account is a prerequisite. Current VoIP settlement systems are still evolving, and as yet, are not profitable due to the cost of porting traffic to the PSTN, where IP termination options do not exist or are unreliable.

2.2. A tremendous growth of traffic

Switched voice still accounts for a majority of the total telecommunications market. In 1998, the much anticipated IP telephony boom did not happen. ISR represented a much more significant departure from the PSTN (5 billion vs. 0.3 billion minutes). Either for switched or IP traffic, the U.S. route stands out as particularly prominent.

In the near future, the IP traffic trend should lead to tremendous levels of growth and a more balanced repartition between PSTN and IP traffic. Indeed, the terrific increase in optical fibre transmission capacity (thanks to Dense Wavelength Division Multiplexing [DWDM]) allows terabit capacities, instead of gigabit ones.

And this offer of cheap bandwidth can increase the customer demand for affordable bandwidth -- beginning a sort of "virtuous circle." The example of the Transatlantic route enlightens that. Every actual project on this route will offer far more capacity than is available now.

But is it possible to extend this example to the rest of the world? Is it possible to hope for affordable bandwidth to everyone?

3. The city-to-city networks

With the development of competition, several global operators (MCI WorldCom, Concert, etc.) own a backbone. But a quick glance at the Internet routes and capacities show the inequity of repartition among countries and continents.

Inter- & intra-regional Internet Bandwidth, 1999, Telegeography
  US & Canada Asia & Oceania Latin America Africa Europe
US & Canada 7,841 Mbps 5,916 Mbps 949 Mbps 170 Mbps 13,258 Mbps
Asia & Oceania 5,916 Mbps 398 Mbps n.a. 3 Mbps 152 Mbps
Latin America 949 Mbps n.a. 48 Mbps n.a. 63 Mbps
Africa 170 Mbps 3 Mbps n.a. 7 Mbps 69 Mbps
Europe 13,258 Mbps 152 Mbps 63 Mbps 69 Mbps 32 Mbps
n.a. = not available

Another example can show us that these city-to-city networks link the most competitive areas. In Latin America and the Caribbean, among the first 50 International Backbone routes, only two are intra-regional. In Europe, 34 among the first 50 are intra-regional.

But in Europe, only the first seven routes are over 2 Gbps, none in Asia/Pacific and in Latin America and the Caribbean, and 50 in the United States. In the United States, there is more domestic capacity than international capacity.

3.1. Unequal access to bandwidth

It appears clearly that the huge capacities are available on the most profitable routes only. On these routes, the price of one Mbit will go down continuously, allowing the provision of quite free telephony.

But outside these routes (some examples could be Iceland, Greece, India, Africa) the old network remains, with its small capacity and its comparatively high price of bandwidth.

We already face the situation of countries with extensive network and huge capacities competing with countries where both teledensity (number of lines per 100 inhabitants) is low (under 1) and bandwidth remains at the old levels, before the arrival of the Internet.

3.2. Developing countries have to build their network first

Developing countries are the first we think about when access questions are asked. The collapse of the accounting rates system puts a lot of pressure on them and decreases the hard currency payment they can hope for. Then, the ability to build their network comes down at the same rate. Because all the necessary equipment require hard currency, they have few perspectives to shift from "vicious" to "virtuous" circle. Moreover, investors are not interested in building network in low-density, low Return On Investment areas.

It is very probable they encounter a growing lateness in their efforts to join the Net economy. As stated by Thabo Mbeki during the 2000 Davos Forum, "only a strong and conscious intervention of the ITU could allow Africa to get back its huge lateness in information technologies." He added: "If some of you think that the market will correct that inequity, I do think it won't."

3.3. Are developed countries under cover?

As terabit networks are flourishing, petabit networks being the next target, the future of developed countries seems cloudless. But can we compare the "4 Gbps London-Paris" with the "100 Mbps Vienna-Zurich" without even talking about smaller cities (villages!)?

Cities directly linked to tera- or gigabit networks will have a decisive advantage over other less lucky cities. And do not be blind: applications, funds, and jobs will follow!

Thus, instead of being a factor of regional development allowing teleworking, remote services, and so on, the trend could be to accelerate the urban concentration process.

We already face a similar situation in Europe with the issue of "the last mile." The technological developments allow several alternatives to get high bandwidth. There is Asymmetric Digital Subscriber Line (ADSL), Wireless Local Loop (WLL), and cable network. Each of these would allow one Mbps, or more. In the case of France, ADSL experimentation was located only in a few cities already having access to the cable network! Thus, very few people have the choice between ADSL and cable; the rest continue to manage their Internet connection with the old copper line. The same process should be repeated with WLL. This illustrates very well that investments go where profits are. The development of competition does not focus on reducing inequities or giving access to rural areas. Such way of development can lead to strong inequities and unfairness.

4. Conclusion

The ability to access the information age and compete in the Net economy will become more and more crucial. This accessibility also appears to be a factor of increasing inequity among developed and developing countries (which is neither fair nor nice but sadly usual), but also, which is more rare, among developed countries, and even cities.

Following that, two issues seem of real importance:

For both questions, ISOC's role is crucial. Either by getting involved in a joint group with ITU or by addressing the inequity's issue, ISOC has the responsibility to give "its best effort" to help develop the "Internet is for everyone" statement.