International Accounting Rate Reform: The Role of International Organizations and Implications for Developing Countries

By Collins, Katherine | Law and Policy in International Business, Spring 2000 | Go to article overview

International Accounting Rate Reform: The Role of International Organizations and Implications for Developing Countries


Collins, Katherine, Law and Policy in International Business


I. INTRODUCTION

Historically, telecommunications services have been predominantly government-owned or monopoly-controlled. During the past decade, countries have liberalized the telecommunications industry by opening their markets to competition and foreign access. Seventy-two countries,(1) representing over ninety-one percent of global telecommunications revenues,(2) have signed the World Trade Organization (WTO) Basic Telecom Service Agreement Annex on Telecommunications (WTO Telecom Agreement), which went into effect in 1997.(3) The WTO Telecom Agreement aims to open market access and foster competition in global telecommunications.

Because telecommunications has traditionally been a monopoly-controlled industry, liberalization requires adjustments to the existing market structure. One such modification is a reform of the current accounting rate system. Members of both the WTO and the International Telecommunication Union (ITU) advocate remodeling the current accounting rate system with the goal of progressing to cost-oriented accounting rates.(4) The transition to competition, however, has potential implications for developing countries that lack the financing or network infrastructure to compete globally. Currently, the accounting rate system provides significant subsidies for development in many countries. In light of the potential effects on the funding and development of telecommunications services in less-developed nations, the issue of accounting rate reform has generated significant controversy, hindering efforts by the WTO and the ITU to effectively implement a new system.

This Note will first provide a brief explanation of the accounting rate system and current reform proposals. The next Part will follow with an explanation of the role of the ITU, both historically and in light of the recent WTO agreement. Part III will discuss the WTO agreement on telecommunications services and the potential impact on developing countries. Finally, Part IV will consider the consequences of international accounting rate reform on developing countries and explore the possible impact of a new competition-based marketplace on infrastructure development and universal service funding.(5)

II. INTERNATIONAL ACCOUNTING RATES

A. Defining Accounting Rates

On a basic level, an international telephone call originates and terminates in different countries, requiring that the call travel over the networks of more than one telecommunications service provider or carrier. The originating carrier charges the customer placing the call a collection charge, usually set in local currency.(6) To complete the call, the originating carrier must "land its traffic" in the foreign country, and that terminating carrier will require compensation for the use of its network.(7) The cost to the originating carrier to complete the call on the terminating carrier's network is termed the "accounting rate."(8)

If the flow of traffic--the number of minutes of calling time--between the originating carrier and the terminating carrier is perfectly balanced, the accounting rate may be divided fifty-fifty between the carriers. However, the volume of traffic among countries is not often balanced.(9) Therefore, the carrier generating surplus traffic must pay a "settlement rate" fee to the other carrier to compensate it for the disproportionate use of its network.(10) It is through this system of payments, the accounting rate system, that carriers compensate one another for the cost of terminating international calls on their network.

B. Establishing Accounting Rates

Accounting rates have traditionally been established through bilateral, private business negotiations between carriers and are often not based on cost.(11) In some cases, the accounting rate is 400% higher than the cost of providing service.(12) In general, both the WTO and the ITU support market liberalization and a transition to a cost-based accounting rate structure. …

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