RESTRICTED
WORLD TRADE S/NGBT/W/4/Add.1
21April 1995
ORGANIZATION(95-0976)
Original: English Negotiating Group onBasic Telecommunications
COMMUNICATION FROM AUSTRALIA
Telecommunications: Termination Services
Addendum
Theattached document, tobereadinconjunction withS/NGBT/W/4, iscirculated attherequest
ofAustralia toMembers oftheNegotiating Group onBasic Telecommunications.S/NGBT/W/4/Add.1
Page2
TERMINATION SERVICES
TheGATS andTraded Telecommunications Services
1. TheGeneral Agreement onTrade inServices (GATS) andtheAnnex onTelecommunications
provideagreedtradedisciplineswhichshouldbecapableofapplicationtoanytradedtelecommunications
service sector.
2. These disciplines include MFN (Article II),transparency (Article III),domestic regulation
(Article VI),monopolies (Article VIII), business practices (Article IX),market access (Article XVI)
andnational treatment (Article XVII). Theapplication ofsuchdisciplines totraded services inthe
basic telecommunications sector would yield significant economic welfare gains.
3. Itisimportant thatthecoverage ofsuchdisciplines iscomprehensive andthatthedefinition
oftraded services captures therealities ofthemodern market place.
4. Inthepast,tradeinthebasictelecommunications sector hasbeenmasked because untilrecently
mostcountries regarded basic telecommunications asaservice provided bystate-owned monopolies.
Theinternational telecommunications framework thatevolved wasintended tofacilitate co-operation
between these monopolies (usually state-owned) sothatservices could bedelivered. Thisframework
didnotanticipate, norallow for,thecompetition thathasdeveloped withwidespread liberalization.
Theframework resulted inrelatively highcharges forservices andrestricted demand.
5. Australia isconcerned toensure thatthetraded elements ofthebasic telecommunications are
recognized assuchandthatthese elements aresubject toagreed trade disciplines. Thisisinlinewith
ITUrecognition thattheexchange ofbasic telecommunications between carries istrade (Section 2.5
oftheWorld Telecommunications Development Report 1995).
Trade inTermination Services
6. Australia hasassessed thatoneofthemajor traded services inbasic telecommunications is
theservice provided todeliver (terminate) aninternational call. Estimates oftheannual turnover in
trade ofsuchtermination services ranged between US$35 billion andUS$42 billion in1993.
7. Asalready described inS/NGBT/W/4, termination services aretheservices which network
operators provide each other when they allow access totheir networks through international
interconnection.Theyaretheonlytradedelementinthecrossborderprovisionofinternationaltelephone
services.
8. Termination services donotcover thecommerce between thecustomer andtheoperator in
thecountry oforigin ordestination country ofaninternational call. Rather, termination services are
about operator-to-operator trade.
9. Forexample, acallwhich originates inCountry Aistransported fromtheoriginating network
tothedestination network inCountry B.Aninterconnection point (gateway switch) transfers thecall
totheterminating network inCountry B.Thisnetwork thendelivers (terminates) thecalltoitsfinal
destination.S/NGBT/W/4/Add.1
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Figure 1.Termination Services
COUNTRY A COUNTRY B
Termination Service
Callorigin G/way switch G/way switch Calldestination
Direction ofinternational call
10. From thisdescription, itisclear thattheoperator originating thecallinCountry A(and/or
theoperator providing gateway togateway transport inaliberalized environment) istheconsumer of
theservice provided bytheoperator inCountry Bincompleting (terminating) thecall(1).Theoperator
inCountry A(and/or theoperator providing gateway togateway transport) could beexpected tohave
some contractual arrangement withtheoperator inCountry Btoensure thattheseservices areprovided
efficiently andforanagreed charge.
11. Aninternational system hasbeenputinplace tofacilitate termination services. Bilateral
agreements havebeenreached between operators inaccordance withArticle 1,paragraph 1.5,ofthe
International Telecommunications Regulations andother recommendations oftheInternational
Telecommunications Union (ITU).
12. These agreements setanotional charge (accounting rate)foreachminute ofbilateral traffic.
Total minutes oftermination services provided bytheoperator ofonecountry areoffset against the
totalminutes provided bytheother. Thesettlement rate(i.e.halfoftheaccounting rate)isthenapplied
totheimbalance ofminutes andpaidperiodically.
13. These agreements provide amechanism fortheservice user(i.e.operator) inCountry Ato
purchase thetermination services oftheoperator inCountry Bandtopayforthese purchases ina
simplified manner. They traditionally havebeenareflection ofthemarket power ofstate-owned
monopolies. Theelement oftrade inservices (i.e.thetermination service) hasbeenobscured by
accounting settlement ratestructures.
14. Withthemove awayfromthemonopoly situation inmany countries andincreased competition,
trade intermination services ismore clearly identifiable. Using theexample above, theoperator in
Country Amaynowbeabletochoose between anumber ofoperators inCountry Btoterminate the
call. (2)Thischoice should bebased onnormal trading considerations including transparency, MFN
andNational Treatment.S/NGBT/W/4/Add.1
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Tariff effect oftermination services agreements
15. Thetrade impact ofcurrent arrangements fortermination services, especially charges for
termination services byoperators, maybelikened totheimpact ofatariff ongoods. Thedifference
between charges derived fromaccounting ratesandthebasecharges fordomestic termination ofcalls
isthetariff equivalent fortermination service charges.
16. Forexample, infuture 1above, Country Bisthedestination country. Itseems reasonable
toassume thatthecostofterminating acallfrom thegateway switch inCountry Bisthesame for
domestic subscribers inCountry Bandtheoperators ofcountries originating thecall(e.g.Country A).
17. There areanumber ofpossible ways toarrive atameasure oftheaverage domestic costfor
terminating acallfromthegateway switch. Onemaybeaweighted average ofalldomestic andlocal
longdistance callcharges. Such ameasure would actually exaggerate costbecause itwould include
billing andmarketing costs. Another (andevenhigher) measure would bethecharge todomestic
subscribers ofthelongest long-distance calls.
18. Ifwecompare ourmeasurement ofthecostofterminating acallfromthegateway switch with
thecharge toforeign operators through accounting rateswecould arrive atatariff equivalent ofthe
effect ofaccounting rates.
19. Infigure 2below, Crepresents ameasurement ofaverage costofterminating acalltoadomestic
subscriber fromthegateway inCountry B.C1represents thecharge (asderived fromaccounting rates)
totheinternational operator incountry Aforthetermination ofacallinCountry B.Thetariffequivalent
oftheaccounting rateisrepresented byT.
20. Because agreements between operators aremade atabilateral level, these tariff equivalents
tendtobeMFN-inconsistent. Theoperator inCountry Bisabletocharge different ratestooperators
indifferent countries. Forexample, infigure 2,C2shows thecharge imposed bytheoperator in
Country Bonanoperator inCountry Candthecorresponding difference isT2orthetariffequivalent.
Figure 2:Accounting ratesandtariff equivalents
$ $
C1
T C2
T2
C C
21. Justasthetariffication andeventual reduction ofbarriers totrade inother sectors areknown
toresult ineconomic gains, wewould expect thatanydisciplines imposed ontariff equivalents in
termination services could beexpected similarly toresult ineconomic gains.S/NGBT/W/4/Add.1
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Trade distorting features ofcurrent system
22. Thecurrentinternationalsystemforfacilitatingterminationserviceshassignificanttradedistorting
effects. TheAustralian approach totermination services seeks tobring themunder GATS disciplines
tominimise these distortions.
23. Thepresent accounting andsettlement ratesystems forpayment oftermination services results
in:
- arbitrary setting ofcharges wellabove costs; and
- bilateral arrangements which areMFN-inconsistent.
24. Thecurrent system, where GATS disciplines arenotapplied, allows monopoly anddominant
operators totaketheirmonopoly rentandexercise price discrimination across markets.
25. Theaccounting ratesystem locks operators intoprice distorting behaviour. Forexample, if
anoperator were toreduce itscharges tosubscribers onaunilateral basis itwould facethepenalty
ofincreased out-payments toforeign operators. Thisisbecause thedemand stimulated bytheprice
cutswould leadtomore minutes oftermination services inthecountry ofdestination thereby increasing
theimbalance ofminutes onwhich theoperator would beforced topaythehighsettlement ratesof
foreign operators.
26. Thenon-MFN nature ofaccounting ratesetting accentuates these distortions. Anoperator
inonecountry isabletosetdifferent accounting ratesfortheoperators indifferent countries, even
though thecostofproviding thetermination service could beexpected tobethesame.
27. Increased competition alone, without theapplication ofGATS disciplines totheexisting
framework, willnotforcereform oftheaccounting ratesystem. Operators losing traffic tovalue-added
services suchascall-back, which bypass theagreements between operators andtheaccounting rate
system, haveanincentive toincrease accounting ratestoeliminate thearbitrage opportunity between
charges forinwards andoutwards call. Current callbackandrefile regimes arenon-transparent and
mayleadtoadded distortions.
Applying provisions oftheGATS toTermination Services
28. Having described thenature oftermination services, theagreements which support them and
theirtrade-distorting effects, itiseasier toseetherelevance ofapplying GATS disciplines tothistraded
service.
29. Itispossible torelate theGeneral Provisions oftheGATS todifferent aspects ofthetrade
intermination services. Ifweadopt anArticle byArticle approach, weseethatthedefinition of
measures bymembers affecting trade inservices assetoutinArticle I.3(a) would seem tocapture
theagreements between operators thatregulate trade intermination services evenwhen these are
negotiated bycommercial parties. Thisisbecause most operators areeither State-owned operators
(i.e."central governments" or"authorities" asperI.3(a)(i) under International Telecommunications
Uniontreatiesorprivatelyownedoperatorsexercising"powersdelegatedbygovernmentsorauthorities"
(asperArticle I.3(a)(ii)).
30. Agreements between operators ontermination services areunlikely tobeconsistent withthe
MFN provisions ofArticle II.Thisisbecause ofthedifferential pricing system entrenched insuch
agreements. Australia suggests thatcountries thatwishtomaintain suchagreements would needtoS/NGBT/W/4/Add.1
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seek MFN exemptions after 30April 1996 when thesuspension ofArticle IIforthebasic
telecommunications sector ends.
31. Transparency andthefreeflowofinformation isimportant forcommercial decision making
andtheliberalization oftrade. Article IIIexplicitly callsformembers topublish "allrelevant measures
ofgeneral applications, which pertain tooraffect theoperation ofthisAgreement. International
agreements pertaining tooraffecting trade inservices towhich amember isasignatory shallalsobe
published".
32. Agreements between operators ontermination services (whether commercial ornot)areboth
"measures" and"international agreements" within themeaning ofArticle I.3(a). Assuchtheyshould
besubject tothetransparency provisions ofArticle III,except where thedisclosure ofconfidential
information would becontrary tothepublic interest orwould prejudice legitimate commercial interests
(Article IIIbis).Itisdifficult tothinkofgrounds onwhich theselegitimate commercial interests would
beprejudiced.
33. Inviewofthemonopoly status ofmany operators ofbasic telecommunications services, and
thejointagreementsreachedbetweensuchoperatorsontheprovisionofterminationservices,ArticleVIII
onmonopolies andexclusive service suppliers isapplicable, particularly paragraph 1(which appears
todirect members toensure thatmonopoly operators provide termination services onanMFN basis).
Intheevent thataMember believes thatthemonopoly supplier ofaservice ofanyother Member is
acting inamanner inconsistent withprovisions ofArticle VIII.1 and2itishastherightofrecourse
totheCouncil forTrade inServices. TheCouncil maythenrequest theMember establishing,
maintaining orauthorizing suchasupplier toprovide specific information concerning therelevant
operations. Inthecaseoftermination services thiscould include specific information onagreements
between operators.
34. Current agreements ontrade intermination services clearly restrict trade inservices because
ofthelargedifference between costandcharges andtheconsequent impact ofthisondemand. Where
business practices (notfalling within Article VIII), suchasthose enshrined intermination services
agreements, restrain competition andtrade inservices, Article IXprovides forconsultations between
members withaviewtoeliminating those practices.
Specific commitments
35. Itisclearly possible tolistspecific commitments fortrade intermination services assetout
inS/NGBT/W/4. Themodel schedule inthatpaper contained comprehensive examples oflimitations
onmarket access, limitations onnational treatment andadditional commitments across modes ofsupply
1,3and4fortermination services.
36. Forexample, under limitations onmarket access forcross-border supply, participants could
schedule anylimitations ontheplaces ofentry toorexitfromthemarket suchasthegateway switch
ornational extension. Similarly, limitations could bescheduled onthenumber offoreign service
providers national service providers caneither sellorbuytermination services toorfrom.
37. Under national treatment forcross-border supply participants could schedule preferences given
todomestic suppliers suchaspricing orconditions ofinterconnection withoraccess tonetworks of
national service providers including licensing andregulatory approval.
38. TheSecretariat 'sinformal noteof14February onModes ofSupply andMarket Access
Limitations alsogavesome examples ofhowtermination services could bescheduled.S/NGBT/W/4/Add.1
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Developing countries
39. Many countries, particularly developing countries, wishtoraisedevelopment revenue from
internationaltelephoneservices,includingthetradedelementofterminationservices.Somegovernments
establish monopoly orexclusive international telecommunications service providers sothattheycan
raiserevenue bysetting charges atalevel higher thanthecostofproviding theservice efficiently.
However, under theaccounting ratesystem, suchdevelopment revenue collection canbeapplied on
adiscriminatory basis, depending onthemarket power ofother operators. Thisresults intrade
distortions.
40. Under anon-discriminatory, transparent andeventually cost-based termination service system,
governments indeveloping countries could replace revenues raised byoperators frommonopoly pricing
withnon-discriminatory andtransparent taxes oninternational traffic. Thiswould contribute tothe
elimination ofdistortions which create arbitrage opportunities forcall-back operators, thatreduce the
utilization ofdeveloping countries telecommunications transport network systems. Over timeand
consistent withthespecial anddifferential needs ofdeveloping countries asrecognized inGATS
Article IV,these taxes could bedisciplined toimprove competitive markets.
Australian approach
41. Thecurrent arrangements fortermination services constitute aserious barrier totrade. The
effect ofthese arrangements istocutdemand byasmuch asone-half according tosome research.
Australia 'sproposals ontermination services could haveavaluable trade-liberalizing effect onbasic
telecommunications. Attheveryleast, thetrade-distorting effect oftermination services would be
made transparent through theapplication ofgeneral GATS provisions inconcert withscheduled
commitments.
42. Thegeneralprovisionswhichneedtobeaddressedasamatterofpriorityforterminationservices
areMFN (Article II)andtransparency (Article III).Operators inthecountry oforigin ofaninternational
telephone callneedtohavereasonable information onthemeans, conditions andcostofgaining access
tothedestinationnetwork.Operatorsalsoneedtoknowwhethertheyareatanycompetitivedisadvantage
vis-a-vis another operator.
43. Operators should berequired topublicise termination rates. Thiswould enable competitive
forces tooperate more effectively tobring down thecharges tooperators fortermination services.
Itcould beexpected thatthiswould, overtime, haveaflow-on effect forsubscribers initiating an
international telephone call. Publication ofterminations services ratesstrictly speaking neednotbe
arequirement inallcases (e.g.agreements between operators ofmembers where thereisgenuine open
competition), butwould behighly desirable inorder toassess whether GATS provisions arebeing
observed.
44. Theschedulingofspecificcommitmentswouldimposeanaddeddisciplineontradeintermination
services. Over timethetariff equivalent inherent inaccounting ratescould besubject totariffication
andreduced.
45. Theliberalization oftrade intermination services isanintegral partoftheNGBT 'smandate
toachieve"theprogressiveliberalizationoftradeintelecommunicationstransportnetworksandservices".S/NGBT/W/4/Add.1
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Footnotes
(1) Thisignores other arrangements suchasrefile andtransit.
(2) However, evenincountries where competition isallowed, thereareusually measures torestrict
choice, e.g.theparallel accounting rateandproportional return requirement.