History of International Settlement Rates

Jan 12 - 18, 2004

Telecommunications in its ideal sense is a business of transportation of voice traffic within and outside the boundaries of particular country, which has traditionally been done on joint service provision and revenue sharing basis, an international framework associated with historical International Telecommunication Regulations (ITRs) of ITU. The roots of the international accounting rate regime can be traced back to the origins of the International Telecommunication Union (ITU) in 1865 and the need to develop mechanisms for compensation for operators transmitting international calls. Since the 1930s, this regime has been working via bilateral contracts (or informal working arrangements) between operators. These contracts typically specify the Accounting Rate (i.e., a notional price per minute to carry traffic from country A to country B or vice-versa); the Settlement Rate (the price per minute that the operator originating the call is supposed to pay to the operator terminating the call usually half the accounting rate); and the currency unit in which these rates are specified. At the end of each accounting period (quarterly), the operator of the country which generated more traffic would settle by paying the difference between the minutes of outgoing and incoming traffic flows between A and B multiplied by the settlement rate, as adopted in the Final Acts of the World Administrative Telegraph and Telephone Conference (WATTC-88) in 1988 in Melbourne, Australia.


The above joint service provision regime worked wonderfully well in an era in which international services were jointly provided by monopoly PTTs and there were no significant traffic imbalances between countries. The system was easy to administer, in spite of thousands of bilateral correspondent relations, with its basic principles being codified under the ITU.

In reality this traditional joint service regime no longer reflects market conditions in the international telecommunications sector. Therefore, the stability of the Accounting Settlement System, however, began to erode with increasing service competition in some of the largest telecommunications markets in the 1980s (particularly, the US and the United Kingdom), the growing wedge between prices and costs of telecommunications services, alternative calling procedures driven by new technologies (including country-direct services and call-back) and the emergence of new modes of operation (including international simple resale and Internet telephony) outside the accounting rates regime. The emerging paradigm is now based on cross-border interconnection and the trading of international traffic minutes, ushered in by implementation of WTO's agreement on basic telecommunications.

As, the new technology and the liberalization of telecommunications markets (under WTO) are putting increasing stress on the accounting rates regime the system used by telecommunications carriers to settle their international traffic accounts. While operators in most countries acknowledge that the current system is unsustainable, many developing countries have resisted the pressures for radical change, arguing that it will cause an unbearably large drop in their operators' profitability. Many depend heavily on international revenues to subsidize network development and public services. Several of the most vulnerable countries derive up to 50 percent of their telecommunications revenues from international settlements.

And for about thirty countries changes to the settlement regime will have a significant effect on current account and fiscal balances. In several of these countries the telecommunications sector is characterized by distorted pricing structures, ineffective policies, and a monopoly service provider. Developing countries' ability to resist changes in the system will be limited, however, because the economic incentives and technological opportunities for bypassing the system are strong. As a result, and in response to accounting rate reforms already being discussed, developing countries have about a four-year window to develop new mechanisms for financing network expansion (with increased reliance on sources of funding external to the telecommunications company), adopt more transparent practices for supporting universal service (local access, traditionally subsidized by international revenues, will have to be provided at prices closer to true costs), and build modern regulatory structures capable of addressing interconnection issues in a cost-based manner. The critical issues for these economies: how to prepare for the new era in international telecommunications relationships, and how to finance the transition. This article briefly reviews the growing pressures on the current arrangements, analyzes the countries most affected, discusses the future of international telephony pricing, and outlines new sources of assistance to help developing countries make the transition.


What role international organizations, particularly the ITU, will play with respect to the international accounting rates regime is an important issue. Many organizations, including the FCC, have stated that they would prefer to achieve a multilateral solution to the accounting rates problem. Whether this is possible, given the growing ease of bypassing the system, is an open question. The role of national regulatory bodies, many of which are only now being established, also needs to be determined. National regulators will need to understand and predict the direction of change so that they can continue to meet their obligations to the public. And once new systems emerge, international operators and national regulators alike will have to face the challenge of operating under a regime of multiple settlement arrangements. Where there are multiple international operators on both sides, several different settlement schemes could be in effect at the same time. Competition among these operators will ensure that the least costly and most innovative system will win out. Proposals to reform the international accounting rates system have generally fallen into two broad categories:

Instituting reform within the current accounting rates system.
Replacing the accounting rates system.

A review of these options indicates the direction in which international settlement arrangements are likely to evolve. Within the current system the simplest and most obvious reforms are to reduce the accounting rates; to change the split of the accounting rate from 50/50 to one that reflects the difference in the cost of delivering a call between the two ends of the relationship; and to abandon the requirement by some national regulators that all international operators in the country have the same accounting rate with corresponding international operators in another country, or receive the same proportion of return traffic as they send out. The ITU is proposing cost-based reforms within the current system. Among proposals for settling international payments outside the accounting rates system, one of the most popular is the concept of transparent, cost-based, non-discriminatory call termination charges. Under this scheme an operator would fix the charge for terminating an incoming international call received at its international gateway at the subscriber's premises. Since this charge would be applied on a non-discriminatory basis, it would be the same for all international operators. It would be transparent because it would be published. The size of this charge remains to be resolved. It might be set arbitrarily by the international operator, or it could be based on cost studies. If set by the operator, chances are that the charge would be well above cost where there is still a monopoly. If the charge is based on the cost of providing the termination service, it would have to be established according to some mutually agreed costing methodology. The ITU, which is adopting the termination charge method along with two other new methods, is also trying to establish agreed cost models and methodologies. This task will not be easy. Most countries have different accounting practices and define costs differently. Another possible method is an interconnection arrangement like the one the European Union is implementing to create a single market. Under an interconnection arrangement a foreign international operator is free to interconnect with a national operator's domestic network at virtually any point in that network. The foreign operator pays for the cost of the facilities used from the point of interconnection to terminate the call. It can establish a gateway or point of presence in the country of destination or simply deliver the traffic through leased circuits to the point of interconnection with the destination operator. The charge for interconnection could, of course, be subject to abuse, especially where the destination operator is a monopoly. A variant of interconnection arrangements is end-to-end service provision. As liberalization proceeds, it increases the possibilities for an operator to be present at both ends of a relationship. An operator could conceivably provide the service from originating to destination subscriber using only its own facilities, and there would no longer be a need for special accounting and settlement arrangements between operators. Global alliances of operators such as Worldcom, GlobalOne, and Unisource are already providing end-to-end services, mainly to corporate customers outside the conventional system.

The sender-keeps-all system, in which the originating operator keeps all the revenue it collects and exchanges no traffic information or accounts with the destination operator, will continue to be used as an alternative to the accounting rates system. It is simple to implement and involves virtually no transaction costs. But the system is often criticized because it produces no financial flows to compensate for the cost of building and maintaining the network at the terminating end and thus does not promote network development at the periphery. Sender-keeps-all is the system most commonly used between Internet service providers.


The accounting rates system worked relatively well when international services were jointly provided by the traditional monopoly service providers and there were no significant traffic imbalances between countries. Even with thousands of bilateral relationships, the system was straightforward and inexpensive to administer, and its basic principles were codified in an agreed framework developed within the International Telecommunication Union (ITU). But simplicity came at a price. The International Settlement Process defines the payment procedures, establishes the terms of payment, and sets the rate of compensation owed by the international carrier billing a call to the international carrier terminating it. The International Telecommunication Union (ITU) recognizes three procedures, categorized and elaborated in table.

1) flat-rate price in which there is a fixed price per circuit;
2) traffic-unit price in which the terminating administration sets and receives a charge per traffic unit; and
3) the accounting revenue division process.


ITU Reform Procedure


1) Termination Charge Procedure

Allows governments or operators to establish a single charge procedure for terminating traffic in their country with in multilateral framework

2) The Settlement Rate Procedure

Allows operators to negotiate cost-oriented and asymmetric settlement rates suited to new market conditions

3) Bilaterally Negotiated Commercial Agreements

Allows any bilaterally negotiated commercial agreement between international carriers

Source: ITU 2001

The rates not only were disconnected from costs depending more on the partners' negotiating abilities but also imposed artificially high prices on consumers. Today regulatory and technological changes have created many more possibilities for bypassing the conventional accounting rates regime. In the 1990s, for example, as an initial step toward competition in international telecommunications, regulators in some countries permitted the resale of international services over capacity leased from facilities-based operators, such as international operators of submarine cable systems and satellite networks. This rapidly growing traffic is not subject to settlement under the accounting rates system, as the new entrant pays only a monthly or annual fee for the facilities leased at both ends of a relationship.


Technological progress is opening new ways for operators to deliver traffic, undermining the accounting rates regime and increasing the competitive pressure for traditional telephone services. Internet telephony, for example, bypasses the accounting rates regime and allows providers to undercut operators of conventional networks. Voice-over-Internet-Protocol (VoIP) traffic surged 80 percent in 2002 to 18.7 billion minutes, accounting for almost 11 percent of international traffic. The growth in VoIP traffic and its substitution for switched calls has contributed considerably to anemic switched traffic growth. Including traffic transmitted via Voice-over-Internet Protocol, aggregate international minutes growth reached approximately 11.3 percent, slightly higher than in 2001 as illustrated in Figure as of total international million minutes called.

Despite its recent growth, VoIP is still primarily used to bypass high settlement rates in developing countries. However, industry acceptance of VoIP is increasing. Incumbent carriers in a growing number of developing countries now accept and terminate incoming VoIP traffic. There are certain strategic advantages of VoIP which lure international and national carriers world over to adopt this plateform to gain economic benefits over traditional telecommunication networks which are categorist in table.


Advantages of IP for Voice


1) Greater Efficiency

The fundamental advantage of IP is that it is packet-switched making it to carry voice, video and date on a network, and best utilizes the medium capacity. Whereas, traditional PSTN systems are circuit-switched where a circuit is fully occupied during a voice call between customer and the companies switch.

2) Lower Cost

IP systems will offer a more economical means for providing communication connections as Internet technology makes available to anyone with a personal computer and modem the ability to bypass the long distance PSTN, challenging the costlier Accounting Settlement Rate Regime.

3) Higher Reliability

Though controversial as IP only provides "Best Effort" rather "Ensured" Quality of Service, at times it is possibleto provide higher reliability using IP networks than the circuit-switched network because IP networks automatically re-route packets around problems such as malfunctioning routers or damaged lines. Also, IP networks do not rely on a separate signaling network, which is vulnerable to outages.

4) Supporting Innovation

IP, being a nonproprietary standard and open architecture, allows entrepreneurial firms to develop new hardware and software that can seamlessly fit into the network. In contrast, the circuit switched network operates as a closed system, thus making it more difficult for innovative developers to build and implement new applications.

Source: Global Internet Policy Initiative

Those telecom carriers using IP for their internal networks can reap these benefits, however, the Internet Protocol was not designed for voice; instead, it is based on a "best efforts" principle, which means that some packets are "lost" and have to be resent, introducing time delays that are inconvenient at best for voice communications. Keeping in view of the reforming accounting settlement rate regime, and emerging post-monopoly competitive markets carriers face tough times to ensure profitability as VoIP puts additional dent to the revenue streams of incumbent operators by benefiting grey markets of telecommunication services. Regulators, policy makers and carriers pose some serious apprehensions over VoIP network deployments creating a serious debate, which are:

Internet telephony bypasses the public switched telephone network and thus reduces the revenue of incumbents, especially long distance and international carriers.

Internet telephony upsets the long distance and international settlement payment mechanism.

Providers of Internet telephony, if not classified as telecommunications service providers, may be exempt from the charges that are used to support universal service.

Quality of service (QOS) standards cannot be guaranteed by IP today's technology.

Internet telephony exacerbates the "digital divide."

The world is divided over whether to allow or to block VoIP incoming and outgoing traffic, such as the case in Pakistan where PTCL has blocked the VoIP traffic over its network, whereas, the regulatory PTA has taken a stance that VoIP should remain non-regulated, alike FCC. Even, ITU World Telecommunications Policy Forum 2001 (WTPF) has supported pro-competitive goals and wide use of IP technology to enhance consumer choice and affordability world over, improving standard of living being a key WTO objective.

Global Mobile Personal Communications by Satellite (GMPCS)

The emergence of new global mobile personal communications by satellite (GMPCS) such as Globalstar, ICO, Iridium, and IntelSat add to the stress on the accounting rates regime. One similar GMPCS services are offered by Thuraya Satellite Telecommunications Company available to mobile and satellite subscribers even in Pakistan, creating new possibilities for customers but making complex situation for issues like accounting rate settlements as the difference between international and national telecommunication mobile access is further blurred.


Thuraya Satellite Telecommunications Company

Thuraya's US$1 billion regional mobile telecommunications via satellite (GMPCS) geo-synchronous system helps meet the need for affordable, high-quality mobile phone services to urban hubs as well as remote communities. Through partnership with leading national telecom and mobile communications companies.

Thuraya provides blanket-to-blanket coverage to more than 100 countries in Europe, the Middle East, North and Central Africa Central and South Asia: a landmass inhabited by an estimated 2.3 billion people. Thuraya's services extend beyond boundaries of terrestrial networks and reach remote areas not accessible by conventional modes of mobile telecommunications. Like in Pakistan the subscribers of Ufone or Mobilink mobile services can access Thuraya satellite network services while using GSM mobile services as usual

Thuraya was founded in the UAE in 1997 by a consortium of leading national telecommunications operators and international investment houses. The turnkey project was built by US satellite manufacturer Boeing Satellite Systems formerly Hughes. The Thuraya-1 satellite was successfully launched on board a Sea Launch Zenit-3SL rocket from the equator in the middle of the Pacific Ocean on 21st October 2000. The launch was a record success, as it was the first satellite initiated from the Middle East and also the satellite was the heaviest to be launched ever. Thuraya's second satellite Thuraya 2 was launched on the 10th of June 2003 while a third satellite is being built by Boeing Satellite Systems to expand system capacity. The Thuraya 2 satellite was deployed into geosynchronous transfer orbit by Sea Launch, which was also the launching vehicle for Thuraya's first satellite. Designed for a 12-15 year lifespan, the Thuraya 2 satellite is positioned in Geosynchronous Orbit, 35,786 km (22,236 miles) above the Earth, at 44 degrees East Longitude and inclined at 6.3 degrees.

GMPCS business plans typically assume that gateway earth stations will be able to interconnect with the public switched telephone network at rates substantially lower than those used in conventional relationships involving developing countries. So these new entrants can be expected to add their voices to those pushing for a reform of the regime or for substantial cuts in the accounting rates.

Several other practices also distort traffic flows, although they do not bypass the accounting rates system. The most common of these is the use of calling or "home direct" cards and callback. This practice turns calls around, increasing the net flow of traffic in the direction opposite to normal and thus skewing traffic settlements in favor of the country where the call was originated-often at the expense of countries with more competitive and efficient services. The growing distortion in traffic flows and in settlement payments caused by calling cards and callback has been an important driver of the demands for change in the regime.


With increasing demand for global bandwidth there are a number of under-the-sea fibre optic cable initiatives among FLAG (Fiber around the Globe) and Global Crossing as illustrated in figures (A) & (B).

FLAG owns and manages a unique fiber-optic and IP-based network providing connectivity between Europe, the Middle East, Asia Pacific and the US and provides highly-reliable and flexible bandwidth, co-location, IP and Ethernet services to carriers, ISPs and content providers being a leading network and transport service provider company offering carrier services to more than 100 international carriers as customer with 95% coverage to global top 20 telecom carriers including British Telecom (BT) of UK, Etisalat of UAE, Telia of Sweden, MCI and Sprint of USA etc. FLAG global IP network has 14 PoPs (point-of-presence) in 4 continents i.e. North America, Europe, Asia and parts of Africa. FLAG currently facilitates 11 world's top IP Exchanges, with numerous landing-points including Karachi, Pakistan.

Proving coverage to 5 continents, i.e. North and South America, Africa, Europe and Asia, Global Crossing's fiber optic network is unmatched in reach and breadth with over 100,000 route miles join more than 200 cities around the globe with fully meshed IP network.


With entry into force of the WTO basic telecommunication agreement (BTA) in 1998, 80 countries made specific commitments in the field of basic telecommunications services to open markets for supply of telecom services for competition with varied levels of liberalization for market access. But the key difference in application of ITU Accounting Rate Settlement Mechanism (1988) and WTO BTA (1998) was the commitment for liberalization from monopoly to competition leading to a settlement to termination based regime, respectively. Accounting Rate Settlements are understandings between government-owned-monopoly incumbent fixed-line operators. With the domestic and international market opens up under WTO liberalization commitments for competition, horizontal and vertical telecommunication market segments appear, replacing the old monopoly incumbent.

During the Uruguay Round of negotiations of WTO Accounting Rates issues were consciously excluded from WTO agreement right up to the conclusion of the agreement on basic telecommunications on 15 February 1997 i.e., the Fourth Protocol, under MFN exemptions that no dispute over accounting rates will be brought to WTO for formal resolution until at least by the year 2000. By late 2001, a total of 86 WTO governments (22 industrialized countries and 66 emerging economies) had tabled commitments, including China and Taiwan. Before Doha Round, some 10 governments proposed a new round of telecommunications negotiations held on full range of telecommunication services including both "basic" and "enhanced" services. In Doha Round, improvements were sought related to liberalization of value-added services, fixed and mobile satellite services, whereas further negotiations failed to take place at Cancun Ministerial Meeting in September 2003 due to a imbroglio which emerged between trade negotiations between developed and the developing countries on various issues such as subsidies, competition and labour policy.

As most of the countries see liberalization of telecommunication commitments as a part of consolidated national trade agenda, trade diplomacy is practiced to liberalize various sectors of the economy under national trade strategy to ensure reciprocity of mutual and multilateral gains. Therefore, most of the countries have linked their liberalization commitments of goods and services together, to seek comparative trade gains and to seek market access in foreign markets for their goods and services. But this is one side of the picture, as most of the countries realize the importance of telecommunications as a key enabler of economic growth and industrial competitiveness, and prioritize development in telecommunications infrastructure accordantly with aggressive Information Technology (IT) and Telecommunication Policies. With the overwhelming response, preparation and participation in ITU World Summit on Information Society (WSIS) 2003, by all member states, public and private groups is an acknowledgement to the fact that telecommunication has become the fundamental driver for socio-economic development across the globe.

Never-the-less, WTO has far reaching implications for international interconnection, particularly among countries that made significant market-opening commitments under market access. With more countries committing market access for supply of international telecommunications services and adopting regulatory safeguards in WTO Reference Paper on Regulatory Issues, the impact of WTO on accounting rates is two-fold, which is:

Driving liberalization of accounting rate levels in international telecommunication services closer to costs

Allowing alternative accounting rate settlements for carrying and settling international traffic as "special arrangements" between carriers forming cross-border interconnection arrangement regime.

Under these realities, today technology and liberalization in telecommunication has taken away almost as much as half of all international traffic outside the accounting rate system, as the number of international voice circuits used for public switched telephone network (PSTN) has declined on busiest routes such as, routes between North America and Europe, private leased line circuits are now carrying more IP traffic.

As these transnational networks multiply, accounting rates become even more irrelevant because a subsidiary of a foreign operator can typically exchange international telecommunications traffic with its home base or other subsidiaries without having to worry about accounting or settlement rates. Together these changes siphon traffic out of the accounting rates regime and foster growing traffic imbalances.


From the United States, for which the most complete data on international settlements are available, almost 70 percent of the nearly US$6 billion in settlement payments goes to developing countries.

The flow is highly skewed: the top four net receivers (Mexico, China, India, and the Philippines) accounted for almost 30 percent of the U.S. deficit in 1995, while the fifty or so countries of Sub-Saharan Africa accounted for only 2.5 percent (US$125 million).

In the countries receiving large net flows, changes in the settlement regime will have significant effects on operators' revenue generating capability and profits. For the ten economies most dependent on settlement payments, these account for up to 50 percent of telecommunications revenues. Moreover, for many developing countries U.S. settlement payments are a major source of hard currency, an important consideration since most equipment used to build out the network is imported and must be paid for in hard currency. The effects will depend not only on the size and pace of cuts in the accounting rates, but also on the operators' willingness to pass on the benefits of lower accounting rates to their customers.


Pakistan is among the top 10 net settlement surplus countries (Saeed and Abbas 1999). Pakistan is at the number four with estimated net settlements over US $ 500 million in 1997, just behind China, India and Mexico as a net settlement surplus country in 1997. As such reducing the settlement rate from 90 cents to 23 cents means eroding the revenues to a quarter of the current level despite the growth in international traffic. According to the ruling, Pakistan had to implement a benchmark settlement rate of US $ 0.23/minute by January 01, 2002 with US carriers under FFC policy over Accounting Rate Settlements. PTCL had signed agreements with US carriers for a settlement rate of US $ 0.90/ minute until June 1998. This implies in post June 1998. International institutions such as the ITU, the World Bank, and the WTO have an important role to play in promoting dialogue about the reform of the accounting rates regime.

For many developing countries, like Pakistan settlement payments are also a major source of hard-currency, and indirectly of fiscal revenues since telephone operators have traditionally been highly profitable. Pakistan, falls into one of four categories dependent on the openness of their telecommunications sector and the balance of payments impact they are likely to feel from accounting rate reforms.


The pressures for reform of the accounting rates system pose a short-term threat to the revenues of telecommunications operators, but they also offer potential benefits. The introduction of cost-based interconnection charges should cut the price of international telephony significantly for all users, accelerating their inclusion in the global information society. Public pressure for reform will increase as the cost of transmitting voice data and images continues to fall and depends less and less on distance. U.S. consumers, for example, will demand to know why they should have to pay 88 cents for some international calls when the price for domestic long-distance calls averages only 13 cents even though the cost to the operator is almost the same. Indian consumers will ask why they have to pay ten times as much to call a relative in a neighboring country as to call another relative living a similar distance away in India. And Latin American consumers will question why it costs two to three times as much to call Chile from Argentina, Brazil, and Mexico as it does the other way around.

Further, availability of new technology such as VoIP (Voice over IP) provides innovative solutions and cost efficient solutions to handle "the new modes of operation" as identified by ITU, including international resale, refile and hubbing arrangements. The impact of these new arrangements on the Accounting Rate System are far reaching pressurizing the industry to adopt "Open Telecom Markets" and "Cost Oriented Settlement Rates". Under the liberalization policy the cross subsidization of telecommunication revenues has to be eliminated by adopting a prudent traffic rebalancing policy by the fixed line operator i.e. PTCL, by decreasing high charges for out going international traffic by adopting cost oriented tariff regime in Pakistan. This is exactly what has become the key policy guideline for telecommunication regulation and policy in Pakistan, with promulgation of Access Promotion Charge regime for LL and LDI, and Technology Neutral License Conditions for mobile telecom operators under Telecom Policy 2003. But VoIP remains the burning policy issue to be resolved between the national regulatory agency and incumbent monopoly operator i.e. PTCL to be settled down. Keeping in view of the dying stream of cash flows generated through international settlement rates which was 30% of total revenues of PTCL in FY 2002 as the single largest contributor incumbent's profitability and future challenges ahead, PTCL has smartly entered into a comprehensive termination rate agreement between 5 international vendors to bring VoIP traffic to PTCL with aggregate growth of 30.75% with international incoming traffic of approximately 300-350 million minutes countering the grey market by December 2003. This has to a certain extent provided a relief to PTCL profitability as the company tries to partially secure its international revenue stream from shifting interests of the consumers from fixed-line telephony to VoIP telephony. However, it has become a fact of the day, that the lucrative accounting settlement rate regime will gradually be replaced by interconnection regime, effecting the most important source of revenue for PTCL and so does the access promotion charge (APC) for new fixed line operators, redefining the way business of telecommunication service provision will be run in the time to come.