In the bad old days when in most countries half the population was waiting for a phone and the other half was waiting for a dial tone, national telephone monopolies had a system for sharing the revenues of international calls called the accounting-rate regime. That regime proved inefficient, uncompetitive, and unjustifiable; and many nations have reformed their systems over the years as a result.
But certain parties today are advocating the extension of the accounting-rate regime to the internet. And they are aiming to do so at the upcoming World Conference on International Telecommunications (WCIT) in Dubai in December 2012.
The WCIT will bring together policymakers and industry officials from across the globe. Their charge is to amend the International Telecommunications Regulations (ITR), the global treaty that governs the transnational flow of data and information. Some telecom operators, mostly from Europe, want to amend the ITR in such a manner that they impose accounting-rate system on the internet.
If they succeed, they threaten the nature of the internet as we know it and threaten to create a global digital divide in the process. Wealthy, developed countries will benefit at the expense of poor, developing nations.
To understand why, we must learn from history. It helps to ask whether the old accounting-rate regime contributed to the great success of extending voice telephony services to all in countries like Sri Lanka. The answer is no. If anything, it made the success more difficult.
As can be seen from Figure 1, the rapid growth that led to the elimination of the persistent waiting lists and has now culminated in over 18 million mobile connections for a country of 20 million people commenced in 2002-03. It was in this same period that the government liberalised the international telecommunications market, issuing multiple external gateway licenses. The inflow of revenues from the accounting-rate regime fell sharply. Yet connectivity exploded. The revenues from the accounting-rate regime had dried up before the rapid build-out of infrastructure that provided voice telephony to almost all households in Sri Lanka.
Revenues did flow in under the accounting-rate regime. But they flowed in to an incumbent operator dominating a market that was far from competitive. And in the later years significant revenues were siphoned off by grey-market bypass operators, leading the incumbent to spend its energies on litigation and other actions to defend an increasingly indefensible international exclusivity.
The decision to liberalise the international market led to the ending of litigation, confiscations and other actions that had given rise to multiple forms of uncertainty in the regulatory environment. The investment climate was thus improved. The liberalisation created incentives for access-network operators to increase incoming and outgoing international revenues through commercial means, rather than by lobbying government or by colluding with those exploiting arbitrage opportunities. International telephone calls became affordable to all, including the millions of family members within Sri Lanka who needed contact with expatriate workers.
Before 2003, Sri Lanka was connected to the world only by the SEA-ME-WE 3 cable and by satellite. Seven years later several additional cables are operational, including SEA-ME-WE 4, FLAG, SLT-BSNL and SLT-Dhiraagu. It does not appear that the effective end of the accounting-rate regime depressed investment in international backhaul. In 2003 Sri Lanka had 700 km of fibre optic backhaul capacity in a metro ring around the capital city and one outer ring. Seven years later, 12,000 km of fibre cables had been laid to connect all parts of the country, including post-conflict areas.
Broadband requires investment in international and national connectivity as well as in access networks. Sri Lanka appears to have done just fine without large inflows of settlement revenues; its success was based on creating the competitive conditions which gave rise to the correct incentives. Market reforms that reduced regulatory risk ensured that the required investments occurred and that companies implemented efficient operations and effective marketing. A World Bank study estimated that there were over two million broadband users, mostly connecting over wireless networks, in Sri Lanka in 2011. With more attractive and country-specific applications becoming available along with smartphones, growth is accelerating.
Sri Lanka had missed the original Business Process Outsourcing (BPO) wave that created export revenues and jobs in countries such as India and the Philippines. The liberalisation of the international segment enabled Sri Lanka to attract several major BPO investments. By 2010, the BPO sector employed 13,000 employees in export-generating activities that yielded USD 98 million in revenues. Seven years after the international liberalisation the combined Information Technology (IT) and IT enabled services sector was the fifth largest source of export earnings for the country.
In sum, Sri Lanka achieved almost universal voice connectivity at the household level after virtually seceding from the accounting-rate regime and is well positioned to provide its people with the low-cost broadband they desire. The liberalisation of the international market also made possible the rapid development of the BPO industry. The causes of its successes lie in private investment and good management, enabled by market reforms. Settlement revenues came packaged with incentives unconducive to market innovation and investment.
Therefore, the fundamental premise underlying the argument for extending the accounting-rate regime to the internet does not hold. Indeed, adoption of the accounting-rate system will likely slow investment in internet infrastructure and deny Sri Lankans access to great swaths of the world’s knowledge and productivity enhancing applications.
It is important that policymakers embrace the multi-stakeholder approach that has contributed to the internet’s growth and success until now. This means the interests of governments, industry, and civil society are heard and respected as reforms to the system of internet governance are contemplated. It would be a mistake to foist a failed 20th century regulatory model for telephones onto the 21st century dynamic and evolving internet.