Today’s post is by Alexia Gonzalez-Fanfalone, Sam Paltridge and Rudolf van der Berg of the OECD’s Science, Technology and Industry Directorate

It used to cost well over $2 a minute to call between OECD countries. The breakup of telecoms monopolies and the introduction of competition means callers now pay as little as $0.01 per minute, or may even have unlimited calls as part of a monthly bundle. Outside the OECD countries, the price has been dropping too, accompanied by a huge increase in traffic. Calls from the United States to India increased eight fold over 2003-2011 for example. But not everybody has benefited. Despite a massive increase in the number of telephones in Africa, international calls to that continent from the United States remained stagnant during this same period.

A new OECD report International Traffic Termination looks at one aspect of why some consumers are losing out: the termination charges imposed on calls coming into a country. The report finds empirical evidence that imposing mandatory higher charges for the completion (termination) of international inbound traffic suppresses demand. Moreover, governments that impose higher termination charges do not see their revenues increase proportionately. Traffic into Pakistan for example has plummeted over the past two years following the creation of a cartel for international telephone calls.

The number of telephone calls from the United States to Asia has dramatically increased in recent years compared with those to the rest of the world. While the spectacular rise in traffic is undoubtedly associated with the growing importance of Asian economies, other factors are at work. One is that much of this traffic reflects tremendous growth in calls between the United States and India. Indeed, people in the United States now make more calls to India than to Western Europe, taking advantage of the growth of mobile telephone penetration. Traffic between the United States and Europe, both of which have high broadband availability, has shifted to substitutable services over the Internet (e.g. VoIP). India still has a low broadband penetration, meaning people in the United States call mobile telephones.

High mobile penetration and low broadband availability are, however, only part of the story. Full liberalisation of communication markets plays a role. Africa, like India, has experienced remarkable growth in the number of mobile subscribers but still has low broadband penetration. Yet calls to Africa have not increased in the same manner as for India. International inbound traffic to India (measured by minutes or calls) was less than Africa’s in 2003 but grew to 10 times higher by 2011. At the same time, the rates to call India decreased tenfold. The difference lies in whether governments let the market set the rates for incoming calls or impose a single rate through an official cartel.

Between 2003 and 2011, for example, the termination charges paid by telecommunication operators carrying traffic from the United States to the rest of the world halved on a per minute basis (from around $0.09 to $0.04). For the highly competitive India market, rates dropped from more than $0.14 to less than $0.02 over the same period. In Africa on average, rates increased, suppressing demand for calls to people on that continent.

A growing number of African countries have introduced a government mandated standard termination surcharge for incoming international traffic even though they have liberalised their domestic communication markets. For example, in 2010 Ghana, which has one of the most competitive domestic telecommunications markets in Africa, set a surcharge that raised the international termination rate by 46%-73% for fixed and mobile services respectively from an average of $0.11-0.13 to $0.19. Authorities in other countries, especially in neighbouring ones, take reciprocal action once someone makes the first move, although independent competition authorities see the perils of such approaches, and in Pakistan, for example, have successfully challenged their introduction.

Some argue that raising international termination rates increases the amount of capital available to invest in infrastructure or simply contributes to general government revenue. The OECD report, however, argues otherwise. When Pakistan raised its rates from $0.02 to $0.088 in 2012, traffic fell from more than 2 billion minutes per month to 500 million according to government officials. There was no increase in revenue but rather a massive loss in consumer welfare.

This is partly due to suppressed demand in foreign countries and partly to various players bypassing the system. The price difference between international and domestic termination rates becomes so large that a “grey” market is created to bypass the official rate by terminating traffic at local levels. This criminalises an activity that in a liberalised market would be viewed as a routine practice, and creates costs in monitoring traffic and in law enforcement.

Communication network operators are also disadvantaged. Between 2009-2011, African countries that did not raise termination rates received 36% more termination revenue per line than those that did. Where rates were raised, not only were there fewer calls, they were shorter.

The argument that the burden is progressive since it falls upon those with a greater ability to pay is also false. Customers with the financial and technical means may use broadband and VoIP to bypass the system. The standard rates only come into effect when calls terminate on a public network where the end user may be unable to afford an Internet connection. As a result the users most likely to be affected, are the diaspora calling relatives and friends in such countries. In many cases, therefore, the people most affected at both ends of the call are likely to be those least able to afford increased prices. Unfortunately, the number of countries that have raised termination rates in recent years, by eliminating competition, is expanding.

Two other reports were released by the OECD this week on communication market developments. Access network speed tests reviews the approaches being taken in OECD countries to measure broadband performance by reviewing information on official speed tests. The development of fixed broadband networks examines the development of fixed networks and their ability to support the Internet economy.

Useful links

Internet traffic exchange: 2 billion users and it’s done on a handshake

Developments in mobile termination rates

International cables, gateways, backhaul and IXPs