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May 20, 1998


FCC rates threaten DoT, VSNL's competitiveness

Email this story to a friend. Implementation of the US Federal Communications Commission benchmarks for calculating the 'telecom accounting rates' in international telecom traffic could seriously impact Department of Telecommunications revenues and render the country's monopoly international carrier, the Videsh Sanchar Nigam Limited, significantly less competitive, says an International Telecommunications
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The TAR is the basis for payments made by foreign carriers to each other for terminating international calls.

The payout is calculated according to the settlement rate, which is usually half the TAR.

Since end-user tariffs in India are higher than that of most developed competitive markets, the volume of incoming traffic is almost three times higher than outgoing traffic.

Higher purchasing power in developed markets has also added to the imbalance. Net settlement payments are therefore positive for India and have been rising from $105 million in 1992 to $389 million in 1996 to $517 million in 1997.

More importantly, the study estimates that they have been rising as a percentage of total telecom revenues, from 9 per cent in 1992 to 11 per cent in 1995 to 13 per cent in 1997.

They have also been rising as a percentage of the country's foreign exchange reserves - from 1 per cent in 1994 to 2.3 per cent in 1996.

Lowering of these rates to the FCC benchmark settlement rate of $0.23 from the current $0.71 could seriously impact future earnings.

FCC rates are important to India because US carriers deliver almost half of all India's incoming calls and account for a very large portion of net settlement revenues.

In 1995, for instance, of the total net settlement payments of $267 million received by India in 1995, US carriers accounted for $209 million. With lowering of settlement rates to FCC levels, growth of settlement inflows is expected to decrease.

The study estimates that if FCC benchmarks are implemented, settlement payments by 2000 would be $544 million, against $694 million if they are not implemented. The latter calculation assumes a natural annual reduction of 10 per cent in settlement rates.

The earnings would be $504 million in 2002 with the FCC benchmarks against projected earnings of $769 million without the benchmarks.

The fall in settlement payments is expected to seriously impact DoT revenues from international settlements. In this context, the study says, "If the FCC benchmarks are implemented, the current revenue sharing agreement could result in DoT's share falling below that of VSNL's as early as 2001." VSNL is also slightly worse off under this scenario after 1999.

In fact, at this rate, DoT's share works out to be a mere $97 million from international revenues compared to VSNL's share of approximately $1.1 billion. According to the DoT-VSNL revenue sharing agreement, DoT absorbs a higher percentage of income decrease in the event of a drop in the settlement rates.

This can be compared to the situation in 1996-1997 when DoT revenues from incoming international calls alone were $683 million. These revenues from international telephony are important since they are channeled into development of the national network and the non-remunerative but "important'' local access.

Net settlement payments in 1997 accounted for 17 per cent of telecom expenditure.

The ITU report also points out that the FCC benchmarks are unlikely to trigger a higher volume of traffic originating from India.

In fact, it points out, if lower settlement rates are passed on to consumers in the US, imbalance will actually increase.

The report points out that higher tariffs, rather than settlement rates, are largely responsible for the imbalance.

The increasing imbalance could deprive VSNL of business in the long term, the report points out. The high tariff rates in India have prompted the phenomenal growth in call back and re-filing of calls.

Calls from some countries are re-routed through the US to take advantage of the lower settlement rates between US and India. The cheap wholesale rates offered by US carriers - 46 cents per minute in the US - makes this profitable, the study says.

Call back traffic is an immediate product of high consumer tariff in India. VSNL tariffs for the US are $2.37 compared to $0.95 offered by US call-back operator - Kall Back.

In 1996, it was estimated that of the traffic volume of 1,147 million minutes, 85.70 million minutes were call back traffic and another 43.06 minutes were re-filed traffic.

In the case of the US originated traffic alone, 24 per cent of the traffic was call-back while 14 per cent was re-file traffic.

This could impact VSNL: "By 2002, carriers in the US could be handling the volume of call-turnaround (call back and refile) traffic large enough to achieve such economies of scale that are hard to match for other countries. VSNL monopoly expires in 2002. So, effectively, it has only two years to earn back call-turnaround traffic, which is truly an uphill task, given the costs of calling in India.''

Although call back has been declared illegal in India, experts point out that unless tariffs are lowered, call back will continue. High tariffs could therefore erode VSNL's customer base and render it less competitive in the long run.

- Compiled from the Indian media

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