Alternatives to Costing Methodologies: Cost proxies, Best practices

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1 Alternatives to Costing Methodologies: Cost proxies, Best practices Dr Tim Kelly ITU Seminar on Accounting Rate Reform, Bangkok, September 1998 Note: The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Alternatives to costing methodologies Agenda l Why not just use a cost model? l Cost proxies Ø FCC Benchmarks Ø Cost proxies for transit routes l Best practices Ø Teledensity bands Ø Published settlement rate data l A possible way forward Ø Focus Group Chairman s Working Document ( 1 1

2 Alternatives to costing methodologies 3 Why not use a cost model? Using a multilaterally agreed, universal cost model would be an ideal solution but: l Alternative cost methodologies produce very different results: Ø Fully distributed costs (e.g., TAS model) Ø Long-run incremental costs (e.g., OFTEL cost model for interconnection pricing) l Regional Tariff Groups (TAF, TAS, TEUREM) have followed different approaches l Costing methodologies require cost data which many PTOs do not have Global average, TAS and TEUREM accounting rates, in per minute Global average TAS "Benchmarks" TEUREM rates (assuming 1 km call) 1.73 >6 km 3-6 km <3 km <3% digitisation >6% digitisation Source: ITU-T Study Group

3 Benin Senegal Togo Burundi Mali Burkina Faso Chad Côte d'ivoire CAR Mauritania Niger Cameroon TAF cost model, Termination cost on s Note: A Geographical correction is applied. Source: TAF Group Alternatives to costing methodologies 6 Alternative 1: Cost proxies l What is a cost proxy? Ø A surrogate or substitute used in the absence of reliable data or an agreed methodology l Possible cost proxies for direct relations: Ø Interconnect prices (national extension) Ø Domestic call prices (national extension) Ø TEUREM component value for switching Ø International Private Line (IPL) prices (int l transmission) l Possible cost proxies for transit relations: Ø International circuit costs Ø Best practice IPL costs 3 3

4 A cost proxy example: FCC Benchmarks l 3 elements: Ø international transmission; Ø int l gateway; Ø national extension l Based on operator s tariffs and FCC estimates l For each income level, an average of the tariff rates for countries in that category were used to set the benchmark 7DULIIHG&RPSRQHQWV3ULFH 3HUPLQXWH86 Hong Kong Korea Thailand China Japan Malaysia Philippines Pakistan India Indonesia Int l Transmission Int l Switching Nat l Extension %HQFKPDUN $. $.1 $. $.3 $.4 NB: Many smaller countries were excluded from the analysis but are nonetheless included in income group averages Who fits where? Asia-Pacific region Income group Benchmark rate Teledensity Less Than Low Income (less than Lower Middle Income Where One do $76) you ($76-$,895) fit in? Upper Middle Income ($,896- High Income ($8,956 or more) 8,955) Deadline 1/1/3 1/1/ 1/1/1 1/1/ 1/1/1999 Countries Afghanistan Bangladesh Bhutan Cambodia Lao PDR Myanmar Nepal China India Mongolia Pakistan Sri Lanka Viet Nam Fiji Indonesia Iran Kiribati Korea, DPR Maldives Micronesia P. N. Guinea Philippines Thailand Tonga Vanuatu W. Samoa Korea, Rep. Malaysia N. Caledonia Australia Brunei Fr. Polynesia Hong Kong Japan Macao New Zealand Singapore Taiwan-China 4 4

5 Potential impact of FCC benchmarks policy Revenue loss Based on 95 traffic, US$ m Revenue loss as % of international revenue, China Hong Kong Thailand Philippines 6.% 18.% India Japan Pakistan Korea (Rep.) 6.%.3% Korea, Rep. Pakistan Philippines Thailand Japan India Hongkong China.7%.% 8.% 11.% Source: ITU. Local call prices and national income In s, for a peak-rate three minute call LDC Other Lower Upper High OECD low mid mid Source: ITU Secretariat Contribution No. 6 to Focus Group ( 5 5

6 Alternatives to costing methodologies 11 Weaknesses of cost proxy approach (for direct relations) l Produces widely disparate results Ø Int l transmission estimates range from less than 1 cent to more than 5 cents per minute l National tariffs are often not yet rebalanced to reflect underlying cost trends Ø Local call price is zero in a number of economies; unrelated to costs elsewhere Ø Interconnect prices often reflect negotiated prices, not necessarily costs l Insufficient countries covered by FCC l FCC methodology under legal challenge Proposed application of cost proxy approach for transit shares Routes with <35 K mins 35K - 1.5m mins Routes with >1.5m mins 64 kbit/s 56 kbit/s 1.5 Mbit/s Source: Focus Group Chairman s Working Document. 6 6

7 Alternatives to costing methodologies 13 Alternative : Best practices l What is best practice? Ø Best practice refers to a business technique whereby a company might compare itself to the acknowledged leaders in a particular field l How can best practices be applied to defining target rates? Ø Dividing countries into different categories, for instance by teledensity or income group Ø Analysing published settlement rate data (e.g., published by FCC, OFTEL, TCNZ) Ø Taking an average of the lowest [5] [%] of existing published rates in each category Number of economies Teledensity by number of economies Teledensity <1: 4 economies 1-5: 36 economies 5-1: 6 economies 1-3: 45 economies 3-4: 17 economies 4+: 37 economies Teledensity Source: ITU World Telecommunication Indicators Database. 7 7

8 Population, million Teledensity by share of global population < >5 Teledensity band Source: ITU World Telecommunication Indicators Database. 7% of world s population live in economies with less than 1 main lines per 1 inhabitants Relationship between teledensity and settlement rates to US, (in s per min).5 Settlement rate to US, in s Source: ITU Secretariat Contribution [35] to the Focus Group. Teledensity, 31/1/96 8 8

9 Illustration of best practice rates, based on average of lowest five.5 Settlement rate to US, in s Best practice rate (average of lowest five settlement rates in category) Source: ITU Secretariat Contribution [35] to the Focus Group. Teledensity, 31/1/96 Examples of possible target rates using a best practices methodology T < 1 1<T<5 5<T<1 1<T<3 3<T<4 T> Source: Focus Group Chairman s Working Document. 9 9

10 Comparison of case study cost elements and best practice rates Uganda Sri Lanka Senegal Samoa Mauritania Lesotho India Colombia Bahamas Case studies (high) Case studies (low) Best practice Source: ITU Secretariat Contribution [35] to Focus Group. Alternatives to costing methodologies Methodological questions to be addressed l How many categories (e.g., 4, 6, 8?) l How to define best practice? Ø Average of lowest five in each category Ø Average of lowest per cent in each category l What is the cut-off date for data Ø 1/1/98 for teledensity data Ø 1/1/98, 1/6/98, 1/9/98 for settlement rate data? l What settlement rate data to use? Ø Only published data, or all data submitted to Focus Group? 1 1

11 Alternatives to costing methodologies 1 Conclusions l Cost methodology would be the best approach, but not really feasible within time available l Cost proxies represents a possible approach, but not necessarily a stable platform for analysis l Best practices approach, based on analysis of published settlement rates, represents a possible consensus approach 11 11