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International Telephony: Solving the puzzle - Views on News from Equitymaster
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  • Oct 23, 2000

    International Telephony: Solving the puzzle

    To achieve economic growth rates similar to those of the tiger economies it is imperative for the Government to overcome infrastructural bottlenecks. Among the first steps in this direction was the liberalization of the telecom sector in 1994.

    The new telecom policy (NTP '94) aimed to provide telephone on demand as early as possible. The policy was also directed at attracting foreign direct investments (FDI) and boosting domestic investments in the sector. The Government, in 1997, set up the Telecom Regulatory Authority of India (TRAI) with a view to develop an effective regulatory framework.

    To ensure that telephony services are accessible by the masses the Government subsidized local telephone calls. Long distance telephony cross-subsidised local telephony to compensate for the shortfall. However, with the opening up of the sector there was a need to rationalize tariffs. Consequently, the TRAI recommended tariff rebalancing and moved towards rationalising tariffs over a three-year time frame (FY98 to FY01).

    Trai's original plan
    % change in 3 yr change FY00 FY01 FY02
    IDD tariffs (44.0) (19.0) (16.0) (18.0)
    DLD tariffs (42.0) (30.0) (8.0) (8.0)
    Local tariffs 4.0 4.0 - -
    Rental tariffs 16.0 12.0 2.0 1.0

    The telecom administrators or recognized private operators on a bilateral basis establish international telecommunication services between two countries. VSNL has the mandate for establishing international telephony services in the country. It has entered into operating arrangements with 244 foreign telecom administrators or recognised private operators.

    The operating arrangements are negotiated every year. These arrangements govern the rates paid by VSNL to foreign carriers for use of their facilities in connecting international calls generated from India. And the rates to be paid to VSNL for use of the local Indian network in connecting international calls generated from abroad.

    These rates are reviewed every year and are known as 'accounting rates'. VSNL has only recently rationalized the accounting rate structure. It has moved towards a system of three basic rates, which cover the United States, Countries of the South Asian Association for Region Cooperation (SAARC) and Europe and rest of the world. This structure currently is effective with 150 of the 244 foreign administrators or recognized operators.

    However, the final payment between two international operators is based on the settlement rate, which is determined from the accounting rate and the ratio of incoming and outgoing calls. Settlement between the United States and VSNL is done monthly while with other carriers it is done on a quarterly basis. The current settlement rates applicable to VSNL range between Rs 23/ min and Rs 123.7/ min. (1USD = Rs 46)

    When an international call is made, the local service provider (MTNL, DoT) carries the call to the local exchange. The call is then handed over to the nearest VSNL gateway. VSNL in turn relays the call to the international carrier e.g. MCI. The international carrier takes the call to the destination country and hands it over to the local operator for its final delivery. For incoming calls the direction will be vice-versa.

    In February 1997 Videsh Sanchar Nigam Ltd. (VSNL) entered into a revenue sharing agreement (RSA) with the Department of Telecom (DoT), which is valid till FY02. The RSA insulated VSNL's revenues from any changes in settlement rates. This implies that any reduction in international telephony rates will not have an impact on the revenue of VSNL.

    VSNL's RSA with the DoT operates as follows:

    • VSNL will pay DoT the average incoming settlement rate/ min less Rs 10/ min for all incoming calls.
    • DoT will pay VSNL the average outgoing settlement rate/ min plus Rs 10/ min for all outgoing calls.

    Thus in all cases VSNL ends up earning Rs 10 / min for all outgoing and incoming calls. The average incoming and outgoing settlement rate is determined as the weighted average of incoming and outgoing settlement rates, weighted by the volume of traffic.

    Further, VSNL and DoT will share any increase or decrease in the combined international traffic revenue.

    Sharing of international traffic revenue
        VSNL   DoT
    FY98 0%   100%
    FY99 0% 100%
    FY00 15% 85%
    FY01 20% 80%
    FY02 25% 75%

    Combined international traffic revenue = Net of payments to foreign carriers and payments by VSNL and DoT to each other.

    The accounting rates are expected to decrease in the coming years with pressure from the Federal Communications Commission (FCC), USA to balance the incoming to outgoing ratio. Consequently, post 2002 DoT may bargain with VSNL to reduce its net revenue.



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