8:09 AM Oct 6, 1995

BASIC TELECOMS, AND NAGGING DOUBTS

Geneva 5 Oct (Chakravarthi Raghavan) -- Senior Trade and Telecommunications officials are due to meet Friday to give a fillip to the negotiations under way at the World Trade Organization for liberalising the trade in basic telecommunication services.

The negotiations, leading participants acknowledge, is going to be very complex in that it the basic telecom services involve complex issues of technology, regulation and difficult accounting and commercial decisions of the service providers in any market -- where it is basically a state or state-regulated monopoly in most cases or very dominant oligopolistic suppliers.

The value of this trade is estimated at an annual 500 billion dollars and growing by about 5-10 percent a year.

But while everyone -- whether WTO Director-General and other WTO officials, or many of the negotiators -- speak of it as a multilateral, but voluntary negotiations, for an agreement within the broad parameters (most-favoured-nation and non-discriminatory) of the WTO and GATS, the remarks of the US about "reciprocal" offers to match the US proposal for "global liberalisation", raised the spectre too of another sectoral outcome as over the financial services -- where the US committed itself only to existing access to existing operators in market and filed an MFN exemption against all future liberalisation.

In financial services, the US enterprises pushed for such an approach, hoping this would help them to break open other markets. And the major US suppliers or even leading G-7 suppliers seem to be flirting with a bilateral and multilateral approaches as alternatives.

That this possibility of the enterprises pushing the US negotiators into a similar outcome is very much in everyone's minds was evident from the remark of the EU's services negotiator, Karl Falkenburg, "I hope I don't have to live through the same experience a second time. Once was enough for me."

The Friday afternoon meeting is to be preceded by a meeting of the Quad countries (Canada, the EU, Japan and the United States).

The United States, which is pushing to pry open markets in other countries for its giant service providers, is not merely seeking market opening offers leading to full liberalization in this sector, but wants to use the opportunity to write-in 'competition' rules in this sector to lay down the limits of national regulatory processes and powers.

Senior US officials in town to push their trading partners on this subsector used some Americanese that would at best intrigue, and worse prove far from reassuring to other countries, particularly the developing countries.

Jeffrey Leng, the deputy US Trade Representative described the US efforts and offers on the table as one that would "lock open" almost every aspect of its telecoms market. Reed Hundt, chairman of the US Federal Communications Commission, said the US push for liberalisation was based on "altruism" while his colleague from the US State Department tried to argue about benefits to development from liberalization and free market.

It was not clear at all whether Leng meant "locking" the US market and its future openness, if there were reciprocal concessions, or opening up other people's markets and "locking" them in through bindings.

When sought to be pinned down on his "altruism" and how the US push to benefit US suppliers in developing country markets would help developing countries developing their basic universal services, Hundt spoke of the major world operators entering into strategic alliances and how these liberalisation and expansion would help equipment suppliers and even local ancillary makers through joint ventures.

But when asked what the US "demands" were in terms of the equipment supplies on Deutsche Telecom, the US negotiators immediately switched back to argue that the negotiations were about services and not goods. The EU Commission negotiator, Carl Falkenberg, while insisting that the EU's own offers tabled this week would "effectively liberalize" access to European markets for all kinds of telecom services, struck a note of caution over the US insistence on using the negotiations to write-in "pro-competitive" rules in basic telecommunications.

The WTO negotiations in this area, with participation on a voluntary basis, but within the framework of the General Agreement on Trade in Services (GATS), was launched at Marrakesh in April 1994 and to be conclude by 30 April 1996.

At Marrakesh some 18 countries and the European Union and its (then 12) members had agreed to participate. Since then 11 more countries have joined the negotiations (with three of the originals now in the EU's 15), bringing the total to 42 countries. Thirty others are observers in these negotiations.

So far ten participants (including the EU as one) have tabled offers. Though July end was the original deadline, the EU's offer was tabled only this week. But the chairman of the Negotiating Group on Basic Telecommunications (NGBT), Neil McMillan of UK, is hoping others participants, mostly the developing countries, will either table or indicate their intentions Friday.

Realistically, trade officials don't expect at the end of the day (April 1996), all 42 current participants, and others who might still join, to table offers and commit themselves.

There is great stress so far, by the principals and WTO officials, that these negotiations are "voluntary" and no one is compelled to join and/or make offers and commitments.

But WTO sources concede there is a "political compulsion".

The GATS, and the telecommunications sectoral accord, and the Marrakesh decision on the "voluntary negotiations" on basic telecommunications -- all leave open the right of the participants to enter or to enter MFN exemptions, across the board or in particulars, as was the case on financial services.

But the US negotiators also seem to be aware of effects of any such repetition, and they are now talking about "time span" for developing countries to join the accord and fully liberalise over a time.

But any major developing country committing itself on this basis, or even getting a phased-in period (the TRIPs accord is being cited as an example) would probably end up "buying a pig in a poke".

As South African President Nelson Mandela very bluntly put it at Telcom-95 opening here (and in his message to the G-7 superhighway meeting in Brussels), the problem facing developing countries is how to provide basic universal access to their people, both in crowded metropolitan areas and in remote rural areas -- access to a telephone, telegraph and other rudimentary facilities for a basic use? How to build these infrastructures and make facilities within the means available to the normal home user of a poor country, and how to raise the capital needed are questions facing the developing countries.

The basic telecom negotiations and their outcome, including the US push (which in one form or other would be incorporated into the final accord) for "pro-competitive rules" over domestic regulatory activities, in the immediate direct sense may not involve the GATS and WTO accords or the relevant ITU regulations on accounting -- dealing with 50-50 share between the originating and recipient countries of an international call.

But as a trade official involved put it, the liberalization process set in motion would inevitably lead to changes having to be made in the GATS and its sectoral annex on communications as well as the ITU's rules.

Even on the issue of the competition policy, while some of the leading players in the negotiations, stress that the basic telecom negotiations could not change or amend the GATS provisions about such issues and rights of countries to take (or not take) actions, inevitably the final accord would need to deal with the issues of how national regulators regulate and whether it would help implementing the commitments or negate it.

At the beginning of the hard negotiating process, both the US and the EU claimed that their current conditions or the process and targets dates for liberalisation (as in the case of the EU under its single-market approach) would guarantee liberalised access and inter-connectivity to any foreign supplier.

Both though have problems of applicability of their commitments respectively to the constituent States of the US and member-states of the EU (atleast four of them, France, Spain, Portugal and Belgium have limitations on foreign investment and ownership, but claim they are ready to negotiate them away), their current conditions and time-table ensure foreign access to a very large share of their domestic market.

Both too are training their guns on Japan, where there are major restrictions on foreigners entering the market through investments. The US has also its eyes on the monopoly situations within EU member-states, notably France and Germany.

Some WTO officials, and negotiators, admit that a key question to be resolved is whether or not the developing countries would be able to continue to cross-subsidise the services -- using the large incomes that are derived from the sharing of the earnings on international traffic for subsidising the costs of domestic services.

As one trade official acknowledged, this is how today's majors built up their domestic infrastructures and expand availability of telephone and their services at affordable costs.

The cost to an operator of providing an international service is much lower than the price charged, while it is the other way round in the domestic service to an individual home user.

At an early stage in the GATS negotiations, and the telecommunications sectoral one, there was an effort to link the "charges" for inter-connectivity and telecom transport to the "costs" (actual costs and reasonable profits) that a domestic PTT may charge, but this ran into much resistance from developing countries that it failed.

But moves towards dealing with regulations and the accounting principles may be used towards the same end.

Some telecommunication policy advisers of major countries suggest that developing countries using the excess profits and earning on such international access to expand their domestic infrastructure should be allowed and encouraged, but not countries using this to augment their own general revenues and foreign exchange earnings.

But with money a very "fungible" element, the question is how.

One idea that some WTO officials suggest could be explicit recognition of the right of developing countries to "subsidise" their domestic service from such earnings, requiring only "transparency" in this and for developing countries to act together in the negotiations to achieve this.

Also, the traditional (ITU sanctioned way) of accounting between countries or their entities on international transactions, is now being threatened by the socalled "Callback" services run from the United States, taking advantage of the technological advances in switching as well as the domestic deregulatory situation of domestic operators gaining access to international circuits.

In a typical "callback" services, a user in country A rings up the US service provider with whom the user has an accord (agreement for the costs to be charged to a credit card), and as soon as the other side answers, hangs up. The US callback service provider rings up the user concerned, who then dials the number he wants to call in another country, and gets a connection -- paying at rates of 25-50% discounts.

Except for the initiating call, where the country A shares 50% of the revenue on that outgoing call with the US entity, the costs and earnings on the actual call does not benefit the originating country.

For individual consumers this is of benefit, but over the long run, it will become a typical market failure due to oligopolistic suppliers and cease to be a public good.

For while, the US or matching EU policies to hit anti-competitive activities of suppliers to their own markets can prevent abuse, as in the area of goods, countries look benignly or encourage export cartels and the situation over time would not be different in this area either.

If that happens, once the domestic PTT (publicly or privately owned, and obligated to provide the universal home service) loses its 'profits' on foreign earnings due to the callback services and has to face the oligopoly of suppliers, it will be forced to compete with the "callback" service by deep cuts on its own charges for international calls, and will be forced to raise the costs of the universal internal service -- whether it be cost of a telephone, giving a line to a user or otherwise.

Would 'procompetitive rules' on domestic regulation be matched by 'rules' of obligations by the major countries and their service providers to deal with such cases? Could developing countries, in return for "offers" to open up their markets, make it conditional on the US or other governments trying to open up international markets, accepting obligations for sharing arrangements for such call-backs?