Tilting at telecom windmills
DON Quixote exemplifies persistent engagement in futile activity. The Bangladesh government's efforts to control the termination of international calls are quixotic.
In 2007 when the government-appointed committee formulating the international Long Distance Telecommunication Services (ILTDS) Policy sought my advice, I told them that the larger policy objectives would be best served by liberalising international gateways.
Liberalisation would enhance the competitiveness of Bangladesh's export industries and create conditions for the efflorescence of the business process outsourcing (BPO) industry, thereby generating white-collar jobs for educated youth. It would eradicate the cancer of black money generated from the bypass business that was corroding the country's body politic.
I also told them illegal termination could not be controlled without bringing down international termination rates.
The committee heard me out, one learned member asking me what business process outsourcing was. I gave examples of call centres found in Bangalore and more. It turned out I was tilting at windmills.
The resulting ILTDS policy contained three references to BPOs: a platitude about facilitating BPOs coupled with a unique proposition about licensing them; a definition; and an entry in the Table of Contents.
The whole idea of liberalising gateways, thereby creating the conditions for entrepreneurs to build businesses and create employment, had flown right over the heads of the esteemed committee who only saw another thing to license. Not being excessively quixotic, I ceased to advise.
What is illegal termination? (and why do other countries not suffer from it?)
Imagine an international call, originating in London and intended for a person in Sylhet. The UK telecom operator (one among many, since the UK market has been liberalised) incurs some costs in hauling the call to some handover point and in collecting the charges through a prepaid card or otherwise.
Several other actions are needed to complete the call: it has to be hauled to Bangladesh and terminated on a domestic network that includes a phone in Sylhet the intended recipient is likely to answer. These are not normally done by the originating operator. He merely pays other parties to do them.
The domestic network within Bangladesh has a degree of monopoly power; unless it accepts the call it will not reach its intended destination. And unless that happens, the caller will not pay.
In the bad old days, government-owned domestic operators made a killing on international call termination, charging extortionate prices to complete these calls. As domestic markets were liberalised, competitive operators entered and more reasonable domestic termination rates were set or mutual termination arrangements put in place that did not involve measuring and paying for minutes. The difference between what is charged for terminating an international call versus a domestic call is the basis of illegal termination.
If, for example, the payment for legally terminating an international call is four cents and that for terminating a domestic call is one cent, an incentive exists to make international calls appear to be domestic calls and pocket the difference. All costs of additional equipment and bribes up to, say, two cents per call can be justified, because a profit of even one cent a minute on millions of minutes is a substantial inducement.
By allowing a large number of operators, including those who operate domestic networks, to operate international gateways, the termination rate will be driven down to a point where incentives for illegal behaviour disappear. International calls will flow through legal channels, yielding taxes to the government and drying up the corrosive flow of black money.
The sheer magnitude of the black money will over time buckle any effort based on policing to prevent the disguising of international calls as domestic. Whatever procedures are put in place, they have to be implemented by human beings. They will be corrupted or the incorruptible will be removed.
Countries that seek to maintain a high differential between international and domestic termination charges will suffer from illegal termination and its attendant ills. Those that remove or reduce those differentials will not. It's as simple as that.
Losses to the nation
But will international-gateway liberalisation deprive Bangladesh of foreign exchange earnings? This hypothetical question is best answered by looking at the actual experience of Sri Lanka, a country that sought to enforce an indefensible termination regime and then liberalised, albeit imperfectly, in 2003.
By 2006, international termination revenues increased by 55% to $68 million. This was because more incoming traffic was being attracted (and counted) as a result of the much larger number of phones in the country (and the channelling of much grey traffic into legal routes by liberalisation).
But one may argue that the trade balance, the difference between what is earned from terminating incoming calls and what has to be paid for outgoing calls, is what matters. Greater connectivity and lower international call prices will generate more calls out of Sri Lanka, resulting in greater outpayments by Sri Lankan operators. True enough, the balance decreased by 24.5% to $19 million by 2006.
Did this mean that liberalisation failed? No. The government had calculated that the balance may even turn negative at some point. We wanted our people and our companies to be able to communicate freely with their families, friends and trading partners. More outgoing calls and lower international prices were good things; and they came with a slight possibility that the telecom-services trade balance could turn negative.
Our eyes were on a bigger prize. Telecom is a critical input to a large number of industries. Greater efficiencies in, and use of, telecom would enhance the competitiveness of all those industries by making them more efficient. The real and much larger benefits to the economy would come from improvements in those industries, not in piddling termination revenues.
The benefits can be demonstrated using data from the central bank of Sri Lanka: "Net earnings from software and IT enabled services exports increased by around 19% to $98 million in 2006."
Nineteen percent of 98 million in one year is a lot bigger than whatever was lost in the telecom services account. And BPOs generated nice white-collar jobs and many positive externalities.
One may ask whether international-gateway liberalisation is essential to develop the BPO industry.
Despite many similarities with southern India, Sri Lanka missed the BPO bus in the 1990s. In investigating why, it was found that the industry required redundancy of suppliers and of media, in addition to low leased-line prices and high quality.
Bangladesh has access to an undersea cable, so the requirement of media redundancy can be satisfied. But that is not enough. Sri Lanka was cable-connected through the 1990s, but failed to get BPO business. The key was liberalisation, which would satisfy the condition of supplier redundancy and would also lower prices and increase quality.
The proof of the pudding is in the eating. When Sri Lanka tried to enforce an unenforceable international exclusivity, it had no BPO industry, many court cases, and low investment. After liberalisation and despite security concerns, it attracted $13.2 million in BPO investments and created 3,200 new jobs by 2006. Its telecom sector exploded in growth. Before liberalisation, there was no BPO, the investments were low, and there was lots of black money. Such odds disappeared after liberalisation in Sri Lanka.
Bangladesh has tried and failed to implement a fundamentally flawed ILDTS policy. It can continue to tilt at windmills. Or it can liberalise.