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Countries foolish to impose international calling fees, says OECD

Charges imposed on calls from foreign lands don't increase countries' revenue, the research organization concludes. Instead, the fees cut revenue and penalize poorer people.

Government-mandated termination fees for international calls, shown in US dollars on the left chart, discourage people from spending time on phone calls.
Government-mandated termination fees, shown in US dollars on the left chart, discourage people from spending time on phone calls. OECD

Poorer countries have tried to raise revenues by charging fees to foreign phone companies calling in, but a new report finds the approach a really bad idea for all parties involved.

The so-called termination fees, increasingly common among African nations, are geared to fund countries' telecommunications infrastructure or increase government revenue, according to an Organization for Economic Cooperation and Development (OECD) report released Friday.

The actual effect of the more expensive phone rates, it said, is dramatically curtailed inbound calling, corresponding decreases in revenue, and retaliatory rate increases from other countries that hurt citizens.

And because wealthy people and businesses have access to Internet calling, the burden falls disproportionately on a country's poorer citizens, the OECD concluded, calling for elimination of government rules requiring minimum termination fees.

"When Pakistan raised its rates from $0.02 to $0.088 in 2012, traffic fell from more than 2 billion minutes per month to 500 million according to government officials. There was no increase in revenue but rather a massive loss in consumer welfare," said report authors Alexia Gonzalez-Fanfalone, Sam Paltridge, and Rudolf van der Berg in a blog post about the report.

Many in the US and Europe are accustomed to steadily dropping rates for phone calls with improving networks, competition, and new technologies such as voice over Internet Protocol (VoIP). The OECD report, though, shows that for a significant population, rates are actually increasing.

The report, based on data the US Federal Communications Commission gathers from US telcos, also said the termination fees hurt the countries' telecommunications companies rather than provide them with revenue to expand their infrastructure.

"Communication network operators are also disadvantaged," the report's authors said. "Between 2009-2011, African countries that did not raise termination rates received 36 percent more termination revenue per line than those that did."

The remedy, the OECD concludes, is to bring the economic liberalization present within countries to international calling, too. That's served to dramatically increase phone usage in the countries such as India.

That advice fits with the general outlook of the OECD, an economic research and policy organization funded by 34 economically developed, free-market countries. It isn't entirely anti-regulatory and pro-business, though; it also focuses on social priorities such as improving people's living conditions.

The report says the argument that the termination fees are progressive -- helping transfer wealth from richer countries to help citizens in poorer ones -- is bogus.

"Customers with the financial and technical means may use broadband and VoIP to bypass the system," the OECD said. "In many cases, therefore, the people most affected at both ends of the call are likely to be those least able to afford increased prices. Unfortunately, the number of countries that have raised termination rates in recent years, by eliminating competition, is expanding."