International benchmarking the process of establishing the price of a service based on prices in other jurisdictions. Benchmarking can be used as a common sense check on the results of cost models. Alternatively, it can be used directly to set prices.
For example in Singapore, the price SingTel can charge is based on the prices of telephone services in neighbouring Asian countries, New York, and London.
Benchmarking involves:
- Selecting a sample of countries or operators. Countries used in the benchmark should be at similar stages of socio-economic and industry development as the country whose interconnection rates are being considered,
- Gathering price data for the service(s) under consideration in each of the sample countries, and
- Adjusting benchmarked rates to account for differences between the country being regulated and the benchmark countries.
Practical Issues in Benchmarking Interconnection Rates
Without appropriate adjustments, benchmarking can result in interconnection rates that make little sense. The goal of the adjustments is to try to model interconnection costs without having enough detailed information on local cost inputs to carry out a full forward-looking cost analysis.
Adjustments are often made for:
- Population density: The number of inhabitants per square kilometre in each country can affect network development costs. Countries with high population densities tend to have lower network costs than countries with lower population densities,
- Local area size: This may affect the proportion of short and long distance calls and therefore the costs of interconnection,
- Extent of urbanization: Network development costs are lower for urban areas than rural areas. Countries with a high degree of urbanization tend to have lower network costs than countries with less urbanization,
- Call duration: This may vary widely across countries for several reasons. For example, if customers pay a flat rate for unlimited local calling, average call duration is likely to be longer than in countries where customers pay a per-minute rate. Networks with higher call durations need more network capacity, and so will have higher costs,
- Input prices: The costs of key inputs will vary across countries, and this will affect interconnection costs. For example, the cost of capital will be significantly higher for most developing countries than for developed countries, due to higher risk in developing markets,
- Scale economies: If a firm faces significant fixed costs, average cost is likely to decline as output increases. Markets with greater scale generally have lower average costs. When attempting to extrapolate prices or costs from countries with scale advantages to a country with a smaller market, it may be necessary to adjust the benchmarked data,
- Exchange rates: Rates need to be converted to the local currency, or some other single monetary unit. This conversion can use either market exchange rates or purchasing power parity (PPP) exchange rates. It makes sense to use PPP exchange rates when the majority of the regulated firm’s costs are local currency denominated and locally sourced, such as staff costs. If the firm’s costs largely consist of repaying foreign currency denominated loans and purchasing capital equipment on the international market, then market exchange rates are generally more appropriate as a basis for comparing prices and costs. When using PPP exchange rates, it is best to use rates estimated by recognized international institutions such as the World Bank, International Monetary Fund or OECD,
- Taxes: Price data included in the exercise should either all include, or all exclude retail taxes,
- Rounding effects: If tariffs are being compared based on a unit of time, the rounding effects of billing mechanisms have to be taken into account. For example, if calls in one country are billed by the minute, and in another country by the second, charges must be converted to a single unit (either per minute or per second) to allow a meaningful comparison.
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Benchmarking Interconnection Rates