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24th APNIC Open Policy Meeting

APNIC fees WG

Wednesday 5 September 2007, Intercontinental The Grand Hotel, New Delhi, India

Minutes

Meeting commenced: 2:45 pm

Chair: Randy Bush

Co-chair: Ming-Cheng Liang

1. Agenda review

Randy Bush

Presentation [pdf]

Transcript

The Chair reviewed the agenda. He explained that due to family illness, Michael Hiller was unable to present on behalf of KPMG, and that the Chair would present on Michael Hiller’s behalf.

There were no changes to the agenda.

2. EC interim fees proposal

Kuo-Wei Wu, APNIC EC Treasurer

Presentation [pdf]

Transcript

The speaker referred the WG attendees to the proposal at:

http://www.apnic.net/meetings/24/fees/member-2007-001.txt

Kuo-Wei Wu explained the historical reasons for the fee structure. He stated that discussions about amending the current fee structure began in Hanoi in September 2005 at APNIC 20. He noted that Delhi was the fifth APNIC OPM where the fee structure had been discussed.

Kuo-Wei Wu reported that the APNIC EC had invited KPMG to do an independent analysis of the APNIC fee structure and funding needs. In May 2007, the APNIC EC had a special meeting in Singapore to hear the results of KPMG’s analysis.

Kuo-Wei Wu stated that the reason for the current fee discussion was that in 2007, APNIC would have a deficit for the first time since its creation.

The speaker explained the two main reasons for the deficit:

1. The change in the currency exchange rate between US and AU dollars, leading to a decrease in the total amount of revenue received in AU dollars

2. Membership fees being based in US dollars but the APNIC Secretariat office expenses are incurred in AU dollars

Kuo-Wei Wu explained that in 2001, one US dollar was worth around 2 AU dollars. However, in September 2007, one AU dollar was worth around 0.82 US dollars.

Kuo-Wei Wu also noted that a contributing factor to the deficit was APNIC’s cost of work production. He reported that in 2005, APNIC made the second largest number of IPv4 allocations among the five RIRs.

He summarised that the three main reasons for the fees discussion were exchange rate variations, that there have been no increase in fees since 1996, and the fact that member expectations continue to grow.

Kuo-Wei Wu stated that APNIC currently had approximately 1500 members, which was to say it had grown around 50 percent in the past two or three years.

He reported that the interim fee proposal to be voted on at APNIC 24 had two elements:

1. A proposal that APNIC charge fees in the same currency as the currency in which Secretariat expenses are incurred: AU dollars

2. Because a long-term solution had yet to be developed, there should be an interim solution to increase the fees to achieve a balanced budget for 2007

Kuo-Wei reported that the future goals from the EC’s point of view were:

  • To stabilise APNIC’s financial position
  • To work on a long-term solution to the fee structure
  • To listen to members’ decisions on the interim proposal
  • To continue to work with the APNIC Secretariat based on members’ opinions

Questions and discussion

There was no discussion time at this point.

3. Explanation of 7% by APNIC Secretariat

Paul Wilson, APNIC Director General

Presentation [pdf]

Transcript

Paul Wilson explained that the information he was presenting had been extracted from the budget report given in March at the APNIC 23 AMM. He noted, however, that the information had never before been presented in the context of fee adjustments.

Paul Wilson reported that APNIC revenues for 2007 were up by 11 percent, but costs were increasing by 18 percent, leaving an overall increase in expenses of seven percent. The budget was the result of a lot discussion in late 2006 with the EC.

He noted that 2007 was the first time APNIC had experienced a substantial deficit since its creation.

Paul Wilson explained that the reason for the seven percent increase in the interim fees proposal was to respond to the increased operating expenses, as well as inflation.

He noted that APNIC staff salaries accounted for 48 percent of the total seven percent increase in expenses. He explained that, over the years, APNIC salaries had fallen below Australian standards and had resulted in staff turnover. He reported that, in 2006, APNIC lost more staff than in all of the previous years of APNIC’s existence combined.

Paul Wilson reported that, in 2006, APNIC had contracted Hay International Consulting Group to analyse APNIC salaries. The result of the analysis was that APNIC salaries were significantly below standards. Paul Wilson reported that APNIC had increased salaries in response to the analysis, but perhaps not as much as wanted.

Paul Wilson noted that of the remaining portion of the overall seven percent expense increase, nine percent consisted of increased travel expenses. He noted that this was the result of the need to represent APNIC at the Internet Governance Forum, demand for more training, and more APNIC liaison staff travelling to meetings within the region. Paul reported that a further five percent of the total seven percent increase was due to increased meeting and training expenses. The remaining 19 percent of the seven percent was distributed across increased expenses across a range of other activities, of which no single activity contributed more than three percent to the total seven percent increase.

Paul Wilson reported that the percentage of cost increase of the 2007 budget was closely related to the major expenses at APNIC.

Questions and discussion

  • The Chair asked if the presentation slide Paul Wilson displayed accounted for 100 percent of the seven percent increase. Paul Wilson confirmed that it did.
  • Paul Wilson explained that the combination of fixing the US to AU dollar exchange rate and the seven percent increase would bring the 2007 APNIC budget back in the balance.
  • The Chair requested that questions be delayed until after the following presentation.
  • The Chair noted that salaries had been very low at APNIC before the salary adjustments.

4. KPMG report on review of fees

Randy Bush on behalf of KPMG

Presentation [pdf]

Transcript

Randy Bush presented the report on behalf of KPMG.

He reported on the background to KPMG’s involvement in the fee review, noting that the EC had commenced the process of reviewing the APNIC fee structure; however, at the EC’s meeting in Singapore earlier in 2007, it had been agreed that there was no short-term quick solution to the fees discussion.

Randy Bush reported that KPMG had identified a narrowing gap between revenues and expenses, with a financial loss occurring for first time in 2007.

The KPMG report noted that APNIC’s revenue had been negatively affected by the US to AU dollar exchange rate.

Randy Bush highlighted the report finding that membership fees contribute approximately 75 percent of APNIC’s income, and therefore have a significant impact on APNIC’s financial position.

He noted that the largest expense for APNIC (45 percent of total expenditure between 2001 and 2006) was salaries.

Randy Bush reported that KPMG had looked at the interim fee proposal and stated that the short-term proposal looked prudent. KPMG had suggested that not to do it would make APNIC face financial risk.

Randy Bush presented KPMG’s report into the issues of long-term fee changes beyond the interim fee proposal. One issue to be considered is the impact of IPv4 depletion on fees. If a significant portion of APNIC’s income was derived from allocation from the IANA free pool of IPv4 addresses, once that pool is exhausted, it could have a big impact on APNIC’s revenue.

Other issues to be considered were the service requirements for IPv6 allocation and the possible transaction-based fee structure. Another possible fee model was a load-based fee structure similar to RIPE’s modelm, where the fees are reduced over time as members require less service from RIPE NCC staff.

KPMG had also raised the possibilities of the APNIC EC steering APNIC’s priorities for activities and the establishment of a budget review committee to increase budget transparency.

Other issues raised in the KPMG report included the perceived lack of transparency of NIR operations, such as address fees for NIRs and confederation members.

Randy Bush reported that at the EC meeting in Singapore, the APNIC EC spent many hours looking at these issues and realised that the issues would not be solved at the Singapore meeting. At that point, the interim fee proposal was developed.

Randy Bush noted that other questions to be addressed included how to account for NIRs that do work and strongly help the region, and the possibility of a continuous formula for fees instead of the current tier-based fee structure.

5. Open discussion of EC interim fees proposal

Transcript

  • The Chair noted that online voting for the interim proposal had ended that morning and there would be onsite voting on Friday 7 September at the AMM.
  • The Chair asked working group participants if they had any questions about the interim fee proposal.
  • Izumi Okutani asked for a short break.

[Break: 3:20 pm - 3:40 pm]

  • The Chair reported that Izumi Okutani and Geoff Huston had begun an interesting discussion during the break and asked them to bring the discussion to the larger working group.
  • Geoff Huston reported that Izumi Okutani had asked why the deficit had happened in 2007 and not earlier or in later years.
  • Geoff Huston explained that APNIC was a very people-intensive organisation. In 2007, APNIC was spending 51 percent of its budget on staff. He explained that this reflected APNIC’s status as a service delivery organisation with a particularly multicultural membership.
  • Geoff Huston reported that in the past few years, APNIC had been quite tough on salaries. He stated that in 2005 and 2006, APNIC had quite a high turnover of staff. He noted that an organisation with a staff of 50 would normally expect an annual staff turnover of two or three. A staff turnover of more than five in an organisation of APNIC’s size indicated a possible problem. Therefore, APNIC conducted an external review to benchmark salaries. The result of the review was that it was discovered that APNIC was consistently underpaying staff. The low salary paid by APNIC was the major reason APNIC staff had left.
  • Geoff Huston explained that when salary is raised, it was an ongoing commitment and not a one-off cost to the organisation. He noted that APNIC needed staff with strong language skills, an ability to travel (not too many family commitments), and strong technical skills. He stressed that retaining such staff was critically important to APNIC’s operations.
  • Geoff Huston noted that the next largest single expense for APNIC was travel. He explained that the cost of plane fares had risen, noting that, in fact, the cost of plane fares had risen more than 9%. To compensate for the increased plane fares, APNIC had decreased its total number of miles travelled.
  • Geoff Huston explained that another of APNIC’s costs was hiring consultants to investigate issues such as salaries, resource certification, and fee structure. He explained that APNIC had a choice between investing time and money to educate existing staff to perform one-off activities like these or hiring consultants for the one-off needs. APNIC had chosen consultants as the more prudent option.
  • Geoff Huston asked Izumi Okutani if his explanation answered her question.
  • Izumi Okutani said that, in Japan, if an organisation wanted to raise fees, the process would be different. She explained that, first, there would be an analysis of the costs for the next two to three years. Then the organisation would examine any areas that could be reduced so the current fees could be retained.
  • Izumi Okutani stated that there was a perception that APNIC had not projected costs for the next few years. She asked if APNIC had, in fact, performed such an analysis.
  • Geoff Huston explained that when the APNIC EC was considering the 2007 budget, there had been no thoughts about possible fee increases. Instead, the EC had needed to consider what sized operating deficit the EC was prepared to accept.
  • To assist the EC in making this decision, the APNIC Secretariat prepared a number of different deficit scenarios. The scenario the EC chose was due to the investment in staff. If APNIC did not increase its salaries, APNIC would lose the people who could have been really valuable to APNIC for the next five years.
  • Geoff Huston explained that the issue was not about dropping the increased salaries for one year, but rather it was about dropping an investment of a few hundred thousand per productive person over the next few years. So faced with this, the APNIC EC had reluctantly chosen to have a deficit. Geoff Huston noted that the budget for 2007 had been discussed between November 2006 and February 2007 because of the sensitivity of the deficit issue.
  • Izumi Okutani stated that JPNIC had thought that APNIC had expanded its activities, and that if those expansions had increased costs, then maybe those activities should be reduced. She explained that because Geoff Huston had shown that the increased costs were related to staff, the deficit made more sense.
  • Takashi Arano asked if one of the reasons for the deficit was that members were demanding more service and more global service. He suggested that perhaps the addition of more services should be a choice for members to make.
  • Paul Wilson responded that there had been plenty of demand from members for additional services, as demonstrated in the results of the most recent member survey. He explained that the first proposed budget for 2007 had a much larger deficit, but through negotiation, some of the services were reduced. An example of one reduction was programming support for resource certification.
  • The Chair stated that it was his understanding that there was no substantive change in services at APNIC, and that the discussion about reviewing services is for the long-term discussion and not part of the interim fee proposal discussion.
  • The Chair noted that one significant point made by Geoff Huston was the need to change salaries to keep pace with industry rates. This adjustment largely took place in 2007, leading to a deficit.
  • Takashi Arano stated that he needed more concrete explanations so he could report back to his upper management. He needed to be able to show that APNIC was making an effort to reduce costs.
  • The Chair replied that he was not sure that he wanted APNIC to reduce services at this critical time for the industry. He suggested perhaps meeting with Takashi Arano and other interest parties with the Secretariat in the evening to discuss the issue more.
  • The Chair stated that he used to work with Arano at NTT and understood the culture of NTT. He suggested that the community needed to work on the issues in a way that was not micromanaging APNIC, but instead considered the community’s needs regarding the transparency of APNIC operations.
  • Geoff Huston explained that APNIC was a service delivery organisation with a high reliance on people. He stated that if APNIC had to reduce costs, it would need to be taken from the personnel component of the budget. This would mean reducing staff levels, resulting in the remaining staff needing to do what was being done before, but not as well.
  • Takashi Arano stated that he did not intend to make APNIC reduce costs, but instead needed to know that APNIC had made an effort to reduce costs.
  • The Chair stated that there was a difference between transparency and micromanagement. He stated that he though Takashi Arano wanted more transparency and not micromanagement.
  • Takashi Arano suggested that APNIC is a monopolised non-profit organisation and had a responsibility to explain.
  • Kusumba Sridhar stated that the expenses issue was a secondary matter. He stated that he thought the primary issue was the deficit in 2007. The money that should have been revenue for APNIC in 2007 could not be met because of fluctuation in the currency exchange rate. In addition, the fluctuation of the exchange rate was the slight increase in expenses. However, if the projected exchange rate had been maintained, APNIC might have been able to balance the budget.
  • Kusumba Sridhar suggested that interim fee proposal would give relief to the APNIC Secretariat immediately and give the EC some time to discuss the budget for 2008.
  • Kusumba Sridhar commented that the majority of the economies in this region had benefited from the US dollar fluctuation. He suggested that because of this change in the exchange rate, even paying an additional seven percent to APNIC would still give APNIC members up to another seven percent savings benefit compared with previous years’ payments to APNIC.
  • The Chair asked for volunteers to meet in the evening to continue discussions.
  • Che-Hoo Cheng stated that the APNIC membership had grown 15 percent between January and June 2007, with most growth in the Very Small and Small membership tiers. He suggested that this growth in smaller, less experienced members would mean that the Secretariat would need to spend more time providing services to the new members.
  • Che-Hoo Cheng predicted that the Secretariat’s workload increase in response to these new members was perhaps 20 percent. He suggested that the increase of revenue by these new members, making up about five percent of the total revenue, was disproportionate to the workload increase.
  • Kuo-Wei Wu stated that members wanted to know the costs for projects. For example, members would be interested in the percentage of costs for training program versus APNIC meetings. He suggested that members did not want a complete breakdown, but wanted a little more detail than currently given.
  • The Chair stated that the session was due to close and expressed the hope that APNIC members would take the time between the end of the current session and the AMM on Friday 7 September 2007 to continue discussion on the fees.
  • Geoff Huston expressed surprise at the sentiment expressed by the EC Treasurer. Geoff Huston stated that APNIC was a membership organisation, and that each year, the membership elected people to the EC to represent the members. He stated that the information people were after as members was part of a dialogue between members and the EC. Geoff Huston stated that what he had heard did not give him a lot of confidence that the EC and the members understood each other’s roles. He explained that the EC was created in the APNIC By-laws to act on behalf of members between meetings. He stated that the issue was not the relationship between members and the Secretariat. Rather, it was about the Secretariat acting on behalf of the membership via the EC.

The Chair closed the session.

Meeting closed at 4:20pm.

Minuted by: Samantha Dickinson