Executive Council Meeting - Monday 9th July 2007

Draft Minutes

A special meeting of the APNIC EC was held at the Royal Plaza on Scotts Hotel at Singapore on the 9th July. Randy Bush, the co-Chair of the APNIC Fees Working Group was invited to attend this meeting, as well as consultants from KPMG who have been engaged to provide advice to the APNIC EC on APNIC fee structures.

Present

Introductory Comments

Paul Wilson opened the meeting with introductory remarks, noting that the general issue of APNIC fee structure is the topic of the meeting. This meeting has come about as an outcome of a previous EC discussion to try and bring this topic to a conclusion by the end of 2007. Paul noted that the situation is one that has not made significant progress in the past year or so, and the previous time we were in this situation (when considering the APNIC secretariat location) we used the assistance of a third party neutral body to analyse the options. The same approach is being used here, and KPMG has been engaged to discuss with us what the issues are, and to investigate what directions may offer some form of resolution. The overall intent is to use KPMG's assistance in making what appears to be a difficult decision for APNIC.

Akinori Maemura commented that this is a topic that has been active within APNIC for several years and we have not made substantial progress. The other big issue at hand now is IPv4 address depletion and the probability that the APNIC business model will be changing as a result. We need to take some big steps to move forward here, including the issues of IPv4 exhaustion. This meeting offers us the opportunity to set a direction for some progress with the assistance of KPMG.

Michael Hiller noted that KPMG have already circulated material to APNIC meeting, including a comparative analysis, membership survey and situation analysis. The objective from this meeting is to identify those issues that are seen as critical by the EC and to establish the general direction of approaches that the EC would see as productive to investigate.

KPMG Presentation

Fee structure has been a topic of considerable debate within APNIC over the years. Many approaches proposed and debated.

This study is using a 2 part approach of initial analysis and consultation, followed by option analysis in further detail.

Membership information

Membership growth in Very Small and Associate membership shows a compound growth 15%, but larger category membership growth is less than 10%

Compare membership growth, fee growth and operating financial outcomes. APNIC is at a critical point, as the current financial structure is not sustainable any longer.

Member survey

There have been 4 member surveys conducted so far, with the most recent one completed in early 2007. Results from this recent membership survey were presented at the APNIC member meeting in March 2007.

The activities with the highest positive feedback were APNIC's role in infrastructure support, the reporting and analysis of Internet activities, support for developmental activities in the region, database, quality, reliability and useability, efficient and effective service delivery. Overall member satisfaction is high here, and there is an expectation of continued excellence in service delivery by the members

It was noted a need for improvement in support for the policy process, resource allocation process, clarity of roles of various related bodies (NRO and ASO), accessibility and affordability in the open policy meetings. There is an expectation from the membership that APNIC services should be improved in these areas.

The survey asked for member views on allocation by APNIC of financial resources to various activity areas - services (including allocation process streamlining, training and education expansion), communications (accessibility, representation and web access) and technical (research and development, infrastructure and resource certification). These are current expectations on the part of the membership and again pose the issues of managing the secretariat's resources and available budgets to encompass these members' expectations regarding service delivery.

It was noted that larger members have a more positive perception of APNIC services,

Discussion about the "satisfaction" result vs category, and noted that there is a discrepancy here in that while APNIC is able to deliver services to high expertise customers, the service is not so readily delivered to smaller customers, and there are issues relating to the accessibility and complexity of the APNIC delivered services to these smaller customers.

There was a request relating to the survey of how many results here are driven by the responses from the larger members - what is the breakdown of the survey results if you take out the larger member categories?

The meeting discussed what would be the 'desired' profile of the member survey? Does this point to an area of potential improvement here that APNIC could concentrate on? What is the desire outcome when looking at APNIC as a whole? Are we happy with this outcome, or are we interested in improving this profile.

A question was raised as to survey participation and KPMG responded that this was a high survey participation rate for surveys of this sort, and the outcomes are reasonably illustrative of the general member perceptions

A question was raised about budgetary process and whether there was the option of beneficiary-based budget analysis. Budget has been largely based to date on prioritization of activities to fit within the budgeted expectation of available funds, rather than setting membership fees and related APNIC charges to match the proposed budgeted objectives.

It was noted by the Fees WG co-chair (Randy Bush) that the focal issue here was all about APNIC fees, not the budget determination process. APNIC is about in the middle of the RIRs in regard to scale of operation. There is the widespread view, supported by the member survey, that AP{NIC is generally doing the right thing in terms of service delivery and support activities, and the question for this meeting is about sustainable funding models, rather than a question of "what" to fund. This is not an exercise of activity stripping.

The comment was made that in terms of fees and service activities there is a need to determine the balance between smaller and larger APNIC members.

The membership survey also exposed the perspective that longer standing members are more comfortable / happier with service delivery from APNIC

Financial performance indicators 2001 - 2006

KMPG analysis of APNIC's finances noted a trend in recent years of APNIC's expense growth out-pacing revenue growth and the foreign exchange movement has been a significant contribution here, in addition to the increasing membership base and activity levels. The 2007 APNIC budget is projecting a loss of some USD 500K. The foreign exchange contribution is significant because of the income in USD currency and expenses incurred predominately in AUD currency. Over the past 6 years revenue growth (expressed in USD) is around 6% and total expense growth is 22%, taking out foreign exchange contributions. The major revenue source remains the membership fees, with per-allocation fees, resource application fees and interest income being the secondary sources. Salary (human resource) is a major expense, at around 43% of total expenses. The majority of these expenses are paid by APNIC in AUD.

There are serious issues around stability and risk of APNIC's income streams. Membership funds have increased, but as a total proportion of the APNIC income, this income steam is dropping and in proportionate terms other income streams are rising at a higher rate.

The highest relative category of income in membership in revenue terms is in the small members, and the question was raised - where should APNIC concentrate its service delivery in order to improve its position in membership satisfaction? Also it was noted that this breakdown does not include the per-allocation fee.

Comparative analysis with other RIRs

It was noted that APNIC is in a median position with respect to overall size, etc, but APNIC has the lowest income / revenue ratio. This implies that APNIC is operating with slimmer margins in terms of financial contingency provision than any other RIR at present.

Kuo Wei Wu asserted that the EC understands the situation and wants to take the approach of looking at the other RIRs and making the decision as to whether we want to continue in this way or look at "another way" that may be modelled on another RIR in that case.

Change Management Considerations

KPMG undertakes a considerable amount of work in change management, and there are elements of change management that need to be considered. These include the generation of a compelling case for change, a clear vision and a defined plan, which, if lacking contribute to outcomes of inertia, confusion and diffusion of effort. Then the change process requires resources and organizational capacity, the lack of which has an outcome in frustration and fatigue. Then motivation and community feedback is required to maintain the pace of change and dispel doubts as to the adopted direction of change.

APNIC, in the fee discussion process, appears to be in the initial case of agreeing that we need a compelling case, but lacking a clear vision or a defined plan at this stage.

Questions to the EC

KPMG requested that each member of the APNIC EC consider this issue by phrasing responses to following questions:

  1. Governance - the role of the EC in setting fees, as opposed to the personal role as a member; role of the DG in fee setting
  2. APNIC's ability to respond to the member survey - need to balance member survey outcomes and financial considerations
  3. The components in a new fee model - suggestions solicited, such as the basis for the calculation of the fees (e.g. resource usage), suggestions about the update of the fee structure (eg in terms of change with CPI or forex or...
  4. Criteria which should be used to assess each fee structure option
  5. The desirable decision process for the EC and membership
  6. Risks
  7. Other comments

Discussion: how does the fee model change the service delivery focus? Noted that RIPE's focus on revenue from new members has meant that RIPE has made it very easy to join and be serviced, and their business model is strongly based on such growth and new members. It was observed that as you structure the revenue sources you adjust the focus of the organization on those sources, so there is a real feedback loop between the fee structure and the service profile that needs to be considered here in the overall discussion

Reponses to KPMG's questions

Kuo-Wei Wu:

Kusumba Sridhar:

Ming-Chen Liang:

Che-Hoo Cheng:

[Michael: maybe there is a need for the EC to circulate its ideas as it evaluates options]

Wei Mao:
[presentation]

Vinh Ngo:

Maemura Akinori:

Randy Bush

Geoff Huston:

Paul Wilson:

APNIC EC Session

The meeting met without KPMG consultants present to consider various principles for fee options and the criteria for assessment of such fee options

It was observed that while it was interesting to see some alternative models of fees and the effect of turning the parameters of various models, the basic question related to the underlying objective here and the associated deliverable from this activity? The questions to be considered include: Who has the responsibility for selling this to the membership? Who should be assembling the material and presenting it to the membership? How is "consensus" of the membership assessed? Given that many parties would tend to favour the option that reduced their own individual fee payments, then how is APNIC going to achieve consensus across the membership in the matter of fee structure?

One approach considered was to put the option of some form of status quo, perhaps as a relative formula rather than a set fee amount as an option to compare against other proposed fee options.

The meeting considered fee structure principles, or parameters that could be adjusted in a fee model, and agreed on the following list:

Discussion of various approaches included the observation that there are activities undertaken by APNIC that produce outcomes of common benefit across the region, there are resource holding where the recipient derives benefit from the held resource and there are service transactions with APNIC.

It was noted in discussion of a service transaction-oriented fee structure that many of the Internet's activities that are infrastructural in nature and essential to the continued operation of the Internet are now falling to the RIRs' activity agenda simply because of the lack of any alternative through either industry activity or public sector activity. It was commented that the NIRs are not in a position to take this general infrastructure activity agenda up as there is a consideration of critical size and capability to undertake such roles that are beyond the scope of an NIR.

Discussion of mechanism for adoption - is this a membership vote or an EC decision? It was commented that the powers of the EC are powers of decision that would otherwise be taken by the membership, and the EC has the ability to make such decisions between member meetings (with a provision for membership review at those meetings). APNIC now has e-voting so the criticality of "between member meetings" is no longer a major consideration. The question was posed: Why not have a vote by the members? Discussion considered whether such a vote would be an up / down vote on a single option, or an either / or vote between 2 models, or a single vote across many models? It was also noted that in the APNIC By Laws as they exist right now is that membership votes are in meetings and electronic voting is prior to the meeting, so membership votes are still associated with the membership meeting schedule.

The group considered assessment criteria and agreed on the following list:

KPMG feedback

The meeting resumed with KPMG, who then presented the issues that they had identified during discussions in the morning.

Issues to be considered:

Need to quantify some of the expectations as indicated in the most recent member survey - how realistic are these expectations? What would it cost?

APNIC concept of mutuality and common beneficiaries

Financial Management considerations:

Need for longer term planning (5 years)

Capacity of LDCs in relation to the fees

Account of historical allocations

Change the IPv4 and IPv6 scaling factors

Proposed Evaluation Criteria:

Potential Risks

Next Steps for KPMG:

KPMG would focus on deliverables for the 7th September (APNIC meeting week). The EC requested that KPMG look to producing some outcomes by the 24th August to allow for some time to prepare.

Next Steps for APNIC EC and Fees WG

There was concern voiced over the scope of the proposed work. It was seen as a significant deliverable, and doubt was expressed that meaningful outcomes could be produced in the time available that would lead to any resolution in time for the 2008 budget process. This was seen as being an unacceptable outcome in terms of APNIC's immediate financial situation in the 2008 - 2009 period.

The critical question posed here was what is the major immediate issue we are facing here and can they be addressed in some interim manner to allow due consideration of the larger issues of fee structures and principles of equity and fairness across APNIC's membership.

There are current and near term (two to five year) fiscal issues, particularly the fact that, because of currency exchange rates for the US Dollar, needed expense increases to meet service needs while retaining employees, etc., APNIC is likely to have over a US$400k loss in fiscal 2007. This means that pragmatic fiscal changes need to be made this year, while the EC and the membership also do long range business analysis and planning of the larger issues that APNIC is facing.

Given that there are currently two major fiscal causes of the budget shortfall, APNIC income is denominated in the falling US Dollar while it incurs expenses in Australian dollars, and costs of the operation rise with inflation factors, the EC asked APNIC financial management what the current prudent course would be. The answer was twofold:

It was also suggested that any subsequent fee increases be capped at no more than 6% per annum.

This proposal would need to be discussed by the APNIC membership as a whole as soon a possible, and formally reviewed and approved at the September Members' meeting if it is to take effect in January 2008.

The Fees WG co-chairs have asked the Secretariat to give the Fees WG a meeting slot in September, as well as time to discuss all this at the Members' Meeting then.

It was noted that this was proposed as a financially prudent action, pending resolution of working out sustaining outcomes. This proposal will allow APNIC the necessary time to work through these longer term change issues. A further comment was made that the EC should have a statement that makes a commitment in terms of dates that resolves the longer term fee structure conversation

Discussion on the basic parameters of the fee structure for APNIC included consideration of a number of quite fundamental perspectives that members have brought to this discussion over the extended period that this discussion has been active in APNIC. This includes:

Action Items