Assigning High Demand Spectrum in the ICT Sector – A possible hybrid method

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The telecommunications sector is the backbone of the of the digital economy. Access to spectrum is essential for speedy, reliable and affordable access to world class networks and communications which form the basis for online activities and more broadly, participation in the Fourth Industrial Revolution. The recent withdrawal of the Electronic Communications Amendment Bill (“EC Amendment Bill) has added to policy uncertainty in relation to the assignment of spectrum.

Last year the Department of Telecommunications and Postal Services (now the Department of Communications) issued a Draft Policy Direction to Independent Communications Authority of South Africa (“ICASA”) on the licensing of unassigned high demand spectrum (“HDS”) for public comment which gave some insight into how spectrum might be assigned.   In terms of the Draft Policy Direction, the assignment of spectrum to licensees would have been subject to conditions related to the controversial Wireless Open Access Network (“the WOAN”), a policy proposal in terms of which spectrum would be assigned to a wholesale network operator and made available to operators on the basis of open access principles. Following the withdrawal of the EC Amendment Bill, the WOAN as well as other policy interventions that were introduced in the Bill, are unlikely to materialise in the near future.

In his 2019 budget speech, Minister of Finance Tito Mboweni indicated that the Minister of Communications, Ms Stella Ndabeni-Abrahams, would be issuing another policy direction which is likely to propose new conditions for the issuing of spectrum licenses. At this stage, the method of assignment (i.e. market-based or administrative) is yet to be confirmed. The various policy decisions available to ICASA in relation to the assignment of HDS are unpacked below.

Why We Should Care About How Spectrum Is Assigned?

Spectrum is an essential, finite, sovereign resource which makes wireless communication possible.

Spectrum, in different radio frequency bands have different quality propagation characteristics which determine the level of investment required to achieve certain levels of coverage. The quality and cost of data network services are a function of, amongst other factors, how much spectrum an operator has. Making more spectrum available to operators is expected to result in cheaper data and lower network roll out costs, which may encourage price competition in the retail market.

Operators are clamouring over the release of HDS because of its propensity to deliver next-generation mobile broadband services (5G) as well as enable technologies which are dependent on high-speed internet (e.g. AI, Internet of Things (“IoT”)). The amount of harmonised frequency bands is limited, and the “scarcity” is aggravated by delays in the assignment of existing HDS and increasing growth in data traffic.

The availability of spectrum does not only promise significant commercial gains but can also aid in the realisation of social goods, such as increased access to ICT infrastructure to underserved areas, e-commerce, lower the cost of online activity, promote the digitisation of local content as well as the development of digital skills necessary to bridge the digital divide and ensure inclusive participation in the Fourth Industrial Revolution.

An Auction Is Not The Only Way To Assign Spectrum

Since the President’s announcement that the licensing of spectrum should be expedited, many have waited in anticipation of an auction of the unassigned HDS. An auction, however, is not the only way for spectrum to be assigned. Other methods include Comparative Evaluations, also known as a Beauty Contest, Lotteries, First-Come-First-Serve (“FCFS”) as well as Secondary Assignment Methods. In terms of the Electronic Communications Act 36 of 2005 (“the ECA”), ICASA has a dual mandate to ensure both economic (e.g. competition, innovation, investment) and developmental outcomes (e.g. affordability, availability and accessibility to electronic communications). Spectrum is a public resource and the public interest needs to be at the forefront of any spectrum management strategies. The method which ICASA uses in issuing spectrum licenses could impact how effectively it is able to realise both economic and social objectives and address the issues in a sector characterised by few competitors, high barriers to entry, and a lack of countervailing buyer power.

  1. Auctions

Auctions are the most popular/dominant method for the assignment of spectrum given the associated potential for revenue generation for the fiscus and efficiencies. An Auction will provide ICASA with an opportunity to determine how much operators value spectrum. An underlying assumption of an auction is that the operator who places the highest value on spectrum is most likely to create the highest social as well as economic value with the scarce resource to ensure a return on investment. This assumption has been questioned in light of recent studies by the European Commission which have shown that operators paying high auction prices have not necessarily translated into higher investment or superior network availability.

In 2016, ICASA issued and Invitation to Apply (” ITA”) in terms which it intended to conduct an auction of HDS. The Minister of the then Department of Telecommunications and Postal Services challenged ICASA’s decision to issue the ITA for its failure to follow process and make the necessary policy considerations, and successfully interdicted the proposed auction pending the finalisation of the review. The dispute has since been settled between the Minister and ICASA in an effort to heed the President’s call to expedite the licensing of HDS.

Some clues could be drawn from the 2016 ITA on how ICASA could go about auctioning spectrum. ICASA could adopt a three-stage process. The first stage would be the qualification stage, where the applications are assessed against certain criteria (e.g. technical or financial capability). The auction would occur in the second stage where applicants submit bids for the radio frequency bands that they want. At this stage, a widely adopted form of auction is the Simultaneous Multiple Rounds Auction (“SMRA”). In terms of this process, bids are placed on a variety of frequency bands (simultaneously) and the different categories or lots of spectrum remain for sale until bidding activity comes to end. Once bidding activity comes to an end, the bid enters the third and final stage where the winning bidder is issued with a license subject to a license fee and licensing conditions. The conditions could relate to, among others, technical restrictions of use, obligations to meet certain coverage targets as well as providing open access to mobile virtual network operators with a specified ownership level for Historically Disadvantaged Individuals.

Other forms of auction include Spectrum Reserve Auctions and Combinatorial Clock Auctions (“CCA”). In a spectrum reserve auction, a reserve or minimum opening bid price is set for participation in the auction. The 2016 ITA set a reserve price of R3 billion per lot of spectrum which was argued to be prohibitive by some operators. Many countries, such as Canada and some European regulators, are adopting the CCA due to its ability to encourage truthful bidding and maximize value. The auction is conducted in two rounds known as the clock phase and final bid round. In the clock phase, bids are made on various generic lots of spectrum with individual price clocks that increase continually depending on the level of interest for each lot until bidding activity comes to an end. In the supplementary round, bidders are allowed to make sealed bids of their best and final offers. In the clock phase bidders are believed to reveal their preferences through their bids and cannot make bids inconsistent with their initial offering in the supplementary round. In the final round, the winning bidders are determined based on the highest value combination of bids. The final price that the winning bidders pay is based on the value of the other bids submitted and / or a set reserve price to ensure that the spectrum is not undervalued and is set at a competitive price.

Although popular, auctions do present challenges such as:

  • “The Winners Curse”: Operators could overvalue spectrum and bid more than is necessary to win a specific lot of spectrum. A counter argument to this would be that this loss is calculated beforehand and accounted for accordingly.
  • The potential for collusive bidding: Auctions are also conducive for collusive bidding between the bidders in order to manipulate auction outcomes and what would have been the bidding prices, in the absence of collusion, resulting in a loss of revenue.
  • Compromised policy objectives: Auctions are often criticised for placing revenue generation over the realization of policy objectives. ICASA could provide for this by making the assignment of spectrum subject to policy related conditions (e.g. the level of HDI ownership and or universal service obligations).
  • Low bidder participation: Auctions often attract incumbent operators with deeper pockets submitting bids. This could pose a threat to ICASA’s intention to increase market participation in the sector and entrench the current market structure.

These unintended consequences can, however, be curbed through activity rules to manage the behaviour of bidders throughout the auction, placing caps on spectrum ownership and setting aside spectrum to facilitate the entrants of new players.

  1. Comparative Evaluation – “The Beauty Contest”

As an alternative to an auction, ICASA could also allocate spectrum licenses by way of comparative analysis or so-called beauty contests. Applications would be considered against weighted criteria which could include socio-economic imperatives. Licenses would then be allocated to applicants based on their ability to meet the criteria. In the past, Sweden’s telecommunications authority allocated 3G spectrum licenses by way of a two-stage beauty contest. The first stage served to ensure that the applicants were technically and financially competent to fulfil the obligations set out in their applications and roll-out their network. The comparative evaluation of the submissions would happen in the second stage and the license awarded based on the applicant’s suitability considering the pre-weighted criteria.

The disadvantages associated with beauty contests include:

  • A long and drawn-out and costly process of assignment.
  • The decision process is not the most transparent given the complexity of the criteria being assessed and depends highly on the good judgment of the regulator. This is particularly problematic given that operators may have asymmetric information over the regulator as to what the most efficient use of spectrum would be.
  • The regulator is vulnerable to lobbying and being accused of corruption or favouritism.
  • The absence of a price discovery mechanism, as in the case of an auction, may lead to spectrum being undervalued.
    1. Lottery

Anotssignment method for spectrum licenses is a lottery, whereby spectrum licences are issued through random selection. Even though this method offers a relatively speedy and inexpensive process for the assignment of licenses, it could lead to spectrum being allocated to operators who do not have the competencies to ensure optimal use of the resource and roll out their networks. In 1982, the United States issued spectrum by way of a lottery in an effort to expedite access to spectrum and lower the costs for entry into the market. This method of assignment was quickly abandoned as the lottery attracted speculative bidders who had no intention to provide services and who went on to sell their rights in secondary auctions at exorbitant prices. Its worthy to note that the ECA does not permit the transfer, cession and assignment of spectrum licenses without regulatory oversight.

  1. First Come, First Served

This method of assignment is best suited for circumstances where there is an abundance of spectrum and often results in incumbents acquiring spectrum. In this case, the regulator can accept applications for a predetermined number of assignments. Where the demand exceeds the amount of assignments available it is likely to use other methods (auction or beauty contest) to ensure a more efficient outcome.  However, should the assignments available be sufficient to meet the level of demand or applications submitted the regulator will proceed to issue licenses.

Secondary Assignment Mechanism: Spectrum Trading and Sharing

The withdrawal of the EC Amendment Bill also saw the withdrawal of provisions relating to spectrum trading and sharing. Spectrum trading refers to the trade of spectrum licenses along with the attached rights (e.g. the bands available for use, the geographical area, the use to which it can be put) and obligations. Spectrum sharing enables multiple entities to make use of a radio frequency band in a specific geographic area simultaneously. Introducing secondary markets is particularly useful in assisting new and smaller players to gain access to a scarce resource and enter the market without incurring the costs of setting up their own networks and thus lowering the barriers to entry. Oversight by the regulator is however required to ensure that these transactions to not distort competition in the sector.

Could a hybrid process be the answer?

Given various economic and developmental interests that ICASA and the Minister need to balance, it may be necessary to adopt a hybrid method of assignment. For instance, where the objective is to facilitate the entry of a new market participant, a market-based approach or auction could pose a significant barrier to entry and entrench the already existing market structures.

Conversely, a method which is heavily reliant on a subjective assessment (e.g. beauty contests) may result in an allocation of spectrum to operators who are technically inefficient and unable to extract the optimal economic value from the assignment. Ultimately whatever method is used to assign spectrum licenses, socio-economic imperatives should be prioritised without stifling innovation and investment in the sector to ensure that South Africa can fully capitalise on the opportunities presented by spectrum availability.

By

Nalo Gungubele | Associate, Adams & Adams

Jac Marais | Partner, Adams & Adams

 

JAC MARAIS

Partner
Commercial Attorney

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NALO GUNGUBELE

Associate
Attorney

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