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The Digital Spectrum Auction: Matters Arising
 
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27-Nov-2015  
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A lot has gone on within the past few days about the 800MHz digital spectrum to be made available for auctioning by the telecoms regulator – the National Communications Authority (NCA).

Initially set for auctioning sometime in November, the latest news is that the dates of December 1st to 3rd have now been set aside for the bidding war with an eventual winner to be announced on 7th December.

 

The days leading up to the eventual announcement date have been nothing short of dramatic with intermittent sub-plots. Perhaps the most obvious matter arising is the lingering debate on whether it would be suicidal to open the auctioning up for both local and multinational companies.

·         Is it, for example, a national security compromise to invite foreign companies to bid for the treasured “product?” 

·         Would the country’s telecommunications industry come tumbling down if this happened?

·         Would Government be deemed to have mortgaged any chance of enhancing revenue in this sector if a multinational company eventually wins the bid?

 

These are but a few of the queries that seem to have captured the general public’s imagination and interest in the lead up to December 1st. 

That notwithstanding, another subject matter that deserves some explanation is the startling realisation that, apart from the only profit-making 3G telecom company in Ghana, the other fixed operators abstained from partaking in the bidding process.

It will be foolhardy to ignore or fail to question why the five 3G Companies refrained from entering the auction process. Let’s look at some analysis;

                The NCA opened public consultation on the licensing of spectrum blocks in the 800MHz band on June 3rd this year, pegging the minimum auction price at US$92million. Subsequent to this, the regulator invited comments and views from Licensed Service Providers, Consumers of Communication Technology Services and the General Public on the process.

In making a case to the NCA, some of the telcos, including the five 3G telecom companies, highlighted a key concern for the regulator to consider. This was in relation to the reserve price of USD$92.2million for the 2x10 MHz blocks and the USD$42million for the 2x5MHz blocks of spectrum in the 800MHz band.

Admittedly, there is everything to be happy about the release of the 800 MHz spectrum following the digital migration which will free this spectrum for use by the Telecom Industry.

The auction was meant to make available spectrum for delivery of mobile data services, however, these telcos were quick to point out that the extremely high reserve price, coupled with the high cost of infrastructure in its delivery, will make very expensive the cost of mobile data services to consumers.

The telcos envisaged a negative investment outlook with the present reserve price based on the expected affordability of data service. This, they argued, was likely to delay consumer uptake, the rollout of broadband services and consequently the provision of affordable mobile data services. .

 

International best regulatory practice requires one to consider factors such as population sizes, average revenues per user and GDP per capita, which are reasonably similar in every material aspect when benchmarking and setting the reserve price for any spectrum.

Where there are no similar markets to use as benchmarking, one is required to make adjustments when benchmarking against a more developed market’s reserve price for the spectrum.

It is understood that a recommendation was made to the NCA that a block of 2x10 MHz block of spectrum should have been priced in the region of USD$30million and USD$15million for the 2x5MHz block of spectrum.

Despite a further consultation that led to a ‘show of leniency’ on the part of the regulator, bringing into fruition a reduction of the price to US$67.5million, there was still an insistence that the price was high and had the potential of discouraging interested bidders from participating in the auction.

 

In an industry, beset with active competition and great dynamism in innovation and creativity, the actions of the regulator must be seen to be encouraging fair competition and engagement; to develop the market and bring greater accessibility and choice to customers.

If these concerns are not factored into decisions at the highest level, the industry risks being plunged into a non-sustainable; ineffective and retrogressive state.

Currently it is an established fact that only one of the telecommunication companies, of all the six telcos, is making profit. Anyone with a subtle knowledge of how telecommunication companies work across the globe would know that it takes a while to recoup such investments made in the industry; let alone the thought of making reasonable profits.

To borrow the Latin phrase, “Festina Lente”, i.e. “to make haste slowly”, it takes time to break even and make profits in an industry such as this. With this picture, the other fixed operators found no business case to enter into the bidding process for the spectrum.

That aside, the policy and regulatory environment has produced a telecommunications industry which is over-regulated, over taxed and over-crowded. Profitability seems antithetical to the purpose of policy and regulation; opportunity to be heard is a luxury and trust is non-existent.

Over-regulated

The recent flurry of regulatory interventions including the decision to create the ‘gang-of-four’ licences (Unified Licence, International Wholesale Carrier Licence, Mobile Virtual Network Operator and Interconnect Clearing House Licences) have succeeded in creating uncertainty for the industry.

Added to these are the various guidelines, directives and regulatory interventions such as (On-net Price Regulation, Schedule of Penalties and Sanctions, Conflicting Directives on Revenue Monitoring, the High Price for the 800MHz Spectrum Auction etc.). These make business planning extremely difficult and affect investment decisions.   

There is huge interest in local participation in the telecommunications industry. Let’s not get it wrong, this piece is supportive of local content since it makes business sense. The more the needed supplies and services are sourced locally, the stronger the value chain of the industry and the more sustainable it is.

However, the pursuit of local content should not detract from the expected return on investments made in the industry by the prime movers. Else, it could tip into becoming more of resource nationalisation than local content. The industry seems to be at that tip.

Taken in their totality, the preponderance of policy and regulatory interventions seem to be aimed at “creaming off” revenue for local companies in the name of local content. The impact on investible revenue to expand congested infrastructure, improve capacity and quality of service will be severe. Ultimately, this will chip away national growth rate as it will stifle the growth of the telecommunications service sector, which is vital to economic growth.

Over-taxation

Ghana has achieved a very high tax environment for the telecommunications sector. The combination of corporate taxes, regulatory and licence fees, Communications Service Tax, Surcharge on International Incoming Termination Rate (ITR), site permits, business operation permits, etc. all contribute to a prohibitive tax regime.

Over-crowded industry

For the size of Ghana’s economy, population and other variables, the number of operators in the telecommunications industry is too many. We currently have six mobile/fixed network operators, in addition to the three local LTE companies. The ICH is also doing a warm-up on the sidelines to join.

With such a fragmented industry, it is no wonder that only one operator is making profit at the moment. This denies government of all the extra revenue that can be derived from profitable businesses. In addition, it weakens the ability of the other operators to re-invest in infrastructure and expansion projects, which could support economic growth;

·         Any surprise that only one operator has the muscle to bid for the 800MHz spectrum?

·         What lessons are government and the regulator (NCA) taking from this situation?

Profitability

The overcrowded nature of the industry, over-regulation and over-taxation explained above have combined to make the industry very unprofitable. The struggle by operators to develop a business case that supports participation in the auction of the 800MHz Spectrum is a function of the unprofitable nature of the industry.

Policy and regulation must enhance competition, offer consumers value for money and contribute to the growth and development of the industry. However, such interventions have been driven more by the quest for extra revenue for government as against developing the sector.

As a result, the line between the regulatory role of the NCA and the revenue generating role of the Ghana Revenue Authority (GRA) is increasingly becoming blurred. There also appears to be a focus on nibbling away at whatever revenue the industry generates.

Most policy interventions are progressed without consulting industry players. Consultation is only done almost as an after-thought; after approval has been given for the policies to be implemented.

At times, these even get published in the media before industry is consulted. They therefore remain ‘tick-box’ exercises, not really intended to obtain input from industry players. 

Trust

What is left as a result of all the issues raised above is an industry suspicious of itself. Government and the regulator do not trust the operators. They believe there could be more to the revenue numbers than meets the eye. They forget that their own policy directions are the greatest inhibitor to realising the potential of the industry.

Operators on the other hand do not trust any initiative by the policy makers and the regulator. They are persuaded that such interventions are ill-conceived. They also believe the superintendents of the industry have huge misconceptions and misunderstanding of the industry. They are of the opinion that their prime objective is to deny operators their revenue.

All these seem to be playing out again, with the so-called one-man ICT Chamber (clearly a hired mercenary work for those who understand what is happening) leading the charge.

 
 
 
Source: Safoa R. Agyeiwaa
 
 

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