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Tim Watts

"Spectrum Sale is Off the Air"

Australian Financial Review

March 19, 2001

Bidding is under way in the latest spectrum licence auction, but one fact has been ignored in the hoopla surrounding the probability of smaller-than-expected proceeds - the way the sale is being conducted is extremely bad for both the telecommunications industry and Australian taxpayers. 

The spectrum is the most valuable publicly owned asset of the information age and its value is likely to grow exponentially over the next few years.

We rely on radio signals sent via the airwaves for everything from mobile phone calls to taxi services, from remote irrigation switching for agricultural production to television broadcasting. 

It is also a scarce resource - each band of the spectrum can have only one user, to prevent interference. 

Responsibility for managing the airwaves lies with the Australian Communications Authority, which has traditionally granted licences according to its perception of the public interest.

The ACA has begun auctioning licences because the Communications Minister, Richard Alston, has been pressing for extra revenue and because many economists have argued that a competitive market is the most efficient way to determine which companies get to use the spectrum.

A competitive auction is supposed to reveal which bidders value the asset most and generate the highest possible return for the asset's owners. The problem is that the value of the airwaves is increasing so quickly that no-one really knows how much they are truly worth.

Five years hence an array of amazing new products and services will exist which rely on the spectrum, so we could be talking about values more than 10 times the $1.5 billion to $2 billion expected now.

But the ACA has chosen a fire-sale auction model that effectively hands permanent control of the airwaves to wireless phone companies. 

Spectrum licences nominally have a 15-year term, but the ACA has publicly stated that licensees can expect automatic renewal in perpetuity at no extra cost.

Auctions are a good way to allocate licences to the airwaves, but Australian taxpayers must retain control of their asset and receive a fair payment from the companies using it. The ACA is basically handing over a goose that lays golden eggs.

The ACA's auction model also hurts the wireless phone industry. By staging a once-off fire sale, the ACA is forcing companies to pay massively inflated prices for their spectrum licences. This ensures that companies have less money to spend on improving their networks, which means consumers suffer through lesser quality wireless phone services.

One telecommunications chief executive, Larry Williams of AAPT, has accused the Federal Government of money grabbing, saying high prices hurt rather than foster competition.

The ACA plans to auction off even more of the spectrum later this year in the same reckless way. 

It is as if Australian taxpayers had employed a team of incompetent investment advisers to look after their most valuable asset and the team developed an eBay addiction.

A better plan, with the long-term interests of the telecommunications industry and Australian taxpayers in mind, would be to auction spectrum licences that also require successful bidders to make annual royalty payments.

Alaskans know exactly how this type of scheme works.

Oil companies in Alaska buy leases on drilling sites from the State Government at competitive auctions, then pay a royalty of 12.5 per cent of production revenue into the Alaska Permanent Fund, an independently managed trust with total assets of about $US26 billion ($50.2 billion).

Each Alaskan citizen collects a dividend of about $US2,000 a year based on the investment returns from that money. The principal is left untouched. 

This example represents sustainable use of the market mechanism in managing a publicly owned resource. 

A competitive auction efficiently determines which companies get access and the long-term royalty structure ensures that the cost to companies is spread over the life of the lease rather than concentrated up front. 

In addition, the owners of the asset, the taxpayers, get a decent return while retaining ultimate control. 

Australians need public assets like the airwaves managed for the long run. There is more to fiscal responsibility than simply balancing this year's Budget.