South Africa: Assigning High Demand Spectrum In The ICT Sector – A Possible Hybrid Method

Last Updated: 16 April 2019
Article by Jac Marais and Nalo Gungubele
Most Popular Article in South Africa, April 2019

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.

2. 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.

3. Lottery

Another assignment 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.

4. 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions