Tuesday, April 21, 2009

Spectrum valuation

The Department of Broadband, Communications and the Digital Economy has issued a tender for consultants to value the expiring fifteen year spectrum licences. The exact brief is;

The Department requires a Consultant to conduct a desktop analysis to estimate the potential value that could be received by government from re-issue of the 15 year spectrum licences. A range of scenarios will be provided to the successful Tenderer. The scenarios will range from the reallocation of licences through an auction process to the renewal of licences held by incumbents. Associated issues, such as disruption costs that could result from an auction (because of the potential for new licensees and service discontinuity) will also need to be assessed.

The Consultant will review relevant international and/or Australian spectrum valuation practices, including giving consideration to the major services that are likely to use the spectrum. Value means the amount of money buyers may be prepared to pay the government to purchase the spectrum when it becomes available. Tenderers should include a description of their proposed approach and methodology.

I don't envy anyone that task. There is a particular problem inherent in the whole construction of spectrum policy and the idea of value. As the tender document also notes;

Spectrum is a valuable resource. The Radiocommunications Act 1992 aims to provide for management of the radiofrequency spectrum in order to, among other things, maximise the overall public benefit derived from using the radiofrequency spectrum. The Government is required to balance a range of social policy objectives against industry demand to achieve this outcome. .

The question always arises of how the "overall public benefit" from using radiofrequency spectrum is interpretted. In an environment of price based allocation is the "pblic benefit" limited to the income generated by the sale of the spectrum licenc, or is it something greater that would be recognised as the social benefit in a more standatrd cost-benefit analysis.

The issue is mute if the public benefits equate to the private benefits of a firm utilising the spectrum. This is not necessarily the case, as the nature of the services is that they are bedevilled with externalities. Some of these are the well-known externalities attributable to network effects. Where the spectrum is providing general communications services these are highly likely to be the kind of privte investments that produce the "spillovers" that generate growth in Paul Romer's new growth theory. In this regard evaluating the public benefit of spectrum is a task akin to measuring the public benefit of, say, the NBN.

The second problem with equating the public benefit with the private benefit as expressed by a price based allocation is one of imperfect information. If we assume that ever bidderr in an auction has imperfect informatio, we can assume that there will be a range of valuations chosen by participants that reflects the errors in their information. In a auction process the spectrum is allocated to the bidder who was most wrong in their over-valuation. In the best of all possible worlds the bidders will have discounted their bids to reflect this uncertainty, however, in the real world we are more likely to see the outcomes that occured in the second PCS auction and the LMDS auction where the amounts paid were simply unsustainable.

Finally, there is the issue of the interplay between the private and public benefit that could be partially sumarised as a consideration of market power. In its most extreme form this reflects the concept of rent seeking, a firm would be prepared to pay some of its economic rent in a higher spectrum price if it can in this way constrain the market. More generally, if the end market for services is competitive every dollar spent in acquiing spectrum is a dollar less that cen be spent on building network, so the consequence of creating a charge for the spectrum sset is to reduce output and incur a deadweight loss.

Whoever wins this consultancy has some difficult tasks ahead, some of which are dealing with entrenched views in policy areas that have equated the public benefit with the revenue received and ignoring the fact that ultimately any payment received for the spectrum comes from consumers.

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