Upcoming auction for mobile internet

For a change, let go of the old tried, tested and failed practices

ISLAMABAD:

All the global telecommunication indices rank Pakistan below every regional country – except Afghanistan. Out of 138 million broadband internet subscriptions, 135 million are wireless mobile, which relies on the radio frequency spectrum.

However, Pakistan is one of the world’s most “spectrum-starved” countries. In its Mobile Connectivity Index Report 2023, GSMA shows Pakistan with the lowest spectrum sub-index in the region.

Currently, a meagre 274 MHz spectrum is allocated for mobile services, while over 560 MHz remains unallocated, including some unfairly “occupied” spectrum by an operator. The unutilised spectrum is a waste of a precious limited national resource.

Reasons for low spectrum

The spectrum auctions have been few and far between. One was held in 2014, 10 years after its previous auction. It took seven more years for the next auction in 2021 – the two mini-auctions in 2016 and 2017 cannot be counted, as they were to sell the unsold spectrum of 2014.

The spectrum auction’s base (minimum acceptable) prices were always fixed very high, which the operators’ business case did not support. These prices are particularly decisive because the operators earn less in Pakistan, where the average revenue per user (ARPU) – about $0.80 – is among the lowest in the world.

The commercial terms are also never supportive. In the 2014 auction, the operators had to buy 2,100 MHz first to qualify for the more sought-after 1,800 MHz.

In addition, some spectrum was reserved for a new entrant, who never showed up. Consequently, 30% of the offered spectrum did not find any takers.

Despite the high spectrum cost, several audit objections and a NAB inquiry claimed that the auction proceeds were too low. The universal concept of technology-neutral spectrum was also challenged. Inquiries have since been closed, but not without scarring the wrongly accused individuals and stagnation in the sector.

Then, in September 2021, under the fear of similar objections/inquiries, the base prices and terms were kept harsh. Therefore, despite the great appetite, only one operator out of four made a bid, picking up about one-third of the offered spectrum.

On top of all that, the spectrum prices have been pegged to the US dollar. The rupee devaluation significantly increases the cost for the operators, who earn in rupees. Between the last spectrum auction of 2021 ($1 equals to Rs163) and now (Rs278), there is a price increase of 70% just on account of rupee devaluation.

A low visible spectrum demand in Pakistan also reduces the incentive to invest. Neither the USF (which collects 1.5% of revenues from telcos) nor the provinces (which collect 19.5% GST on mobile services) invest in any initiatives to stimulate demand that would lure investors on the supply side.

After a couple of half-starts in the last two years, the PTA is going to organise a spectrum auction in early 2025. In the first step of selecting an expert consultant, it received 11 Expressions of Interest (EOIs), who have been issued Requests for Proposal (RFP).

Among other things, the consultant must decide on a suitable spectrum auction methodology, the optimal base prices, and an appropriate set of commercial conditions, including payment terms.

After approval from the government, the consultant will supervise the auction itself. It is still feared that the shadow of past audit objections and inquiries may loom large in the form of a “risk” for the concerned officials.

Auction methodologies

The consultant will choose from among the five commonly used spectrum auction methodologies, including:

Sealed bid auctions, where bidders submit sealed bids and the highest bidder wins. It is simple, but it carries the risk of the winner overpaying (the winner’s curse).

Open outcry, it is an auction format where bidders gather and publicly bid. This methodology is challenging if there are many bidders or licences. Therefore, more modern and efficient formats have replaced it. This model was used in the first spectrum auction in Pakistan in 2004.

Simultaneous multiple round auction (SMRA), it allows bidders to bid on multiple licences simultaneously over multiple rounds. Bidders switch their bids across different licences as they go along. PTA employed the SMRA methodology in 2014.

Ascending clock auction, where the authority increases prices in rounds until only the winning bid remains. PTA used this method in 2021 to auction spectrum bands in AJK and G-B.

Combinatorial clock auction (CCA), it is a two-phase process in which bidders first submit bids for combinations of licences in multiple rounds (clock phase), followed by a final round (supplementary phase). CCA is complex and difficult to implement, which deters the participation of smaller players.

Fixing base price

Before organising a spectrum auction, the base (minimum acceptable) prices of the offered spectrum bands are fixed, involving economic, technical, and strategic considerations.

Mostly, a market-based methodology is used, which consists of benchmarking previous auctions, the recent auctions in similar economies, and consultations with all stakeholders. It combines policy and regulatory considerations to balance revenue generation with the overall socio-economic goals.

The common perception in Pakistan that revenue generation is the primary consideration of spectrum auctions needs to be addressed.

More complex methodologies to determine base prices involve economic/ financial/ technical modelling using econometric models approximating future revenues/ cash flows to generate estimated base prices.

Payment terms

Payment terms for spectrum charges vary based on the country’s regulations and the specific terms of the auction.

In its simplest form, the auction winner pays 100% upfront. In another form, payments are made in instalments over a specified number of years, with or without interest charges. Sometimes, the first payment is deferred for one or more years.

In the past, spectrum payments in Pakistan have been charged in instalments. However, the associated commercial/ payment terms toughened progressively over the years.

The 10-year payment period in 2004 was shrunk to five years in 2014 and 2021, and the interest rates on instalments increased from zero in 2004 to Kibor plus 3% in 2021.

Some countries charge a percentage of the operator’s revenue generated from spectrum usage for a specified number of years. This pay-as-you-earn form makes the government a stakeholder in the spectrum user’s business, which has its own pros and cons.

Bank guarantees by the operators ensure that they will meet their payment obligations. In addition, the licensees pay annual spectrum usage charges, too.

Way forward

Coming to Pakistan, my humble advice based on over 45 years of experience, is that we let go of the old tried, tested and failed practices, and offer all the available spectrum, on technology-neutral basis, at a price and payment terms that the operators cannot refuse. Then make them expand and improve the country’s rather pathetic networks.

The roll-out obligations may include the introduction of 5G in some parts of the three megacities. Let the market take care from there onwards.

The writer is the former CEO of the Universal Service Fund and is providing telecom (policy and regulation) consultancy services in several countries in Africa and Asia