Why not auction cellular licenses?

 

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Category: Trinidad Economy Date: 28 May 00


US$32 billion. That’s how much the British Government earned from their auction of cellular frequencies last month. Germany’s auction, planned for July, is expected to raise $50 billion euro (US$45 billion), on the assumption that it will attract roughly the same bid per cell-phone user as the British sale. Even Morocco, poor as it is, earned US$1.1 billion from the sale of a single cellular license. This move, says The Economist, is “helping Morocco leap-frog generations of development. Investors say the speed and transparency of Morocco’s telecom reforms are unparalleled in the Arab world.”

 

Governments everywhere from Egypt to the US, are successfully auctioning cellular licenses for substantial sums of money. Why not us?

 

The UK cell market consists of 56 million people with a per capita income of some US$17,000 dollars. Work the numbers backwards to Trinidad and Tobago and you end up with our licences being worth US$200 million. Even if it is worthless it is a hell of a lot more than nothing, and will go to the people’s treasury instead of the pockets of a few well placed companies.

 

Think of what we could do with US$200 million. Nurses could be paid; schools, hospitals, furnished; jobs created; infrastructure built; drug trafficking fought. Think of what it could do for those without a safety net - the elderly, the ill, the poor, the youth, the children, the disabled.

 

It could go towards sustainable development: help bridge the yawning menacing gap between the rich and the underclass; fight poverty and illiteracy that is waiting to explode in our faces in the ugly guises of racial tension and crime.

 

Our experience with the sale of national telecommunication assets (including cellular frequencies) in Caricom has come from Guyana and Jamaica. Guyana sold its telephone company for US$15 million, and in two years time it was worth US$150 million. Unfortunately, the profit went to a single foreign company rather than the people of Guyana.

 

In Jamaica, the one place where auctions did take place it was botched up by lack of experience, and had only themselves to blame for not doing their homework before signing on the dotted line.

 

Monopoly

 

When Cable and Wireless bought 49 per cent of TSTT’s shares in the 80’s, the Government signed a contract which gave TSTT monopoly rights until 2010. Minister of Public Utilities Ganga Singh confirmed that we too are attempting to renegotiate our position with C&W for the obvious reasons - improved or cheaper services (or a combination of both) to the benefit their people and businesses.

 

Government has succeeded in breaking the monopoly for cellular licenses and invited submissions for proposals and should be lauded for that. The arguments raised against auctioning our cell licenses are either not valid or are can be dealt with. Here are some possible solutions:

 

Universal provision - Unlike water and electricity, there is no reason to demand universal provision for cellular phones. Why is it necessary for every person in Trinidad and Tobago to have a cell phone?

 

Universal coverage (the ability to use cell phones anywhere) - Any company that does not provide wide coverage will automatically cut themselves out of part of the cellular market since clients will want to use their phones everywhere. It is basic business sense to provide as wide a coverage as possible.

 

The government wishes to set high performance standards or put a cap on charge rates. In such a case, the government can state these criteria publicly and allow bidding to go ahead with all the participants agreeing to the criteria before hand. We may raise slightly less money but we will still get more than a tax pittance.

 

We agree with Govern-ments wish to support the growth of a strong local cellular industry. Other than the fact that we already have TSTT as a national champion, the solution is to reserve one of the three or four licenses to be auctioned to local companies, and open the auction of the remaining licenses to both national and foreign companies.

 

The point that cellular systems are embryonic here in Trinidad and Tobago simply does not hold water. Cellular phones are nothing new. Ask the 40,000 people already with cellular phones. In fact, we have second generation cellular equipment (Digital) and we hope that the licenses are for third generation systems (Internet compatible). We do not want people dumping their used second generation equipment here in Trinidad and Tobago.

 

The cellular business is a hugely successful business worldwide from South Africa to the US. No cellular companies are going bankrupt. On the contrary the cellular company valuations are going through the roof. The size of the market doesn’t matter. Those against it say our local companies simply cannot put up huge lump sums required for auctions. But according to Minister Singh all shortlisted companies are operating as joint ventures with the big boys, eg AT&T and Bell, so they have access to big funds.

 

The company’s who are bidding put a value on the cell market. If UK companies felt they could spend US$32 billion and make money, and the UK government handed the licenses to them (as we propose to do) those same companies would be US$32 billion dollars richer and UK Government that much poorer.

 

Would successful bidders be sucked dry in an auction? The Economist says “the answer is that bidders themselves are the best judges of what the licences are worth. If, during the auction, they had thought that they could not win a licence without making a loss, the solution was obvious: drop out. Granted, the companies may miscalculate: competition may be so fierce that they cannot charge enough for their services to recoup the cost of their bids. But that is their problem. And if a mobile-phone company cannot make money, or goes bust, it can always sell its licence.”

 

Recouping

 

What of the view that cellular companies will be crippled by the sums that bidders have to pay? The Economist says “it is not clear why that should transpire. One might instead argue that companies will have to strive harder and invest more than they would have had they been given the licences free, because of the pressure to recoup their bids.” We do not need to provide windfalls to the AT&T, Bells, the Neal and Massys and Gillettes of this world. If these companies can’t do their calculations right then they should drop out.

 

To the objection that auctions will jack up prices for customers, the obvious solution is to allow four or five companies to operate under a regulator, and the competition will push prices down. Worldwide now, cellular companies who went the way of auctions are giving away phones and free talk time if you hook up with them. In many countries, such as Malawi and Morocco, offers from the cellular companies are so good they become cheaper than land lines. This may even force TSTT to provide better service in the regular telephone market.

 

There is no reason our cellular licenses cannot be auctioned, raising money for us rather than giving it away to rich companies. Paul Klemperer, the Oxford economist who was the principal theorist behind the British mobile-phone auction, says auctions can be designed to suit the size and needs of any country. We can get experts like him to help us.

 

Government has already demonstrated its commitment to break monopolies. There is another monopoly in the telecommunications sector that needs to be auctioned: Cable. All six of which in T&T are owned by Open Telecommunications. Major decisions regarding our collective resources should not be “way down the pipeline” Peter Gillette CEO of Open Telecom says, without the consensus of the people.

 

Choices

 

I take no issue with Peter Gillette, or any other company being awarded a license, conflict of interest or not, as long as they are willing to pay Government what its worth. What I resent on behalf of the people of this country is that we are being treated as if we are stupid. We are not. Our choice is simple. Do we want a US$200 million dollars for our national assets - ie cellular frequencies - or do we want a trickle of tax money while a few local and international companies pocket huge profits? I say give us our lump sum now. We trust our Government to make good use of the money to our benefit since we put them there.

 

A first step towards this is by putting out a green paper listing our criteria to bidding companies, opening up the discussion, and only then allowing them bid. Beginning with US$200 million. Going, going...

 

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All Articles Copyright Ira Mathur