Sri Lanka’s 5G spectrum auction; Possible Game-plan

In the Q1 of 2022, Telecommunications Regulatory Commission of Sri Lanka (TRCSL), the sole regulatory agency, will hold the auction to allocate the license to manage the 5G spectrums in the country. Due to the benefits such as super-fast connectivity which will not only improve the common voice and internet services but also the technologies of the 4th Industrial Resolution (4IR), this would be an important milestone for the country. Therefore the framework and the design of the auction will be a vital factor that would have an impact on the future progress of the sector and the country.

A brief history of Auctions

First known records on Auctions, or similar processes, dates back around AD 195 where not only slaves but also the entire Roman Empire as been given away through an auction. Since then auctions has been used by civilizations to hand-over the ownership of various commodities and services, with a mass adaptation during the 90s with the inception of Internet and Internet-based auctions, pioneered by ebay.

The history of the use of Auction for spectrum allocation is relatively young with the New Zealand using the framework in 1990 to sell the rights. This option has been the preferred method of spectrum allocation for many of the countries, with notable instances such as the auction which was held towards the end of the 1990s by Federal Communications Commission (FCC) of United States. Details of the FCC auction will be discussed later in details, along with the more recent, similar auctions they have used to sell the license for several bandwidths under 5G spectrum.

Why Auctions?

Auctions are not the only procedure that can be used for this purpose, as countries have used several other methods, which are 1) Administrative process, 2) Lottery and 3) First-come-first serve. Administrative process has been used in EU, USA, Canada, Japan, Hong Kong and Singapore among others, have the advantage of being flexible as the regulatory agencies have the freedom to use any criteria of their choice, that would help to attain their goals and objectives. However not only the experiences in USA and Canada show that the process is complex and lengthy due to number of hearings, but also may lack transparency or “fairness” specially since the government seems to have an influence over the decision.

The USA has also used the Lottery method in 1980s to assign cellular licenses, which is swifter compared to Administrative method. However due to the “openness” of the process it may attract number of applicants, including the ones who do not have the necessary technical capabilities and capacities as well. Examples from USA shows that, in the instance if an unsuitable party has won the license by “chance” they would sell the same to a party with the necessary technical expertise (eg :- a telecommunication player), creating a secondary market. Even though this secondary market would ensure that the license would not be ineffective, it do bear the drawbacks such as cost of delays and loss of potential income to the government.

First-come-first serve basis also will be a quick way to allocate the spectrum management rights, however it has drawbacks such as information gaps that would prevent some firms from applying for the license and also the risk of not being able to raise the maximum fees and allocate to the parties with the best use of the license. Furthermore, as the authors Michael Heller and James Salzman have pointed out, this method though considered to be a “fair” way to allocate “possession”, has it’s own loopholes as it only require the parties to be the first in line by any means necessary.

In the context of Sri Lanka, administrative process and first-come-first serve methods are widely used for ownership allocation and they might seem suitable due to the limited number of potential and actual participants. In the case of 5G auction, the already established Telco firms would be the usual competitors with the addition of few other players who might participate individually or jointly with a local Telco. However these methods may not help to achieve the best outcomes for both government and the buyers, for which as per McMillan (1995) the auctions are mostly suitable. That is ensuring 1) efficient allocation and 2) raising the maximum possible revenue for the government in addition to the flexibility the government will have “to address various policy goals, such as avoiding monopoly and directing licenses to minority-owned firms”

One auction (design) to change them all!

FCC’s Spectrum Auction in 1994 dubbed “The Greatest Auction Ever” was not the first of it kind, but it is considered by many to be one of the most successful auctions which was able to achieve the two objectives that were previously discussed. Also it is considered a milestone in terms of Auction Design, due to the introduction of “Simultaneous Ascending Auctions (SAA)” proposed by Preston McAfee of the University of Texas and by Paul Milgrom and Bob Wilson of Stanford. Since then this auction design has been used in many of the similar spectrum auctions around the world, with few adjustment to suit into the context.

In order to understand the benefit of the SAA method, it is important to understand the drawbacks of the traditional auction designs such as First Price / Second Price Sealed-bid, Ascending-price drop-out auction (English type), Descending price auction (Dutch), Double Auction and Sequential Auction.

As discussed by McMillan (1995) an auction is not simply a framework to allocate the ownership of an asset, and subsequently make some revenue to the government. It is an important process to understand the “social value” of a license for which a proxy would be the value or the bid by the most efficient firm. Since at the end of the day, an auction is a vital policy tool in the government’s arsenal to “address a variety of policy goals”. However due to design flaws, such as Lack of a withdrawal penalty, absence of a reserve price, inefficient allocation, pricing disparities and bidder regrets among many others, most of the widely used auction designs would make the process ineffective and inefficient.

But SAA, with the features such as ;

1. Opening all the license for bidding simultaneously (as the name suggest) and remain open until bidding is closed for all
2. Bidding in several rounds and the announcing the bids at the end of each round
3. Initial eligibility based on the deposits and never bid more than the eligibility
4. Insufficient activity reducing the eligibility of winning
5. Auction is closed if no new bids are received

The FCC was able avoid the famous “winner’s curse” — the effect where the winning buyer overestimate the value and thus overpay for the asset, and license aggregation. Furthermore the earned a revenue of around $17 bn compared to $10 bn forecasted by the experts. And overall through an auction, the spectrum allocation was made fair not only from the perspective of the main parties, buyers and the FCC, but also from the perspective of the general public.

Pathways for an inclusive and a diverse auction

As discussed above, TRCL can explore the option to follow a SAA-style auction to allocate the 5G license. The word “style” is important since it is essential to customize the process to the Sri Lankan context, objectives of TRCL and the Government without considering it as a one-size fit for all. In fact due to the flexibilities and the scope of the auction method, TRCL can also make sure to evaluate the framework and the process in a wider way, to ensure that not only before and during the auction, but also after the auction value would be added to the country and the society.

For Auction, TRCL &government can favor certain kind of firms (without political prejudice) to make sure that a variety of relevant firms, with women-ownership, SMEs will have the opportunity to buy at least some of the licenses, similar to how the FCC did during the 1994 auction. The available license percentages can be decided by evaluating factors such as number of available license, potential number of buyers and their characteristics, and the expected revenue. Furthermore to ensure the competitiveness and the future progress, the auction can be designed to offer incentives for innovative firms and provide them with the opportunity to obtain license. This is important as the 5G technology will be essential for number of related 4IR technologies and thereby the Sri Lankan startups that are working on this field.

It is also important to include clauses that would prevent monopolistic behavior during and after the auction. Also ensure universal access by prohibiting the companies refraining to provide the service to remote areas of the country. (an issue that seems to be prevalent in the current telco operations) Overall the TRCL need to make sure that only the “right” to the 5G spectrum and not the ownership of the spectrum is handed over. Such legal foundations would be vital for the management of the spectrum and the future developments of the same.

After the Auction, TRCL will need to maintain their usual role as the industry watch-dog to make sure that the license are only used for its intended use, and to create sufficient value to the Economy and the Society. This include the ensuring the ability of the buyers to enhance the value of the license through innovations and investments, which would not add any cost to the taxpayers or the general public. And finally the government need to make sure that the proceeds from the auction will be used for an effective and positive cause, such as an investment in a critical area, rather than using the same for a short-term, non-value adding activity, such as interest payment.

Reference

McMillan, John. “Why auction the spectrum?.” Telecommunications policy 19.3 (1995): 191–199.

Roth, Alvin E. “The economist as engineer: Game theory, experimentation, and computation as tools for design economics.” Econometrica 70.4 (2002): 1341–1378.

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