Licensing Practices

While telecommunications licensing approaches vary considerably from country to country, there are common features, particularly among better licensing practices. The following sections review good practices that will help ensure the success of a licensing process.

Transparency

Procedural transparency is one of the fundamental requirements of a successful licensing process. The importance of transparency in the licensing process is evidenced by its inclusion in the WTO Regulation Reference Paper (see Box 2-1).

 

Box 2-6:

Auctions and Comparative Evaluations: UMTS Case Studies

Germany In August 2000, Germany auctioned off 12 blocks of UMTS spectrums. The German regulator (Reg TP) published the rules applicable to the award of the UMTS license on 18th February 2000. The rules provided that eligibility to take part in the auction would be governed by the eligibility requirements of the Telecommunications Act. Bidders were required to bid successfully for at least two blocks of spectrum to qualify for a license. Minimum bid increments were set at 10 percents. Additional rules were established to prevent bidders from influencing the outcome or controlling the pace of the auction. While the auction took place, for example, small groups of representatives of each bidder were isolated from 8 am to 6 pm each day, with two observers from Reg TP present with each group at all times. Bidders were not able to see what rivals were biding. Only the highest bids for each block were known to bidders. Germany's UMTS spectrum auction lasted for 14 days and 173 rounds of bids. At the end, six operators each obtained two blocks of spectrum and 20 years licenses. The licenses require operators to provide coverage of at least 50 percent of the German population by the end of 2002. This auction concluded with record bids for UMTS licenses: a combined total of over USD 46 billion. As a result of the enormous amounts paid, concerns were expressed that some operators may well end up spending more on acquiring the licenses than on building their networks.

United Kingdom, Spain, and Netherlands The UMTS spectrum auction held in the United Kingdom in April 2000 raised USD 32.58 billion. That process continued for more than 100 rounds over a period of more than four weeks. The Netherlands auctioned off five licenses for USD 2.3 billion in July 2000. Spain, on the other hand raised only USD 425 million from its sale of four UNTS licenses in March 2000.

Norway In Norway, a comparative evaluation process was used instead of an auction to grant UMTS spectrum licenses. Applicants were required to meet minimum eligibility requirements, such as a commitment to meet specific coverage and roll out obligations, and proof of financial strength/capability. The two main selection criteria were coverage (geographical and interns of population) and roll out. Financial aspects, quality of service environmental impact and previous experience were secondary criteria. Norway's emphasis was not on raining as much money as possible from the licensing of spectrum for 3G mobile systems. Rather the goal was to encourage rapid network development and to increase the country’s overall competitiveness. In Norway, wireless operators are required to pay moderate administrative and frequency management fees. Operators awarded 3 G spectrum licenses were required to pay a special annual fee of approximately USD 2 million. IN addition, subject to parliamentary approval, 3G licensees were required to pay a one-time lump sum of approximately USD 11 million. These sums are very small compared with the results of the spectrum auctions in the United Kingdom and Germany.

Sweden In Sweden, spectrum licenses for 3 G mobile communications systems will also be awarded using a comparative evaluations process. Swedish law provides that spectrum licenses must be awarded based on specific criteria. As in Norway, the main selection criteria for the award of 3 G spectrum licenses in considered beneficial in that it will enable operators to invest in network development. High spectrum fees paid by operators will not be based on to customers.

Transparency requires that a licensing process be conducted openly and that licensing decisions be made based on criteria published in advance. These requirements apply to all licensing decisions, including ones to and or revoke a license. The licensing processes described later in this Module reflect the principles of transparency. Key features of such processes include:

• Advance publication of a call for applications, with application process (tender) rules, qualification and selection criteria
  
• Separation of qualification and selection processes
  
• Return of unopened financial offers (bids) to applicants who do not meet the published qualification criteria
  
• Public opening of sealed financial offers from qualified applicants
  

A transparent process can be different in the case of view of the participants in the licensing process. It is good practice for a regulator to take all reasonable steps to ensure that participants in the licensing processes, including applicants, existing licensees, and competitors as well as the general public, perceive the process to be fair.

Conducting a transparent licensing process is sometimes perceived to be more time consuming and difficult than less transparent alternatives. The process, for instance, of publishing procedural rules and selection criteria in advance can be difficult for a newly formed regulator in a country where procedural transparency is not entrenched in government practice.

However, the absence of transparency undermines investor confidence in the fairness of the entire regulatory process and in the telecommunications market itself. Lack of transparency can significantly slow the process of liberalization and reduce the benefits of privatisation.

Public Consultation

It is good practice to engage in public consultation before and during a licensing process. To start, it is often useful for a regulator to invite public comment on the approach to be taken in a proposed licensing process before it starts. Consultation with stakeholders reinforces the perception of a transparent process. Consultation allows the regulator to receive directly the views of consumers, existing operators and prospective applicants on proposed licensing procedures to be fine-tuned to maximize the prospects for a successful licensing process.

Consultation is particularly important where a general authorization of proposed conditions of general authorisations provides the main opportunity for public comment. By contrast, in a competitive licensing process there are usually other ways for stakeholders to make their views known, such as pre-bid conferences and written exchanges of questions and answers.

Consultation can be formal or informal. In the context of any major licensing initiative, it is generally advisable for the regulator to establish a formal and transparent consultation process. A good approach is for the regulator to publish a notice stating its intention to launch a licensing process, and inviting comments on the proposed approach. The notice should set forth in some detail the proposed approach and any specific issues on which comments are sought. Where the regulator is unsure of the best approach, comments can be invited on different options.

Notices of this kind should be sent to all interested parties, including prospective applicants, existing licensees, consumer and industry interest groups. In some cases, public meeting is held to allow a public exchange of views by interested parties. Copies of written comments can also be published.

A pre-licensing consultation process increases the likelihood that the regulator's approach to licensing will be based on a good understanding of all relevant considerations. Consultation also helps to ensure that even those who may disagree with the regulator's approach will believe that their views have been considered.

License Fees

In the telecommunications industry, the term License fee is used to describe different things. It may include one or more of the following:

• A fee paid as a premium or rent to a government or licensing authority for the right to operate a network, provide a service or use a limited resource, such as radio spectrum or numbers.
  

• Administrative charges to compensate a regulator for its costs in managing and supervising use of the radio spectrum.
  

• Administrative charges to compensate a regulator for costs incurred in performing other regulatory functions, such as licensing operators, ensuring compliance with License terms, resolving interconnection disputes, establishment and supervision of other aspects of the regulatory framework, etc.
  

It is good practice to differentiate the above-noted types of fees. This improves transparency and makes it easier to determine that the administrative charges related to cost recovery are indeed cost based. Separating administrative License fees related to spectrum management from other administrative fees improves transparency and accountability. Spectrum management is usually handled by a separate branch, and sometimes a wholly separate ministry or agency from the telecommunication regulator.

It is generally accepted that administrative fees should not impose unnecessary costs on the telecommunications sector. The most transparent manner by which to achieve these objectives is an explicit cost-recovery scheme. Cost recovery schemes involve establishment of License fees based on the projected or actual costs of the regulator. Once that overall level of cost-recovery has been set, it is necessary to allocate the costs among licenses or market participants. This allocation can be based on different factors, including telecommunications revenues, licensed coverage areas or type of services. The most common allocation factor is revenues.

The July 2000 EC proposal to replace the 1997 Licensing Directive criticized the "lack of transparency and high fees" of its European Member States. It provides the following proposal:

(15) Administrative charges may be imposed on providers of electronic communications services in order to finance the activities of the national regulatory authority in managing the authorization system and for the granting of rights of use. Such charges should be limited to cover the actual administrative costs for those activities. For this purpose transparency should be created in the income and expenditure of national regulatory authorities by means of annual reporting about the total sum of charges collected and the administrative costs incurred. This will allow undertakings to verify that administrative costs and charges are in balance. Administrative charges should not act as a barrier to market entry. Such charges should therefore be distributed in proportion to the turnover on the relevant services of the undertaking concerned as calculated over the accounting year preceding the year of the administrative charges. Small and medium sized undertakings should not be required to pay administrative charges.

(16) In addition to administrative charges, usage fees may be levied for the use of radio frequencies and numbers as an instrument to ensure the optimal use of such resources. Such fees should not hinder the development of innovative services and competition in the market.

Balancing Certainty and Flexibility

Telecommunication Licenses should balance regulatory certainty with the flexibility necessary to address future changes in technology, market structure and government policy.

In many countries, a balance between regulatory certainty and flexibility is achieved by using regulatory instruments other than Licenses as main elements of the regulatory framework. However, where a country's regulatory regime is not well developed, it is often necessary to include a reasonably comprehensive codification of the basic regulatory regime in a License. This is necessary to provide the certainty required to attract new entrants and substantial investment to the sector.

License conditions should be sufficiently flexible to allow their integration into the general regulatory framework for the sector as it develops. Licensing an operator should not preclude future regulatory reform.

There are several approaches to providing such flexibility, including:

• Permitting unilateral license amendment by the regulator;
  

• Establishing short license terms;
  

• Permitting license amendments with the mutual consent of the licensee and regulator; and
  

• Permitting unilateral amendments by the regulator only of specific license conditions that should constitute part of the country's general regulatory regime provided such amendments are made in a procedurally fair and competitively neutral manner.
  The first two approaches are not consistent with regulatory certainty. They will make it difficult, if not impossible, to attract the investment and financing required for a major license, such as a fixed line or cellular license.
  

The fourth approach is more attractive in this regard. To implement it, a distinction can be made between license conditions that are of a regulatory nature and those which can only be amended with the agreement of the licensee. For example, license conditions on industry-wide universal service mechanism or general terms of interconnection may be subject to amendment by the regulator. Other conditions of a purely contractual nature or which are fundamental to the economic value of the license may be subject to modification only on consent of the operator. These would normally include conditions such as the term of the license and the license acquisition fee payable.

Where the regulator has the right to amend the general regulatory conditions of a license, such amendments should be made in a transparent and competitively neutral manner. Any amendments should be preceded by consultation with the licensee and other affected parties. In some cases, a right of appeal or review may be warranted.

Distinguishing Licensing from Procurement

The process of licensing a telecommunications operator should be distinguished from the government procurement process. In many countries there has been confusion between the two types of processes, sometimes with adverse consequences for the licensing process.

In licensing a telecommunications operator, a regulator is not buying goods or services using public money. In essence, licensing involves offering a business opportunity to qualified investors who agree to comply with the license conditions. The regulator is more a seller than a buyer.

This observation leads to two important recommendations for licensing processes:

1. The regulator must offer to license applicants an opportunity that is financially attractive to experienced and competent telecommunications operators. While some licensing opportunities sell themselves, others, particularly those in emerging and transitional markets, must be carefully structured and marketed to attract qualified applicants. Experience shows that almost any call for applicants for telecommunications licenses will attract some bidders. However, many are not financially or technically capable of meeting the regulator's objectives to expand and improve services.
   
   
2. Government procurement procedures are generally not suitable for a telecommunications licensing process. Many countries have bureaucratic centralized procurement administrations. Detailed government procurement procedures are often developed for good reason - to reduce corruption. However, the application of these procedures can cause legal and administrative headaches, and delay and confusion about the real goals of the licensing process. For example, government procurement officials generally want to see detailed specifications for every aspect of the goods and services being purchased and a careful inspection and monitoring of installation and performance after selection and delivery. This kind of micro management is inappropriate in a telecommunications licensing process. As discussed below, clear qualification requirements should be established. However, the regulator is generally concerned only with results. What matters is whether- not how - license conditions are complied with. From this perspective, such issues as technology choices, management structures and marketing strategies should not be the subject of license conditions or selection criteria.
   

Other problems are experienced in trying to apply standard government procurement procedures to a telecommunications licensing process. It is generally best to avoid such procedures, and to use a simple and transparent competitive licensing process, based on internationally accepted telecommunications licensing procedures.