Digital dividend: maximise value, not revenue

The Government yesterday announced its intention to auction off the 700 MHz spectrum in the 3rd quarter of this year to boost 4G mobile networks. These plans are subject to either a legal challenge or a negotiated outcome with Māori over the WAI 2224 claim of electromagnetic radio spectrum as taonga.

As the ICT Minister said, the re-allocation of the 700 MHz spectrum is “a once-in-a-generation opportunity”. How can we maximise the net benefit to New Zealand from this once-in-a-generation opportunity? I believe it is by maximising value to New Zealand, not maximising money (in the form of auction proceeds) for the Crown.

There is widespread agreement that the re-allocated spectrum should be used for 4G mobile networks. That makes the best use of a valuable resource. Somewhat bravely, given the significant number of unknowns, the ICT Minster stuck with earlier government projections and said “we can expect economic benefits for New Zealand of up to $2.4 billion over the next twenty years.”

So, to me, the question becomes: How can we design policies and processes that maximises the benefit for New Zealand? Note, this is most definitely not the same as maximising auction proceeds for the Crown even though many in Government seem to treat the two as synonymous.

Which benefits should be maximised?

At a policy level, MBIE has laid out a long list of policy outcomes from the spectrum re-allocation. These are neither consistent, in that some of them are mutually contradictory, nor are they ordered by priority. While the ICT Minister spoke of economic benefits, some of the policy outcomes maximise non-economic outcomes.

In relation to prioritising the rollout in rural areas, the Government seems to have that covered. The press release says, “new 4G services will start to be deployed in rural areas as they are deployed in urban centres.” That sounds like a reference to the Vodafone RBI contract which requires Vodafone to roll out 4G services in rural areas at the same time as it is in urban centres. Not earlier then but at least parity.

Faith in allocative efficiency of the market

Just as governments around the world are doing, the underlying assumption is that market forces will result in the best allocation of the spectrum. It is conventional, safe thinking. The logic is:

  • The APT band plan means Frequency-division duplexing (FDD) over Time-division duplexing (TDD).
  • In turn, this means that the big 3 (Telecom, Vodafone and 2 degrees) will be the major bidders.
  • The auction process will be supplemented by parameters such as block size, caps, reserve price, ‘use it or lose it’ clause, etc. to achieve policy outcomes.
  • Bidders will price the spectrum to reflect their anticipated commercial gains.
  • The result will be the best outcome for everyone.

While maximising revenue to the Crown is not the stated outcome, conventional thinking is that it is the best way to get the maximum benefit for everyone. So the focus is on maximising auction proceeds is a proxy to maximise benefits. In my opinion, this conventional thinking places an almost naive faith in the allocative efficiency of the market.

The alternative

What is the alternative? It’s obvious really. Create an ordered list of mutually consistent policy priorities. Then design the auction process to maximise those outcomes.

This still has one drawback: the Government extracts money from the industry and uses it to shore up its balance sheet. It could be anything from $100 million to $500 million. A nice sum for the Government in times of balancing the books. But, in the bigger scheme of things, does that maximise the benefits to New Zealand? Why not let the money be used by the industry to increase the investment in 4G networks and the speed of rollout?

After all, if say $200 million auction proceeds represents $2.4 billion gain to New Zealand over twenty years, the Government should be able to calculate the additional gain from an additional $200 million investment. There is obviously a multiplier effect operating here. The exact number could be debatable, but there is no doubt that additional investment by the industry in 4G networks will provide far greater net benefit to New Zealand than using it to help balance the Government’s books.

We should be bold. The once-in-a-generation opportunity from the 700 MHz spectrum re-allocation demands that of us.

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One thought on “Digital dividend: maximise value, not revenue

  1. Very few people get an audience for thinking seriously about how the real economy (of bits transferred for actual people, in this case) works. I hope you do.

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