Home Latin America II 1997 The New Central American Frontier: Spectrum Privatisation

The New Central American Frontier: Spectrum Privatisation

by david.nunes
Pablo T. SpillerIssue:Latin America II 1997
Article no.:8
Topic:The New Central American Frontier: Spectrum Privatisation
Author:Pablo T. Spiller
Organisation:University of California, Berkeley, USA
PDF size:20KB

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Article abstract

Guatemala and El Salvador are attempting the largest scale privatisation of radio spectrum ever, and there are signs that they can become a “Telecoms Paradise” for international operators in a truly deregulated telecommunications market. If there are any countries likely to succeed, these two countries are leading the way as models for telecommunications reform.

Full Article

Central America is now facing a frontier experience similar to the United States’ opening of the West. But instead of land, Guatemala and El Salvador will attempt the largest scale privatisation of the radio spectrum ever. Spectrum Bands Open to Claim Since January 18 1997, any individual, regardless of nationality is entitled to request from the Guatemalan Superintendent of Telecommunications (SIT) a license for a particular block of spectrum, i.e. frequency bands in a specific geographical area. The private sector can thus reclaim undeveloped yet valuable “real estate” from inefficient government control. Almost all spectrum bands are open to claim, as the law reserved minimal spectrum for government use and for amateur radio users. To prevent bureaucrats from holding up the process, the SIT must award a license to the requester if there are no other parties interested in that license. To avoid government favouritism, the SIT must hold an open auction and award the license to the highest bidder if there are any other parties interested in that spectrum block or portions thereof. Minimal License Restrictions The Guatemalan SIT is scheduled to start its first spectrum auction on June 2 1997. In a radical departure from traditional policy, there will be minimal technical or operational restrictions on the license. License holders will be empowered to use their spectrum as they see it fit and take advantage of the ever increasing flexibility of wireless technology, subject to the restriction that they do not cause technical interference to neighbouring license holders. So, for the first time in modern history, the decision whether to use a license for a wireless phone service or a 500-channel TV (or sell it, or sublease it, or anything else, for that matter) will be made exclusively by business considerations, rather than bureaucratic diktat. Since January 18 1997, the SIT has received over 6,000 different requests from these Guatemalan pioneers for well over a 1,000 MHz of spectrum. These entrepreneurs will be at the forefront of the imminent telecommunications revolution in Guatemala and El Salvador, as these now completely open and deregulated markets start attracting private sector investment hoping to capitalise on the development potential in countries where less than one person in ten has a telephone. Telecommunications Paradise? In both Guatemala and El Salvador, any entrepreneur who wants to provide any type of telecommunications needs only to register its business. No permit, license or concession is required, nor are there any ownership or citizenship restrictions (except that wireless operators must obtain the right to use the spectrum, either directly from the SIT or on the secondary market). Prices are deregulated and interconnection between operators is negotiated, with binding arbitration under clear rules to break any deadlocks. Telecommunications Paradise Found? Not yet – as mentioned, the first auctions are scheduled to begin in Guatemala for June 2 1997. In El Salvador, the request period has just opened, and auctions are expected to take place sometime in August or September. But the road map is there and Guatemala is, to a large extent, chartering it. Indeed, a key determinant of the success of the first auction depends on the auction rules, which the Guatemalan SIT recently announced. There are three important sets of rules that the SIT has already determined, and which will enable the development of an efficient spectrum utilisation: · the extent of spectrum fragmentation; · the way auctions will take place; and, · the technical operating conditions associated with each band. Auctions Consider, first, the extent of spectrum fragmentation. In the first Guatemalan auction, 20.8MHz in the low 800Hz range will be auctioned with the explicit purpose of developing a market in spectrum management. Although the SIT properly understood that this segment of the spectrum is currently used for trunk radio, which in the US is fragmented in channels as small, as 25Khz, it decided to fragment it in wider lots, each consisting of two bands of either 1 MHz or 200 KHz. This decision ensures that bidders who would want to use these frequencies for other uses than trunk radio would not have to incur large transaction costs in the resale market. Thus, the SIT not only increased these bidders’ willingness to pay for those frequencies, but reduced overall transaction costs in the economy, and hence increased the efficiency of the telecommunications market. Consider now the way auctions will take place. The Guatemalan SIT decided against auctioning the various bands separately. Instead, it decided to hold simultaneous auctions with multiple rounds for all the properties. In this way the SIT achieves a double objective: on the one hand it ensures that similar properties will be sold for similar prices, while on the other hand, it ensures that properties are sold to those that value them the most. These twin objectives reduce the potential for an after-auction backlash from those bidders that paid high prices, and at the same time reduce transaction costs in the sector. These kind of auctions require as well their own set of specialised rules, like activity rules, withdrawals, penalties, and so on, which the Guatemalan SIT has already determined. The simultaneous multiple round format is particularly appropriate in circumstances where potential bidders remain relatively indifferent regarding the different frequencies bands put up for auction. In the June 2 1997 auction in Guatemala, the lots which have been put up for sale are good substitutes, so final prices for all should turn out to be relatively similar. This outcome would not take place if the lots were sold in separate auctions, as turned out to be the case in New Zealand’s recent experiment with spectrum privatisation. Different prices for similar products may turn out to be a political disaster. Not only the bidders who paid high prices may default on their purchases and attempt to acquire on the secondary market the cheaper lots, but the regulatory agency may find itself mired in legal disputes if some of the lots were to sell for extremely low prices. Technical Operating Conditions Finally, consider the role of technical operating conditions associated with each band. The law in Guatemala specifies a minimal set of technical requirements (time of use, area of influence as defined by electromagnetic field strength, and maximum effective radiated power). These rules are key determinants of the potential utilisation of these frequency bands. For example, if the SIT would have determined the technical operation conditions in a way that only allowed a very narrow set of feasible uses, then it would have constrained future changes in usage, and thus would have further constrained the efficiency of the operation of the telecommunications sector. The SIT, however, in consultation with the private sector determined these technical requirements so as to provide protection to license holders and also to increase the flexibility of frequency usage. This leaves the eventual auction winners to determine the best use of these Guatemalan frequencies, which could range from fixed telephony to wireless cable. Although the spectrum auctions in El Salvador may not take place for another four months, the regulatory agency is also in the process of making similar determinations as the Guatemalan SIT. The law in El Salvador, furthermore, provides a good guideline to the regulator on the nature of these rules. First, the law specifies that the regulator, following requests for spectrum utilisation to which there are multiple potential interested parties, must auction those bands. Second, the law also specifies that the regulator should fragment the requested spectrum if in doing so it may improve the extent of competition in the sector. Third, the law also specifies that if the auction is going to involve multiple bands ~which are to a large extent substitutes – then the regulator should follow auction formats that involve simultaneous multiple rounds. Pioneering Efforts But the law by itself does not make the rules. Agencies make them. In that sense, it is particularly appealing to those interested in entering into the Guatemalan telecommunications market that the Guatemalan SIT is well organised, properly staffed and well run. The key staff members not only properly understand the constraints imposed by the law, but are also dedicated to seeing their experiment succeed. A similar process is taking place in El Salvador, making these two countries the leaders in the telecommunications reform. Conclusion Thus, although the telecommunications markets in both El Salvador and Guatemala are not yet “paradise,” those international operators who want to stake their claim in a truly deregulated telecommunications market, better become Central American pioneers and get in on the spectrum action – at the auctions.

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