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Summary: Allocation and Fee Model Mobile Telephony Frequency Range

The Minister of Economic Affairs has asked the AFTA to give advice on the fee model for the allocation of 5G mobile telephony spectrum, partly in response to a report prepared by consultancy firm Stratix.

In this advice, we discuss the Stratix report and the reactions of market participants to this report, and we analyze the recommendations of Stratix using the OECD Competition Toolkit. Our main findings are as follows:

  • A dynamic and competitive market for mobile services is in the interest of the business customers and consumers in Aruba and is in the interest of the economy of Aruba in general.
  • The allocation of 5G frequency range is reason to adjust the entire fee model for the use of all spectrum by telecom providers for their services. Full implementation of the current fee model would result in a very sharp and unjustified cost increase for the telecom providers, which would hinder the rollout of 5G.
  • The AFTA agrees with the Stratix advice to allocate spectrum administratively and not to hold an auction. Auctions are complex, and there is no shortage of spectrum, so the proceeds of an auction would likely be very low. At the same time, spectrum is about the commercial use of a public good, so a usage fee is justified.
  • The AFTA also agrees with the Stratix advice not to link the fee to market share or turnover. This is administratively complex and unnecessary, also given the advice of the AFTA on the allocation mechanism (see below).
  • The AFTA agrees with Stratix to reserve spectrum range for private networks (which can also create some competitive pressure on existing providers) and for public services.

Partly in view of the risks to competition, the AFTA disagrees with the Stratix advice on a number of points.

  • Stratix proposes to allocate all available spectrum among the existing telecom providers and to proceed to reallocation if new entrants were to present themselves. However, such subsequent reallocation would be complex with risks to competition. More importantly, there is no compelling reason to allocate all spectrum, a public good, among private parties in advance. After all, there is no shortage of spectrum.
  • Stratix proposes to set a uniform fee that is the same for existing and any new telecom providers. The AFTA does not agree with this. A uniform fee boils down to an unjustified competitive advantage for SETAR. After all, SETAR would have much lower spectrum costs per customer than Digicel. Moreover, a uniform fee would be an entry barrier for potential new entrants.
  • Stratix proposes to set a fixed fee for a period of 5 years. According to the AFTA, this period is too short. Network investments typically have a much longer depreciation and (thus) payback period. A period of 5 years leads to uncertainty, which means that market participants are likely to invest less than if a longer period is opted for.

Based on our findings, the AFTA proposes an alternative fee and allocation mechanism with the following characteristics:

  • The Government sets differentiated fees for the use of spectrum in the available frequency bands. The fees must be differentiated because spectrum in the different bands represents a different market value for the telecom providers (spectrum in the lower frequency bands typically has a higher value than spectrum in the higher frequency bands).
  • It is up to the Government to set the fees. Compared to other countries, spectrum is relatively expensive in Aruba, so it is recommended not to set fees that lead to a considerable cost increase for the telecom providers. With regard to the level of the (differentiated) fees, the AFTA unfortunately cannot give more specific advice because the telecom providers have refused to provide detailed financial information that would allow the AFTA to give more specific advice. The fact that the telecom providers have not provided this information is considered a strong indication by the AFTA that the current level of the total fees is not causing any major problems.
  • The telecom providers indicate how much spectrum in which frequency bands they want to purchase and pay the fee set for this. Because of the market share and network differences between SETAR and Digicel, Digicel is expected to have a smaller spectrum requirement than SETAR and will therefore also pay a lower fee. Allocated spectrum cannot be returned to the Government. This ensures that parties have an incentive to make the best use of the purchased spectrum. However, parties can purchase additional spectrum in case of increased demand. This allows the Government to retain control over unused spectrum, and spectrum is expected to remain available for potential new entrants and other uses.
  • The AFTA recommends allocating spectrum for a period of at least 10 and preferably 15 years to ensure investment security for the telecom providers and any new entrants. If a system of annual fees is applied, it would be reasonable to apply an inflation adjustment for such a period (the fee then increases annually in line with inflation).

Furthermore, the AFTA recommends imposing a number of additional obligations:

  •  Minimum quality or coverage requirements for the telecom providers, supplemented by an annual mandatory independent quality measurement. Should imposing such requirements be administratively too complex, it is advised to at least require the telecom providers to have an annual independent quality measurement carried out, with the obligation to make the results thereof public. This is expected to give the telecom providers a strong incentive to maintain the quality of their network and thus service provision.
  • The requirement for telecom providers with a dominant market position – with SETAR falling into this category according to a preliminary assessment by the AFTA – to grant third parties, such as Mobile Virtual Network Operators (MVNOs), access to their network at cost-oriented rates. This access measure may attract new entrants and, even if no third parties enter the market, give SETAR an incentive to charge competitive rates in the Aruba market. After all, if the rates in the Aruban market are too high, this will attract third parties to enter this market.
  • To share the infrastructure required for the rollout of the 5G network, such as antenna sites, also based on cost-oriented rates. Due to the limited economies of scale in the Aruban market, sharing infrastructure can reduce the costs and investments for all parties involved. This promotes efficient use of resources and space and avoids unnecessary financial charges for rolling out and maintaining multiple parallel networks.

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