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2 - 1

MODULE 2

LICENSING TELECOMMUNICATIONS SERVICES

2.1 Introduction

2.1.1 Telecommunications Licences

A telecommunications licence authorizes an entity toprovide telecommunications services or operatetelecommunications facilities. Licences alsogenerally define the terms and conditions of suchauthorization, and describe the major rights andobligations of a telecommunications operator.

Licences for new entrants in telecommunicationsmarkets are frequently granted by means of a com-petitive licensing process, which involves the selec-tion of one or more operators from a group ofapplicants. In other cases, general authorizationsare issued. These authorize any entity that complieswith the basic terms and conditions of the authoriza-tion to provide a telecommunications service,without the need for an individual licence.

Licensing is a relatively recent development in manytelecommunications markets. Historically, state-owned incumbent operators provided telecommuni-cations services on a monopoly basis in mostmarkets. Telecommunications operations weretreated as a branch of the public administration,along with postal services, road transportation andother government services, and licences were notconsidered necessary.

In many cases, licences for incumbent operatorswere prepared as part of their privatization process.By specifying the rights and obligations of suchoperators, investors were provided with some cer-tainty as to the business in which they are investing.The licence provides all stakeholders, includingconsumers, competitors and the government with aclear understanding of what the operator is and isnot permitted or required to do.

Licences are particularly significant in the context ofemerging and transitional economies. Licencesprovide certainty for investors and lenders, and withit the confidence that is required to invest the millionsor billions of dollars required to install or upgradetelecommunications infrastructure in such econo-mies.

Licences do not have the same importance in allcountries. In a few countries where monopoly tele-communications operators have long been privatelyowned, notably the US and Canada, there havetraditionally not been telecommunications licences.Instead, regulatory terms and conditions wereimposed through decisions, orders or tariff-approvalprocesses of a government regulatory authority. Insome other countries, including Latin Americancountries, privately-operated telecommunicationscarriers were traditionally granted concessions orfranchises.

Telecommunications Regulation Handbook

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While the terms licence, concession andfranchise may be defined differently in the laws ofdifferent countries, these terms generally refer to thesame basic concept. In the context of telecommuni-cations regulation, they all refer to a legal documentgranted or approved by a regulator or other govern-ment authority that defines the rights and obligationsof a telecommunications service provider. For thesake of simplicity, we will use the term licence onlyin this Module. In most cases, however, what is saidabout licences applies equally to concessions andfranchises.

The process of licensing incumbents and newentrants is sometimes handled by independent tele-communications regulators and sometimes directlyby governments or Ministers. In this Module, forease of reference, we will generally refer to thelicensing authority as the regulator. This term isintended to include other licensing authorities, suchas Ministers.

No matter which government authority is responsi-ble, the licensing process is generally one of themost important regulatory processes undertaken inthe course of reforming the telecommunicationssector. The licensing process is integrally tied to thestructure of telecommunications markets, the num-ber and types of operators, the degree of competi-tion between them, the revenues earned bygovernments in opening markets, and, ultimately,the efficiency of the supply of telecommunicationsservices to the public.

2.1.2 Licensing Objectives

Governments and regulators normally have severaldifferent objectives for licensing telecommunicationsoperators. Common licensing objectives are set outbelow:

(i) Regulating Provision of an EssentialPublic Service Basic telecommunicationsis viewed as an essential public service inmost countries. While there has been anirreversible trend toward privatization andreliance on market forces, most govern-ments continue to impose some controls toensure basic telecommunications servicesare provided in the public interest. Licences

are an important tool for exercising suchcontrol in most countries.

(ii) Expansion of Networks and Servicesand Other Universal Service Objectives This is a major reason for licensing newtelecommunications operators in mostcountries. Network roll-out and servicecoverage obligations are often included inlicences. This is particularly the case wherea state-owned incumbent operator (a PTT)is privatized, or some degree of exclusivityis granted (e.g. a duopoly cellular licence,with a right to use scarce spectrum).Licences are an important tool for expand-ing infrastructure investment and promotinguniversal service and universal accessobjectives in developing countries.(Universal service objectives are discussedin detail in Module 6).

(iii) Privatization or Commercialization Alicence is necessary where a state-ownedincumbent (a PTT) is privatized. The licencespecifies the rights and obligations of theoperator. It is a key document in the privati-zation process. It specifies what the investoris buying and what the government expectsfrom the operator and the investor.

(iv) Regulating Market Structure A keyaspect of regulation is the determination ofthe market structure of the telecommunica-tions sector, and in particular, the number ofoperators licensed to provide telecommuni-cations services. In many countries a primereason for licensing new telecommunica-tions operators is to increase competition.Licensing of new operators has madecompetition the dominant mode of supply insome telecommunications markets (e.g.cellular, ISP), but not yet in others, includingbasic services. Figure 2-1 illustrates thedifferent levels of competition in varioustelecommunications markets around theworld. A major objective of the licensingprocess in many markets is to ensure theviability and benefits of new competitiveentry. On the other hand, while licensinginitiatives can increase competition,licensing requirements can also provide a

Module 2 Licensing Telecommunications Services

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Licensing

means to limit market access. This is theobjective of licensing authorities in somecountries, where licences have granted orretained monopoly, duopoly or other exclu-sive rights. Such rights are often retained forpolitical or financial reasons. For example,governments in many countries haveincreased privatization proceeds to gov-ernment coffers by granting monopoly rightsto the newly privatized operator for a fixedterm. While maintenance of monopoliesgenerally reduces efficiency in telecommu-nications markets, many governments haveaccepted this as a transitional problem, inorder to generate cash for purposes likedebt reduction. In these cases, liberalizationgenerally proceeds in stages.

(v) Establishing a Competition Framework Licences frequently include conditions toestablish a level playing field for competi-

tion, and to limit the prospects thatincumbent operators will abuse theirdominant position in telecommunicationsmarkets. Such conditions are generallyreferred to in licences as anti-competitivesafeguards or fair trading conditions.(Examples of such conditions are discussedin greater detail in Modules 3, 4 and 5).

(vi) Allocation of Scarce Resources Finiteresources required in the operation of atelecommunications service (such as radiospectrum, numbers and rights of way)should be allocated between operatorsfairly, efficiently and in the public interest.This allocation often requires a balancing ofcompeting interests and priorities. Spec-trum, for instance, may be auctioned to thehighest bidder or allocated at low cost toreduce prices or to encourage the rollout ofnew services. Access to rights of way can

Figure 2-1: Licensing Competitive Operators

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be a source of revenue to governmentauthorities or public utilities, but economic orother restrictions on access can delay therollout of services and lead to higherconsumer prices.

(vii) Generating Government Revenues Licensing of telecommunications operatorsand of radio spectrum can provide signifi-cant revenues to governments. An auctionfor new licences can generate one-timerevenues. In addition, annual licence feesoften provide a continuing source ofrevenue to fund the operations of the regu-lator, or for other purposes. In addition,licensing of new operators can increase theoverall size of telecommunications marketsand thus generate higher tax revenues forgovernments.

(viii) Consumer Protection Conditions relat-ing to consumer protection are oftenincluded in telecommunications licences.Such conditions may relate to matters suchas price regulation, billing practices,consumer complaint mechanisms, disputeresolution, limitations of liability for servicedefaults, and mandatory services to con-sumers (e.g. directory services, operatorassistance and emergency services).

(ix) Regulatory Certainty By clearly definingthe rights and obligations of the operatorand the regulator, a licence can significantlyincrease confidence in the regulatory re-gime. Regulatory certainty is a criticalelement of the licensing processes wherethe aim is to attract new operators andinvestment. This is particularly true in thecase when foreign investment is sought inriskier developing or transitional economies.

2.1.3 Licences and Other RegulatoryInstruments

In most countries, licences comprise only one ele-ment of the regulatory framework. Other rules thatgovern operators are included in telecommunica-tions laws, sector policies, regulations, decrees,orders, decisions, guidelines, directions and otherdocuments of general application.

Whether an operators rights and obligations are setout in a licence or by some other means is generallydetermined by two factors:

requirements of local law, and

the level of development of the local regulatoryframework.

Matters that are dealt with in licences in somecountries are dealt with in other regulatory instru-ments in different countries. For example, in Mexico,the quality of service standards and targets forTelmex were included in the licence (concession)prepared for Telmex prior to its privatization. InCanada, quality of service standards and targets areset out in decisions and orders of the regulator, theCRTC.

Privatization and liberalization first occurred inEurope in the United Kingdom in the early 1980s. Atthat time, the concept of telecommunications regula-tion was new to the UK. There was no existingregulatory framework. Therefore, the licence issuedto British Telecom was prepared as a largely self-contained regulatory code. It governed most aspectsof the operations of BT and granted a variety of ex-clusivity rights, such as a limited monopoly for basicvoice services and limitations on simple resale.Similarly, the licence for Mercury, the first fixed-linkcompetitor in the UK, contained a fairly comprehen-sive regulatory code for that operator.

A similar model was adopted in a number of othercountries in Europe and elsewhere as incumbentoperators were privatized and new operators werelicensed.

As indicated above, some countries, particularly inNorth America, have no tradition of issuing compre-hensive licences that spell out detailed regulatoryregimes. In the United States and Canada, detailedregulatory rules are typically contained in regula-tions, decisions, orders or tariffs made or approvedby the regulator. Accordingly, when Canadaimplemented a licensing regime for certain tele-communications operators for the first time in 1998,the regulator issued very short (2 page) licences forinternational service operators. The balance of therules governing these operators is set out in otherregulatory instruments.


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Licensing

Countries that do not have a clear regulatory frame-work and that intend to license new operators, orattract investment in incumbents, will need todevelop fairly comprehensive licences. Somecountries that have initiated privatization andliberalization without clear and detailed licences orother regulatory instruments have experiencedserious problems due to regulatory uncertainty.

In other countries, without a clear regulatory frame-work, certainty has been achieved at an early stagethrough the use of comprehensive licences.Examples include Hungary, Uganda, Morocco andJordan. The more detailed licences have contributedto the success of privatization and new competitiveentry. Table 2-5 provides an example of the fairlycomprehensive contents of a PSTN licence in adeveloping country without a clear regulatoryframework.

With increasing competition in telecommunicationsmarkets, it should be possible to reduce the detail ofthe regulatory framework included either in licencesor in other regulatory documents. This trend isrecognized in the 1997 European Union Directive onLicensing, and the subsequent July 2000 licensingproposals, which favour minimal licence conditionsand the eventual elimination of the licensingrequirement.

However, the situation remains different in lessdeveloped telecommunications markets, and espe-cially in those with perceived high country risk,economic and governance problems. Most of thesemarkets do not have clear or consistent regulatorypolicies or frameworks. In such markets, it will beimportant to develop clear and detailed licences aspart of privatization and liberalization initiatives.There should be two key goals in preparing suchlicences:

Regulatory Certainty Where privatization andlicensing transactions are implemented before aclear regulatory framework has been developed,the rights and obligations of operators should beclearly defined in licences. Regulatory certaintyon key issues (such as interconnection, priceregulation and competitive safeguards) will pro-mote success of privatization and initiatives topromote new market entry. Uncertainty willreduce investor interest. It will also reduce

proceeds to governments from privatizationsales or licensing fees.

Defining Exclusivity Rights Sector policymay call for the licensing of multiple operators,or it may grant exclusive monopoly (or duopoly)rights for specified periods of time. The grantingof exclusivity rights generally increases govern-ment revenues from privatization and licensingtransactions. However, as noted in Modules 1, 4and 6, maintaining monopolies can limit sectorgrowth and reduce operator efficiency to thedetriment of consumers. Whatever policy isadopted on exclusivity, it should be clearlyreflected in the licences of new operators inorder to provide certainty to them, their investorsand lenders.

2.1.4 Multilateral Trade Rules

The General Agreement on Trade in Services(GATS) and the 1997 WTO Agreement on BasicTelecommunications (ABT) of the World TradeOrganization (WTO) include trade rules applicable totelecommunications regulation and licensing. Sig-natories to the ABT, as well as countries wishing tojoin the WTO, must bring their regulatory andlicensing practices into compliance with WTO traderules.

The trade rules relevant to the licensing process aresummarized below. Further detail is provided inother Modules (e.g. trade rules affecting intercon-nection, fair competition and universal service). Thecentral themes of all of these rules are evolutiontowards open competitive markets and transparentlicensing processes.

(i) General GATS Requirements

All WTO member states are bound by the generalobligations and disciplines of the GATS. Three ofthese are directly relevant to the licensing process:

(a) Most Favoured Nation (MFN) Treatment (GATSArticle II) A licensing regime must grant marketaccess to operators from a WTO membercountry on terms no less favourable than theterms applicable to operators from any othercountry.


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(b) Transparency (GATS Article III) All laws andrules affecting trade in services must bepublished. The Telecommunications Annex tothe GATS specifically requires publication of,among other things, all notification, registrationor licensing requirements, if any as well as anyother forms of recognition and approval (e.g.type approval of terminal equipment) neededbefore foreign service suppliers can do businesslawfully in a member country.

(c) Barriers to Trade (GATS Article VI) Licensingrequirements must not constitute unnecessarybarriers to trade.

(ii) Specific ABT Commitments

The schedules to the GATS contain additional tradecommitments by individual member countriesconcerning specific services, including basic tele-communications services. Further, nationalcommitments made as part of the WTO Agreementon Basic Telecommunications require many coun-tries to provide greater telecommunications marketaccess. In many cases, implementation of thesecommitments is phased in over a period of severalyears.

The WTO Regulation Reference Paper, which wasannexed to many countries ABT commitments,binds them to adopt certain regulatory practicesapplicable to basic telecommunications services.Two of these commitments, which are set out in Box2-1, are directly relevant to licensing.

The complete text of the WTO Regulation ReferencePaper is set out in Appendix A.

2.1.5 The EU Licensing Directive

The 1997 EU Licensing Directive provides a detailedframework for telecommunications licensing inEurope. This framework is consistent with the WTOcommitments of the EU. While it is only bindingwithin the EU, the Directive provides a goodapproach for other countries to consider in develop-ing their own licensing regimes.

The EU has recently published a proposal for newlicensing Directive (Proposal for a Directive on theauthorization of electronic communications networksand services, 12 July 2000). However, as discussedbelow, this new proposal largely represents arenewed effort to implement the harmonized and

Box 2-1: Licensing Rules in WTO Regulation Reference Paper

WTO Regulation Reference Paper Commitments on Licensing Process

4 Public Availability of Licensing Criteria

Where a licence is required, the following shall be made publicly available:

(a) All the licensing criteria and the period of time normally required to reach a decision concerning anapplication for a licence, and

(b) the terms and conditions of individual licences.

The reasons for the denial of a licence will be made known to the applicant upon request.

6. Allocation and Use of Scarce Resources

Any procedures for the allocation and use of scarce resources, including frequencies, numbers and rights ofway, will be carried out in an objective, timely, transparent and non-discriminatory manner. The current stateof allocated frequency bands will be made publicly available, but detailed identification of frequenciesallocated for specific government uses is not required.


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Licensing

deregulatory approach set out in the 1997 Directive.Therefore, we will focus on the 1997 Directivebelow.

The objectives of the EU in adopting the Directiveare set out in Box 2-2.

The Directive encourages the use of generalauthorizations, which the British refer to as classlicences. The proposed use for individual licences isrestricted to public voice telephony and servicesusing scarce resources. Conditions of generalauthorizations should be limited to those relating toessential requirements. The contents of this type ofcondition are described in Box 2-3. The licence con-ditions and eligibility criteria for generalauthorizations are to be published by the licensingauthority. Any person who meets the criteria will beauthorized to provide service without any furtherselection process, regulatory decision or individuallicensing requirement.

Under the 1997 Licensing Directive, restrictions arealso placed on the types of conditions that may beapplied to individual licences. These conditions aredescribed in Box 2-4. Specific provisions of theDirective relating to the form and content of licencesare discussed in more detail later in this Module.

In its July 2000 proposal for a new LicensingDirective, the European Commission renewed itsefforts to harmonize and reduce European licensingrequirements. Although the 1997 Licensing Directivegives priority to general authorizations, the ECdetermined that it still leaves too wide a margin forMember States to use individual licences. In fact, theEC found that individual licences have become therule rather than the exception in most Europeannational licensing regimes. In order to furtherpromote market entry, the ECs July 2000 proposalwould cover all services and networks under ageneral authorization scheme, and would limit theuse of individual licences to the assignment of radiofrequencies and numbers only. The proposed direc-tive would also further limit the number of conditionsthat may be imposed on service providers. Itrequires strict separation between conditionsestablished under general law (applicable to alloperators), conditions under the general authoriza-tion and conditions attached to individual licences.

Box 2-2: EU Licensing Objectives

Objectives of the 1997 EU LicensingDirective

To extend competition in telecommunicationsmarkets by means of a licensing regime which:

Eliminates all barriers to entry except forobjective, transparent, non-discriminatory and proportionaterestrictions relating to the availability ofscarce resources, such as numbers,spectrum and rights of way,

Simplifies and harmonizes licensingprocesses across the EU, and

Establishes licence conditions that aretransparent and constitute the lightestpossible regulation, compatible with thefulfillment of applicable requirements.

The ECs July 2000 proposal aims to ensure that noinformation is required as a prior condition for marketentry. It also places limits on subsequent verificationof compliance with conditions. In addition, theproposed Directive would reduce administrationcharges considerably, and would require regulatorsto publish annual overviews of costs and charges. Ifcharges collected by regulators exceeded theiradministrative costs, the regulators would be re-quired to adjust the level of charges the followingyear.

2.2 Types of Licensing Regimes

In general, there are three approaches to authorizingtelecommunications operators and services:

1. individual operator licences;

2. general authorizations; and

3. no licensing requirements (i.e. open entry).

These 3 categories are reflected in the regulatoryframework of a number of countries. The categoriesare used in the EUs 1997 Licensing Directive. Whilethe existing legal framework in all countries does not


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Box 2-3: EU Rules on Conditions for General Authorizations

1. Any conditions which are attached to authorizations must be subject to the principle of proportionality andconsistent with the EUs competition rules.

2. Conditions which may be attached to all authorizations:

2.1 Conditions aimed at ensuring compliance with relevant essential requirements,

2.2 The provision of information reasonably required for the verification of compliance with applicableconditions and for statistical purposes,

2.3 Conditions intended to prevent anti-competitive behaviour in telecommunications markets, includingmeasures to ensure that tariffs are non-discriminatory and do not distort competition,

2.4 Conditions relating to the effective and efficient use of numbering capacity.

3. Specific conditions which may be attached to general authorizations for the provision of publicly available. Telecommunications services and networks:

3.1 Conditions related to the protection of users and consumers, in particular, in relation to:

The prior approval by the national regulatory authority of the standard subscriber contract,

The provision of detailed and accurate billing,

The provision of a procedure for the settlement of disputes,

Publication and adequate notice of any change in access conditions, including tariffs, quality and theavailability of services.

3.2 Financial contributions to the provision of universal service, in accordance with Community law.

3.3 Communication of customer database information necessary for the provision of universal directoryinformation.

3.4 Provision of emergency services.

3.5 Special arrangements for disabled people.

3.6 Conditions relating to the interconnection of networks and the interoperability of services, in accordancewith the EUs Interconnection Directive and obligations under Community law.

Source: CEC (1997)

reflect this categorization, it is a useful approach forconsidering licensing requirement. (Once again, theNorth American situation is different. There havegenerally been no licensing requirements for tele-communications operators or services, except forspectrum licences, FCC Section 214 facilitiescertifications, CRTC international service licences,and, historically, public convenience and necessitycertificates in some states and provinces.)

The main features of each of the three approachesto licensing are outlined in Table 2-1.

The form of a licence depends on the legal regime ofeach country. Matters of form are largely irrelevantto good licensing practice. What is more important isthat the licence conditions are clear, proportionateand enforceable.

In many countries the grant of a telecommunicationslicence is a unilateral act of the regulatory authority.The licence is granted to one or more licenseessubject to the terms and conditions specified in thelicence. The grant of the licence is a purely adminis-trative act.


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Licensing

Box 2-4: EU Rules on Conditions for Individual Licences

Specific conditions which may be attached to individual licences, include:

Specific conditions linked to the allocation of numbering rights (compliance with national numberingschemes).

Specific conditions linked to the effective use and efficient management of radio frequencies.

Specific environmental and specific town and country planning requirements, including conditionslinked to the granting of access to public or private land and conditions linked to collocation and facilitysharing.

Maximum duration, which shall not be unreasonably short, in particular in order to ensure the efficientuse of radio frequencies or numbers or to grant access to public or private land, without prejudice toother provisions concerning the withdrawal or the suspension of licences.

Universal service obligations.

Conditions applied to operators having significant market power, intended to guaranteeinterconnection or the control of such significant market power.

Conditions concerning ownership which comply with European Community law and the Communityscommitment vis--vis third countries.

Requirements relating to the quality, availability and permanence of a service or network.

Specific conditions relating to the provision of leased lines.

Source: CEC (1997)

In other countries, a licence is a contract betweenthe regulator and the operator. This approach isused where licences are granted by way of tradi-tional concessions. Licences in this form generallyset out rights and obligations of both the regulatorand the operator in some detail and are signed byboth parties. This contractual form of licence ismost common and useful in countries where thelegal and regulatory framework is less developed.

Over time the need for individual licences will dimin-ish in many liberalized markets. In a highlycompetitive market the main justification forindividual licences will be the need to fairly allocatescarce resources such as spectrum. This is onereason to separate the licensing of spectrum fromthe other aspects of licensing.

Whatever the legal form and process of licensing,good licensing regimes have common features.These include clarity, transparency and the avoid-ance of unnecessarily burdensome conditions.These features are discussed further in Section 2.4of this Module.

2.3 The Licensing Process

The last section considered different types oflicensing regimes. In this section, we consider thedifferent processes by which licences are issued.The process will depend on the sector policies, lawsand market structure in a particular country. Fivecommon types of licensing process are discussedbelow.

2.3.1 Licensing Incumbent Operators

The telecommunications reform process in mostcountries includes privatization of PTTs and thegranting of competitive licences in various marketsegments. Many countries have completed this pro-cess; others are in the midst of implementing it, anda few have not started.

A major step in the privatization and liberalizationprocess in many countries is the issuance of alicence to incumbent operators. This step generally


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Table 2-1: Types of Licensing Regimes

Type of LicensingRequirement

Main Features Examples

IndividualLicences

(Operator SpecificLicences)

usually a customized and detailed licencedocument

frequently granted through some form of com-petitive selection process

useful where:

(i) a scarce resource or right is to be licensed (e.g.spectrum) and/or

(ii) the regulator has a significant interest inensuring that the service is provided inparticular manner (e.g. where the operator hassignificant market power)

basic PSTN services ina monopoly market

mobile and fixedwireless services

any service requiringspectrum

GeneralAuthorizations

(Class Licences)

useful where individual licences are not justi-fied, but where there are significant regulatoryobjectives which can be achieved byestablishing general conditions

normally contain provisions relating to con-sumer protection and other essentialrequirements

generally issued without competitive selectionprocess; all qualified entities are authorized toprovide service or operate facilities

data transmissionservices

resale services

private networks

Services whichmay be providedwithout a licence(fully liberalizedservices)

no licensing process or qualification require-ments

useful where an activity is technically caughtwithin the definition of activities subject toregulation (e.g. offering a telecommunicationsservice to the public) but where there is no jus-tification for imposing licence requirements

general requirements (e.g. registration with theregulator) can be imposed through a generalregulation or order

Internet serviceproviders (ISPs)

Value-added services

does not involve competitive selection or otherformal public process. New telecommunicationslaws or amendments often authorize the licensing ofthe incumbent operator. The licensing processinvolves the detailed identification of existing andnew rights and obligations of the operator. In somecases, incumbent operators may be granted general

authorizations. Others, including the PTT, generallyreceive individual licences. While the EC licensingproposals advocate a move away from individuallicences in mature competitive markets, there arestill good reasons for individual licences forincumbents in less competitive markets with lesswell-defined regulatory frameworks.


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Licensing

Table 2-2: EU Licensing Directive: Types of Regulation of Competitive PSTN Operator

Type of Regulation Form of Regulation

Allocation of spectrum individual spectrum licence issued throughcompetitive selection

essential requirements general operating authorization or classlicence available to all qualified operators

anti-competitive practices and universalservice

general laws and regulations applicable to alloperators in the sector

The rights and obligations incorporated in newlicences for incumbents must generally be adaptedto a new sector policy and regulatory regime. Inparticular, they must often be adapted to the realitiesof a market based economy, especially where theoperator is to be privatized and to face competitionfor the first time in some markets. It is generally ad-visable to obtain good market input before settlingthe terms of such licences. This can be achievedthrough a public process, although it is more com-mon to do so by retaining good professionaladvisors with experience in privatization andliberalization in other markets.

In practice, the licensing of incumbents ofteninvolves a process of negotiation between the PublicTelecommunications Operator (PTO) and the regu-lator. Additional input generally comes from profes-sional advisors, including investment bankers andlawyers hired by the PTO, government or regulator.It is important for the regulator (or other licensingauthority) to obtain a good balance of views on thecontents of the licence. In this regard there are oftencompeting agendas between the PTO, which maywant to retain as much exclusivity and market poweras possible, and those promoting a competitive tele-communications policy. Ministries of Finance andinvestment bankers for PTOs often focus ongranting exclusivity and market advantages asmeans of increasing privatization proceeds.Ministries of Communications and regulators areoften more focussed on promoting competition as ameans of increasing efficiency of telecommunica-tions markets and delivering better services to thepublic.

Parallel Licences for PTO and New Entrants

In some countries, established PTOs are grantedlicences for new services (e.g. cellular, data com-munications, ISP, value added services) whilelicences for those services are also granted to newentrants. The PTOs generally receive the licenceoutside the competitive selection process that maybe used to select new entrants, such as new mobileoperators. This has been the case for cellular mobilelicences in both developed and less developedcountries.

Issues of competitive fairness arise in this process.Often the new entrant pays a significant amount forthe licence under a competitive selection processbut the incumbent does not. This issue has some-times been addressed by requiring incumbentoperators to pay a fee equal to the amount of thewinning bid or a fixed percentage of that amount.This occurred recently when Jordan licensed asecond GSM operator. When Colombia licensedsecond cellular operators in each of three regionalmarkets, the existing operators were required to pay95% of the amount of the winning bid in theapplicable region.

In other countries the incumbent operator has notbeen required to pay licence fees, even though newentrants do pay. Some argue that the incumbentwas awarded a licence in accordance with pastpractice and law, and that it would be unfair to retro-actively tax it. Others have pointed out that theincumbent may have taken risks and incurredexpense in developing the market. From this


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perspective the retroactive imposition of a substan-tial licence fee may be considered inappropriate.While there is not always a right answer in thesesituations, care must be taken to provide a levelplaying field. If preferential treatment is granted to anincumbent, there should be clear benefits to thepublic for doing so. These may include maintenanceof network rollout obligations or other specificuniversal service objectives.

2.3.2 Licensing New Entrants - IndividualLicences

The issuance of individual licences to new operatorsrequires some form of selection process. Where noexisting operator holds a licence, it is best to imple-ment a competitive and transparent licensingprocess in accordance with the practices discussedin detail later in this Module (especially in Section2.4).

2.3.3 General Authorizations

Issuance of general authorizations (class licences)involves the definition of licence eligibility criteria andlicence conditions. Ideally, both processes shouldinvolve prior public consultation. This improves thetransparency of the licensing process and ensuresall relevant information is taken into account. Noselection process is required for general authoriza-tions, since all eligible operators or service providerswill be licensed.

Implementation of a general authorization regimecan be more complicated where existing individuallicences authorize the same services as thosecovered by the general authorization. For example,general authorizations are frequently used toestablish conditions for the provision of value addedservices. However, many PTO operators are alsoauthorized to offer value added services under theirindividual licences.

To ensure fair competition, regulators should ensurethat any differences between general authorizationsand individual licence conditions are competitivelyneutral. A good solution is to indicate that individuallicences do not authorize the offering of any servicethat can be offered under a general authorization. Inthis way, regulators can ensure that all providers of

the same service are subject to the same licenceconditions.

2.3.4 Spectrum Licences

Many telecommunications services require anauthorization to use radio frequencies. Spectrumlicences that are required to provide a service areoften granted as part of an individual licensingprocess. It is necessary, for instance, to authorizecellular operators to use the required spectrum aswell as authorizing them to operate the cellular net-works.

Authorizations to operate a telecommunicationsservice and to use the required radio spectrumshould be granted at the same time. There shouldbe no delays or risks of inconsistent regulatory re-quirements as between the two types of authoriza-tions. If two separate licences are issued, theyshould be issued simultaneously. A good approachis to attach a draft spectrum licence as well as adraft operators licence to a call for applications forlicences. This approach is discussed later in thisModule.

One reason for retaining two separate licences isadministrative convenience in management of thespectrum. In most countries spectrum managementis delegated to a different administrative group fromthe group that regulates other aspects of telecom-munications operations, such as price regulation oranti-competitive conduct. By having a separate,consistent form of spectrum licence, technical,reporting and compliance requirements can bestandardized across all users of the radio spectrum.

2.3.5 Spectrum Auctions, Lotteries andComparative Evaluation Processes

The radio spectrum is universally acknowledged tobe a valuable, limited public resource and thussubject to government regulation. Technologicaldevelopments have expanded the usable portions ofthe spectrum and enabled the transmission of moreand more information in the same amount of band-width. Despite these developments, an increasingnumber of telecommunications services andapplications rely on spectrum, and thus demand forspectrum often exceeds availability. Hence there is aneed to develop policies and approaches to assign


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Licensing

spectrum. These approaches have similarities withother licensing processes, but there are alsodifferences.

In the era of public telecommunications monopolies,PTTs were often responsible for spectrum assign-ment, and they assigned spectrum for their own useas the need arose. Many countries have since de-veloped new approaches to spectrum assignment toreplace those used in the era of public monopolies.The development of new approaches was spurredon by the WTO Regulation Reference Paper.Section 6 of the paper requires that procedures forthe allocation and use of scarce resources, includingfrequencies, be carried out in an objective, timely,transparent and non-discriminatory manner.

Different approaches have been adopted to assignspectrum where demand exceeds availability. Noconsensus exists as to which approach is best inwhich cases.

Traditionally, governments often allocated spectrumto particular applications and then assigned parts ofthe spectrum to entities to use for specific purposeson a first come, first served basis. This approach isfast, practical and inexpensive, but not appropriate intodays competitive environment. The increase in thenumber of competitors and demands for spectrumhave led to the development of competitiveapproaches for its assignment. These approachesinclude lotteries, comparative evaluation approachesand auctions. Various combinations of theseapproaches have also been used. For example,applicants may be short-listed using a comparativeevaluation approach and then participate in anauction or lottery for the final assignment ofspectrum.

Lotteries

Lotteries provide a fast, inexpensive and transparentapproach for selecting from substantially similar orequally qualified applicants. Lotteries should gener-ally be preceded by a formal qualification process toselect lottery participants. Otherwise, their use mayhinder sector development. In the US, for example,experience demonstrates that some past lotteryparticipants had no intention of operating telecom-munications services, but simply planned to reselltheir spectrum licences for a profit. Other lottery

winners proved to be financially incapable of startingup service.

Comparative Evaluation Processes

Under a comparative evaluation approach, theregulator (or another government agency) decidesto whom the relevant spectrum is to be assigned.Comparative evaluation provides an approach forchoosing among multiple applications that are sub-stantially equal. It also allows regulators to matchspecific sectoral objectives with the operators incharge of achieving them.

There are many forms of comparative evaluationschemes. In some cases, spectrum licences areawarded to applicants expected to make the bestuse of spectrum to serve the public. Comparativeevaluation processes may involve the application ofa variety of qualification and selection criteria. Inmost cases, these criteria will be published inadvance, and applicants will strive to demonstratehow their applications meet the criteria better thanother applications.

Minimum qualification requirements generallyinclude evidence of financial resources, technicalcapability and commercial feasibility of the relevantspectrum application. Selection criteria may includeproposed tariffs, coverage (geographical and interms of users), network rollout targets, quality andrange of service commitments, and efficient use offrequencies. Some of the above criteria are appliedin some cases as qualification criteria and in othersas selection criteria, depending on the country andeven on categories of services within a country.

There have been many criticisms of the comparativeevaluation approach. Criticism generally focuses onlack of transparency. No matter how stringent theevaluation criteria, there is a subjective element tomost comparative evaluation processes. Hence theyare sometimes referred to as beauty contests.Because of the subjective element, it is oftensuspected that regulators or other decision-makersmay not exercise their judgement impartially. Insome cases these suspicions have led to litigation.In others, the suspicions are not acted upon, butthey nevertheless undermine the credibility of thelicensing process and the government or regulator.


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Other criticisms of the comparative evaluation proc-ess focus on its speed. The process is often slow.Careful evaluations of financial capability, technicalplans, etc. can take time. Finally, comparativeevaluation processes are sometimes criticized asinvolving inappropriate or questionable regulatoryintervention in the selection of winners and losers. Itis often said that auctions provide a better alternativeto comparative evaluations, in that they rely on mar-ket forces rather than regulatory fiat to determinecompetitive outcomes.

Auctions

Auctions are increasingly used by regulators to grantspectrum licences to the highest bidders. In the caseof auctions, the market ultimately determines whowill hold the spectrum licences. However, in manyauction schemes, bidders are pre-qualified usingcriteria similar to those used in comparative evalua-tion processes. As a result, participation in someauctions is limited to bidders with proven financialand technical capabilities.

Experience with spectrum auctions in the US illus-trates the importance of using rigourous technical,financial and commercial criteria to pre-qualifybidders. In that country, some successful bidderslater proved to be incapable of financing theiraggressive bids. It appeared that others had neitherthe technical capability nor the intention of operatingtelecommunications services utilizing the frequen-cies they had successfully bid on.

There are different types of spectrum auctions. Themost common are:

One round or simple auctions (open or closed);and

Multiple-round auctions (sequential or simulta-neous).

Initially developed in the US in the mid 1990s, thesimultaneous, multiple-round auction has becomethe most widely used auction approach. While thereare variations from country to country, the approachgenerally involves a simultaneous auction fordifferent spectrum licences. There are rounds ofbidding, that is series of consecutive bids, for eachlicence. The bids continue to increase during these

rounds until a high bidder is determined for eachlicence.

At the beginning of each round, every bidderreceives information about its eligibility to bid andabout the standing high bid on each licence. Newbids must normally be higher than the standing highbid by at least a minimum pre-set amount. In somecases, bidders may have the opportunity to withdrawbids made in earlier rounds, although this action isusually subject to penalties. Sometimes an activityrule penalizes bidders who are inactive by reducingtheir bidder eligibility points. The rounds continueuntil there are no new bids on any licence.

The bidding process in simultaneous multiple roundauctions is usually computerized, so that bids andother auction information can be posted and calcu-lations made quickly. Bids are typically encrypted forsecurity and submitted electronically.

Some key features of simultaneous multiple roundauctions are illustrated in Box 2-5, which describesthe Canadian auction process.

There are many arguments in favour of spectrumauctions. Auctions provide an efficient, transparentand objective means of awarding spectrum licencesto the bidders who value them most highly. A properpre-qualification process can ensure that successfulbidders have the technical and financial capabilitiesto implement services quickly and efficiently. Thehigh investments required to win an auction can beviewed as incentives for rapid roll-out of infrastruc-ture and services, since that is the only way thesuccessful bidder can recoup its investment in thelicence fee. Another argument in favour of spectrumauctions is that they provide the means to providethe public with the highest rents for the use of apublic resource. Governments can use the proceedsof auctions for deficit reduction and other publicpriorities.

There are also arguments against spectrum auc-tions. First, it is argued that the high costs paid bysuccessful bidders are usually passed on tocustomers. The result can be excessive rates forconsumers of wireless services, and reduced pene-tration, particularly among lower income consumers.Some argue that capital used to pay high auctionfees will not be available to invest in network


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Licensing

Box 2-5: Features of Multiple Round Auctions: The Canadian Example

1. Bidder Eligibility Points: Each licence in an auction is assigned a number of points proportionate tothe bandwidth and population covered by that licence. Each bidder must indicate which licences, and thenumber of points-worth of licences, it may wish to bid on.

2. Activity Rule: A bidder is considered active on a particular licence if it has the current high bid from theprevious round or if it submits an acceptable bid in that current round. In each stage of bidding, a biddermust be active on licences whose corresponding points add up to a certain percentage of the bidderseligibility point level.

3. Bid Withdrawals/Penalties: If a bidder makes a bid and later wishes to change it, it may do so subjectto paying a penalty which corresponds to the potential loss of revenue caused by the withdrawn bid.

4. Bid Increments: Bid increments are used to expedite the auction. They are set in percentage and/orabsolute dollar terms and are changed during the course of the auction.

5. Waivers: Waivers protect bidders against mistakes they may make or in the case of technical or commu-nication problems. They prevent a bidder from losing bidder eligibility points when it does not satisfy theactivity requirements in a given stage.

6. Stopping rule: The auction generally stops when a round finishes with no acceptable bids or waivershaving been submitted on any licences.

7. Forfeiture: A bidder who submits the high bid on a licence but fails to pay will forfeit its right to thelicence and must pay a penalty

Source: Department of Industry Canada (1998)

infrastructure. While it is arguable that a well-financed applicant should be able to pay for both, itis not possible to prevent strategic bidding to obtainspectrum. Banks, rating agencies and financialadvisors have been critical of recent record-highauction fees paid for UMTS mobile spectrum inseveral European countries. Share prices and debtratings of some successful bidders have droppeddue to widely-held perceptions that too much waspaid by them in the auctions. Finally, high auctionfees may discourage smaller participants fromentering a telecommunications market. The resultmay be increased market concentration, and ulti-mately also higher consumer prices.

Simultaneous multiple round auctions have recentlybeen used to license wireless service providers inAustralia, Canada, Spain, the Netherlands, theUnited Kingdom and Germany. The recent UMTS(3G Cellular) licensing process provides some inter-esting case studies in different spectrum licensingapproaches. Box 2-6 describes the quite differentUMTS licensing processes utilized in a variety ofEuropean countries.

2.4 Licensing Practices

While telecommunications licensing approachesvary considerably from country to country, there arecommon features, particularly among better licens-ing practices. The following sections review goodpractices that will help ensure the success of alicensing process.

2.4.1 Transparency

Procedural transparency is one of the fundamentalrequirements of a successful licensing process. Theimportance of transparency in the licensing processis evidenced by its inclusion in the WTO RegulationReference Paper (see Box 2-1).

Transparency requires that a licensing process beconducted openly and that licensing decisions bemade based on criteria published in advance. Theserequirements apply to all licensing decisions,including ones to award or revoke a licence. Thelicensing processes described later in this Module


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Box 2-6: Auctions and Comparative Evaluations UMTS Case Studies

Germany In August 2000, Germany auctioned off 12 blocks of UMTS spectrum. The German regulator(RegTP) published the rules applicable to the award of the UMTS licences on 18 February 2000. The rulesprovided that eligibility to take part in the auction would be governed by the basic eligibility requirements ofthe Telecommunications Act. Bidders were required to bid successfully for at least two blocks of spectrum toqualify for a licence. Minimum bid increments were set at 10 percent. Additional rules were established toprevent bidders from influencing the outcome or controlling the pace of the auction. While the auction tookplace, for example, small groups of representatives of each bidder were isolated from 8 a.m. to 6 p.m. eachday, with two observers from RegTP present with each group at all times. Bidders were not able to see whatrivals were bidding. Only the highest bids for each block were made known to bidders.

Germanys UMTS spectrum auction lasted for 14 days and 173 rounds of bids. At the end, six operatorseach obtained two blocks of spectrum and 20-year licences. The licences require operators to providecoverage of at least 50 percent of the German population by the end of 2002. This auction concluded withrecord bids for UMTS licences: a combined total of over USD 46 billion. As a result of the enormousamounts paid, concerns were expressed that some operators may well end up spending more on acquiringthe licences than on building their networks.

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

Norway In Norway, a comparative evaluation process was used instead of an auction to grant UMTSspectrum licences. Applicants were required to meet minimum eligibility requirements, such as acommitment to meet specific coverage and roll out obligations, and proof of financial strength/capability. Thetwo main selection criteria were coverage (geographical and in terms of population) and roll out. Financialaspects, quality of service, environmental impact and previous experience were secondary criteria.

Norways emphasis was not on raising as much money as possible from the licensing of spectrum for 3Gmobile systems. Rather the goal was to encourage rapid network development and to increase the countrysoverall competitiveness. In Norway, wireless operators are required to pay moderate administrative and fre-quency management fees. Operators awarded 3G spectrum licences were required to pay a special annualfee of approximately USD 2 million. In addition, subject to parliamentary approval, 3G licensees wererequired to pay a one-time lump sum of approximately USD 11 million. These sums are very smallcompared with the results of the spectrum auctions in the United Kingdom and Germany.

Sweden In Sweden, spectrum licences for 3G mobile communications systems will also be awardedusing a comparative evaluation process. Swedish law provides that spectrum licences must be awardedbased on specific criteria. As in Norway, the main selection criteria for the award of 3G spectrum licences inSweden are coverage and roll out. Modest fees will be charged for the spectrum licences. This approach isconsidered beneficial in that it will enable operators to invest in network development. High spectrum feespaid by operators will not be passed on to customers.

reflects the principles of transparency. Key featuresof such processes include:

advance publication of a call for applications,with application process (tender) rules, quali-fication and selection criteria;

separation of qualification and selectionprocesses;

return of unopened financial offers (bids) toapplicants who do not meet the publishedqualification criteria; and


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Licensing

public opening of sealed financial offers fromqualified applicants.

A transparent process can be different in the case ofelectronic applications or auctions. These arediscussed above under the heading Auctions.

Transparency is best measured from the point ofview of the participants in the licensing process. It isgood practice for a regulator to take all reasonablesteps to ensure that participants in the licensing pro-cesses, including applicants, existing licensees, andcompetitors as well as the general public, perceivethe process to be fair.

Conducting a transparent licensing process issometimes perceived to be more time consumingand difficult than less transparent alternatives. Theprocess, for instance, of publishing procedural rulesand selection criteria in advance can be difficult for anewly formed regulator in a country where proce-dural transparency is not entrenched in governmentpractice.

However, the absence of transparency underminesinvestor confidence in the fairness of the entireregulatory process and in the telecommunicationsmarket itself. Lack of transparency can significantlyslow the process of liberalization and reduce thebenefits of privatization.

2.4.2 Public Consultation

It is good practice to engage in public consultationbefore and during a licensing process. To start, it isoften useful for a regulator to invite public commenton the approach to be taken in a proposed licensingprocess before it starts. Consultation withstakeholders reinforces the perception of a trans-parent process. Consultation allows the regulator toreceive directly the views of consumers, existingoperators and prospective applicants on a proposedlicensing initiative. This allows licence terms andconditions and licensing procedures to be fine-tunedto maximize the prospects for a successful licensingprocess.

Consultation is particularly important where ageneral authorization is to be issued. Advancepublication of proposed conditions of generalauthorizations provides the main opportunity for

public comment. By contrast, in a competitive li-censing process there are usually other ways forstakeholders to make their views known, such aspre-bid conferences and written exchanges ofquestions and answers.

Consultation can be formal or informal. In thecontext of any major licensing initiative, it is generallyadvisable for the regulator to establish a formal andtransparent consultation process. A good approachis for the regulator to publish a notice stating itsintention to launch a licensing process, and invitingcomments on the proposed approach. The noticeshould set forth in some detail the proposedapproach and any specific issues on which com-ments are sought. Where the regulator is unsure ofthe best approach, comments can be invited ondifferent options.

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

A pre-licensing consultation process increases thelikelihood that the regulators approach to licensingwill be based on a good understanding of all relevantconsiderations. Consultation also helps to ensurethat even those who may disagree with the regula-tors approach will believe that their views have beenconsidered.

2.4.3 Licence Fees

In the telecommunications industry, the term licencefee is used to describe different things. It mayinclude one or more of the following:

a fee paid as a premium or rent to agovernment or licensing authority for theright to operate a network, provide a serviceor use a limited resource, such as radiospectrum or numbers;

administrative charges to compensate aregulator for its costs in managing and su-pervising use of the radio spectrum; and


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administrative charges to compensate aregulator for costs incurred in performingother regulatory functions, such as licensingoperators, ensuring compliance with licenceterms, resolving interconnection disputes,establishment and supervision of otheraspects of the regulatory framework, etc.

It is good practice to differentiate the above-notedtypes of fees. This improves transparency andmakes it easier to determine that the administrativecharges related to cost recovery are indeed cost-based. Separating administrative licence feesrelated to spectrum management from otheradministrative fees improves transparency andaccountability. Spectrum management is usuallyhandled by a separate branch, and sometimes awholly separate ministry or agency from the tele-communications regulator.

It is generally accepted that administrative feesshould not impose unnecessary costs on the tele-communications sector. The most transparentmanner by which to achieve this objective is anexplicit cost-recovery scheme. Cost recoveryschemes involve establishment of licence feesbased on the projected or actual costs of theregulator. Once that overall level of cost-recoveryhas been set, it is necessary to allocate the costsamong licensees or market participants. This alloca-tion can be based on different factors, including tele-communications revenues, licensed coverage areasor types of services. The most common allocationfactor is revenues.

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

(15) Administrative charges may be imposed onproviders of electronic communications servicesin order to finance the activities of the nationalregulatory authority in managing the authoriza-tion system and for the granting of rights of use.Such charges should be limited to cover theactual administrative costs for those activities.For this purpose transparency should be createdin the income and expenditure of national regu-latory authorities by means of annual reportingabout the total sum of charges collected and the

administrative costs incurred. This will allowundertakings to verify that administrative costsand charges are in balance. Administrativecharges should not act as a barrier to marketentry. Such charges should therefore be distrib-uted in proportion to the turnover on the relevantservices of the undertaking concerned ascalculated over the accounting year precedingthe year of the administrative charge. Small andmedium sized undertakings should not berequired to pay administrative charges.

(16) In addition to administrative charges, usagefees may be levied for the use of radio frequen-cies and numbers as an instrument to ensure theoptimal use of such resources. Such fees shouldnot hinder the development of innovativeservices and competition in the market.

2.4.4 Balancing Certainty and Flexibility

Telecommunications licences should balance regu-latory certainty with the flexibility necessary toaddress future changes in technology, marketstructure and government policy.

In many countries, a balance between regulatorycertainty and flexibility is achieved by using regula-tory instruments other than licences as mainelements of the regulatory framework. However,where a countrys regulatory regime is not welldeveloped, it is often necessary to include areasonably comprehensive codification of the basicregulatory regime in a licence. This is necessary toprovide the certainty required to attract new entrantsand substantial investment to the sector.

Licence conditions should be sufficiently flexible toallow their integration into the general regulatoryframework for the sector as it develops. Licensing anoperator should not preclude future regulatoryreform.

There are several approaches to providing suchflexibility, including:

permitting unilateral licence amendment bythe regulator;

establishing short licence terms;


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Licensing

permitting licence amendments with themutual consent of the licensee and regulator;and

permitting unilateral amendments by theregulator only of specific licence conditionsthat should constitute part of the countrysgeneral regulatory regime, provided suchamendments are made in a procedurally fairand competitively neutral manner.

The first two approaches are not consistent withregulatory certainty. They will generally make it diffi-cult, if not impossible, to attract the investment andfinancing required for a major licence, such as afixed line or cellular licence.

The fourth approach is more attractive in this regard.To implement it, a distinction can be made betweenlicence conditions that are of a regulatory nature andthose which can only be amended with the agree-ment of the licensee. For example, licenceconditions on industry-wide universal servicemechanisms or general terms of interconnectionmay be subject to amendment by the regulator.Other conditions of a purely contractual nature orwhich are fundamental to the economic value of thelicence may be subject to modification only onconsent of the operator. These would normallyinclude conditions such as the term of the licenceand the licence acquisition fee payable.

Where the regulator has the right to amend thegeneral regulatory conditions of a licence, suchamendments should be made in a transparent andcompetitively neutral manner. Any amendmentsshould be preceded by consultation with the licen-see and other affected parties. In some cases, aright of appeal or review may be warranted.

2.4.5 Distinguishing Licensing fromProcurement

The process of licensing a telecommunicationsoperator should be distinguished from the govern-ment procurement process. In many countries therehas been confusion between the two types ofprocesses, sometimes with adverse consequencesfor the licensing process.

In licensing a telecommunications operator, a regu-lator is not buying goods or services using publicmoney. In essence, licensing involves offering abusiness opportunity to qualified investors whoagree to comply with the licence conditions. Theregulator is more a seller than a buyer.

This observation leads to two important recommen-dations for licensing processes:

The regulator must offer to licence applicants anopportunity that is financially attractive to experi-enced and competent telecommunicationsoperators. While some licensing opportunitiessell themselves, others, particularly those inemerging and transitional markets, must becarefully structured and marketed to attractqualified applicants. Experience shows thatalmost any call for applications for telecommu-nications licences will attract some bidders.However, many are not financially or technicallycapable of meeting the regulators objectives toexpand and improve services.

Government procurement procedures aregenerally not suitable for a telecommunicationslicensing process. Many countries have bureau-cratic centralized procurement administrations.Detailed government procurement proceduresare often developed for good reason - to reducecorruption. However application of these proce-dures can cause legal and administrativeheadaches, and delay and confusion about thereal goals of the licensing process. For example,government procurement officials generallywant to see detailed specifications for everyaspect of the goods and services beingpurchased and a careful inspection andmonitoring of installation and performance afterselection and delivery. This kind of micro-management is inappropriate in a telecommuni-cations licensing process. As discussed below,clear qualification requirements should beestablished. However, the regulator is generallyconcerned only with results. What matters iswhether - not how - licence conditions arecomplied with. From this perspective, suchissues as technology choices, managementstructures and marketing strategies should notbe the subject of licence conditions or selectioncriteria.


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Other problems are experienced in trying to applystandard government procurement procedures to atelecommunications licensing process. It is generallybest to avoid such procedures, and to use a simpleand transparent competitive licensing process,based on internationally accepted telecommunica-tions licensing procedures.

2.4.6 Concessions, BOTs and SimilarArrangements

A licence is a grant by a public authority of a right tooperate a service, subject to the terms and condi-tions specified in the licence or in other regulatoryinstruments. The issuance and enforcement of alicence is therefore always, to some extent, a matterof public or administrative law. As indicated above,licences, concessions and other types ofgovernment permits to operate telecommunicationsfacilities and services have more in common thannot.

However, in some cases, private sector investorshave entered into business arrangements withgovernments or state-owned operators that aremore in the nature of joint ventures with governmententities than independent rights to operate telecom-munications facilities or provide services.

Before describing these arrangements, the termconcession should be discussed. In mostcountries, this term is used to refer to a documentthat establishes a commercial agreement between agovernment and the private builder, owner or op-erator of an element of public infrastructure (such asa toll road, power plant or telecommunicationsnetwork) or a business located on public property.Contractual remedies, such as money damages, areavailable for breach of a concession through civilcourts or arbitration. Governments can fine tuneconcession terms to establish the protections andincentives necessary to attract investors and toguarantee performance by the concession holder.

Some licences have both regulatory and concessionfeatures. It is important to distinguish between thetwo. A good approach is to deal with the concessionfeatures in a concession contract between the hostgovernment (not the regulator) and the investor. Inproject finance terms, such an agreement would becalled a government support agreement.

It should be noted that the term concession hasdifferent meanings in different countries. Forexample, in some Latin American countries, such asMexico, the term concession is used to refer to adocument (e.g. the Telmex Concession) that is es-sentially a licence, not a commercial agreement,although it is signed by the government and theconcession holder.

Some countries, particularly in Asia, have grantedconcessions that are in the nature of joint ventureagreements rather than granting full licences tooperate telecommunications networks independentof the government.

Many variations are possible on the theme of jointventures between private sector investors on theone hand and governments or PTTs on the other.These include Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO), Build-Operate-Own (BOO),and an alphabet soup full of alternatives limited onlyby the imagination of project finance lawyers andbankers. Some examples of countries where sucharrangements have been implemented are listedbelow:

BTO: Thailand, Philippines

BOT: Lebanon, India, Indonesia (JointOperating Schemes or KSOs)

BOO: Malaysia, Solomon Islands

In general, these are all project finance structuresaimed at attracting investment and managementexpertise required to develop telecommunicationsinfrastructure. A variation on such structuresinvolves contracts where an investor does not buildor own any facilities, but shares in revenues from astate-owned operator in return for providing financ-ing, management or both. Financing contracts of thistype have been entered into in China and Indonesia.An example of a management contract with revenuesharing is the Vietnamese Business CooperationContract.

Most of the types of structures discussed in thisSection have experienced initial success in promot-ing network expansion. In part this was becausethey were not characterized as licences to privateoperators but rather as contracts under which


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Licensing

private contractors would build and operatetelecommunications services owned by thegovernment or by a state-owned operator. Thisarrangement allowed for private sector participationin telecommunications operators without breachinglaws or policies that prevented private sector owner-ship of operators.

However, experience in Lebanon, Indonesia andelsewhere suggests that these models are not viablein the long term. Investors in BOT projects lack thelong-term security and equity interests of a licensee.They are therefore motivated to maximize short-termprofitability at the expense of long term network orservice development. A BOT must either terminate,with the resulting withdrawal of the private investor,or it must be converted into a true licence. If theinvestor withdraws, the operator may or may not beable to continue to expand and manage the serviceon its own. If the concession is converted to alicence, serious questions may arise regarding thefairness and transparency of the licensing process.

2.4.7 Service Areas

The definition of geographic service areas to becovered by a new licence presents unique chal-lenges. Different approaches have been taken indifferent countries. In some cases, national licencesare issued, while in others, a distinction is madebetween regions or between rural and urban areas.In some cases, national licences are offered inparallel with competing regional licences for thesame service.

There is no one right approach to designatingservice areas. However, some approaches are likelyto be less successful than others. One approach thathas experienced limited success in a number ofcountries is to preserve the profitable urban marketsfor a state-owned PTT, and to invite private sectoroperators to serve only financially less viable ruralareas. In some cases, the failure of the private sec-tor operators to perform well in such areas has beenused as evidence to argue against further sectorliberalization.

The following points are relevant in selectinglicensed service areas:

Financial viability must be a key factor. If finan-cially non-viable rural or high cost areas arelicensed, a universality fund, or similarmechanism should be established. A preferredapproach in such cases is to select a licenseefrom among competing applicants, based on thelowest requested subsidy. Universality fundingmechanisms and approaches for measuringfinancial viability are discussed in Module 6.

Experience shows that regional licensees oftenmerge with, or are acquired by, other regionallicensees to serve larger regions or formnational operators. Examples range from theColombian cellular operators to the U.S.Regional Bell Operating Companies. Thesemoves are often driven by economies of scale.Regulators may want to keep this trend in mind,and license several competing national opera-tors at the outset, rather than numerous finan-cially weaker regional operators. The result willbe lower transaction costs for the sector, andless disruption due to integration of differentoperating systems.

Licensing operators to serve larger areas willpermit them to cross subsidize from more profit-able areas to less profitable ones. Thisapproach can be used to extend service to lessprofitable areas. However, it can lead to anti-competitive conduct where an incumbentoperator retains the right to serve profitableurban markets as well as less profitable ruralones, while new entrants can serve only therural markets. Problems of anti-competitivecross-subsidy are discussed in detail in Module5.

National licences and large service areas areconsistent with the consumer interests in ob-taining seamless one stop shopping servicefrom a single service provider. This is particularlytrue where technical or other barriers to efficientinterconnection or roaming are present.

2.4.8 Qualification Criteria

It is important to distinguish between criteria relatingto the qualification of an applicant to participate in alicensing process and criteria for the selection of a


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successful licensee from among the qualified appli-cants.

In the case of a general authorization, only the quali-fication criteria are relevant because there is noselection to be made. In the case of a selectionprocess for an individual licence, both qualificationand selection criteria are normally developed. It isgenerally advisable to conduct a licensing process inat least two phases. The qualification phase iscompleted first. Only qualified applicants participatein the second phase the licensee selectionprocess.

Qualification criteria are minimum requirements forthe right to participate in the selection process.Generally, qualification criteria are limited to ensur-ing applicants have the financial and technicalresources and experience to successfully operatethe licensed service.

Some countries impose foreign ownership restric-tions that establish minimum levels of localownership for licensed operators. Foreign ownershiprestrictions are generally contrary to the spirit, if notthe letter of foreign trade agreements, including theGATS. However, various WTO signatory countrieshave registered exceptions permitting them tocontinue to apply foreign ownership restrictions.Over time, such restrictions are likely to be phasedout in most countries.

The importance of establishing clear and rigourousqualification criteria is related to the level of competi-tion in the applicable service. In the case ofindividual licensees that will enjoy monopoly or otherexclusive rights, it is of critical importance to ensurethat the licensed operator is financially and techni-cally able to meet its licence obligations. Otherwise,the licensee may fail to meet important licenceconditions, such as those related to network rollout,service coverage and quality. The process ofenforcing licence compliance or revoking and re-tendering a licence in the case of default is timeconsuming, costly and disruptive for consumers.

In the case of competitive services, competition willgenerally discipline the market. If a market issufficiently competitive, consumers will switch froman operator that fails to provide adequate service to

another operator that does provide it. A qualificationprocess is therefore less important.

Recent experience in spectrum auctions demon-strates, however, that even in relatively competitivemarkets, such as mobile services in Brazil and theUS, it is important to establish some minimumqualification requirements. These requirements willensure that valuable spectrum and other scarceresources are awarded to applicants who are finan-cially and technically capable of providing the publicwith service using such resources.

Some licensing processes involve more than onequalification phase. In issuing a large individuallicence, a pre-qualification requirement is oftenestablished. This limits the eligibility of applicantswho can participate in the final qualification process.It is justified, for example, where there are high costsincurred by the regulator (and applicants) in con-ducting a detailed qualification process or whereconfidential access to information or facilities isgranted to applicants.

In those circumstances it makes sense to discour-age participation in the process by applicants whoare unlikely to meet the qualification criteria or tosubmit a competitive application. Various pre-qualification options exist. These include:

payment of a substantial registration fee;

a substantial document purchase fee; and

use of a proxy indicator of experience andresources (e.g. minimum number of custom-ers or lines in service for similar services inother markets).

It is important to specify whether qualification criteriaare in any way relevant to selection. Transparencyrequires that applicants be told whether minimumcompliance with qualification criteria is sufficient.There has been litigation against regulators in somecountries where certain qualification criteria werespecified, and then some qualified applicants wererejected on the basis that they were less qualifiedthan others.

Table 2-3 sets out possible qualification criteria for avariety of different services.


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Licensing

2.4.9 Selection Criteria

There are two basic types of selection processes:

Competitive selection based on a singlequantitative criterion. Examples include:

an auction where the highest bidder wins;and

a subsidized rural service competition, wherethe operator that bids the lowest subsidywins.

Comparative evaluation where based on a moresubjective evaluation of one or more quantitativeor qualitative criteria.

Advantages and disadvantages of both approachesare discussed above under the heading SpectrumAuctions, Lotteries and Comparative EvaluationProcesses. The single criterion approach is clearlythe most transparent and simplest to use. It is themost consistent with international trade agreements,and the most frequently recommended approach ofinternational financial institutions and internationaldevelopment organizations that promote telecom-munications sector reform. However, it may notalways result in the selection of the best qualifiedapplicant, and, in the case of an auction, it mayresult in the imposition of excessive costs on thesector.

There are many variations on these two basicapproaches. For example, in some cases, there ismore than one quantitative criterion, with a weightingscheme for the various criteria that will result in asingle score. In other cases, numerical scores aregiven for essentially subjective measures, such asthe experience record of an applicant, or the qualityof its management

Several observations can be made about the choiceof selection criteria:

Qualified applicants are motivated to devotefinancial and other resources to those aspects oftheir applications that will form the basis of theselection decision. Licensing selection is a zero-sum game. Each applicant has a finite amountof cash and other resources to devote to the

proposed service. Resources which are allo-cated to one aspect of an application on whichselection is based (i.e. the financial offer oraccelerated roll-out commitments) are notavailable to fund other aspects of the operationwhich are not related to selection criteria (i.e.universal service, lower prices, introduction ofenhanced services).

Transparency is increased by use of simplequantitative selection criteria. A competitiveselection process that is based on subjective orqualitative criteria will be less transparent. Thesame is true of multiple criteria that cannoteasily be compared. A lack of transparencyundermines the credibility of the process and ofthe regulator. It also opens the door for com-plaints of bias, corruption or incompetence. Tomaximize transparency, a single financial orother quantitative selection criterion should beused. This can be derived by use of a formulawhich combines a number of selection criteriainto a single numeric factor if desired.

Use of a single financial criterion does not meanother service factors or licensing objectives areirrelevant. Important factors and objectives not usedas selection criteria can be indirectly included in thequalification process. For example, coverage, rolloutand universal service commitments can be specifi-cally incorporated as licence conditions that anysuccessful applicant will have to comply with. Allapplicants will then incorporate these minimumrequirements into the calculation of their financialbid.

Table 2-4 describes possible types of selectioncriteria and summarizes their advantages anddisadvantages.

2.5 Contents of Licences

The contents of licence documents vary considera-bly depending on the country, the service and theoperator. As indicated above, much depends on thestate of development of the regulatory regime in acountry. Where it is well developed, licences tend tobe shorter. Where it is not well developed, licencesmust often include considerably more detail, in orderto provide a comprehensive regulatory frameworkfor the operator or service being licensed. For


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Table 2-3: Possible Qualification Criteria

Licence Type Possible Qualification Criteria Rationale

First newcompetitivefixed network(local orinternationalservice)

Applicant not currently licensed tooffer a competitive service; notassociated with the incumbent

Applicant has a minimum number offixed lines in service in other coun-tries/markets (an international PTO aspartner)

Relevant experience in similar mar-kets (direct or by contract)

Financial comfort letter from recog-nized bank

Business plan, including pro formafinancial statements and a marketingplan

Technical plan, including details ofnetwork planning and roll out andtechnology selections

Effective competition will not developbetween related entities

Only experienced operators canmeet the significant challenges fac-ing a start up fixed line competitor

Experience and contacts in localmarket increases prospects ofsuccessful start-up

Evidence of access to requiredfinancing

Evidence of financial viability andlikelihood of success of the project;disadvantage in that it is costly toprepare plan

Business plan and technical plancan demonstrate detailed and viableservice plans and knowledge of localeconomic and other conditions

Competitivecellularservice (firstnew entrant inan emergingmarket)

Similar to, but less onerous than,above

Presence of competition reduces(but does not eliminate) public costsof failure

Significant ec

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