Introduction
Last week’s column argued that because the Marriott project has no discernible origins in the most recent complete and systematic indication of the government’s investment strategy (the 2011-2015 Poverty Reduction Strategy Paper) it is fair to assess that project as an opportunistic rogue investment. This week I argue the presidential spectrum giveaway just before the 2011 national elections is another instance of opportunistic rogue investing. Interestingly, both of these projects are troubled.
However, while the Marriott does not appear as a governmental priority in the source documents detailing government’s investment strategy, in those same documents ICT is prioritized, with emphasis placed on access and required legislative and regulatory reforms. Indeed the PRSP pointedly asserts: “The key to opening the ICT sector to competition and increased investment is to provide a level playing field to all investors [my emphasis] to this end, the Government [will] liberalize the market based on revised legislation” (PRSP Page 63)
This approach clearly requires legal/regulatory/institutional reforms as a precondition to further action. The presidential spectrum giveaway, however, puts the cart before the horse. And, for this reason I view it as another example of opportunistic rogue public investing.
Basic economics and
the spectrum giveaway
Modern university introductory level economic textbooks carry numerous examples of what their authors’ term “economics in action.” These examples show first year students numerous practical ways in which knowledge of economics can help to separate sense (common) from nonsense (fallacies). A favourite example is the economically efficient allocation of the electromagnetic resources of the spectrum to private investors.
These textbook presentations note that governmental authorities are responsible for distributing rights to use the radio-frequency spectrum, because the spectrum is a collective national resource.
Governments sell these rights (issue licences) to transmit signals over specific bands of the spectrum, thereby spreading ownership of using the spectrum to private non-state enterprises/organisations.
Indeed, they observe that during the past two decades best practice aimed at promoting a competitive market-based approach to spectrum management.
This deliberate choice rejects approaches that seek to enhance influences such as political favouritism, corruption, and the illicit/illegal rigging of the mechanisms for transferring spectrum resources from government to private individuals and organisations.
Spectrum auctions
These textbooks show how to accomplish this. First, they observe that, just as a rice farmer needs a piece of land to farm, a telecommunications firm similarly needs a piece of the airways through which to send signals.
By the mid-1990s economists had convinced most governments, the best way to promote an economically efficient market-based approach to spectrum management is through allocating spectrum licences at “spectrum auctions.”
Spectrum auctions differ from typical auctions. Why? Because the spectrum is intrinsically different from traditional auction items (art, mining permits, houses, cars, animals, and so on). This difference lies in the fact that the value to a telecommunication firm of a piece of the spectrum depends heavily on the access of that piece of the spectrum to adjacent parts. This adjacency is both geographic (for example, East Coast Demerara and East Bank Demerara) and frequency adjacency (that is, with nearly the same megahertz number).
Given this feature, economists advise that if the spectrum is auctioned in the traditional manner, this would be inefficient. In traditional auctions if you have, say, six items to auction, this is done sequentially; that is, one after the other. However, when the spectrum is auctioned off, it is done simultaneously. In other words, bidders are asked to bid for several bands of the spectrum at the same time. Compared to traditional auctions this would be like putting all items up for auction together, and letting bidders bid different prices on each.
By wide consensus, economists deem spectrum auctions a remarkable success for economics in action.
By now readers would realize there are very detailed technical regulations guiding spectrum auctions.
These cannot, however, be spelt out in this column. Readers may nevertheless find the following observations useful: 1) Spectrum auctions can be spread over hours or months.
They are designed to ensure that the winning bid(s) is (are) won by the enterprise(s) that value(s) the bands most. When this occurs an economically efficient outcome is secured. 2) In the USA this process is called Simultaneous Multiple Round Auctions or Simultaneous Ascending Auctions. 3) These auctions are normally done electronically with public access assured through the Internet, after the auction is complete. 4) Bidders, however, remain anonymous until the auction is completed, which generally takes place when there are no further bids. 5) Regulations for the auction legally prohibit collusion (tacit or explicit) among bidders. 6) These auctions have been conducted in many countries and are today the best practice method used by governmental authorities to allocate spectrum resources.
Conclusion
While spectrum auctions strive to ensure the public coffers get a fair share of the value embedded in the spectrum, this is by no means their exclusive goal, as is implied from local public commentaries on this matter.
There are other equally important related goals. These include 1) ensuring the spectrum is utilized efficiently; 2) promoting economic opportunity and competition to achieve the goals set; 3) preventing the emergence of anti-competitive practices, especially preventing those enterprises that win bids from creating barriers to entry against other enterprises and securing unfair advantages; 4) avoiding concentration of ownership among particular groups (especially political insiders, illicit businesses, and narrow economic interests); 5) finally, ensuring that the auctions fuel dynamic innovation.
Next week I offer some concluding observations on both the presidential spectrum giveaways and the Marriott Hotel project before I move on to the second of the four sequential phases of public investment management in Guyana, previously identified.
