Ministry of Economic Development Home
Header Image Enlarge +
Microwave dishes
Document Actions

Market mechanisims (ARCHIVED)

— filed under:
  1. The market for spectrum in New Zealand currently comprises two quite separate market mechanisms. The first is a tightly prescribed formal primary allocation system for both spectrum management rights and spectrum licences. The second mechanism is an informal, ill-defined and casual secondary market for licences and for management rights. This market is characterised by private bi-lateral negotiation.
  2. In our opinion, both mechanisms are in need of review if the goal of an effective market for spectrum is to be realised.
  3. Moreover, though, we believe that this duality derives from a conventional view about the respective roles of Government and the market, and so is also open to more fundamental policy questioning. Such a traditional conservative view sees clear and distinct roles being cast for:
    1. government as a central authority which sees in itself a central planning role, offering to the market by primary allocation the rights it defines; and
    2. market participants who acquire these rights and then participate in trading those rights;
  4. Such a duality in market models seems inconsistent with our observations that government (in a macro sense) is also an active participant in the market, and that the release of more spectrum rights by central Government through the MED can have a profound effect on the value and market for existing rights holders, especially when new primary releases are substitutable for existing rights in the marketplace.
  5. We also note that all levels of Government including Departments of State, Crown-Owned Companies (COCs) and State Owned Enterprises (SOEs) as well as public utilities are also market participants. We observed during this assignment some criticism of the role of central Government in the market, particularly through the actions of Departments of State including MED. Without extending credence to these claims, two organisations interviewed during the assignment made an observation that the only "hoarding" of spectrum being observed in New Zealand was undertaken by central Government (including we understand Departments of State, and some SOEs). Whether the observed behaviour actually amounts to "hoarding" is a difficult issue that we treat later in our report, however, the fact that the criticism was made by some in industry highlights the suspicion about the public sector's dual roles as a market regulator and market participant. Whatever the merits of the complaints by industry, one cannot escape the fact that all New Zealand Government entities, both Departments of State (including MED) and SOEs are market participants. MED is a particularly influential market participant because of its management of Crown rights, through its ability to define new management rights, and for its relationship as a policy adviser to the Government's ability to withhold rights from market allocation.
  6. We see this as undesirable in a public policy sense because its lacks independence and transparency, however overcoming it is a matter of some sensitivity. One way that might be considered is to separate the management of spectrum from Government by way of a statutory independent regulator, such as in Australia with the Australian Communications Authority, however this is not a whole solution, for the ACA still has the capacity to release spectrum to the market and so remains a market participant, although it is constrained by statutory checks and balances relating to public consultation and by the Minister's statutory roles in taking public policy decisions (for which s/he is accountable to the Parliament) to move spectrum to the private rights regime. We believe that a separate independent regulator presents difficulties for New Zealand in maintaining a critical mass of skilled resources to maintain such an organisation.
  7. On balance, while it would be attractive for public policy reasons to put in place such a statutory separation of powers, the costs to New Zealand do not seem warranted, especially when other mechanisms could be considered.
  8. The way that Government interacts with the market, both as a direct participant and as the central regulator releasing spectrum to the market, can have destabilising implications for the integrity of the value of the rights regime and could ultimately lead to a loss of investor confidence in spectrum properties as an investment. Therefore, one goal for any change would be to make sure that Government action is subject to the same transparency and to the same forces as private spectrum trading. We are therefore attracted to an approach, where Government's role in disposing and acquiring spectrum would take place openly and transparently on the same trading terms as the private sector.
  9. An alternative way of thinking about the role of Government is to accept government's role as an active market participant in its own right, rather than being external and somehow "above" the function of the market. As such, the Government could then become both a seller and a potential buyer of spectrum [a trader], raising the possibility that far more spectrum in Government hands might be released to the market.
  10. We recognise that the needs of Government for spectrum can change over time, just as they do for business, and so the role of Government as a buyer in the market will become more important as more spectrum rights are moved to a private management paradigm. When public policy is a driver, there may need to be some statutory compulsion on a buyer to sell to Government at an equitable price, say to meet some new emergent public policy requirement.
  11. We believe that it is possible to construct a more efficient market mechanism (a market exchange) that combines outcomes currently performed by the primary allocation role of Government with secondary market activity into a uniform, stable, rule bound market system. Such a system would be designed to avoid of the current deficiencies in both the primary allocation and secondary market elements that we observe. We believe it should out-perform the current dual system in terms of economic and spectrum management efficiency.
  12. Primary allocation systems are public and formally defined, but they only operate unilaterally, from seller to buyer. The secondary market is operate bilaterally or multilaterally, but is normally private. In essence, an exchange would combine the positive elements of both systems without the negative attributes. It would be a place where buyers and sellers come together in a stable rule-bound framework inheriting that advantage from primary allocations. At the same time it would be multilateral and bi-directional, allowing buyers and sellers to express preferences. The exchange would therefore enjoy the substantial advantage over the current primary allocation system for both buyers and sellers because it would provide real feedback to the current spectrum manager (the MED) over buyer's demands.
  13. A market exchange for a heterogenous product like spectrum would require some sophistication, but we believe that current auction theories, especially for two-sided auctions, perhaps using combinatorial optimisation (see our comments below on Primary Allocations) may offer a promising line of development. A formal rule-bound exchange would need to enjoy some credibility, but we see no compelling reason for this to be provided by statutory mandate, for to do so would be to put the exchange within the public sector. We tend to the view that it might be more successful as if undertaken and promoted in the private sector where incentives of profit and return on investment provide a stimulus for success. Nevertheless, without some for of sanction by Government, it may not obtain the legitimacy in the minds of the industry necessary to succeed. Such a sanction might well be in the form of a commitment by Government to cease primary allocations as currently practised and make future market based releases of management rights through the exchange.
Document Actions
Last updated 26 October 2007