Background

Since 1989, the Crown has progressively created and allocated tradable rights to spectrum under the Radiocommunications Act 1989 (the Act). Spectrum rights generally have been allocated either as:

nationwide management rights to spectrum bands used for telecommunications services; or
spectrum licences under Crown-owned management rights for television and radio broadcasting.

Spectrum rights for commercial use are usually allocated by competitive tender or auction. Government reserves and allocates spectrum rights to meet specific government objectives contained in non-commercial broadcasting policy and to meet Treaty of Waitangi obligations. All spectrum rights are subject to the fees set out in the Radiocommunications Regulations.

Expiry of rights

Spectrum rights have a maximum term of 20 years under the Act. The first rights created, for UHF television, expire in 2010. Rights for AM and FM sound broadcasting expire in 2011 and VHF television rights (TV1, TV2, TV3 and C4) in 2015. Expiry dates for mobile telephone services vary, with the first rights expiring in 2011. A list of rights and expiry dates is appended to the attached discussion document.
The Act provides that rights revert to the Crown at expiry, but is silent as to how they should be allocated or reallocated. An amendment to the Act in 2000 allows the Crown to create a "succeeding" management right ahead of expiry, to ensure a seamless transition from one term to another.

Cabinet has agreed the following policy for the reallocation of commercial spectrum rights at expiry [POL Min (03) 9/1 refers]:

that commercial spectrum rights be reallocated five years before expiry for a further 20 years, subject to review on a case-by-case basis to ensure consistency with New Zealand's international radio obligations and the general objective of maximising the value of the spectrum to society as a whole;
that, subject to the review outlined in recommendation [i, above], the Crown should receive a fair financial return for the use of spectrum in the future period; and
that spectrum rights be reallocated to existing rightholders based on price-setting formulae that estimate the market value of the rights, and that, if existing rightholders do not wish to pay this price, the respective rights be reallocated by way of auction.

Cabinet has directed the Ministry of Economic Development ("MED"), in consultation with the Treasury and other interested departments, to report back to the Cabinet Policy Committee on the price-setting formulae referred to above, including how these could best be implemented, and MED, Te Puni Kōkiri and the Ministry for Culture and Heritage to report back with policy proposals for dealing with non-commercial spectrum rights when they expire.

MED commissioned econometric consultants Covec Limited (Covec) to develop a formula, which was peer-reviewed by PricewaterhouseCoopers (PwC). PwC were further commissioned to provide advice concerning the valuation of VHF-TV rights.
In its simplest form, the price-setting formula applies a growth factor (z) to the price originally paid for rights (V1), to obtain a price at which the right will be offered (V2). For rights allocated for n years (usually 20), this simple version of the formula is written:

V2 = (1+z)nx V1

The growth factor represents an estimate of how net cashflows from the use of rights in the renewal period compare with net cashflows from the current period. It is calculated by collecting data on industry revenues, identifying revenue drivers and, through regression modelling, forecasting revenues to the end of the renewal period.

Covec derived growth factors (z) for the first rights due to expire. In broadcasting markets, population growth, which can be projected forward with a high degree of accuracy, was found to be the best proxy for forecasts of revenue growth. In its peer review PwC agreed that Covec's approach was not unreasonable, but did not itself evaluate or audit Covec's econometric or statistical calculations.
The attached discussion paper proposes MED's preferred position regarding growth factors for broadcasting markets. To ensure that the values proposed are sufficiently robust, the New Zealand Institute for Economic Research (NZIER) was engaged to evaluate Covec's calculations.
NZIER undertook a "first principles" calculation of "z" for radio and television markets. NZIER ultimately agreed that population growth was the most practicable proxy for revenue growth, and derived similar but slightly higher values for "z" using input data identical to Covec's, by following a different (but equally valid) econometric process. NZIER and Covec have jointly recommended use of averages of the values derived from the two independent analyses. This approach is proposed in the discussion paper.

Reports provided by Covec and PwC have been publicly released and submissions received from interested parties. Respondents generally supported the use of the formula for reallocation of commercial spectrum rights at expiry.
The Radio Broadcasters Association saw prices from Auction 6 held in late 2003 as an obstacle to their support for the policy, as they consider prices in that auction to be significantly higher than in previous auctions.
For cellular telephony rights, both Vodafone and Telecom preferred the Covec formula over the alternative of a detailed valuation exercise, though Motorola suggested that the market was too immature for a simple formulaic approach.
TVNZ and TV3 agreed that valuing VHF-TV rights should be deferred until closer to expiry, as such technological change as the introduction of digital terrestrial television may affect the value of these rights significantly and unpredictably.

Last updated 4 April 2008