Spectrum royalties and lotteries are administrative methods for raising revenue which may bear no resemblance to either the economic value of spectrum or the cost of spectrum management. Historically, royalties and lotteries preceded what are now viewed in practice as more reliable market-based methods for setting prices – such as auctions.
Spectrum or licence charges can be assessed as a percentage of (or royalty on) revenues or profits, which has to be handed to the spectrum regulator under the terms of the licence received or profits earned by an operator. This can be a way to cover regulatory costs, or it can be designed to raise revenue for the government.
The amounts that royalties paid go up and down depends on the the prosperity of the firm and sector (e.g., mobile communications). This makes the regulator a kind of ‘partner’ of the operator, sharing a common interest in maximising revenue or profit. Because royalty payments depend upon operator’s performance the income they generate is unpredictable, which may be a disadvantage. There also needs to be legislative clarity to ensure that what might be viewed as taxation is indeed legal.
Finally, the basis for calculating payments must be spelt out, to prevent an operator from using accounting devices to hide income or profit and thus reduce payment.
Revenues are raised by applicants paying entrance fees to gain spectrum rights. Although this procedure may seem attractive and equitable, it has many drawbacks and has fallen out of favour.
- First, if there are many applicants, the cost of administration may be large, especially if applications are reviewed and vetted for suitability.
- Second, tif applicants are not vetted the lucky winner may not have the necessary qualifications to operate the service efficiently. If they are not allowed to sell the licence, this may be a recipe for disaster.
- And if, thirdly, they are allowed to sell them to efficient operators, the winners will be appropriating auction proceeds which would otherwise go to the government.