1. 1 PRESENTATION ON NEW SPECTRUM FEES AND PRICING STRATEGY To Nigerian Telecommunications Operators 11 th December, 2002

2. 2 BACKGROUND Ministry of Communications had a spectrum pricing formula they have been using over the years, which our study has revealed to be defective in certain aspects. Ministry of Communications had a spectrum pricing formula they have been using over the years, which our study has revealed to be defective in certain aspects. A detailed analysis of the records of previous spectrum allocation by the MOC revealed the following facts: A detailed analysis of the records of previous spectrum allocation by the MOC revealed the following facts:

3. 3 BACKGROUND CONT’D Spectrum was priced on a per-subscriber basis, however, it was observed that there were lots of inconsistencies on the amount charged per subscriber. Spectrum was priced on a per-subscriber basis, however, it was observed that there were lots of inconsistencies on the amount charged per subscriber. While some were charged 50,000 per subscriber other charged 5,000 or 2,500 per subscriber on exactly same spectrum band. While some were charged 50,000 per subscriber other charged 5,000 or 2,500 per subscriber on exactly same spectrum band.

4. 4 BACKGROUND CONT’D Frequency licence was renewable every year Frequency licence was renewable every year Frequency assignments were not accompanied with license conditions to enable each assignee know his rights and obligations, e.g. fees renewal etc Frequency assignments were not accompanied with license conditions to enable each assignee know his rights and obligations, e.g. fees renewal etc

5. 5 RESULTS There were lots of inconsistency and discrimination in pricing.There were lots of inconsistency and discrimination in pricing. Fees tied to subscriber base were punitive, discouraged expansion and efficient use of spectrum and led to false declaration of actual subscriber base by operators.Fees tied to subscriber base were punitive, discouraged expansion and efficient use of spectrum and led to false declaration of actual subscriber base by operators.

6. 6 RESULTS CONT’D Annual frequency licence increased administrative overhead cost, constituted insecurity for investors and encourages licence renewal evasion. Annual frequency licence increased administrative overhead cost, constituted insecurity for investors and encourages licence renewal evasion. Strong protest by operators. Strong protest by operators. Loss of confidence in the licensing process by investors. Loss of confidence in the licensing process by investors. Higher cost of services to consumers. Higher cost of services to consumers.

7. 7 METHODS OF DETERMINING SPECTRUM PRICES (INCLUDING ADVANTAGES AND DISADVANTAGES) Source: ITU Spectrum Management Handbook and other references.

8. 8 LEAST COST ALTERNATIVE OR OPPORTUNITY COST CRITERIA. The alternatives to spectrum are copper network, optical fibre or coaxial cable.The alternatives to spectrum are copper network, optical fibre or coaxial cable. May lead to artificially high prices.May lead to artificially high prices. Cost of alternatives difficult to determine.Cost of alternatives difficult to determine.

9. 9 A PROPORTION OF REVENUE DERIVED FROM THE LICENSEE’S USE OF RADIO SPECTRUM Simple and generates economic value. Simple and generates economic value. May discourage investment and growth. May discourage investment and growth. Revenue may not be directly related to economic value of spectrum. Revenue may not be directly related to economic value of spectrum. May suppress usage and impair innovation. May suppress usage and impair innovation.

10. 10 FEES BASED ON ECONOMIC COST ASSOCIATED WITH THE USE OF THE SPECTRUM BY A LICENSEE. Cost of network infrastructure increases as operating frequency increases. Cost of network infrastructure increases as operating frequency increases. Promotes efficiency. Promotes efficiency. Promotes competition. Promotes competition. Difficult to estimate and quite sophisticated. Difficult to estimate and quite sophisticated. Useful in determining auction reserve prices. Useful in determining auction reserve prices.

11. 11 FEES BASED ON THE ADMINISTRATIVE COST OF SPECTRUM MANAGEMENT FUNCTIONS Administrative costs includes: Record-Keeping, Monitoring, Licensing, e.t.cAdministrative costs includes: Record-Keeping, Monitoring, Licensing, e.t.c Useful for pricing non-commercial spectrum usage.Useful for pricing non-commercial spectrum usage. Full recovery of administrative cost.Full recovery of administrative cost. Compensation for exclusive use of public resource.Compensation for exclusive use of public resource. Price does not reflect economic or market price of spectrum.Price does not reflect economic or market price of spectrum.

12. 12 BENCHMARKING: FIXING SPECTRUM FEES BASED ON WHAT OBTAINS IN OTHER COUNTRIES OR INTERNATIONAL PRICES. Price comparison should be made only with countries with similar economic conditions and level of development. Price comparison should be made only with countries with similar economic conditions and level of development. May lead to price distortions as a result of varying economic indices from country to country. May lead to price distortions as a result of varying economic indices from country to country.

13. 13 NCC’S APPROACH

14. 14 INTRODUCTION In line with common practice, the price of spectrum for commercial applications will be determined by competitive methods to be selected by NCC from time to time. In line with common practice, the price of spectrum for commercial applications will be determined by competitive methods to be selected by NCC from time to time. These will include, but are not limited to, auction, Beauty contest, etc. These will include, but are not limited to, auction, Beauty contest, etc. The method selected ensures that frequency resource gets into the hands of those who will make the most efficient use of it. The method selected ensures that frequency resource gets into the hands of those who will make the most efficient use of it.

15. 15 NCC’s CONSIDERATIONS Price of spectrum should reflect market or economic value. Price of spectrum should reflect market or economic value. Spectrum fee should be directly proportional to spectrum size. Spectrum fee should be directly proportional to spectrum size. Incentive fee approach adopted in order to achieve government policy objectives and NCC goals. Incentive fee approach adopted in order to achieve government policy objectives and NCC goals. i.Even development of the country ii.Universal access and service

16. 16 NCC’s CONSIDERATIONS CONT’D Price of spectrum will vary from State to State. Price of spectrum will vary from State to State. Price of spectrum will not be based on number of subscribers in order to encourage efficient use of spectrum and stimulate growth. Price of spectrum will not be based on number of subscribers in order to encourage efficient use of spectrum and stimulate growth. Adequate consultation with all stakeholders. Adequate consultation with all stakeholders.

17. 17 NCC’s CONSIDERATIONS CONT’D Fee mechanism should be simple, easily understood and predictable.Fee mechanism should be simple, easily understood and predictable. Fees structure must fully recover administrative cost of spectrum management.Fees structure must fully recover administrative cost of spectrum management. Standard licence duration will be 5 years in order to ensure tenure security and bring it in line with the duration of NCC’s operating licenses.Standard licence duration will be 5 years in order to ensure tenure security and bring it in line with the duration of NCC’s operating licenses.

18. 18 NCC’s CONSIDERATIONS CONT’D The result of the recently concluded FWA auction process has been used as a basis for the determination of spectrum fees by NCC. The result of the recently concluded FWA auction process has been used as a basis for the determination of spectrum fees by NCC. The bid values are a reflection of the ‘market value’ of spectrum. The bid values are a reflection of the ‘market value’ of spectrum. Other factors considered are: Spectrum size; Demand pattern from band to band; Licence duration; Price variation from State-to-State; Shared and Exclusive spectrum use, etc. Other factors considered are: Spectrum size; Demand pattern from band to band; Licence duration; Price variation from State-to-State; Shared and Exclusive spectrum use, etc. NCC has come out with a pricing formular for spectrum the details of which are shown in annex ‘A’. NCC has come out with a pricing formular for spectrum the details of which are shown in annex ‘A’.

19. 19 LICENSING POLICY AND PRICE DETERMINANTS For the purpose of frequency licensing, the country has been divided into licensing areas, which correspond to the 36 states and the Federal Capital Territory. For the purpose of frequency licensing, the country has been divided into licensing areas, which correspond to the 36 states and the Federal Capital Territory. Frequency license for wireless local loop services will henceforth be issued on the basis of the above licensing areas. Frequency license for wireless local loop services will henceforth be issued on the basis of the above licensing areas. Spectrum fees henceforth will vary from state to state in accordance with market potentials and level of economic activities. For this purpose, the 37 licensing areas (states) of the federation have been categorized into tiers as follows: Spectrum fees henceforth will vary from state to state in accordance with market potentials and level of economic activities. For this purpose, the 37 licensing areas (states) of the federation have been categorized into tiers as follows:

20. 20 LICENSING POLICY AND PRICE DETERMINANTS CONT’D (TIERING OF THE COUNTRY) Tier 1Lagos Tier 2Rivers, FCT, Delta, Kano, Kaduna, Tier 3Ogun, Edo, Oyo, Anambra, Abia, Tier 4Enugu, Akwa Ibom, Benue, Ondo, Bayelsa, Plateau, Cross Rivers, Imo, Osun, Niger, Kwara, Kogi, Borno, Bauchi, Tier 5Nassarawa, Gombe, Ebonyi, Adamawa, Ekiti, Jigawa, Katsina, Kebbi, Sokoto, Taraba, Yobe, Zamfara

21. 21 LICENSING POLICY AND PRICE DETERMINANTS CONT’D The price of spectrum will vary according to frequency band. The price of spectrum will vary according to frequency band. Band price will reflect the level of congestion in the band, market demand and the relative cost of deploying network infrastructures. Band price will reflect the level of congestion in the band, market demand and the relative cost of deploying network infrastructures. To encourage efficient use of spectrum, fees payable will not be based on subscriber population. To encourage efficient use of spectrum, fees payable will not be based on subscriber population. The more you use, the more you pay. The price of spectrum will be directly proportionate to the size of spectrum assigned. The more you use, the more you pay. The price of spectrum will be directly proportionate to the size of spectrum assigned.

22. 22 LICENSING POLICY AND PRICE DETERMINANTS CONT’D (LICENSE DURATION) The under listed tenure period will apply to frequency licenses The under listed tenure period will apply to frequency licenses 1) Short Term Permit<=3months (Not Renewable) 2) Medium Term License= 1 Year (Renewable) 3) Long Term License>=5 Year 3) Long Term License>=5 Year (Renewable)

23. 23 LICENSING POLICY AND PRICE DETERMINANTS CONT’D The standard duration of frequency license is 5 years. The standard duration of frequency license is 5 years. The duration of license will be determined on case- by-case basis, but spectrum fees will be directly proportional to duration. The duration of license will be determined on case- by-case basis, but spectrum fees will be directly proportional to duration. Shared Spectrum:- Spectrum that is capable of being shared by many users, e.g. DECT and Microwave Links, will be assigned under class licenses. Shared Spectrum:- Spectrum that is capable of being shared by many users, e.g. DECT and Microwave Links, will be assigned under class licenses.

24. 24 LICENSING POLICY AND PRICE DETERMINANTS CONT’D Annual License Tenure: NCC encourages long-term tenure for licenses. Hence unit frequency fees will be based on a standard five year license term. Annual License Tenure: NCC encourages long-term tenure for licenses. Hence unit frequency fees will be based on a standard five year license term. Present operators who prefer annual payment for licenses will be allowed the option as a special case. Present operators who prefer annual payment for licenses will be allowed the option as a special case. Simplex Channels: A simplex channel frequency allocation (TDD) will cost half of an equivalent Duplex Channel Simplex Channels: A simplex channel frequency allocation (TDD) will cost half of an equivalent Duplex Channel

25. 25 PRICING FORMULA For existing license holders and for future frequency assignments, fees schedule and pricing mechanism detailed below will apply. For existing license holders and for future frequency assignments, fees schedule and pricing mechanism detailed below will apply. The Pricing regime will be applicable to all frequency assignments by NCC and renewals. The Pricing regime will be applicable to all frequency assignments by NCC and renewals. The price per MHz of Spectrum for the different Tiers for a five year license term is given in tables below. The price per MHz of Spectrum for the different Tiers for a five year license term is given in tables below. These prices per MHz may be adjusted from time to time by the Commission for new frequency licenses in response to market trends. These prices per MHz may be adjusted from time to time by the Commission for new frequency licenses in response to market trends.

26. 26 UNIT PRICE PER MHZ FOR EACH LICENSING REGION AND FOR A FIVE-YEAR STANDARD LICENCE LICENSING REGION UNIT PRICE PER MHZ/5YEARS( N) Tier 1: Lagos Lagos N14million Tier 2 : Abuja FCT Abuja FCT Kano State Kano State Rivers State Rivers State Kaduna State Kaduna State Delta State Delta State N 7million in each Region

27. 27 UNIT PRICE PER MHZ FOR EACH LICENSING REGION AND FOR A FIVE-YEAR STANDARD LICENCE CONT’D Tier 3: Anambra State Anambra State Edo State Edo State Ogun State Ogun State Abia State Abia State Oyo State Oyo State N 5.5million in each Region

28. 28 UNIT PRICE PER MHZ FOR EACH LICENSING REGION AND FOR A FIVE-YEAR STANDARD LICENCE CONT’D Tier 4: Akwa Ibom State Akwa Ibom State Bauchi State Bauchi State Bayelsa Bayelsa Benue Benue Borno Borno Cross-River Cross-River Enugu Enugu Imo Imo Kogi Kogi Kwara Kwara Niger Niger Ondo Ondo Osun Osun Plateau Plateau N 3million in each Region

29. 29 UNIT PRICE PER MHZ FOR EACH LICENSING REGION AND FOR A FIVE-YEAR STANDARD LICENCE CONT’D Tier 5: Adamawa Adamawa Ebonyi Ebonyi Ekiti Ekiti Gombe Gombe Jigawa Jigawa Katsina Katsina Kebbi Kebbi Nasarawa Nasarawa Sokoto Sokoto Taraba Taraba Yobe Yobe Zamfara Zamfara N 1.5 million in each Region

30. 30 PRICING FORMULA CONT’D The price of spectrum for a licensing region will be calculated using the formula below: The price of spectrum for a licensing region will be calculated using the formula below: Spectrum Fee = (Unit Price)(B)(K 1 )(K 2 ) per state Spectrum Fee = (Unit Price)(B)(K 1 )(K 2 ) per state Where B = assigned bandwidth in MHz or Spectrum size in MHz. Where B = assigned bandwidth in MHz or Spectrum size in MHz. K 1 = Band factor K 1 = Band factor = 1 for 3.5GHz Band = 1 for 3.5GHz Band = 1.6 for 1.8/1.9GHz Band = 1.6 for 1.8/1.9GHz Band = 1.4 for 800/900GHz Band = 1.4 for 800/900GHz Band = 1.2 for 2.3-2.5 GHz Band = 1.2 for 2.3-2.5 GHz Band = 0.8 for 10.5GHz Band = 0.8 for 10.5GHz Band  For Bands Higher than 10.5GHz, the factor, K1, will be determined as the bands are allocated.

31. 31 PRICING FORMULA CONT’D K 2 = Tenure duration factor = 1 for 5-year license (standard) = 1.8 for 10-year license = 2.6 for 15-year license Duplex/Simplex: For Simplex channel, unit price per state will be half of equivalent duplex channel.

32. 32 CLASS LICENCE FOR FREQUENCY Spectrum bands, which have possibility of being shared among large number of users will be assigned under class licences. Spectrum bands, which have possibility of being shared among large number of users will be assigned under class licences. These include microwave frequencies, DECT frequencies and point-to-point VHF/UHF radio channels. These include microwave frequencies, DECT frequencies and point-to-point VHF/UHF radio channels.

33. 33 CLASS LICENCE FOR FREQUENCY MICROWAVE CONT’D (PRICING FORMULA) F2=Bandwidth Factor 3.5 MHz=1 7 MHz=2 14MHz=4 28MHz=8 56MHz=16 N=Total number of RF Channels (for N+1 Systems)

34. 34 CLASS LICENCE FOR FREQUENCY MICROWAVE CONT’D All microwave frequency licenses are subject to renewal latest 31 st December of every year. Microwave frequencies are not licensed on state basis.

35. 35 TABLE 1: FINANCIAL IMPLICATION OF THE FORMULA ON MICROWAVE LICENCES Band (GHz) Channel Spacing (MHz) Computation of Price Per HopPrice per Hop per Annum 620/29.65N18,000 x 1 x 8 = 144,000N144,000 728N18,000 x 1 x 8 = 144,000N144,000 87N18,000 x 1 x 2 = 36,000N36,000 1328N18,000 x 0.8 x 8 = 115,200N115,200 1514N18,000 x 0.7 x 4 = 50,000N50,000 183.5N18,000 x 0.7 x 1 = 12,600N12,600 1856N18,000 x 0.7 x 16= 201,600N201,600 237N18,000 x 0.5 x 2 = 18,000N18,000

36. 36 CLASS LICENCE FOR FREQUENCY CONT’D DECT A simplex channel frequency allocation (TDD) will cost 50% of equivalent duplex channel A simplex channel frequency allocation (TDD) will cost 50% of equivalent duplex channel On this basis Frequency fee for DECT allocations will be derived from the following formula given below. On this basis Frequency fee for DECT allocations will be derived from the following formula given below.

37. 37 CLASS LICENCE FOR FREQUENCY CONT’D DECT PRICING FORMULA Price Per Licensing Area =B(Unit Price)(0.5)(K1)(K2) Price Per Licensing Area =B(Unit Price)(0.5)(K1)(K2) Where B=Assigned bandwidth Where B=Assigned bandwidth K1=Band factor 3.5 GHz Band=1 1.8/1.9 GHz Bands=1.6 800/900 MHz Bands=1.4 2.0 – 2.5 GHz Bands=1.2 10.5 GHz Bands=0.8  For Bands Higher than 10.5GHz, the factor, K1, will be determined as the bands are allocated.

38. 38 CLASS LICENCE FOR FREQUENCY CONT’D DECT PRICING FORMULA K2=Tenure Factor =5 year license term=1 =10 year license term=1.8 =15 year license term=2.6

39. 39 CLASS LICENCE FOR FREQUENCY CONT’D POINT-TO-POINT/PRIVATE MOBILE RADIO/TRUNK RADIO To be advised.

40. 40 COMPARISON OF NEW Vs OLD

41. 41 SPECTRUM FEES BASED ON NCC’s FORMULA

42. 42 AN OPERATOR IN LAGOS REGION USING 5MHz OF SPECTRUM Using NCC’s formula, a WLL operator in the 800 MHz band with facilities in Lagos and a 5 MHz spectrum will pay a 5-year spectrum fee as follows : Using NCC’s formula, a WLL operator in the 800 MHz band with facilities in Lagos and a 5 MHz spectrum will pay a 5-year spectrum fee as follows : FEES PAYABLE = [UNIT PRICE][BANDWIDTH][BAND FACTOR] FEES PAYABLE = [UNIT PRICE][BANDWIDTH][BAND FACTOR] = [14 MILLION][5][1.4][1] = [14 MILLION][5][1.4][1] = N98 MILLION = N98 MILLION

43. 43 EQUIVALENT SPECTRUM FEES BASED ON MOC FORMULA

44. 44 CASE 1: 20,000 SUBSCRIBERS @ N5,000 PER SUBSCRIBER Assuming a subscriber base of 20,000 in Lagos alone, at the rate of N5,000 per subscriber per annum. Assuming a subscriber base of 20,000 in Lagos alone, at the rate of N5,000 per subscriber per annum. Fees payable in 5 years=20,000 x N5,000 x 5 =20,000 x N25,000 =N500,000,000 =N500million for Lagos State alone. NCC’s Price (N98million) = 19.6% of MOC’s price

45. 45 CASE 2: 20,000 SUBSCRIBERS @ N50,000 PER SUBSCRIBER Assuming the same subscriber base of 20,000 in Lagos at the rate of N50,000 per subscriber per annum which MOC charges some operators. Fees payable in 5 years =20,000 x N50,000 x 5 =N5Billion for Lagos State alone. NCC’s price (98million) =2% of MOC’s price The above figures show that NCC’s price is very fair and competitive.

46. 46 NCC FEES AS PERCENTAGE OF OPERATOR REVENUE

47. 47 CASE 1: 20,000 SUBSCRIBERS @ N1,500 FIXED CHARGE Assuming a subscriber pays a fixed charge of N1,500 per month irrespective of usage. Assuming a subscriber pays a fixed charge of N1,500 per month irrespective of usage. Operator fixed revenue per annum= 20,000 x N1,500 x 12 Operator fixed revenue per annum= 20,000 x N1,500 x 12 = N360million = N360million Operator’s fixed revenue in 5 years = N1.8Billion Operator’s fixed revenue in 5 years = N1.8Billion NCC Spectrum fees (N98m) = 5.5% of operators Fixed Revenue (not considering revenue from airtime charges) NCC Spectrum fees (N98m) = 5.5% of operators Fixed Revenue (not considering revenue from airtime charges)

48. 48 CASE II: 20,000 SUBSCRIBERS @ N1,000 FIXED CHARGE Assuming the same subscriber base but a fixed charge of N1,000 per month per subscriber: Operator’s fixed revenue/annum = 20,000 x 1,000 x12 =N240,000,000 Revenue in five years=N1.2 Billion NCC Spectrum fees (N98m) is 8% of Operators fixed revenue.

49. 49 RENEWAL FEES BASED ON MOC FORMULA S/NOPERATORREGION No. of Subs Spectrum fees @5,000 Per Sub Nm. SPECTRUM FEE @50,000 Per Sub Nm SUB Total 1IntercellularLAG30,0001501500 "Ogun1,000550 Rivers4,50022.5225 Abuja5,20026260 Niger5002.525 Total 205 2050206 2060 2RelianceLAG30,0001501500 Abuja10,00050500 Rivers10,00050500 Anambra10,00050500 Total 300 3000300 3000 3BOURDEXSE80,0004004000 Using Ave of 50% of inst as subscribed 40,0002002000 4MULTILINKSLagos40,0002002000 5StarcommsLagos4,00020200 6EMISLagos4,00020200 7CELLCOMLagos6,00030300

50. 50 END OF SHOW Thank you for listening.