Surplus gone, will 4G spectrum stay pricey?

The budget surplus turned out to be more of a mirage than the Australian government had hoped, so will we see a shift in the floor price for 4G 700MHz spectrum?
Written by Josh Taylor, Contributor

Australian Treasurer Wayne Swan has admitted that it is highly unlikely that the budget will go into surplus in the 2012-13 financial year, but the government would have known this a week ago, when it announced the reserve price for the 700MHz digital dividend spectrum. So why is it going ahead with the controversial price?

The Finance Department's monthly statement, released yesterday, showed that cash receipts so far for the government to the end of October totalled AU$111.6 billion, which is AU$3.9 billion down on what the government had expected — meaning that the razor-thin AU$1.1 billion budget surplus that the government had been hoping to reach is now looking extremely unlikely.

The federal government has had the 2013 budget surplus as its target since the 2010 election, as it was one of the commitments that Labor took to the election. Since then, budgets have been slashed, and spending and new projects have been delayed, all with an eye on the incredibly elusive surplus.

Last week, when the government announced that the reserve pricing for the 700MHz "digital dividend" spectrum that the telcos will use for 4G networks will be AU$1.36 per megahertz per population, putting the lowest price at close to AU$3 billion, it was widely reported that this was to help the government get back into surplus.

Now that the surplus is off the table, why isn't this price being revised? Optus is teetering on the edge of pulling out of the April 2013 auction because of the price, and Vodafone pulled out months ago. Wouldn't it make more sense for the government to cut its losses and revise the price somewhere lower?

And, perhaps more importantly, if the government knew that the surplus target had vanished last week, then why announce the spectrum pricing before the government let the rest of us in on the secret?

I expect the government will say that it is all about securing value for the taxpayer for this precious resource. And that is fair enough. But given that only one of the three mobile operators in this country seems dead set on picking up on that spectrum, it's probably time to rethink the price.

Swan said yesterday that the government would not be "loosening the purse strings" and spending more now that it's not getting its surplus, but you've got to think that there would be some wiggle room on the spectrum price.

One of the major factors that is likely to be keeping Vodafone out of the auction, for example, is the fact that the government wants payment upfront for the spectrum. The telcos will have to pay for the spectrum at the time of auction in April 2013, but won't get access to that spectrum until much later, when the last analog television signal has been switched off and the government has restacked the spectrum band.

But with the government now not as desperate for the cash in this financial year, it would make more sense to delay the payments until the telcos actually get hold of that spectrum and are then in a position to be getting revenues from 4G customers who can fund those spectrum purchases.

A failure to rethink the pricing on the spectrum could see us in the situation where the only company bidding for 700MHz spectrum also happens to be the company that is being paid AU$11 billion from the government to switch off its fixed network.

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