Kathy Gibson is at ITU Telecom World in Durban – Spectrum prices are high around the world, but developing countries are actually charging telcos more than their counterparts in the developed world.

The issue of spectrum pricing has been a thorny one for as long as auctions have dramatically inflated the costs paid out by telcos, says Houlin Zhao, secretary-general of the International Telecommunications Union (ITU).

He believes that auctions create unequal pricing structures. And, with massive amounts going to government, little is left for mobile operators to invest in their own infrastructures.

It’s not realistic to have free spectrum, Zhao says, but frequently the auction is not viable either, he says.

“How much can we fix the price? And use the investment that industry puts into the spectrum into infrastructure instead?”

Countries have to balance investment protection for telcos with an environment that encourages infrastructure investment, Zhao believes.

For developing markets this is particularly important, says Kalvin Bahia, principal economist at the GSMA.

“We hear the theme ‘digital divide’ all the time,” Bahia says.

Around the world, 2,6-billion people are not connected on mobile, and 4,3-billion are not connected to the Internet.

Not surprisingly, 90% of the unconnected people are in developing countries.

In sub-Saharan Africa, 56% are not connected to mobile, and 78% are not on the Internet.

“This highlights the digital divide between regions,” Bahia says. “And there is a divide within countries as well.”

GSMA research shows that governments typically take a couple of issues into account when they think about spectrum pricing. These are around maximising consumer welfare and raising public revenue.

Typically, governments prioritise revenue maximisation – and this can have a negative impact on consumers, and thus the wider economy in that it slows development.

Developed countries are not making moves to reduce spectrum prices, Bahia adds. In fact, the prices in developing countries are similar to those in developed countries – so a unit of spectrum actually costs the same

This has the net effect, when income is factored in, that spectrum prices are effectively higher than in developed countries.

The elements driving higher spectrum prices include demand and a willingness to pay.

But spectrum policy also plays a major role, Bahia says.

Spectrum policy sets high reserve prices for spectrum, but here are also limited supplies, limited public participation in spectrum roadmaps, and poor rules for events like auctions.

The reserve price has not only been consistently higher in developing countries, but actually doubled between 2010 and 2017.

Interestingly, spectrum reserve prices are linked to sovereign debt, and is particularly strong with short-term debt

“The idea of using spectrum as a way to maximise government revenues holds true,” Bahia says. “And where there is short-term debt, governments are using spectrum revenues to address that.”

This matters because it affects operator investment and pricing decisions – and usually reduces affordability for users.

It also creates uncertainty for long-term investment horizons, and can impose financial constraints.

There is a school of thought that spectrum represents a sunk cost, so it shouldn’t affect ongoing operations.

“But the reason we care about spectrum pricing is because it potentially affects consumer wellbeing,” Bahia says.

The GSMA research shows that high spectrum prices are linked to more expensive services to consumers. And the relationship is stronger in the lower usage pricing bundles.

High spectrum prices also translate into poorer 4G coverage. And very high prices can result in unsold spectrum, and thus less coverage.

Network quality also suffers, with higher prices driving lower download and upload speeds.

Bahia concludes that high spectrum prices are driven not only by demand and market factors. In addition, short-term public finance considerations are driving some governments to prioritise revenue maximisation.

And this has repercussions for consumers and businesses in terms of poorer coverage, expensive services and slower speeds.

The GSMA recommends that governments rely on the market to set prices, with reasonable reserve pricing and annual fees.

Bahia adds that governments should licence spectrum as soon as it’s available, avoid measures that increase risk for operators, and publish long-term spectrum award plans that prioritise economic benefits.