One-time Fees and Recurring Fees

 

Editors’ Note:

The following is excerpted from Chapter 4, “Licence Fee Practices:  Historical Perspectives and New Trends,” ITU Trends in Telecommunications Reform – 2004/05:  Licensing in an Era of Convergence (Geneva:  ITU, 2004).  The authors of Chapter 4 are Lynne Dorward and Clayton Rogers.

 

4.1.1               One Time Fees

4.1.1.1         Market-Set Fees

“Market-set fees” are those that have been developed using common telecommunication valuation methodologies.  They are typically applied in comparative evaluation processes (see Chapter 3).  In such “beauty contests,” licences are awarded based on a detailed evaluation of how the submissions measure up to established criteria.  But one condition of obtaining the licence is often the payment of a one-time, fixed licence fee, which can be determined in several ways, including the following:

 

§         A measurement of discounted cash flow;

§         A measurement of net present value;

§         Benchmarking against regional or international results for comparable licences and markets;

§         Previously applied licence fees (in the case of multiple licences issued at different time periods); and

§         A specific amount set to address government revenue objectives.

 

In addition to the different methodologies used to establish fees, there are often different payment schemes utilized for collection.  Most regulators still require the full licence fee to be paid within a specified number of days after the licence award, but some have attempted to lessen the payment burden on licensees by allowing them to make smaller payments at various intervals after receiving their licences.  The two most frequently utilized schemes are:

 

1)      “Split payments” (for example, payment of half of the fee in the first year and the remaining half two years later), and

2)      Payment of equal, periodic instalments over a set number of years.

 

It should be noted, however, that even in a beauty contest, the government should be reasonable and fair in establishing the licence fee.  If prospective bidders perceive a pre-set licence fee to be too high, the fee may present a barrier to entry, resulting in the delay or cancellation of the competitive tender process.  In a worst-case scenario, there may be fewer bidders than the number of available licences or, in the case of a single licence, there may be no interested bidders at all.  This is examined further in Section 4.5.1, below.

 

4.1.1.2         Price Floors and Minimum Bids

In the case of auctions, the most typical approach is to set a “floor” (or reserve) price for the licence, to ensure that the starting point for bids is in line with government expectations.  Floor prices are derived in much the same way as pre-set licence fees established for beauty contests.  Often, governments may set a high floor price because they are overly optimistic about the market value of the licences.  This could dampen potential investment and become a bar to market entry.  With auctions, as with beauty contests, fee payment mechanisms vary.  Because of the high prices that auctions can generate, regulators are more likely to permit instalment payments following auctions.

 

4.1.1.3         Spectrum Evacuation Fees

 

4.1.2               Annual or Recurring Fees

4.1.2.1         Revenue-Based Annual Fees

In addition to the up-front, non-recurring licence fees discussed in the preceding section, most regulatory authorities apply some form of recurring charges or fees to recover administrative costs or to fund specific telecommunication initiatives such as universal service programmes.  Although these fees are typically presented as cost-recovery mechanisms, in practical terms, some governments simply view the fees as an additional source of revenue.

 

One of the most widely used approaches to set recurring fees is to base them on a percentage of each licensee’s annual gross revenues (also referred to as “turnover”).  Regulators often allow some deductions from the gross revenue fee base to account for tax payments and other obligations imposed on the operator.  Revenue-based fees are usually paid annually, after the licensee’s fiscal year ends.  In some instances, however, the government requires payment of a minimum annual payment in advance.  Such payments are often not refundable if the licensee’s revenues subsequently fail to generate a percentage that measures up to the minimum it has already paid.[1] 

 

When annual fees were first introduced, the percentage contributed to the government was often quite high.  Many regulatory authorities have subsequently recognized that an excessively high revenue-sharing percentage may be a barrier to entry and an impediment to the healthy growth of the sector.  As a result, regulators have tried to reduce fees.  In some countries where fees go into the general treasury, regulators efforts to reduce the fee burden may be resisted by various ministries in the government. 

 

India’s Department of Telecommunications recently asked the Ministry of Finance for approval to lower the revenue-sharing amount, which stood at 6-10 per cent, to a level designed solely to cover administrative costs.   Meanwhile, in contrast to many countries, Venezuela was able to reduce revenue sharing when it introduced its new Telecommunications Law in 2000.  It implemented a gradual reduction from 10 per cent to the current rate of 5.3 per cent.   Recently implemented revenue-sharing schemes usually impose lower rates, ranging from 0.2 per cent to 2 per cent, but significant exceptions still remain (see Table 4.1 below on mobile licensing in Oman and Jordan).

 

4.1.2.2         Other Licence Fees for Regulatory Cost Recovery

In addition to annual revenue sharing, some regulators have adopted other cost-recovery mechanisms.  The most prevalent form of non-revenue-based fee is a recurring annual licensing fee.  This can be a fixed amount, or it can be adjusted each year to reflect the government’s budget needs.  A sample of such recurring licence fee mechanisms is provided in Table 4.1 below (which discusses all forms of recurring fees, including revenue-sharing).  Data on non-revenue-based licence fees are more difficult to obtain since the fee amounts and collection mechanisms may be listed only in the actual licence, which is often not publicly available.

 

Table 4.1:  Recurring Licence Fees

Selected Countries

 

Country

Annual non Spectrum Related Fees

Fee Type

Licence Types

Austria

0.1 – 0.2 % of gross turnover

Revenue sharing

All licences

Bahrain

1% of gross revenues

Revenue sharing

Mobile

Bhutan

Pre-determined fixed amount

Annual licensing fee

All licences

Chile

Variable fixed fees

Annual licensing fee

All licences

Croatia

USD 6.6M

Annual licensing fee

3G Mobile*

France

1% of 3G revenues

Revenue sharing

3G Mobile

Greece

.025 – 0.5% of gross turnover

Revenue sharing

All licences

Hong Kong, China

15% of gross revenues with escalating annual minimum payment

Revenue sharing

3G Mobile

India

6% - 10% of gross revenues

Revenue sharing

Fixed and mobile

Ireland

0.2% of gross turnover

Revenue sharing

Fixed and Mobile

Italy

EUR 38 million

Annual licensing fee

3G Mobile

Jordan

10% of gross revenues

USD 100,000

5% gross revenues

Revenue sharing

Annual licensing fee

Revenue sharing

Mobile

Mobile

Fixed monopoly

Kenya

0.5% of gross turnover

Revenue sharing

All licences except paging

Luxembourg

0.2% of gross turnover

Revenue sharing

Mobile

Maldives

5% of gross turnover

Revenue sharing

Mobile, Fixed and ISP’s

Oman

12% gross revenues

Revenue sharing

Mobile

Korea (Rep.)

Approximately 1- 3.0% of gross revenues (annual adj.)

 

Revenue sharing

 

All licensed operators

Spain

0.2% of gross turnover

Revenue sharing

Fixed and Mobile

Tanzania

1.0% of annual turnover

1.5% of annual turnover

Revenue sharing

Fixed, long distance

Mobile

Venezuela

5.3% of gross revenues

Revenue sharing

Mobile

Sources: Adapted from ITU World Telecommunication Regulatory Database, various regulator web sites.

4.1.2.3         Spectrum Usage Fees

4.1.2.4         Additional Contributions

Up-front and recurring licence fees, along with spectrum fees in some cases, serve as funding sources to finance regulatory oversight of the sector.  In addition, some governments levy further fees and taxes on licensees.  In some cases, these are levied by other government ministries, not the telecommunication ministry or regulator.  

 

One popular approach, particularly in Latin America and Europe, is to apply an incremental telecommunication tax.  The tax may be passed on to the subscribers in their monthly bills.  In countries with universal service funds, operators are often required to pay a small annual contribution based on a percentage of gross billed revenues.

 

Furthermore, in countries such as Canada and the Republic of Korea, all telecommunication operators are required to set aside a small percentage of gross billed revenues for a national research and development fund.  All local exchange, long distance and mobile carriers in Canada must contribute 2 per cent of adjusted gross billed revenues, and in the Republic of Korea, operators must contribute 1 per cent of gross billed revenues.  In Venezuela, a portion of revenue sharing is allocated to support a universal service fund (1 per cent) and a telecommunication training and development fund (0.5 per cent).

 

TRT-PN-M2-364

 



[1] One example is Hong Kong, China, where 3G licensees are required to pay an annual spectrum utilization fee that, from year six to year 15 of the licence term, is the higher of a minimum annual payment and a royalty percentage (which was set at 5 per cent of revenues pursuant to the terms of the 3G tender).

 

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