Selection Mechanisms in Comparative Perspective

Comparative evaluations or “beauty contests”

As we have noted elsewhere in this Module, there are two main approaches to selecting an applicant for the award of licence:  comparative evaluations (or “beauty contests”) or auctions.  Both of these approaches can be structured in a variety of ways.

In general, beauty contests involve an evaluation of a written application.  The basis of evaluation—the selection criteria—varies.  An applicant’s technical expertise, operational experience, and financial resources are frequently given considerable weight in the evaluative process.  These factors were all given consideration in the licensing processes in Switzerland, Bahrain, and South Africa.  However, other selection criteria, such as network roll-out, have also featured prominently in some tender processes, such as in Iceland and Norway, while prices for services have played an important role in other comparative evaluation processes, for example, in the Former Yugoslav Rep. of Macedonia. 

The evidence that is required in support of each criterion also varies considerably.  For example, although regulators may agree that “financial strength and viability” is an important selection criterion, they have different views of what this criterion implies and how it should be proven.  A comparative reading of the tender documents issued by the regulators in Switzerland, Bahrain, Norway, and South Africa demonstrates this point. 

Regulators have taken different approaches to the number of criteria that are used to evaluate applicants and to the weightings of each criterion.   The weightings assigned to various types of criteria vary considerably, for example.  Most regulators specify in the guide to the licensing process how many points are attached to each criterion.  This promotes certainty and transparency in the licensing process.

Auctions

Regulators have taken different approaches to structuring auctions for tender processes.  One common form of auction is the multiple round auction with an unlimited number of stages.  This type of auction was used in the 2008 Canadian auction for spectrum licences for Advanced Wireless Services (AWS) and other spectrum in the 2GHz range.  In the Canadian AWS auction, applicants bid for related sets of licences in simultaneous multiple rounds.  The design of the auction featured an “activity rule” that penalized bidders who were inactive in order to maintain the pace of the auction.  The rounds in the auction continued until there was a round in the final stage in which there was no further activity (defined as a “cessation of bidding”).  The standing high bidders on each licence at the cessation of bidding were deemed the provisional winners of those licences.

Finland adopted a simultaneous multiple-round auction format for its 2500-2690 MHz auction in November 2009.  The 15 frequency blocks available in the auction were auctioned at the same time.  The auction involved several rounds of bidding.  Like the Canadian AWS auction, the Finnish auction featured an activity rule that required bidders to be active during each round of bidding, subject to the provision that each bidder was permitted to sit out up to three bidding rounds.  The auction concluded in the bidding round where there were no new bids received and where no bidders elected to sit out the bidding round.  The bidder who had the standing highest bid for one or more frequency blocks won those frequencies in the auction.

Another example of an auction that featured a multiple round bidding process is the 2007 Nigerian 2GHz spectrum auction.  There were four licences available in this spectrum auction.  This auction featured two phases.  Phase 1 featured simultaneous multiple round closed bidding that continued until there were only five active bidders left in the process.  These top five active bidders advanced to Phase 2 of the process.  Phase 2 involved a sealed bid single round auction.  Each of the top five active bidders submitted a single, sealed bid.  After all the bids were received, the Auction Manager opened the sealed bids.  The four highest bids were awarded the licences.  The successful bidders were permitted to choose which licence they wanted, beginning with the bidder that had submitted the highest bid.   A similar approach was taken in the 2007 Nigerian 800 MHz spectrum auction.

The 2004 Estonian 3G licensing process also featured a multiple round auction with an unlimited number of stages.  In that auction, applicants bid for the licence in sequential multiple rounds.  The Estonian 3G tender document stipulated rules for disqualifying applicants in each round of bidding so that the auction would continue sequentially through multiple stages until only one bidder was left.  The last remaining bidder was awarded the licence.

There are a myriad of variations on the multiple round auction.  Some multiple round auctions, such as the Estonian auction, feature sequential rounds, where the bidding for each licence takes place separately.  Other auctions proceed through rounds simultaneously such that more than one licence may be auctioned at the same time.  Canada used this approach in its AWS spectrum auction in 2008.  In this auction, a related set of licences were auctioned at the same time using a multiple-round auction format.  Multiple round auctions may be “open”, with an unlimited number of stages, or “closed”, with a limited number of stages.  There are also different methods for how participants may bid in the auction and how participants are disqualified.

Another common form of auction is the single round auction.  This form of auction is simpler than the multiple round auction as it involves only one step.  Typically, each applicant is required to place its bid in a sealed envelope and to submit the bid with its application package.  The envelopes are opened at a pre-determined date, and the licence is awarded to the applicant with the best bid.  The second phase of the Nigerian spectrum auction for the award of licences in the 2GHz range featured a sealed bid, single round auction.  As described above, this phase was preceded by a simultaneous multiple round auction to determine the top five bidders.  Only the top five bidders were eligible to participate in Phase 2 of the auction.  The second phase of the Nigerian 800 MHz spectrum auction also featured a sealed bid single round auction.

The Nepalese regulator adopted a single-staged auction approach in its rural telecommunications services (“RTS”) licensing process.  In the Nepalese case, the RTS licence was to be awarded with a subsidy for the provision of services.   Applicants were required to bid upon the amount of subsidy required.  The licence was awarded to the applicant that bid the lowest subsidy amount. 

The Nepalese RTS licensing auction illustrates another possible variation in the structuring of auctions, namely the criterion used to judge participant’s bids.  In the Nepalese RTS licensing auction, the criterion was the amount of subsidy required.  In the Estonian licensing auction, the criterion was the value placed by the applicant on the authorization.

The advantages and disadvantages of selection mechanisms

Using a single criterion to select a licensee (e.g., the bid made in an auction) is the most transparent and simplest selection mechanism to use. It is the most consistent with international trade agreements and the most frequently recommended approach of international financial institutions and international development organizations that promote ICT sector reform. However, it may not always result in the selection of the best qualified applicant, and, in the case of an auction, it may result in the imposition of excessive costs on the sector.

There have been many criticisms of the comparative evaluation approach. Criticism generally focuses on a lack of transparency. No matter how stringent the evaluation criteria, there is a subjective element to most comparative evaluation processes. Because of the subjective element, it is often suspected that regulators or other decision-makers may not exercise their judgement impartially. In some cases these suspicions have led to litigation. In others, the suspicions are not acted upon, but they nevertheless undermine the credibility of the licensing process and the government or regulator.

Other criticisms of the comparative evaluation proc­ess focus on its speed. The process is often slow. Careful evaluations of financial capability, technical plans, etc. can take time. Finally, comparative evaluation processes are sometimes criticized as involving inappropriate or questionable regulatory intervention in the selection of winners and losers. It is often said that auctions provide a better alternative to comparative evaluations, in that they rely on mar­ket forces rather than regulatory fiat to determine competitive outcomes.

Learn More