Authorization regimes around the world feature a variety of different fees that are imposed on licensees. This section reviews the different types of authorization fees that exist and outlines common trends and practices related to the imposition of these fees.

3.5.1 Authorization and Other Fees

Many different kinds of authorization fees have been imposed on the telecommunications industry. Transparency in the authorization process is enhanced by differentiating between different kinds of authorization fees and by clearly identifying which authorization fees apply in each authorization situation. The main types of authorization fees include:

    • administrative fees, based on cost-recovery for regulators;
    • cost-based spectrum management fees;
    • discretionary administrative or spectrum fees (i.e. not cost-based); established on a one time or periodic basis (e.g. annually);
    • royalties or highest bid ‘auction fees’ paid to a government or regulatory authority for a authorization, and unrelated to the administrative costs of regulation; and
    • other special fees bundled with authorization fees, such as access deficit charges, universal service fees, industry taxes etc.; such fees should be separated from authorization fees.

Practice Notes

Reference Documents More on Authorization Fees

This section provides further information on a subject introduced earlier in this module, namely authorization fees.

In the ICT industry, the term “licence fee” (or “authorization fee”) is used to describe different things. It may include one or more of the following:

  • administrative fees that compensate a regulator for its costs of regulation; such fees are increasingly common, and are often seen as the ‘best practice’;
  • spectrum management fees, which are based on similar cost-based principles to the aforementioned administrative fees; these are usually charged separately from “operating authorization fees”;
  • discretionary administrative or spectrum fees established on a one time or periodic basis (e.g. annually), but not cost-based; these fees may be established on an arbitrary ‘value of authorization’ basis or based on some type of benchmarking of other rates;
  • revenue-sharing fees, that is, royalties, premium or “rent” paid to a government or regulator for the right to operate a network, provide a service or use a limited resource, such as radio spectrum or numbers; these fees may be set based on arbitrary numbers, benchmarking or market-based ‘auction fees’; and
  • in some cases, other special-purpose fees have been bundled with authorization fees such as access deficit charges, universal service fees, industry taxes etc. Transparency and good authorization practice requires such fees to be separated from authorization fees. Special-purpose fees are discussed further in Module 4, Universal Access.

Where more than one type of authorization fee is charged, it is good practice to unbundle them – that is to calculate them separately. This improves transparency and makes it easier to determine that the administrative charges related to cost recovery are indeed cost-based. Separating administrative authorization fees related to spectrum management from other administrative fees improves transparency and accountability. Spectrum management is usually handled by a separate branch, and sometimes a wholly separate ministry or agency from the ICT regulator.

Authorization fees paid for the right to operate a network, to provide certain services, or for the right to use a scarce resource are generally set before or during the process of awarding the relevant authorization. These fees may include a one-time initial charge for the authorization, recurring charges payable on a regular basis over the term of the authorization or, in some cases, both a one-time initial charge and a recurring fee. Most regulators provide details in tender documents about what charges, if any, will be levied on licensees and how such charges will be calculated in order to promote greater transparency and certainty.

One-time initial authorization fees may be fixed fees determined by the regulator, Minister, or government or the market value of the authorization, as determined through an auction. The nature of one-time initial authorization fees reflects the mechanism used to select the successful applicant. For example, in an auction, the fee is generally determined by the bids made by applicants. By contrast, authorizations awarded through a beauty contest may be subject to a fixed fee that is determined by the regulator or by the Minister or to no fee at all.

Fixed fees may be set at an arbitrary amount determined by the regulator or Minister. However, in order to promote transparency in the authorization process, it is prudent to adopt a market-set fee. Market-set fees are developed by using common telecommunications valuation methodologies. The ITU “Trends in Telecommunications Regulation – 2004/05, Licensing in an Era of Convergence” offers the following examples of measurements that may be used to determine a market-set fee:

  • A measurement of discounted cash flow;
  • A measurement of net present value;
  • Benchmarking against regional or international results for comparable authorizations and markets;
  • Previously applied authorization fees (in the case of multiple authorizations issued at different time periods); and
  • A specific amount set to address government revenue objectives.

There are a number of different payment schedules for one-time initial authorization fees. The ITU Trends Report notes that the two most common payment schemes are “split payments”, where unequal portions of the fee are payable over the term of the authorization, and the payment of equal, periodic instalments over a set number of years. (See the Practice Note on One-Time Fees and Recurrent Fees, which is excerpted from the ITU Trends Report. A link to this Practice Note is set out below.)

Authorization fees paid for the right to operate a network, to provide certain services, or for the right to use a scarce resource have evolved considerably over the past five to seven years. The advent of mobile technology is responsible in part for this evolution. Although authorization fees had remained stable for several years, the development of wireless technology triggered significant changes in fees structures. Over the past five to seven years, most individual authorizations have been awarded to wireless operators, while fixed line operators are increasingly operating pursuant to general authorizations or class licences.

The ITU Trends Report on Licensing includes further information about the fluctuation of one-time initial authorization charges levied on wireless operators. Relevant portions of the Trends Report in this regard are excerpted in a Practice Note, a link for which is set out below.

In addition to one-time initial authorization fees, some authorizations are also subject to recurring fees such as revenue sharing fees (royalties) and annual authorization fees. In some cases, the recurring fee is paid as compensation or as royalties to the government for the right to operate a network, to provide a service, or to use a scarce resource. Other recurring charges include administrative charges levied to compensate the regulator for the cost of regulation and fees levied to promote certain public policy objectives such as universal access.

The ITU Trends Report on Licensing notes that the annual recurring revenue charges (revenues sharing fees) that were first introduced in the ICT sector were quite high. Regulators have recognized, however, that a reduction in the level of revenue-percentage payable to the government is prudent in order to avoid imposing barriers to entry. Both India and Venezuela have taken measures directed to reducing the level of revenue-sharing with the government imposed on telecommunications operators. (See Box 1.)

“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.”

Box 3.5 Reduction of Revenue-Percentage Charges in India and Venezuela

Source: ITU Trends Report 2004, Chapter 4, “Licence Fee Practices: Historical Perspectives and New Trends”.

Policy considerations sometimes play a central role in determining what type of fees will be levied on ICT services providers and how such fees should be calculated. The ITU Trends Report on Licensing notes that regulators can advance a number of policy objectives by setting authorization fees at reasonable levels during the first years of market development. This Report identifies in particular the objective of promoting economic or social goals such as universal access or service affordability and the objective of stimulating competition in the sector by lowering barriers to market entry. With respect to this latter objective, the Report also advocates maintaining the stability of authorization fees during the initial years of market development since increases to authorization fees are disruptive and may threaten the financial viability of operators. Further discussion of the socio-economic benefits of establishing low authorization fees is set out in a Practice Note, a link for which is set out below.

It is generally accepted that administrative fees should not impose unnecessary costs on the ICT sector. The most transparent manner by which to achieve this objective is an explicit cost-recovery scheme. Cost recovery schemes involve establishment of authorization fees based on the projected or actual costs of the regulator.

Once that overall level of cost-recovery has been set, it is necessary to allocate the costs among licensees or market participants. This alloca­tion can be based on different factors, including ICT revenues, authorized coverage areas or types of services. The most common allocation base is gross revenues from the provision of ICT services.

Given the high degree of interconnection among ICT service providers, and correspondingly high interconnection and access charges among them, it is a good practice to use the following base amount for calculating authorization fees: gross ICT service revenues minus interconnection and access charges paid to other ICT service providers. Use of this base amount prevents double counting. For example, an ICT service provider that depends heavily on resale, may pay 50% or more of its gross revenues to other service providers by way of interconnection and access charges. The other service providers will be paying authorization fees based on those revenues. In order to avoid levying authorization fees twice on these revenues, the reseller should not be required to pay authorization fees on the revenues that are paid to the other service providers.

The EU Authorization Directive provides a good example of how authorization fees may be imposed in a transparent and fair manner. The Authorization Directive mandates that, in the case of issuing general authorisations, regulators may only charge fees to recover the costs of administering the authorization regime. Thus, fees must be set on a cost recovery basis.

Practice Notes

Next: 3.6 Authorization Practices & Procedures