[By Duncan McLeod]

SA is about to auction off a chunk of radio frequency spectrum that can be used to provide wireless broadband services. Let’s hope our operators don’t do what their European counterparts did a decade ago with 3G spectrum.

It’s known as the great telecommunications crash of 2001. Mobile operators in the UK and Germany bid ridiculous amounts — cumulatively, hundreds of billions of rand — for radio frequency spectrum to provide services using third-generation (3G) mobile technology.

They bid so much for the spectrum that some of them got into financial trouble. They couldn’t cope with the huge debts they were forced to take onto their balance sheets.

In SA, the telecoms regulatory agency at the time had far more sense than the Europeans, awarding 3G spectrum to Vodacom and MTN at a relatively low set fee.

Because they weren’t saddled with debt from the process, the two operators were able to pump billions of rand into building their 3G networks.

Now, though, 10 years after the European disaster, the Independent Communications Authority of SA (Icasa) has announced plans to auction off valuable spectrum in the 2,6GHz and 3,5GHz bands. Both bands are lucrative because they can be used to provide 3G and, perhaps more importantly, 4G wireless broadband using technologies such as WiMax and long-term evolution (LTE).

LTE is the successor of the 3G systems used by the mobile operators. They’re expected to begin deploying LTE in earnest within the next two or three years.

Icasa will conduct an “ascending price, closed-bid” auction. This means the operators have to write down their bids, put them in envelopes, seal them, and submit them to the authority’s designated auctioneer.

Participants will bid against one another, with each subsequent bid higher than the previous one. The auctioneer will announce the prices and pronounce the highest bids. The auction will end when participants are not willing to bid further.

Similar auctions in the UK and Germany resulted in operators submitting ridiculous bids. They bid so much they struggled to raise the cash they needed to build their 3G networks. In the US, regulators had to rerun a similar auction after operators bid so much they could barely raise the debt.

Icasa needs to tread carefully. If operators in SA submit similarly ludicrous bids, it could impede their deployment of 4G services and serve to keep prices high.

If the operators bid too much for the spectrum, the authority must not be afraid to start the process again. If not, the impact on corporate tax receipts could offset any money flowing into the treasury from the auction. It could also lead to job losses in the industry.

Of course, our spectrum auction will be different. For one thing, Icasa has set a minimum black equity requirement of 30% on any company wanting to participate in the process. This requirement could mean the mobile operators are excluded from bidding — none has 30% or more of its shares in black hands. What seems more likely is they’ll set up special purpose vehicles in partnership with black-owned telecoms companies to secure the spectrum.

For Icasa, there are potentially big dangers lurking in the process. Operators could collude with one another before the auction in an attempt to keep bid prices low.

This has happened in other markets and the competition commission would be well advised to keep a close eye on proceedings. The temptation to collude is high.

Operators interested in bidding have until June 25 to respond to an invitation to apply from Icasa. The auction is expected not long thereafter. Expect high drama.