Introduction

1.1 Electromagnetic spectrum (spectrum) is the range of all possible frequencies of electromagnetic radiation. Most electronic devices, including smartphones, satellites, tablets, televisions, radio and radars rely on spectrum frequencies to carry information.

1.2 The next generation of wireless broadband technology, known as 5G, is expected to deliver improvements in reliability and performance in fixed wireless and mobile broadband networks. The 3.6 GHz band (frequency range 3575–3700 MHz) is part of a larger band that has been identified by various countries for mobile broadband network capabilities, including the early deployment of 5G.¹

1.3 The release of the 3.6 GHz band was undertaken using a two-stage process known as reallocation and allocation. The 3.6 GHz band in Australia was ‘encumbered spectrum’ in that there were existing licence holders who were using the band. This meant that before issuing licences, a process known as ‘reallocation’ was used whereby the spectrum access of existing licence holders within the 3.6 GHz band was removed so that the spectrum could then be ‘allocated’ to new users. In this report, the end-to-end process of reallocation and allocation has been referred to as the ‘3.6 GHz reallocation process’.

Responsibilities and governing legislation

1.4 The Department of Communications and the Arts (department) is the lead policy authority on matters relating to spectrum, including providing advice to the Minister for Communications and the Arts (minister) on spectrum allocation and use, proposing changes to relevant legislation, and leading spectrum-related industry and international engagement.

1.5 The Australian Communications and Media Authority (ACMA) is the entity responsible for radiocommunications regulation consistent with the Radiocommunications Act 1992 (Radiocommunications Act). The ACMA is responsible for planning, public consultation, and execution of processes associated with the reallocation of spectrum.

1.6 The ACMA’s responsibilities for spectrum management are set out in section 9 of the Australian Communications and Media Authority Act 2005 (ACMA Act). The specific responsibilities are shown in Appendix 2.

1.7 The Radiocommunications Act sets out provisions for the management of radiofrequency spectrum in Australia. The object of the Radiocommunications Act is set out in Part 1.2.

The object of this Act is to provide for management of the radiofrequency spectrum in order to:

1. maximise, by ensuring the efficient allocation and use of the spectrum, the overall public benefit derived from using the radiofrequency spectrum;
2. make adequate provision of the spectrum:
   
   1. for use by agencies involved in the defence or national security of Australia, law enforcement or the provision of emergency services; and
   2. for use by other public or community services;
3. provide a responsive and flexible approach to meeting the needs of users of the spectrum;
4. encourage the use of efficient radiocommunication technologies so that a wide range of services of an adequate quality can be provided;
5. provide an efficient, equitable and transparent system of charging for the use of spectrum, taking account of the value of both commercial and non-commercial use of spectrum;
6. support the communications policy objectives of the Commonwealth Government;
7. provide a regulatory environment that maximises opportunities for the Australian communications industry in domestic and international markets;
8. promote Australia’s interests concerning international agreements, treaties and conventions relating to radiocommunications or the radiofrequency spectrum.²

Summary of the spectrum reallocation process under legislation

1.8 The Radiocommunications Act includes provisions relating to the ACMA’s planning processes for the use of spectrum, the reallocation of encumbered spectrum and the allocation of spectrum licences. A high-level summary of the reallocation process is shown in Figure 1.1.

Figure 1.1: High-level summary of the reallocation process

Note: The figure provides context for matters addressed in this report, it is not intended to provide a complete representation of relevant legislative provisions or the timing of the application of those provisions.

Source: ANAO analysis.

Spectrum planning

1.9 Under section 30 of the Radiocommunications Act, the ACMA may prepare a spectrum plan. The spectrum plan specifies the general purpose or purposes for which spectrum bands may be used. The ACMA may also prepare frequency band plans that specify how parts of a spectrum band may be used.

1.10 The Radiocommunications Act recognises three types of licences that may be issued by the ACMA.

• Class licence — automatically authorises anyone to use a compliant device within a particular band. As a class licence is not issued to individuals, class licences do not have to be applied for and no licence fees are payable. Class licences are typically used for remote locking devices (vehicles and garage doors), wireless headsets for mobile phones, remote controls for TV, CB radio operation and WiFi.
• Apparatus licence — typically an apparatus licence is site-based and authorises the operation of an individual device at a particular location. Examples include transmitter licences for applications such as aircraft transmissions, maritime coast transmissions and broadcasting transmissions, and receiver licences for fixed and mobile reception. Apparatus licences are generally purchased over the counter for a fixed fee for a maximum of five years. Prior to the reallocation process for the 3.6 GHz band, the relevant band³ had a number of apparatus licence holders operating in the band including for space communications earth stations, fixed wireless networks and amateur users.⁴
• Spectrum licence — authorises the operation of a device(s) within a defined geographical area and frequency band. Examples include a licence issued to a Mobile Network Operator to provide services to consumers in a major metropolitan area. The maximum duration of spectrum licences is 15 years, but licensees have the right to trade their licence in whole or part at any time during the licence period, subject to rules set by the ACMA.

Reallocation of encumbered spectrum

1.11 Under section 153 of the Radiocommunications Act, the ACMA may recommend that the minister make a spectrum reallocation declaration. The effect of a spectrum reallocation declaration is to ultimately clear the spectrum of apparatus licence holders.

1.12 Before making a recommendation, the ACMA must prepare a written notice which includes a draft version of the reallocation declaration recommendation, publish a copy of the notice on the ACMA website and, as far as practicable, make reasonable efforts to give each potentially affected apparatus licensee a copy of the notice. The notice must invite each potentially affected apparatus licensee to give comments to the ACMA about the draft version of the recommendation. The ACMA must have regard to the comments of potentially affected apparatus licensees.

1.13 A reallocation declaration must include the specified parts of the spectrum that are subject to reallocation and the ‘reallocation period’, which is the time available to affected licence holders to vacate the spectrum. The reallocation period begins within 28 days after the declaration is made and runs for at least two years.

1.14 The reallocation declaration must specify the ‘reallocation deadline’, which must be at least 12 months before the end of the ‘reallocation period’. The reallocation deadline is the time by which the ACMA must have allocated at least one spectrum licence under the reallocation declaration or the reallocation declaration is taken to be revoked.⁵

1.15 If any affected apparatus licences are in force at the end of the reallocation period, they are automatically cancelled.⁶

Allocation of spectrum licences

1.16 Under section 39A of the Radiocommunications Act, the ACMA must, by legislative instrument, prepare a ‘marketing plan’ for ‘issuing spectrum licences that authorise the operation of radiocommunications devices’.

1.17 The ACMA must determine the procedures to be applied to allocating spectrum licences.⁷ The options available are by auction, tender or allocation at a predetermined price. Under subsection 60(2), the ACMA may establish procedural requirements including the setting of reserve (starting) prices for auctions. The key considerations when setting reserve (starting) prices include:

• policy requirements;
• competitive and anticompetitive behaviour, and prevailing market conditions;
• competition/allocation limits;
• tolerance for unsold lots;
• opportunity cost;
• licence duration; and
• technical issues that can affect the value of the spectrum.

1.18 Under subsection 60(5) the ACMA may set limits on the amount of spectrum that may be held by an individual or group (allocation limits) only if, under subsection 60(10), the minister directs the ACMA to impose such limits.

1.19 Under section 14 of the ACMA Act and subsection 60(10) of the Radiocommunications Act, the minister has powers to direct the ACMA in relation to many of its functions, including the setting of reserve (starting) prices and allocation limits for auctions.

Overview of the 3.6 GHz reallocation process

1.20 In December 2017 the ACMA made a recommendation to the minister that relevant reallocation declarations be made for the 3.6 GHz band. The recommendation (and subsequent declarations) included information about the type of licence, parts of the spectrum to be auctioned (125 MHz of spectrum in the range 3575–3700 MHz), the reallocation period (two, five or seven years depending on geographical area) and the reallocation deadline, which was 29 March 2019.

1.21 Some parts of Australia, mainly remote Australia, were excluded from the recommendation. The minister signed the three relevant declarations on 5 March 2018.

1.22 The reallocation process involved public consultation, the issuance of legislative instruments and the execution mechanism itself which, for the 3.6 GHz band, was the conduct of an auction. The three elements of the reallocation process, and the associated timeframes are shown at Figure 1.2.

Figure 1.2: Elements of the reallocation process

Source: ANAO analysis.

Public consultation

1.23 The process for the reallocation of the 3.6 GHz band began in October 2016, and public consultation about the use of the spectrum continued into 2018. This is shown in Table 1.1.

Table 1.1: Public consultation papers

Source: ANAO analysis.

1.24 Table 1.1 shows the key public consultation documents prepared by the ACMA, and the timing of their release. The documents identified focused on the potential options for the intended uses of the spectrum, as summarised below:

• the Discussion paper on the use of the 1.5 GHz and 3.6 GHz bands, which was intended to determine if the bands should be progressed to the preliminary replanning stage;
• the Options paper further explored the uses of the 3.6 GHz band, and included a number of potential options for the use of the band; and
• the Highest Value Use (HVU) assessment provided analysis relevant to the identified options.

1.25 An analysis of public consultation outcomes was released in October 2017 and outlined decisions and preliminary views which formed the basis of the subsequent recommendation to the minister. The ACMA also released public consultation documents in relation to the draft reallocation recommendation in October 2017 and the draft allocation instruments in May 2018.

Legislative instruments

1.26 From March 2018 to November 2018, the legislative instruments were made, which outlined the parameters and processes for the auction. This is shown in Box 1 below.

Source: ANAO analysis.

1.27 The minister made three declarations in March 2018⁸ that the 3.6 GHz band would be subject to reallocation.

1.28 On 6 July 2018 the minister made a direction under the Radiocommunications Act about the spectrum licence allocation limits. This direction required the ACMA to limit the amount of spectrum that could be acquired by a bidder during the auction based on the aggregate amount of spectrum that would be held in the 3.4 GHz and 3.6 GHz bands by the bidder.

1.29 On 17 July 2018 the minister made a direction under the ACMA Act to require the ACMA to manage the potential for interference⁹ between the adjacent 3.4 GHz and 3.6 GHz bands and thereby ensure that 125 MHz of spectrum within the 3.6 GHz band could be used to maximum utility.

1.30 On 27 July 2018 the ACMA made the marketing plan for the 3.6 GHz band, which set out the procedures and timeline for the release of 3.6 GHz spectrum licences.

1.31 On 27 July 2018 the ACMA made a determination under section 60 and section 294 of the Radiocommunications Act, which outlined the procedures and rules to be applied to the reallocation of spectrum including setting the reserve (starting) prices.

Allocation of spectrum licences

1.32 The auction was designed for the sale of a total of 125 MHz of spectrum. This was arranged in 5 MHz lots, spread in brackets of 25 lots per geographical area across 14 separate metropolitan and regional areas, resulting in a total of 350 lots available for sale. The areas, and the lots available for sale in each, are summarised in Table 1.2.

Table 1.2: Auction areas and number of lots available for sale

Note a: The Perth metropolitan area was split into two sub areas known as ‘Perth Upper’ (9 of the 25 lots) and ‘Perth Lower’ (16 of the 25 lots) to reflect that ‘Perth Lower’ would remain encumbered spectrum because of the operations of a Perth earth station.

Source: ANAO analysis of ACMA data.

1.33 A high-level timetable associated with the implementation of the auction is provided in Figure 3.1 in Chapter 3.

1.34 The ACMA decided to use an Enhanced Simultaneous Multi-Round Ascending (ESMRA) system to support the 3.6 GHz auction. This system involved a two-stage auction format.

• The first stage was a multi-round auction, with each round time limited with price increments between rounds. This stage determined the quantity of lots (frequency blocks of 5 MHz in one of 14 separate areas) won by the bidders. The first stage continued until supply equalled or exceeded demand for each of the separate areas. At this stage the lots were generic and did not have specific frequencies assigned to them.
• The second stage was the assignment stage which determined the specific frequencies of the lots won.

The spectrum review and future legislative reform

1.35 In May 2014 the minister announced a review of Australia’s spectrum policy and management framework, with the objective of: simplifying the framework; improving flexibility and allocation efficiency; ensuring appropriate oversight; promoting consistency across legislation and sectors; appropriately considering public interest issues; improving the whole-of-government approach to spectrum policy and developing a whole-of-economy approach to valuation of spectrum that includes consideration of the broader economic and social benefits.¹⁰

1.36 In March 2015 the review report was published. The government announced that it would accept the recommendations contained in this report in relation to:

• replacing the current legislative arrangements with new legislation that removes prescriptive processes and streamlines licensing for a simpler and more flexible framework;
• better integrating the management of public sector and broadcasting spectrum to improve the consistency and integrity of the framework; and
• reviewing spectrum pricing to ensure consistent and transparent arrangements to support the efficient use of spectrum and secondary markets.

1.37 The Spectrum Review noted that ‘conversion and or reallocation from apparatus licences to spectrum licences are complicated and lengthy processes.’¹¹ As part of its acceptance of the Spectrum Review recommendations, the government committed to a legislative reform process to address issues with the current Act. An exposure draft of the proposed Radiocommunications Bill has been released and the department is continuing to consult on proposed changes. The objective of the changes is to put in place a spectrum allocation framework that is ‘simpler, more efficient, flexible and sustainable to support new and innovative technologies and services while providing certainty of spectrum access rights for users.’¹²

Future 5G spectrum releases

1.38 As the next stage in the on-going release of 5G spectrum, in September 2018 the ACMA commenced the consultation process for the reallocation of the 26 GHz band through the release of the Options for wireless broadband in the 26 GHz band consultation paper. This was followed by the release of the Future use of the 26 GHz band – Planning decisions and preliminary views paper in April 2019. In October 2019, the minister made a reallocation declaration in accordance with a recommendation from the ACMA. The declaration provides that 2.4 GHz of spectrum in the 26 GHz band will be reallocated by issuing spectrum licences in 29 geographic areas.

Rationale for undertaking the audit

1.39 Most electronic devices rely on spectrum frequencies to carry information. This spectrum is a limited resource. The social and economic benefits of 5G are expected to be wide ranging, and the department and the ACMA need to work closely with industry, government and the community to make spectrum available in a manner that maximises the benefits of 5G, while minimising the impacts on existing communications services and customers. The auction of the 3.6 GHz band was the first spectrum reallocation targeted at the deployment of 5G services, and the department and the ACMA are preparing for future 5G spectrum releases.

Audit approach

Audit objective, criteria and scope

1.40 The objective of the audit was to examine the effectiveness of spectrum reallocation to support the deployment of 5G services. The audit examined the following high-level criteria:

• whether the department and the ACMA effectively prepared for the reallocation of spectrum in the 3.6 GHz band; and
• whether the ACMA effectively administered the reallocation of spectrum in the 3.6 GHz band.

Audit methodology

1.41 In undertaking the audit the Australian National Audit Office (ANAO):

• examined documentation held by the department and the ACMA in the form of relevant policies, procedures, frameworks and guidelines, including documentation relating to the auction of spectrum in the 3.6 GHz band; and
• interviewed relevant staff of the department and the ACMA.

1.42 The audit was conducted in accordance with ANAO Auditing Standards at a cost to the ANAO of approximately $376,810.

1.43 The team members for this audit were Susan Ryan, Peter Bell, Glen Ewers and Paul Bryant.

2.1 In order to examine this criterion, the audit reviewed:

• responsibilities and accountabilities — the large scale, timeframe and complexity of the reallocation preparation process necessitates an effective governance structure and coordination processes between the entities;
• compliance management — the reallocation preparation process is subject to a variety of key legislative, policy and supporting guideline requirements, with a particular emphasis on public consultation processes;
• other reallocations — previous reallocation processes undertaken in Australia, and internationally, can provide valuable input into the preparation process; and
• transparency and equitability — the reallocation process has possible impacts on a broad range of stakeholders, and it is important to provide public confidence in how spectrum is to be treated and used.

Were governance arrangements, roles, responsibilities and accountabilities clearly established for the reallocation preparation process?

Entity responsibilities in the reallocation process based on legislation and practice

2.2 The reallocation of encumbered spectrum and the subsequent allocation of spectrum licences required tasks to be completed at defined stages in the process. The involvement of the various government entities is shown in Figure 2.1 below.

Figure 2.1: Government entities involved in the reallocation process

Source: ANAO analysis.

2.3 The requirements to be followed by entities for the reallocation of spectrum are primarily contained in the Radiocommunications Act 1992 (Radiocommunications Act) and the Australian Communications and Media Authority Act 2005 (ACMA Act). This legislation requires entities to make independent decisions and take independent actions in relation to specific objectives and responsibilities.

2.4 The Department of Communications and the Arts (department) provides policy advice to the Minister for Communications and the Arts (minister). The key roles the department performed during the 3.6 GHz reallocation were:

• advising the minister on communications policy objectives;
• briefing the minister on potential outcomes of the Australian Communications and Media Authority’s (ACMA’s) recommendations and decisions, alignment with communications policy and on sensitivities and contentious matters;
• advising the minister on impacts to key stakeholders;
• briefing the minister on, and drafting, reallocation declarations;
• advising the minister on the policy implications of arrangements established for the auction of the spectrum;
• advising the minister on emerging issues, if and when, they arose;
• briefing the minister on, and drafting, the direction to the ACMA on allocation limits; and
• preparing a Regulation Impact Statement (RIS) for the allocation limits.

2.5 In relation to spectrum, the ACMA is responsible for ‘managing access to radiofrequency spectrum bands through radiocommunications licence arrangements and resolving competing demands for that spectrum through price-based allocation methods.’¹³ For the 3.6 GHz band reallocation, the key roles performed by the ACMA were:

• preparing key spectrum planning documentation to determine how spectrum would be best used;
• consulting with key stakeholders, including incumbents, on the use of spectrum and the required legislative instruments;
• making a reallocation recommendation to the minister;
• developing a technical framework for the use of the spectrum;
• developing a marketing plan and determining the approach and procedures for allocating licences;
• setting reserve (starting) prices;
• implementing allocation limits based on directions from the minister;
• working with a third party provider to develop an operational auction system; and
• holding the auction and announcing auction results.

2.6 The ACMA convened a Technical Liaison Group (TLG) as a consultation forum for the ACMA, industry and other stakeholders with an interest in the technical framework underpinning the spectrum licences.¹⁴ The TLG advised the ACMA on technical aspects required for the development of a spectrum licence technical framework for the 3.6 GHz band.

2.7 The ACMA is required to consult with the Australian Competition and Consumer Commission (ACCC) in specific limited circumstances during the reallocation process.¹⁵

2.8 The ACMA is also responsible for issuing licences to successful bidders and managing the transition to the operation of these licences.

Entity collaboration

2.9 Whilst the framework for the reallocation of spectrum requires individual decisions and actions by the minister (and his department) and the ACMA, the timeframe, competitive market, technology environment and interdependence of many elements in the process requires that these entities have regard to the functions performed by each other and effectively cooperate in order to achieve the government’s overriding objectives. For example, the direction to implement allocation limits is the responsibility of the minister, however, it should be completed at a time that will allow the ACMA sufficient time to incorporate these limits into its consultation process and Applicant Information Package. Similarly, the making of the reallocation declaration requires the ACMA to make a recommendation to the minister and for the department to prepare a briefing and draft legislative instrument. This requires the department and the ACMA to coordinate their efforts to ensure the appropriateness of the legislative deadlines that are a consequence of making of the declaration.

2.10 In practice, there were instances where the entities did not effectively coordinate, in a consistent and timely manner, their efforts to address specific technical (refer paragraphs 2.60 to 2.71) and legal (refer paragraphs 2.24 to 2.28, and 3.17 to 3.26) issues emerging during the course of the reallocation planning process.

2.11 In July 2019, the department prepared a document titled Guide for policy officers working on spectrum reallocation declarations and spectrum licence auctions. This provides guidance to policy officers on the end-to-end process for the management of spectrum auctions as ‘projects’, and outlines key roles and responsibilities for stakeholders. This guide was not prepared in consultation with the ACMA, has not been agreed with the ACMA or provided to the ACMA for review. The department views this guide as being for the department’s use only.

Risk management

2.12 The Public Governance, Performance and Accountability Act 2013 (PGPA Act), applies to all non-corporate Commonwealth entities such as the department and the ACMA. The PGPA Act includes a requirement to establish and maintain an appropriate system of risk oversight and management. The requirements for this are set out in the Commonwealth Risk Management Policy and related Resource Management Guide (RMG 211: Implementing the Commonwealth Risk Management Policy – Guidance, 2016). An assessment against the key requirements of the Commonwealth Risk Management Policy is shown below.

• Establishing a risk management policy and risk management framework — both the department and the ACMA have enterprise level risk management policies and frameworks consistent with the Commonwealth Risk Management Policy.
• Understanding and managing shared risk¹⁶ — the ACMA developed a risk register for the reallocation, however, the register identified risks only from the ACMA’s perspective, and not as shared risks (the owners identified in the risk register were all internal to the ACMA). There was no evidence of the department’s consideration of shared risk.
• Maintaining appropriate systems of risk oversight, management and internal control¹⁷ — the ACMA risk register did not identify any risks associated with fraud and integrity management, despite the reallocation process being concerned with the sale of an asset of potentially material value. The ACMA risk register did not identify any controls but did identify a number of tasks that were classified as ‘risk mitigations’.

Probity management

2.13 The PGPA Act places an obligation on Australian Government entities to ensure that probity principles and procedural fairness are maintained when carrying out that entity’s activities.¹⁸

2.14 A probity plan for the reallocation process, ‘including pre-auction and post-auction procedures’, was prepared by the ACMA. The plan did not address all aspects of the reallocation process as it was approved in July 2018, four months after the minister’s reallocation declaration, when many elements of the reallocation preparation process had already commenced.

2.15 Under the probity plan, ACMA members were required to sign confidentiality deeds. The probity log, which recorded whether probity forms had been completed, identified that two members of the ACMA did not sign confidentiality deeds. The ACMA stated that this was because subsequent legal advice determined that signature by these members was unnecessary because of the operation of Part 7A – Disclosure of Information of the ACMA Act.

2.16 Under the probity plan, ACMA and departmental staff, contractors and advisors were required to sign confidentiality deeds and conflict of interest declarations. The probity log did not identify if any contractors or advisors signed relevant probity forms (for example the auction provider and external probity adviser).¹⁹

2.17 The probity plan stated that ‘any breach of, or inability to implement, any of the principles or procedures set out in this probity plan must be promptly reported to the Project Executive, who may then seek the advice of the Probity Adviser’. There were three instances where apparent probity issues arose but were not dealt with in line with these protocols:

• on 24 July 2018, a confidential document containing advice about a range of issues relevant to the reallocation was inadvertently emailed to a third party. The document classification was ‘in-confidence’ and it contained sensitive information. The ACMA identified that this issue would be dealt with by requesting that the third party delete the information and that it not be disclosed;
• on 29 August 2018 a request for a meeting by one of the potential auction participants was refused on the grounds of probity; and
• on 18 October 2018 an auction participant raised concerns about the auction process and in doing so disclosed confidential details of another auction participant. Auction participants were required to sign confidentiality deeds as part of the application process. This prohibited the disclosure of information which had been provided to participants by the ACMA in confidence.

2.18 There is no evidence that the appointed Probity Adviser was advised of these issues, or that these issues were managed in consultation with the appointed Probity Adviser. The probity register was blank at the conclusion of the auction.

Was the reallocation preparation process consistent with legal obligations, policy and spectrum management principles?

2.23 A high-level illustration of key legislation, policy and guidance relevant to the spectrum reallocation process is shown in Figure 2.2.

Figure 2.2: Summary of legislation, policy and guidance for spectrum reallocation

Source: ANAO analysis.

Consistency of the 3.6 GHz reallocation preparation process with legal obligations

Radiocommunications Act 1992

2.24 The specific requirements contained in the Radiocommunications Act that were relevant to the planning for the reallocation of the 3.6 GHz band, and an assessment of the consistency of process with these requirements, are set out in Appendix 3.

2.25 The assessment indicates that the reallocation planning process was consistent with the relevant obligations under the Radiocommunications Act, with the exception of requirements under sections 153G and 153C, as outlined in Table 2.1.

Table 2.1: Assessment of process consistency with legal obligations under the Radiocommunications Act — sections 153G and 153C

Source: ANAO analysis of the Radiocommunications Act and the department and the ACMA responses.

2.26 The failure to identify 10,000 potentially affected amateur licence holders came to the ACMA’s attention after the reallocation declarations had been made. The legislative responsibility of the ACMA was to identify and consult with these licence holders before the draft recommendation was provided to the minister.

Australian Communications and Media Authority Act 2005

2.27 The specific requirements contained in the ACMA Act that were relevant to the planning for the reallocation of 3.6 GHz spectrum, and an assessment of the consistency of the planning process with these requirements, is set out in Table 2.2 below.

Table 2.2: Assessment of process consistency with legal obligations under the ACMA Act — section 14

Source: ANAO analysis of the ACMA Act and the department and the ACMA responses.

2.28 The assessment indicates that the reallocation planning process was consistent with the relevant obligations under the ACMA Act.

Consistency with policy and guidance

2.29 The Australian Government’s communications policy that underpins the management of spectrum is articulated in the 5G—Enabling the Future Economy policy statement and the Regulation Impact Statement - Allocation limits for the 3.6 GHz spectrum auction. For internal purposes, the ACMA has developed the Principles for Spectrum Management to assist it in implementing government policy. The consistency of the 3.6 GHz reallocation with these documents is analysed below.

Communications policy relevant to 5G

2.30 In October 2017, the Government issued the 5G – Enabling the future economy policy statement which recognised that 5G was ‘more than an incremental change for mobile communications’ and had the potential to ‘produce far-reaching economic and social benefits.’²⁰ The policy stated that the Australian Government’s direction on enabling the future economy was focused on supporting ‘the timely rollout of 5G in Australia.’²¹ Immediate actions by the Government were intended to:

• make spectrum available in a timely manner;
• actively engage in the international standardisation process;
• streamline arrangements to allow mobile carriers to deploy infrastructure more quickly; and
• review existing telecommunications regulatory arrangements to ensure they are fit-for-purpose.

2.31 In July 2018, the department sought to bring together all the elements of the policy relevant to the 3.6 GHz reallocation in its development of the Regulation Impact Statement - Allocation limits for the 3.6 GHz spectrum auction. This document identified the government’s communications policy objectives as follows:

• competitive market outcomes;
• efficient allocation and use of spectrum;
• encouraging secondary trading;
• supporting 5G networks; and
• investment in infrastructure, including in regional Australia.

2.32 While this document provided a clear consolidation of the policy objectives, it was prepared after the 3.6 GHz reallocation declaration, and was therefore not established at a time when the objectives could be formally incorporated into planning for this reallocation. The alignment of the outcomes of the auction process with these objectives is examined in paragraphs 3.31 to 3.34.

2.33 In briefing the minister about the upcoming draft 26 GHz band reallocation recommendation by the ACMA, the department has developed the communications policy objectives for the allocation of the 26 GHz band. These policy objectives were prepared to guide departmental advice to the minister, with the intention of promoting consistency in decision making under the Radiocommunications Act by the various decision makers. While this initiative has made the policy objectives for the 26 GHz band reallocation clearer than those for the 3.6 GHz band reallocation, the ACMA has not incorporated these policy objectives into its initial planning for the reallocation of the 26 GHz band. The policy objectives were communicated to the ACMA on 17 July 2019.

Principles for Spectrum Management

2.34 In March 2009, the ACMA set out five principles for the reallocation of spectrum which were intended to guide the ACMA’s management of spectrum within its existing legislative responsibilities and government policy settings. The key theme of the principles was that maximising ‘the overall public benefit from use of the radiofrequency spectrum requires balanced application of both regulatory and market mechanisms.’²²

2.35 The principles are:

• allocate spectrum to the highest value use or uses;
• enable and encourage spectrum to move to its highest value use or uses;
• use the least cost and least restrictive approach to achieving policy objectives;
• to the extent possible, promote both certainty and flexibility; and
• balance the cost of interference and the benefits of greater spectrum utilisation.

2.36 The planning for the 3.6 GHz reallocation process relied on four key documents:

• Future use of the 1.5 GHz and 3.6 GHz bands: Initial investigation of the 1427-1518 MHz and 3575-3700 MHz bands for mobile broadband services discussion paper, October 2016 (Discussion paper);
• Future use of the 3.6 GHz band: Options Paper, June 2017 (Options paper);
• Future use of the 3.6 GHz band: Highest value use assessment – Quantitative analysis, June 2017 (HVU assessment); and
• Future use of the 3.6 GHz band – Decisions and preliminary views, October 2017 (Decisions and preliminary views paper).

2.37 The Discussion paper, Options paper and HVU assessment were the basis of public consultation on determining the best use for the 3.6 GHz band. Each of these documents sought submissions and responses to inform the development of planning options which were then assessed by the ACMA against a range of factors, including the Principles for Spectrum Management, to develop the Decisions and preliminary views paper. The documents considered issues such as:

• how much, if any, of the 3.6 GHz band should be considered for replanning and in which geographies;
• the potential impact of reallocation in the band on current incumbents’ use of the spectrum;
• alternative options for incumbents’ service provision;
• the need for better clarity and investment certainty; and
• potential flexibility that could be demonstrated by extended transition periods.

2.38 The HVU assessment was intended to be a ‘comprehensive assessment of the highest value use of the 3.6 GHz band.’²³ It was intended to indicate ‘whether change of spectrum use is likely to be welfare maximising.’²⁴ It was a key input for determining the future use of the 3.6 GHz band as it provided an analysis of costs and benefits associated with the proposed options for changing the use of the band.

2.39 The HVU methodology equated the value of spectrum in its proposed use to the price producers were willing to pay for it (producer values). As a proxy for this, the HVU used prices previously paid for spectrum in Australia to make a judgement about possible minimum and maximum prices that producers might be willing to pay for spectrum in the 3.6 GHz band.

2.40 The HVU assessment resulted in a range of potential producer values for the 3.6 GHz band of between $0.03 per MHz/per person (MHz/pop²⁵) and $0.625/MHz/pop which in turn resulted in an Australia wide range of estimates of the value of the spectrum to producers of between $87 million and $1.8 billion.²⁶

2.41 The estimated costs of displacing incumbents as a result of reallocating the 3.6 GHz band were calculated to be between $47 million and $144 million for the geographical areas auctioned.²⁷

2.42 The HVU assessment focused on the costs and benefits of particular options. This approach ignored the extent to which these options reflected government priorities for use of the spectrum, and the HVU assessment did not adopt an approach that integrated cost-benefit analyses with all policy objectives and spectrum management principles.²⁸

Was the design of the reallocation process informed by internationally recognised better practice and previous spectrum auction experience?

The ACMA

2.46 The ACMA incorporated international better practice into its planning and reallocation documentation through research, study groups and ongoing international stakeholder engagement.

2.47 The ACMA incorporated 3rd Generation Partnership Project²⁹ (3GPP) technical requirements, which support international standardisation of the technologies for mobile network operations. The 3GPP has a key role in the identification of 5G bands and the standardisation of the underlying technology. The 3GPP standards were adopted in the specifications included in the marketing plan.

2.48 The ACMA regularly attends International Telecommunications Union’s (ITU) conferences into the technical requirements. The ITU is a global organisation that promotes development and standardisation of telecommunications through conferences and study groups.³⁰ In 2018–19, the ACMA attended 23 international meetings, conferences and study groups. These encompassed the ITU Global Regulators’ Symposium, the International Institute of Communications Regional Regulators’ Forum, the Spectrum Regulators’ Forum and the European Spectrum Management Conference. In addition, the ACMA engaged in fourteen international activities including delegation visits and meetings with international spectrum and communications regulators.

2.49 In 2018 the ACMA developed its International Engagement Strategy 2019-2021, that sets out the ACMA’s strategic objectives for international engagement which are focused on:

• building strong co-operative relationships and partnerships;
• promoting and protecting Australian interests; and
• supporting broader government policies and activities.

Previous spectrum auction experience

2.50 The ACMA conducted a lessons learnt exercise for the 1800 MHz band spectrum auction that was held in 2015. This identified eight areas that ‘could be improved’ in relation to the 1800 MHz allocation project. The focus of the lessons learnt was on the execution of the auction.

2.51 For the 3.6 GHz reallocation, the ACMA’s choice of auction format took into account these lessons learnt, specifically in relation to factors such as the characteristics of the spectrum for sale and the expected demand for the spectrum.

2.52 The ACMA determined that the most appropriate format the 3.6 GHz band auction was the Enhanced Simultaneous Multi-Round Ascending (ESMRA) auction system. This decision was informed by an assessment of the relative merits of an ESMRA compared to the ACMA’s existing auction capability, and the findings of reports from the University of NSW and Takon/DotEcon. These reports drew on international better practice in auction systems and highlighted potential enhancements to the ACMA’s existing auction capability.

2.53 The in-principle decision to utilise the ESMRA format was made on 2 June 2017. The ACMA approved the acquisition of ESMRA capability in March 2018. The system to facilitate the ESMRA was developed for the ACMA by Innovative Auctions Limited/Power Auctions LLC.

The Department

2.54 The department maintains an awareness of internationally recognised better practice related to spectrum policy through:

• subscriptions to various media and policy communication tools, including CommsDay and Policy Tracker which have information on spectrum management in a global context;
• the Spectrum Branch has an international team which leads the department’s work on international radiocommunications matters through:
  • attending various international meetings such as regional and ITU preparatory meetings for World Radiocommunications Conferences; and
  • attending events such as the APT Symposium on Spectrum Management, which was held in 2018 in the Philippines.

Was the reallocation preparation process sufficiently transparent and equitable to meet the legitimate needs of stakeholders?

Transparency

2.55 The 3.6 GHz reallocation process had impacts for a broad range of stakeholders including incumbent licence holders, potential bidders, industry and community groups. The ACMA’s communications guide recognises that open and transparent public consultation is an important part of engendering certainty about how the spectrum would be treated and used.

2.56 The broadband services discussion paper released in October 2016 resulted in seventy-two submissions. For the subsequent public consultation papers released in June 2017 (the Options paper and HVU analysis) thirty-five submissions were received. The outcomes of the ACMA’s analysis of these submissions and the impact on decisions was addressed in the Decisions and preliminary views paper, which was made publicly available in October 2017.

2.57 The ACMA provided an opportunity for public consultation on the draft reallocation recommendation for the 3.6 GHz band in November 2017. Sixteen submissions were received. These addressed the terms of the draft reallocation recommendation and other matters related to the auction. The ACMA also conducted separate face-to-face consultations on the lot configuration on 21 March 2018 and the ESMRA auction system on 10 April 2018 which provided input into the allocation instruments.

2.58 The ACMA provided an opportunity for public consultation on the draft legislative instruments to be used in the 3.6 GHz reallocation process in the period May 2018 to June 2018. A total of fifteen submissions were received. These addressed both the allocation and technical frameworks. The ACMA reviewed the submissions and made changes to the instruments where required.

2.59 After the ACMA established the allocation and technical framework instruments, the ACMA made publicly available a comprehensive pack of documents to assist potential bidders in preparing for, and engaging in, the auction of spectrum.

Equitability

2.60 One issue was identified that appeared to have the potential to treat prospective bidders differently — the decision to take holdings in the 3.4 GHz band into account when determining the allocation limits for the 3.6 GHz band auction. This decision was made eight months after the release of the Decisions and preliminary views paper.

2.61 The issue of effectively combining the 3.4 GHz and the 3.6 GHz bands was canvassed publicly in the October 2016 broadband services discussion paper, however this was not included as an option in the subsequent Decisions and preliminary views paper in October 2017. This paper concluded that, with respect to licensing arrangements, the ‘current arrangements in 3.4 GHz are the right ones.’³¹ It was also indicated that work surrounding the defragmentation of arrangements in the 3.4 GHz band would be deferred to facilitate a timely consideration of the 3.6 GHz band.

2.62 On 8 March 2018, the minister requested advice from the ACCC on whether he should direct the ACMA to impose appropriate allocation limits for the auction of the 3.6 GHz band (allocation limits have the effect of restricting the amount (in MHz) that any bidder could purchase in a particular geographic area in the auction based on aggregate holdings) and, if so, what the allocation limits should be.

2.63 Amongst other things, the ACCC advised in May 2018 that the allocation limits for the 3.6 GHz band should take into account holdings in the 3.4 GHz band. Specifically, the ACCC recommended that allocation limits should be set such that:

In metropolitan areas of Sydney and Melbourne:

• No person, or specified group of persons, is allowed to purchase an amount of spectrum in the upcoming 3.6 GHz spectrum auction which would cause its aggregate holdings across the 3.4–3.7 GHz band to exceed 45 MHz.

In other metropolitan and regional areas:

• No person, or specified group of persons, is allowed to purchase an amount of spectrum in the upcoming 3.6 GHz spectrum auction which would cause its aggregate holdings across the 3.4–3.7 GHz band to exceed 60 MHz.

2.64 On 22 June 2018, the department proposed to the minister that allocation limits of 60 MHz in all metropolitan areas and 80 MHz in regional areas be imposed, on the basis that these limits would provide better coverage of ‘all Government communications policy objectives’. The minister agreed to the department’s proposed allocation limits across the 3.4 GHz and the 3.6 GHz bands. The allocation limits effectively treated existing holdings of 3.4 GHz spectrum as being of equivalent value to spectrum in the 3.6 GHz band.

2.65 The consultation documents on the draft legislative instruments in June 2018 did not raise the possibility of 3.4 GHz spectrum holdings limiting the ability to acquire spectrum licences in the 3.6 GHz band.³²

2.66 The auction approach adopted by the ACMA was predicated on increasing the price of spectrum until the demand was equal to the supply. The supply of 125 MHz had been determined in the minister’s declaration on 5 March 2018 which did not reference holdings in the 3.4 GHz band because this band was already spectrum licenced. However, the decision in June 2018 to apply allocation limits across the 3.4 GHz and 3.6 GHz bands impacted the amount that could be acquired by individual bidders in the 3.6 GHz auction and had the potential of creating an excess of supply, negatively impacting the selling price for the auction.

2.67 The effect of the allocation limits imposed, and the incorporation of existing holdings in the 3.4 GHz band within these allocation limits, on the potential bidders’ ability to acquire 3.6 GHz band spectrum is shown in Table 2.3.

Table 2.3: 3.4 GHz band holdings before the 3.6 GHz auction

Source: Adapted extract from the ACMA Authority Paper on 3.4 GHz trading analysis.

Notes: The information in Table 2.3 was prepared by the ACMA on 21 August 2018, before the joint venture between TPG Telecom (TPG) and Vodafone Hutchison Australia (VHA) was registered. This is detailed in Chapter 3 of this report.

In relation to allocation limits, existing holdings were rounded down to the nearest 5 MHz if they fell between multiples of 5 MHz. For example, 3.5 MHz held by Optus in Western NSW was rounded to 0 MHz.

Any holdings in the 3.4 GHz band that did not cover 15 per cent of the population in the regional area were not included for the purposes of allocation limits and have been excluded from Table 2.3.

2.68 Table 2.3 shows that, when combined with the allocation limits of 60 MHz in all metropolitan areas and 80 MHz in regional areas, the effect of incorporating existing 3.4 GHz holdings would be to potentially reduce the market to three bidders in metropolitan areas (with one of the three bidder’s ability to acquire reduced in four of the six areas), and four bidders in regional areas (with one of the four bidder’s ability to acquire impacted in five of the eight areas).

2.69 The department stated that including 3.4 GHz band holdings in the allocation limits would preclude some bidders from acquiring additional metropolitan spectrum ‘and encourage them to reach a commercially negotiated outcome for their fragmented holdings in the 3.4 GHz band through secondary trading’.

2.70 Although holdings in the 3.4 GHz band were technically equivalent³³ to the 3.6 GHz band in relation to the ability to support 5G services, the holdings were not necessarily equivalent in practice. The ACMA stated that ‘(t)he utility of the smaller and fragmented holdings in the 3.4 GHz band are not considered equivalent to the utility of the larger unfragmented spectrum potentially available in the auction of the 3.6 GHz band’. The allocation limits treated these holdings as being equivalent and thereby had the effect of treating some potential bidders differently.

2.71 The ACMA and bidders commented on the minimum amount of contiguous spectrum that would be necessary for a sustainable 5G service. These considerations took into account not only the technical aspects of 5G but also the commercial aspects such as investments in infrastructure. There was no consistent view on the optimal amount of spectrum that would be required to deliver 5G services. This was highlighted in technical documents prepared by the ACMA which indicated that 100 MHz of contiguous spectrum was ideally required and at least one potential bidder who indicated that 40 MHz of contiguous spectrum was required.

3.1 In order to examine this criterion, the audit reviewed:

• auction conduct — the management of bidder application and eligibility requirements, the establishment of systems to facilitate the auction and the undertaking of activities to manage emerging risks were important elements in effectively supporting the execution of the auction process;
• auction outcomes — the alignment of auction outcomes and relevant legislative and policy objectives is important in evaluating the effectiveness of the auction process; and
• lessons learnt — auctions will continue to be a key method for the reallocation and allocation of spectrum, and relevant learnings can provide valuable input into the future processes.

Did the ACMA conduct the spectrum auction in accordance with the reallocation requirements?

3.2 The execution of the auction process for the 3.6 GHz reallocation spanned the period August 2018 to December 2018. The key dates for the auction process are shown in Figure 3.1 below.

Figure 3.1: Timetable for the execution of the 3.6 GHz band auction

Source: ANAO analysis.

3.3 Figure 3.1 shows the timing of key events in the auction process for the 3.6 GHz band. Once the Applicant Information Package was released on 6 August 2018, the timing for the auction was established and notified to potential bidders.

3.4 Adhering to the auction timing was important to ensure that the reallocation deadline was met. The reallocation deadline was the time by which the ACMA must have allocated at least one spectrum licence under the reallocation declaration or the reallocation declaration would be taken to be revoked.³⁴ The reallocation deadline was 29 March 2019.

Management of application, eligibility and associated auction processes

3.5 The Applicant Information Package released on 6 August 2018 comprised two parts; the Auction Guide (Guide) and the Auction Forms. The Guide set out detailed information about the auction and how to participate, including:

• details of the auction lots;
• how the auction would be conducted;
• how bidders could participate in the auction;
• technical matters; and
• key dates.

3.6 The forms required to be completed in the Applicant Information Package were:

• Form 1 — Application form;
• Form 2 — Deed of Acknowledgement;
• Form 3 — Deed of Confidentiality;
• Form 4 — Statutory declaration about affiliations — section 32;
• Form 5 — Statutory declaration about affiliations — section 35;
• Form 6 — Deed of financial security;
• Form 7 — Statement about affiliations for winning bidders;
• Form 8 — Associates form — body corporate;
• Form 9 — Associates form — individuals; and
• Form 10 — Eligibility nomination form.

3.7 By the application deadline of 31 August 2018, completed forms had been received from Telstra, Optus, NBN Co, the TPG Telecom (TPG) and Vodafone Hutchison Australia (VHA) joint venture (refer paragraph 3.17) and Dense Air.

3.8 On 3 September 2018, the ACMA provided each applicant with copies of all of the completed Form 8 documents received for the 3.6 GHz auction. These provided details of all applicants and associates for the auction.

3.9 By the eligibility deadline of 27 September 2018, all applicants had provided a completed Form 10 document and paid the required eligibility payment³⁵ through a deed of financial security (or cash) to the ACMA.³⁶

3.10 The auction commenced on 20 November 2018 and concluded on 6 December 2018. The auction comprised:

• a primary stage of 42 rounds of bidding;
• a secondary stage with one round for the allocation of one unsold lot; and
• an assignment stage where specific frequencies were assigned to each successful bidder’s lots.

3.11 The auction outcomes were publicly announced on 10 December 2018.

Technology facilitating the auction process

3.12 The ACMA utilised an Enhanced Simultaneous Multi-Round Ascending (ESMRA) auction system to facilitate the auction process. The final production version of the ESMRA auction system was delivered by Power Auctions to the ACMA in August 2018. In September 2018, security risk and control documentation for the ESMRA system was finalised. This documentation included a disaster recovery plan, a security risk management plan, an incident response plan, emergency procedures, a change management plan and a business continuity plan.

3.13 User acceptance testing over the ESMRA system commenced in September 2018 and the report on the user acceptance testing outcomes was delivered to the ACMA in the same month. This report was finalised in December 2018 and approved by the Executive Manager Spectrum Licensing Policy Section. In this final report, the status of all issues identified in the user acceptance testing was reported as ‘closed’.

3.14 Potential bidders were provided with the opportunity to participate in mock auctions in order to familiarise themselves with the technology. All potential bidders participated in mock auctions between 12 October 2018 and 9 November 2018.

3.15 The ESMRA system was designed to provide detailed audit logs of all actions within the system during the auction. The audit logs provided evidence of who accessed the system, when the access occurred and the actions taken. There was evidence that the audit logs were progressively inspected by the ACMA during the auction. However, there was no structured testing or review of the logs or key system controls. The ACMA should establish and implement a plan for the provision of assurance over key controls for future reallocation processes.

Emerging risks during the auction process

3.16 After the release of the Applicant Information Package, but before the application deadline on 31 August 2018, two issues arose that introduced risks to the outcomes of the auction. These issues, and how they were dealt with by the Department of Communications and the Arts (department) and the ACMA, are outlined below. The responses to these issues reflect, in part, the matters referenced in paragraph 2.9 regarding the benefits of the department and the ACMA agreeing an approach for cooperation and coordination in undertaking respective responsibilities in the process for future spectrum reallocations.

Proposed merger of TPG and Vodafone

3.17 On 22 August 2018, TPG notified the Australian Securities Exchange that it was in ‘exploratory discussions’ with VHA about a merger. On 30 August 2018 (one day before the auction application deadline) TPG and VHA wrote to the minister and the Chair of the ACMA indicating that they had registered a joint venture for the purposes of bidding in the 3.6 GHz auction and were intending to merge.

3.18 At this time, the allocation limits and reserve (starting) prices for the auction had already been set and communicated to potential bidders. The reserve prices were set to reflect the ACMA’s ‘low-tolerance for unsold lots’ and set on the basis of recently completed spectrum auctions overseas which ‘…provides international precedent for implementing a low starting price despite significantly higher expected commercial valuations’.

3.19 The decisions on these auction parameters were made on the assumption that there would be at least three bidders in metropolitan areas (TPG, VHA and Telstra).³⁷ The impact of the proposed merger was that it was likely to reduce the auction to two potential bidders in metropolitan areas. Given the allocation limits that had been set, the department concluded that the proposed merger would result in unsold spectrum and/or that spectrum would be sold at the reserve price in metropolitan areas.

3.20 These issues prompted the department and the ACMA to consider, independently, whether it was possible to take action in response to the resulting changes in market conditions. The department and the ACMA sought legal advice about potential responses. The potential responses considered were whether:

• reserve prices could be changed to better reflect the competitive environment;
• allocation limits could be changed to better reflect the competitive environment;
• the allocation determination could be revoked or varied; and/or
• the auction could be delayed or postponed for a short period.

3.21 The respective sources of advice concluded that neither the reserve prices nor the allocation limits could be changed without the risk of a successful legal challenge by a bidder. The advice also concluded that a revocation of the allocation determination risked successful action by bidders negatively affected. These risks were not considered against the potential financial consequences of continuing with the auction process in a low competition environment. The possible quantum of these financial consequences is outlined at paragraphs 3.35 to 3.49.

3.22 The department concluded that, notwithstanding these unexpected circumstances, the Australian Government would still be able to deliver on its commitment to bring 5G spectrum to market as quickly as possible and that revenue from the auction would still be more than the contingency reserve.³⁸ The department advised that there should be no intervention by the minister.

3.23 The advice indicated that the department and the ACMA were limited in the actions they could take in response to these emerging issues. Nonetheless, the department and the ACMA should establish arrangements to ensure that financial consequences are able to be appropriately considered in decision making processes during the auction preparation and execution period.

5G Security Guidance to Australian Carriers

3.24 On 23 August 2018 the Australian Government released its 5G Security Guidance to Australian Carriers. On 27 August 2018, VHA wrote to the minister and to the Chair of the ACMA to express concerns that, as a result of the security guidance, there was uncertainty about whether a key supplier to VHA would be precluded from supplying 5G network equipment. In this situation, VHA would have no choice but to fundamentally reassess its 5G network rollout strategy. On this basis, VHA requested a delay in the reallocation and auction process.

3.25 The department recommended that the minister take no action and allow the ACMA to take a decision on the application deadline. The ACMA noted that a short extension to the application deadline could be accommodated without affecting the overall auction timeline. Nevertheless, the ACMA decided that there were insufficient grounds to grant VHA’s request for a delay in the application deadline.

3.26 The VHA request was being considered at the same time as the consideration of the proposed merger between TPG and VHA. Both matters had the potential to affect the competitive environment during the auction and consequently the auction outcomes (refer paragraphs 3.35 to 3.49).

Was the outcome of the spectrum auction consistent with the objectives of the approach adopted?

Objectives for the reallocation approach adopted

3.27 At different times during the 3.6 GHz reallocation process, the department and the ACMA focused on various objectives, priorities, outcomes or benefits for the reallocation, ranging from a broad external object, as set out in the Radiocommunications Act 1992 (Radiocommunications Act) ‘to maximise … the overall public benefit derived’, through to narrower internally focused objectives such as ‘selling all lots’.

3.28 Further objectives for the reallocation of the 3.6 GHz band were articulated in:

• 5G – Enabling the Future Economy, October 2017; and
• the Australian Government’s communication policy objectives for the 3.6 GHz auction, as articulated in Regulation Impact Statement—Allocation limits for the 3.6 GHz spectrum Auction, July 2018.

3.29 At the conclusion of the auction, the ACMA stated that it had ‘designed an auction process … that aimed to maximise efficiency, competitive outcomes and the full utility of this spectrum for 5G.’³⁹ It concluded that these goals were reflected in the auction outcome. The high-level outcomes cited by the ACMA at the conclusion of the auction were:

• all 350 available lots were sold;
• total revenue of $853 million;
• four companies won spectrum; and
• licences won would commence in March 2020 and extend until December 2030.

3.30 Subsequent to the completion of the 3.6 GHz auction, in July 2019 the department documented a consolidated list of objectives for the proposed 26 GHz band reallocation process:

• supporting the deployment of 5G technologies;
• promoting competitive market outcomes for the long-term benefit of consumers;
• promoting the efficient allocation and use of spectrum;
• promoting co-existence with existing services;
• supporting technological innovation and a range of wireless broadband use cases; and
• encouraging investment in infrastructure, including in regional Australia.

Consistency of auction outcomes with the objectives of the reallocation approach

3.31 The auction outcomes were analysed by the ANAO against the various objectives for the auction. The detail of this analysis is included in Appendix 4.

3.32 The auction outcomes were consistent with the object of the Radiocommunications Act. They were largely consistent with the Australian Government’s communication policy objectives. Some events occurring during the reallocation process distorted market conditions, which resulted in lots being sold at reserve (starting) prices in metropolitan areas (refer paragraphs 3.17 to 3.23). This was not consistent with the expected competitive market outcomes identified during preparation processes.

3.33 The auction outcomes were largely consistent with the priorities set out in the Principles for Spectrum Management, except for incomplete identification of potentially affected licensees and that the incorporation of existing 3.4 GHz holdings into the reallocation limits impacted the ability of several bidders to participate in metropolitan and regional markets for the auction (refer paragraphs 2.24 to 2.26, and 2.60 to 2.71 respectively).

3.34 The auction process was consistent with the objectives set out in 5G – Enabling the Future Economy, as the auction was completed in a timely manner.

Financial consequences

3.35 The 3.6 GHz auction was designed to sell spectrum at the price where supply equalled demand. However, the minister (and his department) and the ACMA had influence over several supply, demand and pricing factors. In particular:

• on the advice of the ACMA, the minister determined the amount that was available to be reallocated — 125 MHz represented the whole of the available spectrum in the 3.6 GHz band, however a lesser amount of spectrum within this band could have been auctioned, or a greater amount (by including additional spectrum from outside this band);
• the minister, on advice from the Australian Competition and Consumer Commission (ACCC) and the department, chose to include holdings in the 3.4 GHz band within the allocation limits, which had the effect of restricting potential bidders’ ability to acquire spectrum in the 3.6 GHz band (refer paragraph 2.67); and
• the ACMA set reserve (starting) prices which impacted on revenues achieved from the auction. The setting of reserve (starting) prices was based on a detailed analysis of a range of factors, including; an assessment of the market, allocation limits, tolerance for unsold lots, differences between metropolitan and regional lots and strategic demand reduction.

3.36 There were a number of issues that arose during the reallocation process that, when combined with these factors, had the potential to impact on competition in the market and consequently the financial outcome of the 3.6 GHz band auction. These have been previously identified in this report as:

• the decision by TPG and VHA to use a joint venture to bid at the auction, which effectively reduced the number of assumed bidders by one. The department indicated that during planning it expected only three likely auction participants in Sydney and Melbourne and only two primary bidders for regional spectrum. The decision by TPG and VHA impacted the level of demand (refer paragraphs 3.17 to 3.23); and
• the decision to include holdings in the 3.4 GHz band in the allocation limits for the 3.6 GHz auction, which effectively reduced the potential bidders’ ability to acquire spectrum in a number of geographies. For example, Optus and the NBN were unable to bid for spectrum in metropolitan areas because of existing holdings in the 3.4 GHz band (refer paragraph 2.67).

3.37 When the department considered these issues, it recognised that the likely result of the proposed merger between TPG and VHA would be that lots were sold at reserve (starting) prices and that this was considered to be ‘suboptimal’. The department advised the minister to continue with the auction noting that this would allow the Australian Government to deliver on its commitment to bring 5G spectrum to market as quickly as possible.

3.38 The outcomes of the 3.6 GHz auction in $/MHz/pop⁴⁰ are shown at Figure 3.2.

Figure 3.2: 3.6 GHz auction outcomes — realised $/MHz/pop

Source: ANAO analysis.

3.39 Figure 3.2 shows that:

• all metropolitan lots sold at the metropolitan reserve price of $0.08/MHz/pop, except for Perth Lower, where a lower reserve price was set to adjust for an incumbent operator (Perth earth station) continuing to use this band; and
• all of the regional lots sold above the regional reserve price of $0.03/MHz/pop:
  • the average price achieved in regional areas resulted in the auction of regional lots achieving an average of $0.46/MHz/pop; and
  • Regional WA sold at 2.6 times reserve price and Regional SA and Regional Southern/Western NSW sold at approximately 50 times reserve prices. On average, spectrum lots in regional areas sold at approximately 25 times reserve prices.

3.40 The fact that lots in some areas sold at reserve (starting) prices does not imply that the most efficient use of the 3.6 GHz band was not achieved. However, it indicates that there may have been financial consequences resulting from changes in the competitive landscape in the lead up to the auction.

3.41 Table 3.1 sets out the range of multipliers of reserve prices achieved across the 14 metropolitan and regional areas.

Table 3.1: Range of multipliers of reserve prices

Note a: The Perth metropolitan area was split into Perth Upper (9 lots) and Perth Lower (16 lots).

Source: ANAO analysis.

3.42 Table 3.1 shows that all metropolitan areas sold at the associated reserve price, and that regional areas sold at multiples of between 2.61 and 50.21 of the associated reserve price. The average multiplier of reserve prices in the regional areas was 24.62.⁴¹

3.43 The changes in the competitive landscape in the lead up to the auction meant that all metropolitan area lots were sold at reserve prices. The department and the ACMA were limited in their ability to respond to these changes because of the restrictive nature of the legislation and the legislative instruments which formed the basis of the reallocation.

3.44 The sale of the metropolitan area lots at reserve prices resulted in suboptimal financial outcomes for these lots, as the reserve prices were set to reflect the ACMA’s ‘low-tolerance for unsold lots’ and were lower than expected commercial valuations.

3.45 The outcomes of the 3.6 GHz band auction were analysed by this audit to provide an assessment of the potential scale of financial consequences emerging from the changes in the competitive landscape and the department’s and the ACMA’s inability to respond.

3.46 The analysis was based on two models:

• taking the lowest multiplier of reserve prices achieved in the regional areas and applying this to metropolitan areas; and
• calculating the average price of lots ($/MHz/pop) achieved in the regional areas and applying this to the metropolitan areas.

3.47 This analysis is intended to show the impact that a relatively low level of competition had on the financial outcomes of the 3.6 GHz band auction in the metropolitan areas. These models have limitations, as the level of revenue achieved would be affected by a range of other factors including each potential bidder’s intended strategy and use of the spectrum, available funding and other financial constraints.

3.48 The results of the analysis are shown in detail in Appendix 5. In summary, the results indicate that:

• had the metropolitan areas achieved the lowest multiplier of reserve prices achieved in the regional areas, the revenue from the auction would have been $1.1 billion, which would have constituted an increase of more than $253 million on actual revenue; and
• had the metropolitan areas achieved the average price ($/MHz/pop) achieved in regional areas, the revenue from the auction would have been $1.6 billion, which would have constituted an increase of more than $750 million on actual revenue.

3.49 The analysis suggests that there were material financial consequences from the unexpected lower competitive environment in metropolitan areas. As stated in paragraphs 3.21 to 3.23, the department and the ACMA did not appropriately consider these financial consequences in decision making in response to issues emerging during the auction preparation and execution period.

Have relevant learnings from the 3.6 GHz process been incorporated into the preparation process for future reallocations?

3.50 Both the department and the ACMA have conducted formal lessons learnt processes. The ACMA has also engaged with industry to obtain feedback on bidders’ experience with the auction process.

The department

3.51 In February 2019, the department conducted a workshop to identify lessons learnt from the 3.6 GHz reallocation. All departmental staff involved in the 3.6 GHz reallocation process were involved in the lessons learnt exercise. The focus of the workshop was to identify the strengths, key challenges and opportunities for improvement coming out of the reallocation process.

3.52 The key strengths identified by the department related to, the early establishment of probity arrangements, maturing relationships with the ACMA, ACCC and Australian Government Solicitor, risk and issues management, robust advice to the minister, strong team arrangements and the testing of innovative policy approaches.

3.53 The key challenges identified by the department were in relation to the diversity of views within industry about shared use and the timing of the reallocation process; clarity about the role of the department and the ACMA and the ACCC in relation to regulatory risk, amateur licences and synchronisation, probity arrangements and logistics, the timing of release for information and uncertainty over staffing and resourcing.

3.54 The opportunities for improvement identified by the department included:

• holding a lessons learnt session with the ACMA;
• creating a ‘how-to’ guide for the allocation processes;
• ensuring all agencies involved have a shared understanding of policy and trade-offs;
• taking a project management approach to the reallocation process;
• building and maintaining allocation process capability; and
• working with the ACMA to ensure its planning papers provide robust analysis.

3.55 As at September 2019, the department has prepared and is implementing a Guide for policy officers working on spectrum reallocation declarations and spectrum licence auctions. This guide provides for the implementation of a project management approach to spectrum auctions and incorporates the lessons learnt from the 3.6 GHz band auction. The department has developed a detailed Gantt Chart for the implementation of the 26 GHz reallocation process that includes the identified lessons learnt. Whilst the guide and the Gantt Chart include the department, the ACMA and other stakeholders, they were not prepared or agreed in conjunction with these stakeholders.

The ACMA

3.56 In May 2019 the ACMA developed an End of Project Report which included a chapter on lessons learnt and a final risk register for the 3.6 GHz process. The lessons learnt were drawn from feedback from bidders and general observations on the reallocation process.

3.57 The lessons learnt identified 12 events that were classified as ‘went well’ and 24 events that were classified as ‘could be improved’. The events were categorised into:

• auction rules — which focused on technical aspects of the interaction between the ACMA and bidders during the auction;
• auction system — which focused on the auction system itself and the software for managing the auction;
• schedule and reporting — which focused on timing and execution of key processes;
• starting prices — particularly the timing of when reserve prices were set; and
• communication — which focused on communication with bidders and the department.

3.58 The ACMA has identified a range of actions aligned to each of the events/observations that are intended to be incorporated by the relevant team at the relevant time in the 26 GHz band reallocation process. As at September 2019 there were no specific timelines for the implementation, or individual action owners to implement the actions or monitor their completion.

Appendix 1 Entity responses

Department of Communications and the Arts

ANAO comment on the Department of Communications and the Arts response

1. Paragraph 2.13 footnote 18 states that accountable authorities of Commonwealth entities have a responsibility under paragraph 15(1)(a) of the PGPA Act to govern an entity in a way that promotes the proper use of Commonwealth resources for which the authority is responsible. As noted in paragraph 3.27, the object of the Radiocommunications Act is to ‘maximise…the overall public benefit derived’. The ANAO analysis reflects that this broad legislative objective encompasses a range of factors including potential financial consequences. As noted in paragraph 3.37, the department considered the potential financial consequences of the proposed merger between TPG Telecom (TPG) and Vodafone Hutchinson Australia (VHA) on the 3.6 GHz auction process and concluded they were likely to be ‘suboptimal’.

2. The implications of incorporating existing 3.4 GHz holdings into the allocation limits for the auction are discussed at paragraphs 2.60 to 2.71. Table 2.3 note 2 references that, in setting the allocation limits, existing holdings were rounded down to the nearest 5 MHz if they fell between multiples of 5 MHz. Paragraph 2.69 notes the department’s stated position on the ability for commercial trading (to overcome any inequitability) of 3.4 GHz holdings prior to the auction taking place.

3. In paragraph 3.47 the ANAO recognises the limitations of the analysis of potential financial consequences and indicates some of the other factors that could have had an effect on financial outcomes.

Australian Communications and Media Authority

ANAO comment on the Australian Communications and Media Authority response

4. As noted in paragraph 3.37, the department considered the potential financial consequences of the proposed merger between TPG and VHA on the 3.6 GHz auction process and concluded they were likely to be ‘suboptimal’.

5. In paragraph 3.45 the ANAO notes that the objective of its analysis was to provide an assessment of the potential scale of financial consequences emerging from changes in the competitive landscape.

6. Paragraph 2.62 states that the minister requested advice from the ACCC on whether he should direct the ACMA to impose appropriate allocation limits for the auction of the 3.6 GHz band and, if so, what the allocation limits should be. Paragraph 2.63 outlines the ACCC’s advice in this regard, and paragraph 2.64 outlines the department’s final advice to the Minister, which proposed an alternative set of allocation limits to that recommended by the ACCC, on the basis that these alternative limits would provide better coverage of ‘all Government communications policy objectives’.

Appendix 2 The Australian Communications and Media Authority Act 2005

The ACMA’s spectrum management functions as outlined in section 9 of the Australian Communications and Media Authority Act 2005 (ACMA Act) are as follows:

1. to manage the radiofrequency spectrum in accordance with the Radiocommunications Act 1992;
2. to advise and assist the radiocommunications community;
3. to report to and advise the Minister in relation to the radiocommunications community;
4. to manage Australia’s input into the setting of international standards for radiocommunications (except so far as Standards Australia is responsible for managing that input);
5. to make available to the public information about matters relating to the radiocommunications community;
6. to conduct public educational programs about matters relating to the radiocommunications community;
7. to give advice to the public about matters relating to the radiocommunications community;
8. such other functions as are conferred on the ACMA by or under:
   
   1. the Radiocommunications Act 1992 (other than a provision of that Act covered by paragraph 10(1)(p)); or
   2. the Radiocommunications (Receiver Licence Tax) Act 1983; or
   3. the Radiocommunications (Spectrum Licence Tax) Act 1997; or
   4. the Radiocommunications Taxes Collection Act 1983; or
   5. the Radiocommunications (Transmitter Licence Tax) Act 1983; or
   6. Part 14AA of the Broadcasting Services Act 1992;
9. to monitor, and to report to the Minister on, the operation of each Act specified in paragraph (h), to the extent it is so specified;
10. to do anything incidental to or conducive to the performance of any of the above functions.

Appendix 3 Assessment of process consistency with legal obligations under the Radiocommunications Act

1. The specific requirements contained in the Radiocommunications Act that were relevant to the planning for the reallocation of 3.6 GHz spectrum, and the results of the assessment of the consistency of the process with these requirements, are set out below.

Table A.1: Assessment of process consistency with legal obligations under the Radiocommunications Act

Source: ANAO analysis of the Radiocommunications Act and the department and the ACMA responses.

Appendix 4 ANAO assessment of the achievement of objectives for the 3.6 GHz reallocation process

Appendix 5 Analysis of financial consequences

1. The table below sets out the actual revenue compared to the revenue that would have been achieved if spectrum in the metropolitan areas had sold at the lowest multiplier of reserve (starting) prices (i.e. 2.61) in the regional areas.

Table A.2: Total revenues — metropolitan areas achieving the lowest multiplier of reserve prices achieved in regional areas

Note a: This revenue excludes revenue from the assignment stage.

Source: ANAO analysis.

2. The table above shows that had the metropolitan areas achieved the lowest multiplier of reserve (starting) prices achieved in the regional areas, the revenue from the auction would have increased by more than $253 million.

3. Table A.3 sets out the actual revenue compared to the revenue that would have been achieved if spectrum in the metropolitan areas had sold at the average $/MHz/pop achieved in the regional areas.

Table A.3: Total revenues — metropolitan areas achieving the average $/MHz/pop in regional areas

Note a: This revenue excludes revenue from the assignment stage.

Source: ANAO analysis.

4. Table A.3 shows that had the metropolitan areas achieved the average $/MHz/pop as was achieved in the regional areas, the revenue from the auction would have increased by more than $750 million.