Royalty-Based HK 3G Auction To Facilitate Financing-Fitch

date: 21st February 2001, source by: dowjones.com

The Hong Kong government's decision to issue third generation mobile licenses through a royalty-based auction will be positive for the successful bidders as it will make it easier to obtain financing because it reduces the fixed-cost burden, rating agency Fitch said in a report issued Wednesday.

At the same time, though, Fitch believes the requirement for the license winners to open up at least 30% of their networks to operators without their own infrastructure will likely make the licenses less attractive.

According to Fitch's Dhileepan Parameswaran, non-license holders - also called Mobile Virtual Network Operators - are likely to only want to pay for part of the networks if 3G proves successful. And this is still a big unknown.

"Network operators are getting hit both ways - if they are successful they will be forced to sell and if not successful they will be forced to keep (parts of their networks)," Parameswaran said, brushing aside arguments that the open network environment will provide network operators with a steady cash stream.

"It (the open network requirement) doesn't reduce the underlying business uncertainties and hence doesn't ease access to financing," Fitch said in the report.

The royalty-payment system, however, is fair, Fitch said, especially because the government will charge all the winners of Hong Kong's four licenses the same royalty. The government will partly share the fortunes of the 3G business, both on the upside and the downside, although on the downside it will be protected by a guaranteed minimum payment, it added.

Under a royalty-based system, telecom operators will pay a percentage of their future annual revenues instead of an upfront license fee for the right to operate a 3G network.

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