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Review of rental arrangements for Crown land communication tower sites

Background material for the public round table

I N D E P E N D E N T P R I C I N G A N D R E G U L A T O R Y T R I B U N A L O F N E W S O U T H W A L E S

I N D E P E N D E N T P R I C I N G A N D R E G U L A T O R Y T R I B U N A L O F N E W S O U T H W A L E S

Review of rental arrangements for Crown land communication tower sites


Other Paper OP25 ISBN 1 920987 15 0

February 2005

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

Inquiries regarding this paper should be directed to Anna Brakey (02) 9290 8438

Independent Pricing and Regulatory Tribunal of New South Wales Level 2, 44 Market Street, Sydney NSW 2000

Ph 02 9290 8400 Fax 02 9290 2061 www.ipart.nsw.gov.au

ALL CORRESPONDENCE TO: PO BOX Q290, QVB POST OFFICE NSW 1230

TABLE OF CONTENTS

1 INTRODUCTION 1 1.1 Terms of Reference 1 1.2 Primary users and co-users 2 1.3 Process and timetable 2

1.3.1 The Issues Paper 2 1.3.2 The round table 3 1.3.3 Draft and Final Reports 3

1.4 This background material 3

2 CRITERIA FOR ASSESSING ALTERNATIVE ARRANGEMENTS 4 2.1 Efficient pricing principles 4

2.1.1 What is the value of a site to the land management agencies? 4 2.1.2 What is the value of a site to a user? 5

2.2 Fair allocation of benefits from site use 5 2.3 Negotiation and enforcement costs and administration 6 2.4 Ensuring efficient investment 6 2.5 Maximising use and minimising proliferation of sites 6

3 CO-USER FEES 7 3.1 Fee per co-user collected via primary users 7

3.1.1 Advantages 7 3.1.2 Disadvantages 7

3.2 Fees collected directly from co-users 7 3.2.1 Advantages 8 3.2.2 Disadvantages 8

3.3 Annual rental 8 3.3.1 Advantages 8 3.3.2 Disadvantages 8

4 DIFFERENTIAL PRICES 9 4.1 What is differential pricing? 9 4.2 Uniform pricing 9


4.3 Charging different users different prices 10 4.3.1 Advantages 10 4.3.2 Disadvantages 11

5 RENTAL ARRANGEMENTS 12 5.1 Case by case negotiation 12


5.2 Pricing formula 13 5.2.1 Advantages 13 5.2.2 Disadvantages 14

5.3 Revenue sharing 14 5.3.1 Advantages 14 5.3.2 Disadvantages 14

5.4 Published price schedule 15 5.4.1 Advantages 15 5.4.2 Disadvantages 15

6 SUMMARY OF KEY ISSUES FOR DISCUSSION 15


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1 INTRODUCTION

The Independent Pricing and Regulatory Tribunal (the Tribunal) is conducting a review of the rental arrangements for communication tower sites on public land in NSW (the Review), under section 9 of the Independent Pricing and Regulatory Tribunal Act 1992 (the IPART Act). The Tribunal published an Issues Paper, inviting comment on the key matters for consideration under the Review, in September 2004.1 This Discussion Paper provides a more detailed examination of several key issues for discussion at the Review round table on 9 March 2005.

1.1 Terms of Reference The Review considers the Crown land used for communication tower sites administered by the land management agencies2 and utilised by the Department of Commerce, representing certain government agencies. The Terms of Reference require the Tribunal to report on an effective and efficient framework that would allow the NSW Government to obtain fair market-based commercial returns for these sites that reflect the benefits realised by all users of the sites. In addition the Tribunal is required to have regard for the related objectives of: • maximising the use of the sites; • minimising proliferation of the sites; and • not impacting adversely on the potential investment in telecommunications and

related communications services using the sites. The Review is intended to develop a broadly consistent government policy covering tenure, licensing and rental fees to apply to primary and co-users of sites. The Terms of Reference require the Tribunal to examine the merits of: • developing a consistent ‘commercial’ fee regime for primary users, reflecting the

strategic nature of sites and the status of the occupier, with a potential option to consider a site control fee in addition to site rental fees;3

• applying site rental fees to co-users that, if practical and permissible, may be recovered from the primary user; and

• developing consistent approaches, where feasible, to network licensing, tenure, rental adjustments and reviews, instrument transferability and other related matters.

The Tribunal will report its findings to the Minister for Commerce, the Minister for Environment, the Minister for Primary Industries and the Minister for Lands. The Tribunal will publicly release its final report after it has been presented to the Ministers.

1 Independent Pricing and Regulatory Tribunal, Review of Rentals for Crown Land Communication Tower Sites:

Issues Paper, September 2004 (the Issues Paper). 2 The Department of Lands, Forests NSW and the Parks and Wildlife Division, Department of Environment

and Conservation, referred to jointly as the land management agencies. 3 A site control fee is an additional levy that could be imposed in addition to the site rental.

Independent Pricing and Regulatory Tribunal

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1.2 Primary users and co-users The party contracting with the land management agency for access to the site to develop communications infrastructure is known as a primary user. Primary users usually construct and own the tower at the site. They often offer other users, known as co-users, access to their sites and associated infrastructure for an agreed fee. Co-users usually install equipment on the primary user’s tower, and may also install other equipment in the primary user’s equipment shelter or construct their own shelter. Many users act as a primary user at some sites and a co-user at other sites across their network. Throughout this report we refer to the party that has the primary relationship with the land management agency as the primary user. Primary users often invest significant amounts developing sites and associated infrastructure. The infrastructure and associated costs are outside the scope of this Review – rather, the Tribunal is concerned with the land rental arrangements.

1.3 Process and timetable The Premier requested the Tribunal undertake the Review in July 2004.

1.3.1 The Issues Paper The Tribunal published an Issues Paper in September 2004. The Issues Paper outlined the scope of the Review and invited comment on the range of issues to be considered, classified broadly as occupancy matters and rental and fee matters. The Tribunal received 23 public submissions in response to the Issues Paper. There was broad agreement among respondents on several issues raised in the Issues Paper: • applying leases or licenses to networks of sites is not practical. Stakeholders were

broadly comfortable with umbrella or master agreements between parties, applied on a site specific basis;

• the importance of security was recognised and it was generally agreed that the term of the occupancy should be around 20 years (consistent with current practice); and

• instruments should be transferable, with the consent of the relevant authority. The submissions indicated a wide range of views in relation to: • automatic right of renewal for incumbents on existing sites; • the type of instrument (lease versus licence); • the application and collection of co-user fees; • the benefits of differential pricing for Government users; and • the appropriate mechanism for setting site rentals.


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1.3.2 The round table The Tribunal will hold a public round table on 9 March 2005. The purpose of the discussion is to enable more detailed consultation with key stakeholders on three key issues for the Review through presentations, responses from key stakeholders and general discussion. The accompanying documentation includes the agenda and outlines the process for the discussion. The Terms of Reference covers a range of issues, including rental and contractual arrangements. However, the Tribunal would like to use the round table to seek specific stakeholder inputs on three key issues: • How should rentals that reflect the benefits from co-users utilising their sites be

determined? • Should pricing differentiate between different types of users? • What is the optimal mechanism for setting site rentals? The Tribunal’s Draft Report will address the whole Terms of Reference, including the three issues discussed at the round table. The Tribunal recognises the importance of contractual arrangements including term and security of tenure, and the relationship between contractual arrangements and rentals, and is continuing to analyse these issues.

1.3.3 Draft and Final Reports Following the round table discussion the Tribunal will produce a Draft Report, which will set out the Tribunal’s analysis of the issues in the Terms of Reference and draft recommendations. Further submissions will be invited following the publication of the Draft Report. The Tribunal will produce its Final Report to the relevant Ministers before releasing it publicly.

1.4 This background material This background material is intended to inform and focus the discussion at the round table. It is structured as follows: • section 2 considers the criteria for assessing alternative rental arrangements, based on

the objectives set out in the Terms of Reference; • section 3 discusses determining rentals that reflect the benefit from co-users utilising

their sites; • the merits of charging different prices for different types of users is considered in

section 4; • section 5 assesses options for rental arrangements; and • the issues for discussion are summarised in Section 6.


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2 CRITERIA FOR ASSESSING ALTERNATIVE ARRANGEMENTS

The Terms of Reference for the Review provide guidance on the criteria that should be applied when assessing alternative rental arrangements. The Tribunal is concerned with developing a set of rental arrangements that: • are consistent with efficient pricing principles; • deliver a fair allocation of the benefits arising from use of the sites; • minimise the costs of negotiating and enforcing contracts, and to this end are simple,

transparent and cost reflective; • ensure efficient investment in the industry; and • promote efficient utilisation of community assets, by maximising site utilisation and

minimising site proliferation. We discuss each of these criteria in more detail below.

2.1 Efficient pricing principles It is important that any framework recommended by the Tribunal is consistent with the principles of efficient pricing. Allocative or price efficiency is concerned with ensuring that society’s scarce resources are allocated to their highest value use. Prices will be allocatively efficient if the outcome of the agreement is that both parties are better off than if they did not enter into an agreement. The maximum a user would be prepared to pay for a site is the benefit they derive from using the site. The minimum the land management agencies would be prepared to accept for a site is the value of the site in its next best use. Mutually beneficial agreements can therefore take place at prices between the value of the site to the land management agency (the opportunity cost) and the value of the site to the user (the willingness to pay). The difference between the value of the site to the user and the land management agency is the potential ‘surplus’ from the transaction. Any price within this range can be considered efficient. Section 2.2 discusses the fair allocation of this surplus.

2.1.1 What is the value of a site to the land management agencies? The value of a site to the land management agencies is a function of the next best alternative use for the land. If the alternative for the land management agencies is that the site remain as Crown land then the value will depend on alternative uses, including for example the development of plantations (in the case of Forests NSW), leases for other purposes or maintenance of the land for recreation or conservation use4. Any rental that is payable should at least be sufficient to compensate the public for the use of the Crown land in question, in addition to any costs that are triggered as a consequence of the agreement.

4 This would reflect the intrinsic value that the community attaches to the land in recreation or

conservation use, which may be difficult to value, particularly for areas of special environmental significance. This proposition was explored in the Tribunal’s decision on waterfront Crown land (Independent Pricing and Regulatory Tribunal, Review into Rentals for Waterfront Tenancies on Crown Land in NSW, April 2004), where it was recognised that the community may place a significant value on waterfront land on Sydney’s waterways.


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It may be that a site is of interest to several alternative primary users. In this case the reservation value of the land to the land management agencies is represented by the rental that could be collected from the alternative primary user.

2.1.2 What is the value of a site to a user? The value of the site to a user will be a function of the benefits the user derives from the site and the availability and cost of an alternative site: • the benefit a user derives from a site depends on the type of user and the way it

proposes to use the site. For example, site users that earn revenue from on-selling communication services will not be prepared to pay more than the profit they expect to earn in the downstream market. The value of the site to a primary user will also be a function of the revenue it can earn by providing access to co-users (after allowing for the costs of developing and maintaining infrastructure made available to co-users); and

• a user will not be prepared to pay more for a site than the cost of accessing an alternative site that provides the same (or similar) services. In some cases there may be few substitutes for the site under negotiation, or the use of other sites may involve significant additional expenses.5 In these cases the user will have a relatively high willingness to pay for a site, because the alternatives are unavailable or can only be developed at significant cost.

2.2 Fair allocation of benefits from site use The Terms of Reference require the Tribunal to consider fair, market-based commercial returns that reflect the benefits realised by all users of the sites. This requires the Tribunal to decide upon a fair allocation of the surplus created by the difference between the value of the site to land management agencies and users. Two extreme allocations are possible. Prices may be set at the land management agency’s opportunity cost, in which case the user retains the entire surplus from the transaction. Alternatively, prices may be set at the user’s willingness to pay, which would mean the land management agency retains the entire surplus from the transaction. It is likely that neither of these extremes would be accepted as representing a fair allocation of the available gains from utilising Crown land. A fair sharing of the benefits of site use involves a sharing of the difference between the value of the site to land management agencies and users. This implies that land management agencies are entitled to a share in the: • benefit that primary users derive from using the site; and • rent that primary users recover from co-users (after allowing for the primary user’s

costs of developing and maintaining infrastructure used by co-users). In practice the difficulty that arises in applying this principle lies in accurately estimating this value as defined by the difference between the land management agency’s opportunity cost and the user’s willingness to pay, as we discuss in Section 5.1.

5 For example, a site may be highly valued because it is well located and the alternatives would require

larger towers (or more sites) to achieve the same coverage.


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2.3 Negotiation and enforcement costs and administration Productive efficiency is concerned with minimising the cost of production. In this case, we are particularly concerned with minimising both the up-front costs of negotiating agreements and the ongoing costs of administering and enforcing agreements. Information obtained from the land management agencies, NSW Government agencies and other jurisdictions indicates that rentals are generally small, both in absolute terms and in terms of the total revenues for the agencies. It follows that the cost of negotiating and enforcing agreements must be kept as low as possible to ensure the community obtains the maximum possible value from the use of these sites. Another aspect of transaction costs concerns the enforceability of the contract. For a contract to be enforceable: • the terms of the contract must be verifiable; and • the costs of enforcement should not exceed the benefits of enforcement. It is important that the land management agencies’ costs of negotiation and enforcement do not outweigh their share of the surplus from the transaction over the life of the agreement. Minimising the costs of negotiating and enforcing contracts is therefore a key consideration in the assessment of alternative arrangements.

2.4 Ensuring efficient investment Dynamic efficiency is concerned with ensuring efficient investment takes place. Efficient investment is likely to be affected by both the: • rental arrangements: the stability and transparency of the rental regime will be an

important consideration in relation to ensuring efficient investment; and • contract terms and conditions: this is an important consideration in the Tribunal’s

ongoing deliberations in relation to contractual arrangements.

2.5 Maximising use and minimising proliferation of sites The Review objectives refer specifically to the complementary objectives of maximisation of site utilisation and minimisation of site proliferation. There are a number of reasons why the minimisation of site proliferation is likely to be pursued almost irrespective of the nature of the pricing arrangements (for example, legislative provisions, planning requirements, industry codes of practice, technical requirements6 and the commercial interests of primary users themselves to maximise site utilisation). The key issue in the consideration of alternatives will be to ensure that the options do not adversely impact on the existing incentives for co-location.

6 Including, for example, Australian Broadcasting Authority requirements for geographic co-location of

broadcasters.


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3 CO-USER FEES

The previous section established that a fair sharing of the benefits of site use implies that the land management agencies are entitled to a share of the fees primary users collect from co-users, after allowing for the cost of developing and maintaining infrastructure used by co-users. The key issue then becomes the most appropriate mechanism to share this revenue: • explicitly, through a fee per co-user collected:

- via primary users; - directly by the land management agencies; or

• implicitly, through the annual rental collected from primary users. We consider the relative merits of the each of these options below.

3.1 Fee per co-user collected via primary users It would be possible for the rental agreements between land management agencies and primary users to be amended so that a fee is charged for each co-user on a site. Different fees could be set for different types of co-users, to accommodate the common practice of differential pricing (discussed in the next section).

3.1.1 Advantages The key advantages of this approach are that: • it facilitates efficient pricing and fair sharing by establishing a relationship between

rentals paid by primary users and fees paid to primary users. The land management agency is able to extract some value from the greater utilisation of the site; and

• it limits the risk of deterring transactions or investment by setting fees for primary users too high because the revenues earned from co-users was over-estimated.

3.1.2 Disadvantages There are several key disadvantages of this approach: • the costs of monitoring and enforcing such a regime are likely to be relatively high.

Primary users will want to recover the costs of administering such a regime. Land management agencies will also need to monitor the number (and type) of co-users to ensure they are receiving appropriate payments;

• co-user fees could provide a disincentive for co-location if the fees are set above the willingness to pay of the co-user; and

• land management agencies are still faced with the difficulty of how to set co-user fees. To accurately set co-user fees estimates of willingness to pay for various co-users, and an analysis of the proportion of co-user fees that should be directed to primary users to recover infrastructure costs and risks, are required.

3.2 Fees collected directly from co-users An alternative would be for the land management agencies to collect fees directly from co-users. The land management agencies attempt to do this now.


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3.2.1 Advantages The key advantages of this approach are: • facilitates efficient pricing and fair sharing, in the same way as collecting co-user fees

via primary users. The choice between these two alternatives relates to the relative costs of administering and enforcing the regimes; and

• there may be some additional advantages in the land management agencies knowing the identity of co-users, in relation to environmental management, access, disputes and debt recovery.

3.2.2 Disadvantages The key disadvantages of this approach are: • the costs of monitoring and enforcing the regime are likely to be high. Enforcement

may be a particular issue given in most cases the land management agencies do not have a contractual arrangement with co-users;

• the risk of deterring co-location by setting fees to high, as discussed in Section 3.1.2; and

• the difficulty setting co-user fees, as described in Section 3.1.2.

3.3 Annual rental It would be possible for no explicit co-user fee to be set, but for primary user rentals to be set according to the principle that there should be a fair sharing of the benefits of site utilisation.

3.3.1 Advantages The main advantage of this approach is that it is likely to minimise the administration and enforcement costs relative to the alternatives.

3.3.2 Disadvantages The key disadvantages of charging an annual rental with no explicit co-user fees are: • the risk of deterring co-location by setting fees to high, as discussed in Section 3.1.2; • the difficulty of estimating co-user fees. Estimates of the number, type and willingness

to pay of co-users are required to implement this approach, while the approaches above only require estimates of co-user fees and rely on actual numbers; and

• the risk that a fair sharing of the benefits is not achieved, because the number and type of co-users is over or under estimated.


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4 DIFFERENTIAL PRICES

Differential pricing is an important consideration for the Review, in relation to the principle of a fair sharing of the net benefits of site use, and therefore the setting of fees for site use. It is therefore necessary for the Tribunal to consider the potential for differential prices for all types of users.

4.1 What is differential pricing? Differential pricing or price discrimination refers to the practice of charging different prices to different types of customers. Price discrimination depends on the ability of the seller to be able to identify groups that value the service differently and are therefore willing to pay varying prices.7 There are many everyday examples of differential pricing. For example, cinemas offer discounts to students or pensioners. Similarly, airlines typically differentiate between classes of travellers, charging higher prices to those customers that value the service more highly (for example, business travellers). Many site owners and primary users currently offer differential prices to co-users. For example, emergency services are often able to negotiate cheaper prices for use of a site compared to broadcasters or mobile carriers. The rationale for charging different users of communication tower sites different prices is based on two key propositions: • a fair sharing of the benefits should recognise that some users value the sites highly

and that the community should appropriate a proportion of this value; and • other users place lower value on sites, and may be discouraged from using sites if

prices are set too high. From the land management agencies’ viewpoint differential pricing maximises the potential number of (and revenue collected from) co-users, which in turn increases the surplus to be shared as part of the site rental arrangements.

4.2 Uniform pricing It would be possible to set a single price for all co-users, regardless of the characteristics of each user.

4.2.1 Advantages The advantages of this approach are that: • uniform pricing is likely to be relatively simple and therefore relatively less costly to

administer; and • it could be argued that exposing inner budget sector agencies to a uniform market

price may encourage resource use efficiency.8 • 7 In economic terms, different price elasticities of demand exist in the different market segments. 8 In this discussion we distinguish between inner sector budget agencies (such as Police) and government

trading enterprises, such as Forests NSW and state-owned corporations such as TransGrid.


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4.2.2 Disadvantages The key disadvantages of this approach are: • it doesn’t recognise that different users value sites differently. Charging a price that

reflects the user’s willingness to pay facilitates site use and maximises the potential co-user revenue to be shared; and

• increasing the rentals land management agencies charge inner budget agencies will mean these agencies will need to apply to the NSW Government for additional funding. This will in turn increase in administration costs.

4.3 Charging different users different prices • An alternative to uniform pricing is to charge different prices to different types of

users, based on estimates of their deemed willingness to pay (see section 2.1.2). Potential categories of users include:

• Government users; • broadcast transmission providers; • radio users; • telecommunication providers; • aggregators/infrastructure providers; • data carrier service providers; • community based organisations; and • other users. • Alternatively, charges could be levied on the basis of the type of infrastructure in place (for example, a mobile phone base station), which is a proxy for the type of user.9

4.3.1 Advantages The key advantages of this approach are: • differential prices facilitate site use. This in turn maximises the potential surplus from

the transaction to be shared between the land management agencies and primary users; and

• avoids the administration costs associated with the government adjusting budgets for both government users and the land management agencies.

9 SPI Powernet issues a price list based on the type of infrastructure in place and the geographic location of

the sites.


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4.3.2 Disadvantages The key disadvantages of this approach are: • estimating the value of a site to Government users is not straightforward. Many

Government users, such as emergency services do not earn revenue in a downstream market which means that their willingness to pay for communication sites cannot be directly linked to a commercial value;10 and

• raises administration and enforcement costs relative to uniform pricing. For example, identification of different types of users is not always easy - many Government users use the centrally administered Government Radio Network.

10 The willingness to pay of an inner budget sector agency will be determined by a combination of factors,

including the organisation’s operational obligations and the expectations of budgetary supplementation in order to ensure the effective provision of core services.


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5 RENTAL ARRANGEMENTS

In this Section we assess four options for the rental of communication tower sites. A key distinguishing characteristic of the options is the scope for pricing discretion, and relatedly the associated administrative costs. The four options are: • case by case negotiation: parties bilaterally negotiate the rental arrangements for each

site; • revenue sharing: the land management agency would collect a proportion the profit of

the primary user, including a proportion of the fees that the primary user collects from co-users;

• pricing formula: site rentals are calculated based on a pre-determined formula; and • price schedule: land management agencies publish a schedule of rental fees. Sites are

made available at these fees on a ‘take it or leave it’ basis. We discuss these rental arrangements in the context of primary users, but the same options also exist in the setting of co-user fees. It would also be possible to introduce some degree of differential pricing under all options, via flexibility in negotiations, relating rentals to willingness to pay via a formula or by establishing schedules of prices for different types of users.

5.1 Case by case negotiation Under this option negotiations would take place on an ad hoc basis with users. This is the approach historically applied in relation to the rental arrangements for NSW Crown land communication tower sites. Some of the land management agencies have developed price schedules used to inform their negotiations.

5.1.1 Advantages The main advantage of this approach is that case by case negotiations provide land management agencies and users with the greatest flexibility in negotiations. Negotiated prices will by definition be efficient. The fairness of the prices depends on the negotiating strengths of the parties, including their access to relevant information.

5.1.2 Disadvantages The main disadvantages of this approach are: • negotiation and information gathering costs could consume much of the surplus

allocated to the land management agencies. Effective negotiations require the land management agency to have a sound understanding of the value a user places on a site. Users will understand this and have an incentive to downplay the commercial value of the site. The challenges for the land management agencies in determining willingness to pay of users are compounded by the fact the downstream market that is characterised by rapid technological development and significant structural change and that the rental of communication sites is not a ‘core business’ for the many of the land management agencies; and

• there is a risk that case by case negotiations can lead to a range of inconsistent terms and conditions across the industry, which could entrench high transactions costs in the future. This is one of the concerns that led to the current Review.


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There are a number of possible approaches that may be adopted to reduce the costs associated with negotiating and monitoring agreements: - use of independent valuations or price schedules to guide the negotiations; - develop a single standard agreement for all land management agencies and

potentially also Department of Commerce users; and - centralise management of the Government’s portfolio of communication tower

sites on Crown land.

Importantly, standardisation of contractual arrangements and centralised management could also be implemented under the options discussed below.

5.2 Pricing formula An alternative model involves deriving a formula that can be used to calculate rentals for each site. A number of different approaches could be used to develop an estimate of the rental fee. The simplest approach to developing a pricing formula would be to relate the site rental to some observable market value. The Tribunal was able to determine a pricing formula for lease of waterfront tenancies for private use because there was an active trade in parcels of land that were proximate to these tenancies which were sufficiently similar in character to allow the calculation of a suitable proxy (the precinct statutory land value).11 The same relationship does not exist in relation to land management agency communication tower sites. In some cases, there will be few, if any, land sales in the precinct and where these land sales occur, for example farmland, the sale values will bear no systematic relationship to the value of communication sites to users. An alternative approach could be to quantify the value derived from each key value driver. It may be possible to estimate a users’ value for a site as a function of key parameters including the contract terms and conditions, the technology used on the site and the population of geographic coverage from the site.

5.2.1 Advantages The main advantages are: • a formula may increase the certainty in relation to prices for sites, facilitating

investment; and • a formula allows some flexibility for prices to vary to reflect differences in key value

drivers between users and sites.

11 Independent Pricing and Regulatory Tribunal, Review into Rentals for Waterfront Tenancies on Crown Land in

NSW, April 2004.


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5.2.2 Disadvantages The key disadvantage with this approach is the difficulty in establishing a meaningful formula: • surrounding land values will not reflect the potential value of communication sites to

users, and are therefore unlikely to result in a fair sharing of benefits; and • developing a relationship between site and user characteristics is not straightforward.

Estimating a rental fee as a weighted function of key value drivers may create a false sense of precision.

5.3 Revenue sharing An alternative pricing approach is to set a rental fees on the basis of a proportion of revenues earned by the primary user. The revenue sharing model could incorporate: • a proportion of the revenues that the primary user earns through its business activity.

The assumption of this approach is that the revenues earned by the user are a reasonable measure of the benefit from using the site. The Australian Broadcasting Authority adopts a similar approach in the charging of some licence fees; and

• a proportion of the revenue that the primary user earns from co-users, less a charge that reflects the value of the infrastructure development and site management costs provided by the primary user. This is consistent with the fee per co-user collected via primary users option discussed in Section 3.1.

5.3.1 Advantages The main advantages of this approach are: • it allows the prices to be determined with reference to the actual benefits of site use,

reducing the risk of inefficient prices and ensuring a fair sharing of benefits. Under ideal circumstances (eg perfect information) a revenue sharing model is likely to be the preferred option; and

• the co-user revenue sharing model could be offered to primary users as an alternative to the application of a prescribed fee schedule. However, primary users may be reluctant to reveal actual revenues since this information could improve the bargaining position of land management agencies in subsequent rounds.

5.3.2 Disadvantages The revenue sharing model has several disadvantages: • it is demanding in terms of the informational requirements and may be considered to

be too intrusive given the relative magnitude of the benefits; • given the evidence of difficulties experienced in obtaining accurate information from

primary users regarding the identity of co-users there is some doubt regarding feasibility of this approach; and

• this approach could not be uniformly applied. Arrangements would need to be developed to charge non-revenue earning users, such as inner budget sector agencies and community groups.


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5.4 Price schedule A more prescriptive arrangement would be to publish or post prices. Users would be required to pay the published fee if they elected to rent a site (or sites). It may also be possible to combine this approach with the use of additional negotiated fees for particular high value sites. Guidelines would need to be established to make clear when it would be appropriate to augment the fee schedule with additional negotiated charges. Alternatively, it may be possible to establish price schedules that differentiate geographically between regions or zones. This approach is adopted by the land management agency in British Columbia.12 Alternatively, the agencies could develop a standard price schedule to apply in the same manner, but not make it public.

5.4.1 Advantages The key advantages of a published price schedule are: • increased certainty in relation to prices for sites, facilitating investment; and • lower negotiation costs by eliminating the bargaining process that might otherwise

take place.

5.4.2 Disadvantages The key disadvantages are that: • a fixed price schedule creates the risk that prices may be above the willingness to pay

of users which could lead to some potentially beneficial contracts for use not being entered into. Similarly, there is a risk that prices may be set too low and therefore be inconsistent with a fair sharing of the benefits of site use. One option to reduce the risk of getting prices wrong would be to set a number of different fees for different: - types of users (as discussed in Section 4): for example, commercial users,

Government users and tax exempt users; and - site locations: for example, metropolitan, regional or rural.

• the problem of estimating the rentals to be included in the schedule remains. One option is to use an independent valuer to inform the development of the schedule. It is likely that the schedule would require periodic updating, and consideration must be given to consistency and stability to avoid adverse effects on investment.

6 SUMMARY OF KEY ISSUES FOR DISCUSSION

• Is it practical and permissible for land management agencies to levy co-user fees? If so, how should these be recovered?

• Should pricing differentiate between different types of users? • What is the optimal mechanism for setting site rentals:

- Prices negotiated on a case-by-case basis? - Prices calculated according to a pre-determined formula? - Prices based on sharing the revenue of the primary user? - Prices published on a take it or leave it basis?

12 The land management agency in British Columbia applies three zones – zone 1 (urban), zone 2 (semi-

urban) and zone 3 (remote).

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