Brazilian 5G Bidding Call - XI - Consequences of the Federal Accounting Court (TCU) Final Decision

Brazilian 5G Bidding Call - XI - Consequences of the Federal Accounting Court (TCU) Final Decision

In Brazil, led by the National Telecommunications Agency (“ANATEL”), is advancing the process which will auction radio frequencies in the 700 MHz, 2.3 GHz, 3.5 GHz, and 26 GHz bands, establishing important guidelines for the implementation of mobile telephony networks with 5th generation technology (“5G”) in the country and the increase of connectivity in the Brazilian territory.

The date on which the auction will be held remains pending confirmation, although there is an expectation that it could take place in October 2021.

The wording of the bidding public notice will only be deemed definitive at the time of its official publication, but the establishment of several of its aspects depended, in part, on the assessment of the Federal Accounting Court (“TCU”) regarding the draft that had been approved by ANATEL in the first half of this year.

In order to allow due consideration by the Ministers of the TCU, the Office for Inspection of Water Infrastructure, Communications and Mining (“SeinfraCOM”) of this Court conducted an extensive technical analysis of the approved wording, as well as of its base documents, finally exposing its understanding that several adjustments would be needed. There was also a statement by the Prosecution Office with the TCU based on the available documents, which were later forwarded to the Reporting Minister of the process, Raimundo Carreiro, for assessment and preparation of a vote. 

The Reporting Minister’s vote was presented to the other Ministers in a full court session held on August 18. On the same occasion, Minister Aroldo Cedraz requested access to the case records, alleging the need to evaluate certain SeinfraCOM notes, such as the pricing of the 3.5 GHz band.

Despite the presentations brought by Minister Cedraz, his vote was defeated in a new TCU full court session held on August 25 to finalize the trial of the case. Seven Ministers followed the Reporting Minister’s vote, resulting in the approval of Decision (Acórdão in Portuguese) No. 2032/2021. 

In his vote, the Reporting Minister agreed with some understandings of SeinfraCOM, although he has diverged with regard to other relevant points, maintaining, for example, the obligations of implementation of the Private Communication Network of the Federal Public Administration ("Private Network") and of the Integrated and Sustainable Amazon Program (“PAIS”, Programa Amazônia Integrada e Sustentável in Portuguese), included in the scope of the 3.5 GHz band. 

Regarding the Private Network (composed of a mobile network, limited to the territory of the Federal District, and a fixed network complementary to the already existing government network, to serve federal public bodies) and the PAIS (which aims the installation of optical fibers under riverbeds), SeinfraCOM’s positioning was that the respective items should be excluded from the scope of the public notice for implying irregularities and illegalities. For example, in such cases there would be a violation of the General Telecommunications Law (“LGT”); of the constitutional and legal duty of bidding for the acquisition of goods and services; absence of definitions on performance guarantees, sanctions, characteristics, and minimum specifications (including, in the case of PAIS, insufficient specification of information routes and cities to be served, details of fiber characteristics, mileage, and other items), definition of the legal instrument to be adopted for the transfer thereof to the Federal Government, among other allegations. 

However, the Reporting Minister expressed a different understanding, in the sense that there are justifications for the permanence of such commitments in the scope of the bidding procedure. According to him, the obligations are in accordance with the LGT provisions, with the conditions therein contained being met, with no violation of the obligation for the commitments included in the public notice to be related to the object of the bidding procedure and to be classified as of interest of the community or of the users of telecommunications services. Furthermore, he also considered that several of the weaknesses pointed out by SeinfraCOM are remediable.

On the other hand, the Reporting Minister agreed with some concerns of SeinfraCOM regarding the Private Network and the PAIS, for example, regarding the lack of definition of the characteristics, minimum specifications, obligations, and commitments associated with the works. For this reason, ANATEL and the Ministry of Communications ("MCOM") were informed that TCU, "through a specific control action, will monitor the matter, in order to verify if the necessary measures have been taken by those responsible for the regularization of the issues pointed out in the report and vote” that substantiates the resolution. 

In a relevant decision, the Reporting Minister accepted the claim of Brazilian parliamentarians and decided to recommend to ANATEL and MCOM the inclusion, in the public notice, of commitments that establish the obligation of connectivity of basic education public schools, with the quality and speed necessary for the pedagogical use of information and communication technologies ("ICTs”) in educational activities regulated by the Connected Education Innovation Policy (Política de Inovação Educação Conectada in Portuguese, Law 14,180/2021 and Decree 9,204/2017), "especially through the allocation of amounts arising from the acquisition of lots in the 26 GHz band, and allocated to projects granted, identified, selected, and priced by the Ministry of Education”, to meet the obligations of universal access to broadband Internet in all Brazilian public schools. It is important to note that the recommendation intends to prioritize regions with lower levels of connectivity in public schools, in order to reduce regional and social inequalities. As stated by the Minister of Communications, the recommendation will be accepted.

Additionally, as stated in the aforementioned Decision, TCU considered that it is appropriate to make other various determinations to ANATEL. Some of these are summarized below:

  • Exclude from the public notice draft the clause that provides for the possibility of granting frequencies without a bidding procedure or public call for the first company that manifests itself, even if it is not the only one interested (although ANATEL may establish, in the public notice, a rule aiming at expediting contracts related to frequencies that eventually do not receive bids in the auction, in primary character, provided in accordance with the legal system and with the adoption of measures to mitigate the risks pointed out in the justification report and vote).
  • Include, in the public notice, the requirement of a performance guarantee for all commitments assigned to the auction’s winning bidders, including those to be performed jointly through the so-called Management Entity of the 3.5 GHz Band ("EAF", Entidade Administradora da Faixa de 3,5 GHz in Portuguese), as is the case of the cleaning of the 3.5 GHz frequency band.
  • Change the Conditions for Participation in the Bidding included in the public notice draft, so that the control of the spectrum amount takes place during the session of opening, analysis and judgment of Price Proposals and opening of Qualification Documents (i.e., after the proposals’ judgment, but before the end of the session of opening and judgment of proposals), avoiding the breach of equality and unjustified restriction of competition between interested parties, as well as inefficient spectrum use.
  • Review the calculation of the number of radio base stations (“ERBs”) estimated to cover the urban area of municipalities in the 3.5 GHz band, reliably representing the reality verified for the sector.
  • Use the same type of dollar conversion rate for local currencies in the pricing of the 26 GHz band (e.g., purchasing power parity estimates [“PPC”] released by the International Monetary Fund and market exchange rate), avoiding distortions and damages to the treasury due to underestimation of the minimum price (since, for the pricing of this band, ANATEL used an international benchmarking model, in which it considered the average values of bidding procedures carried out in Australia, Finland, Greece, Thailand and Taiwan, using the Organization for Economic Cooperation and Development [“OECD”] PPC for the first three locations, and the market exchange rate quotation for the last two, to compose the calculation of the value of a national lot and, from this, the price of regional lots). 
  • Promote adjustments to the public notice, making it clear that any remaining balances of resources transferred to the EAF (including for the implementation of the Private Network and PAIS) will be allocated to coverage commitments.

In addition, several recommendations were also made to ANATEL, some of which are summarized below. However, as stated by the Reporting Minister himself, ANATEL will not have the obligation to implement them, although, in the event of non-implementation, it is relevant to formally record the due justifications to maintain the transparency of public acts, as well as compliance with the motivation duty.

  • Improve the wording of the draft to clarify the destination of amounts offered by the winners exceeding the additional obligations established by the public notice and annexes, preventing part of the premium of the winning bid from being collected to the Federal Government or converted into commitments due to differences in its interpretation.
  • Improve the draft text, enabling the dispute and auction of regional lots of type D in the 3.5 GHz band (resulting from the regionalization of any 20 MHz national lot that does not receive a proposal), by winners of type C lots in the corresponding region, maintaining isonomy between the winners of national and regional lots and contributing to the efficient spectrum use.
  • Improve the wording of the public notice, indicating the measures and prioritization criteria to be adopted if the amount offered by the winners of the national lots in the 3.5 GHz band is less than the total amount to be transferred to the EAF, in order to avoid losses to the provision of 5G services due to insufficient financial resources to clean up the frequency band, if one or more lots in that band are not auctioned.
  • Consider, in the next pricing of spectrum use grants, possible revenues arising from the partial transfer of the authorization of use related to radio frequencies acquired and not used by the operator in regions where direct exploitation is not economically attractive (in the so-called "secondary market" ), so that the asset can be valued at its fair and real price, without prejudice to evaluating the inclusion of said revenues in the pricing of the 5G auction.
  • When estimating the number of beneficiaries of the kit for the migration to the satellite Ku band, consider the expected decrease in users of free and open television service through satellite dishes over time.
  • Adopt measures that correct modeling inconsistencies that consider that all locations and municipalities will be served in the first year of operation and with 95% of coverage.
  • Consider, in the pricing of frequency bands and their variables, the market share behavior compatible with the real competition profile existing in the locations, avoiding distortions, and valuing the asset at its fair and real price.
  • Establish, in the public notice, the periodic review of the locations that will be served by coverage commitments in 4G technology and backhaul in the 700 MHz, 2.3 GHz and 3.5 GHz bands, avoiding public investments in locations already served or the overlapping of public resources expenditure due to different regulatory instruments over time.
  • Adopt, prior to the public notice publication, measures to correct incompatibilities between its current conditions, which intend to regionalize the Personal Mobile Service ("SMP") lots and the participation of regional providers and new entrants, and the existing network sharing and roaming rules in the same public notice and in the industry regulation, avoiding the creation of barriers and limitations to network operation and users of regional providers.
  • Amend the public notice draft, specifying that the hypothesis of withdrawal without cause and without sanctions of lots in the 26 GHz band is applicable only to cases where the redistribution of lots is necessary and there is no consensus among the winners involved.
  • Evaluate the convenience and opportunity of rediscussing the inclusion in the public notice of mechanisms that make it possible to anticipate the use of the 3.5 GHz band in certain areas, for commercial exploitation, respecting the operational technical feasibility.
  • Evaluate the convenience and opportunity of adjusting the public notice to enable the change (total or partial) of the order of service for municipalities included in the service commitment with ERBs that allow offering the SMP through a technological standard equal to or greater than the 5G NR release 16 of the 3GPP.
  • Regulate, in a regulatory act, the possible secondary spectrum use before the effective use of the radio frequencies object of the public notice referred to in article 11.3 of Annex IV of the approved draft, in order to reduce risks of legal uncertainty and judicialization of the matter.

In additional points of his vote, the Reporting Minister also stipulated that ANATEL and MCOM should be informed about other aspects in addition to those referring to the Private Network and PAIS, among which we cite:

  • The prioritization of investments of public resources resulting from the auction in places already having access to 4G technology mobile broadband (including the choice of those with coverage of up to 95% of the geographic area) is in dissonance with Decree 9612/2018 (which provides for telecommunications public policies).
  • The procedure provided for in the public notice draft allowing the winners to freely choose the order of fulfillment of coverage commitments confronts the sectorial public policy guidelines (Decree 9612/2018 and Ordinance 1924/2021/SEI-MCOM), since it does not ensure the prioritization of service to regions with a larger population.
  • The significant change of clauses in the public notice that might affect bidder’s proposals, even if carried out through replies to requests for clarification on their part, without the proper republication of the public notice and reopening of deadlines for the submission of proposals, offends the principles of publicity, of binding to the call notice, and isonomy.

According to information contained in the report and vote of the Reporting Minister, the total value of the frequency bands to be auctioned was evaluated by ANATEL at BRL 45.6 billion. The minimum price of the sum of all lots would correspond to BRL 8.68 billion, with the amount referring to the commitments stipulated in the public notice draft of approximately BRL 37.1 billion. The work of the Private Network is valued at BRL 1.0 billion; the one relating to PAIS, in turn, at BRL 1.5 billion. The cleaning of the 3.5 GHz band was valued at BRL 4.1 billion. 

However, as a result of the Decision’s determinations and recommendations, ANATEL has been carrying out internal analyses for the introduction of adjustments to the public notice draft, which might lead to changes in the pricing of the lots; the definitive values have not yet been published by the Agency’s Board of Directors. The inclusion of the obligation to provide connectivity to public schools could have an impact of more than BRL 4 billion, without affecting the final values for the winners of the auctioned bands. 

After making the adjustments, the resulting new public notice draft will be voted by ANATELs Board of Directors, in which the Board Member Emmanoel Campelo will act as the Reporting Director. The publication of the public notice occurs after its approval.

Finally, we emphasize that this material contains only a brief summary of some relevant points of the TCU’s decision, and it should not be understood as exhaustive in its regard.

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