Hon David Cunliffe
Minister of Communications
Minister for Information Technology
Associate Minister of Finance, Revenue and State-Owned Enterprises

2 August 2005 Media Statement

Certainty for broadcasters with AM/FM Licence renewal offers

The renewal arrangements for AM and FM broadcasting licences, announced today, will provide a stable environment for investment and growth in the industry says Communications Minister, David Cunliffe.

The government will make offers for the renewal of commercial licences in 2006, five years ahead of their expiry in 2011.

“The development of the arrangements is a further step in providing certainty for commercial broadcasters as the expiry of their present licences nears” said David Cunliffe.

Offers will take into account several factors including population-based averaging of prices in the same market, and early payment options being available at a discounted rate.

"The government wants to set a fair market price for licence renewal offers,” said the Minister “they will be based on a fair, formula based approach which recognises initial sale prices and a growth factor for the industry”.

Settlement will not be due until 2010 but the Crown will be happy to work with individual companies to arrange earlier payment at a discounted rate, to assist those companies in meeting their obligations.

The formula was developed through a rigorous process involving consultation with industry and independent expert advice.

The proposed approach has been discussed extensively with industry and is accepted by the Radio Broadcasters Association.

“The ultimate safeguard, should an individual company not wish to take up the offer, is that the licensee can decline the offer and contest the licence in an auction if they believe the licence offer price is significantly higher than their estimate of market value” concluded the Minister.

The aim of the renewal policy is to offer certainty and ensure a fair market return for the public when spectrum is used for commercial purposes. The Crown will receive revenue at the level of and not more than $96 million in 2010 if all offers are accepted.

QUESTIONS AND ANSWERS: AM/FM RADIO BROADCASTING: RENEWAL OF SPECTRUM LICENCES

Q What are spectrum licences?
A A spectrum licence gives the licensee the right to utilise a particular frequency for radiocommunications purposes. Unlike ordinary radio licences, however, spectrum licences can be traded or mortgaged. As they have a value, they are considered to be assets of a business for tax purposes.

Q When do AM/FM spectrum licences expire?
A Almost 600 licences purchased commercially by AM and FM radio broadcasters since 1991 expire in April 2011. The Government has agreed to offer renewal of these licences for a further twenty years, subject to payment at a market value that yields a fair return to the Crown.

Q Why has this offer been made?
A Existing licensees have invested in businesses based on their ownership of spectrum licences, and Government does not want to unreasonably affect these investments.

Q Who owns the licences?
A 38% are owned by Canwest Radioworks Ltd, 35% by The Radio Network Ltd and 12% by the Rhema Broadcasting Group Inc. The remainder are held by a number of local and regional broadcasters.

Q How much is the renewal price?
A The price will relate to the location of a licence, its original cost, the number of years for which it was originally issued and its population coverage. Final figures have still to be calculated. A station broadcasting from Skytower in Auckland, with a potential and growing audience of 1.1 million people, is likely to pay a sum around $5.5 million for a new twenty year licence. A Christchurch FM licence covering a relatively static population of 380,000 is likely to cost in the region of $70,000 (all numbers are approximate only at this stage).

Q What is the expected total revenue from the renewals?
A The actual revenue will depend on whether all the offers are accepted, or whether some licences might be subsequently auctioned. If all offers are accepted, a total revenue at the level of and not more than $96 million (in 2010 dollars) is anticipated. Government has agreed that offers will be limited, if necessary, to ensure this value is not exceeded.

Q Why is payment not due until 2010?
A Existing licences expire in early 2011 and settlement will be due six months before the expiry date. The pricing mechanism calculates values in 2010 dollars, although early payment options will be possible at a discount rate set to recognise the Crowns cost of borrowing and default risk. Initially this will be set at 8%, but will be subject to periodic review.

Q Who will set the individual offer prices?
A Prices will be calculated by the Ministry of Economic Development in accordance with principles approved by Cabinet.

Q How will these prices be determined?
A They will be calculated from prices originally paid for the licences, by means of a price-setting formula approved by Cabinet in 2004 and subsequently accepted by radio and television broadcasters. The formula has already been used successfully to calculate prices for UHF-TV licences expiring in 2010, which are currently on offer. For any particular location and broadcast power, prices will be averaged so that commercial broadcasters pay the same price for the same local coverage.

Q What process was followed to establish the pricing formulas?
A There was extensive consultation in establishing the pricing formulas. There was input from the Radio Broadcasters Association and advice from independent consultants on technical aspects of the formulas.

Q When will broadcasters know what the renewal prices are?
A They will be released when contractual renewal offers are made next year.

Q What is proposal for licences used for non-commercial purposes such as Access radio?
A Use of such licences, which were initially granted without charge, will be reviewed closer to the 2011 expiry date to determine if they should be renewed. If so, then the government expectations placed on the broadcaster for the forthcoming period will be specified in an associated contract.

ENDS

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