12 Pages Posted:
Fulbright University Vietnam
Date Written: February 13, 2020
The debate about non-market authoritarian telecom manufacturing firms subsidization and security risk continues to rage but there has been almost no talk about the benefits they provide and how to counter them by open liberal democracies. In this paper, provide a simple financial model of the range of cost differences between market and non-market telecom manufacturers. I then provide different policy options for states of how best to address these concerns. Pleas to national security and alliances will only go so far given the large subsidized cost differentials between market and non-market providers. There are numerous reasonable policy options that will narrow the cost differentials such as moving from cash spectrum auction to royalty, funding risk mitigation with tax on high risk gear, and multilateral lending currently disallowed by the OECD to fund critical infrastructure. Importantly, global 5G financing could be provided by the United States for less than $5 billion capital allocation.
Keywords: 5G, infrastructure financing
JEL Classification: L63, L78
Suggested Citation: Balding, Christopher, Financing 5G Rollout in the Face of Nation State Security Threats and Non-Market Subsidies: Policy Options for States to Address Cost Concerns (February 13, 2020). Available at SSRN: https://ssrn.com/abstract=
Managing the Finances To Keep Huawei Out Leaving aside technical and national security issues, a fundamental driver of the interest in Huawei gear by telecoms providers is the low cost. There is no systematic data on cost, but anecdotally industry contacts routinely tell of Huawei bidding 25% less with some deals having significantly greater equipment discounts. To address the challenge posed by Huawei, it is important to address and narrow the financial gap. It is important to note that the total financial cost gap between nonmarket subsidized firms and market based companies is significant and comes from multiple channels directed by the total state involvement. Furthermore, they utilize business practices that are not allowed by market based democratic countries. While appeals to national security are notable and important, democratic market based countries must better address the total cost differential to make market based competitors feasible alternatives for telecommunication providers looking to purchase the low cost products.
Conclusion Lost beneath the headlines of valid security risks from adopting non-market telecoms network gear are cost considerations of service providers. The financial framework for telecom service providers
and the interest in the state in receiving non-debt cash payments has tilted the incentives towards manufacturers that provide disallowed OECD financing packages. By working to fund risk mitigation activities, return to unsubsidized lending, and shift to royalty based system, there is significant scope to reduce the cost differentials between market and non-market telecom manufacturers. Perversely the state is incentivizing telecom service providers to depend on China for state subsidized financing by relying on spectrum auction cash up front rather than shifting to royalty auctions. By providing such abnormal financing terms, China is driving up auction prices increasing the upfront cash to countries. If states are concerned about the security risks to using network gear, the simplest policy change they could make is allow firms who legally commit to keeping Huawei gear out of the network to switch to royalty payments.