Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Good afternoon and welcome to the Committee of Public Accounts. This afternoon we welcome David Hendon, who is the Chief Executive of the Radiocommunications Agency, who is going to answer our questions on the Comptroller's Report on the Auction of Spectrum for the Third Generation of Mobile Phones. Welcome, Mr Hendon.

  (Mr Hendon) Thank you.

  2. Perhaps I can just ask you a very easy question to start off with, to get you in your stride. You raised £22.5 billion, far higher than originally expected, how did you manage it?
  (Mr Hendon) It was easier than perhaps I expected. I think, Chairman, we set out to devise an auction which would perform well in a situation which was entirely novel, both to us and those who would bid. So, because it was novel we had to think about many eventualities and that enabled us to come up with something which turned out to be robust, even when the figures that people decided to bid were considerably higher than we had originally expected them to bid. I can go into a lot of detail if you would like.

  3. This is just by way of introduction, colleagues will return to this vital part of the evidence. Let us look at the other side of the coin, shall we say. You say you were more interested in getting a vigorous market than in maximising proceeds. In fact, you have got the reverse, high proceeds, we would accept, but companies strapped for cash, possibly to the detriment of competition. Were you not too successful?
  (Mr Hendon) Well, I do not think so. Of course, as you know, raising proceeds was not the point of the auction, the point of the auction was to place the spectrum in the hands of companies which would make the best economic use of it. We had to devise a way that would do that when none of us really understood—no-one, not even the companies—how the market was going to work or what it was going to look like. I think what we have now is five companies who have a tremendous incentive to use this resource that they have paid a lot of money for and roll out services which the consumers will want to have. I am particularly pleased, also, that we have a new entrant who has considerable experience of mobile communications across the world and also the new entrant has, as you know, some shareholding from the Japanese operator, NTT DoCoMo, who are in the position of putting the first 3G system in the world into operation. So, I think we are going to see that new entrant being quite aggressive in bringing interesting services to consumers in order to build the market share from nothing to something which helps them to cover the cost of it all.

  4. I will come back to the new entrant in a moment but let us just stay on this subject of the companies and their indebtedness. Figure 23 on page 41 shows a huge increase in their indebtedness caused, of course, in part by the price they had to pay in the auction. Are you now going to allow them to share their networks so as to reduce their infrastructure costs?
  (Mr Hendon) The simple answer to that is yes but with conditions. In fact some months ago, I think maybe six months ago or more, we agreed with the DTI and Oftel what guidance we could give companies on sharing infrastructure and there is a paper on the Oftel website which is a formal guidance. What we say basically in that document is that providing the agreements that companies make to share infrastructure respect competition law then there is a prima facie case that is to be made that we should allow those agreements to stand. I think maybe a second point we will be looking for is that the advantage that the companies gain through sharing infrastructure should be shared with the consumer as well as with the companies. So, for example, it will probably not be for me to judge, let me say it is for Oftel to judge, I think, but if it was me I would be looking to see how allowing them to share infrastructure will bring greater benefits to consumers, for example in making a faster roll out available to consumers.

  5. Just on the subject of sharing information. During the auction the companies did not know that standing behind TIW was Hutchison, does that worry you?
  (Mr Hendon) Certainly it worried us enough to go into it after the auction was over and when we discovered that Hutchison had bought the licence from TIW, but we have looked very carefully at the arrangement that there was and we understand there was no formal agreement. We are satisfied the rules of the auction were complied with.

  6. All right. Let us look briefly at paragraph 2.22, which is the subsequent auction of broadband spectrum. Now that, of course, unlike the first auction was a disappointment in terms of low proceeds and licences left unallocated. What conclusion have you drawn following this less successful auction?
  (Mr Hendon) Sorry, this is section?

  7. I am looking at paragraph 2.22. I want to ask you about the subsequent auction of broadband spectrum.
  (Mr Hendon) Yes.

  8. I want to ask you about conclusions that you have drawn, whether it was a mistake to approach this matter by way of an auction?
  (Mr Hendon) No, I do not think it was. In fact, I remember very early on in that auction, before the results came out, writing to my colleagues and saying despite the fact it was clear already at that stage that we were not going to place all the licences in the market, that we should be clear that this auction was a success because what we had managed to do was to find out what the value of these 28 gigahertz licences were to companies in this new market of broadband. We discovered actually rather early, the point we were trying to auction them, that the idea that this was going to be a solution to there being broadband in rural areas was a false hope, at least at the present state of development of the technology and the present state of the market. That meant two things, firstly, we would have to look elsewhere to meet that policy objective, getting broadband everywhere and, secondly, we still have spectrum in the cupboard which we could allocate in some other way rather than it sitting in the cupboards of operators who had no means to exploit it.

  9. Instead of going forward by way of auction, you do not think you could have waited for people to come to you?
  (Mr Hendon) That is a very interesting suggestion and, in fact, that is what we have now done with the second phase of the 28 gigahertz auction. We announced a couple of months ago that the licences that we had not sold before, we would place them on the market again. They are effectively lying on the table. We have started the auction but there is no formal auction process until someone comes along and shows an interest in a licence. At that point, we then publicise that someone is interested in a licence at the reserve price, which we have previously set, the same reserve price, and if no-one else wants it they get it for that price and if someone else is interested then we carry out a mini auction on that licence. I think that is a good development actually. In a situation where we were being told by players in the market that they had fantastic plans to roll out national broadband infrastructures then we were keen to get the spectrum out so they could get on with it. Once we discovered actually those plans were not sufficiently convincing that the financial communities would back them with cash, and many of those companies therefore were just stopped in their tracks by lack of availability of funds, then it was no longer a good idea to get the spectrum out, it was better to make it available in a way that was a bit more responsive.

  10. I think a very interesting figure is Figure 5 on page 14. You will see there that actually 3G and Fixed Broadband cover a very small part of the spectrum, and you can see that Defence and Emergency services take up 28 per cent of the spectrum, broadcasting of radio takes up only 1 per cent. I suspect there are huge inefficiencies in the way Defence and Emergency services use their spectrum, if they could release more spectrum there are great opportunities for another successful auction. What views have you on encouraging particularly the Defence and Emergency services to use their spectrum more efficiently and release more?
  (Mr Hendon) The first thing to say is that this is generally regarded as being a fruitful area for action, so to speak, so I think the industry generally would support your own view. There are some constraints on the Defence spectrum. For a start, quite a lot of it is agreed internationally for NATO use, and so even if we decided not to use it in this country, we would have to maintain the frequencies available for visiting NATO use, so it is not simply replacing some MoD kit with something new in a new band and releasing some that way. But, having said that, we have had a scheme in operation with the MoD whereby they pay the same commercial rate for their spectrum which taxi companies and other conventional communications-users pay, and I think we may be the only country in the world which makes the Ministry of Defence pay in that way. Certainly I am not aware of any other one. When I talk about this, for example, to colleagues in the United States, they are frankly amazed that we have managed to do this. The second thing is that in order to bottom-out what scope there is for doing just what you are asking, the Secretary of State for Trade and Industry and the Chancellor of the Exchequer set up a joint independent review of radio spectrum management, and you may know that Professor Martin Cave is carrying out this review, and we hope he will report early next year. One of the things we are particularly interested in knowing from him is how we can bring under the incentive spectrum management system which we currently use all the spectrum which is not at the moment covered.

  11. You know by the way when my colleagues come in, try and keep your answers as brisk as possible because they are limited in how much time they have. I know it is a complicated area but please allow them to get in as many of their questions as you can. On that similar subject, how much scope is there for releasing more spectrum for 3G telephony, do you think?
  (Mr Hendon) First of all, there are extension bands allocated internationally for 3G, and we will be able to release those in the same timescale they are being released internationally. There is also spectrum which is currently used for 2G which could probably be re-used for 3G at some point in the future, and we have not taken any decisions yet about who will be able to use that and when, but all of that is fruitful ground for further spectrum auctions. As well as that, it is quite likely that some of the spectrum which would be released when analogue television is turned off, when digital television is fully rolled out, could be used for this sort of technology.

  12. A last question on paragraph 3.15. Some companies or licensees have been less successful than others in attracting customers, are you going to allow licensees to trade surplus spectrum with each other in rather the way farmers are allowed to trade dairy quotas with each other?
  (Mr Hendon) The short answer is yes but not yet. Do you want the long answer?

  13. A tiny bit longer!
  (Mr Hendon) We have been very interested in spectrum trading for several years now and the thing which has prevented us from introducing it is the European Community Directive on licensing. One of the articles in that Directive talks about decisions about allocating scarce resources like spectrum or telephone numbers to be made in an open and transparent and non-discriminatory way, and unfortunately all the lawyers agree that, although probably none of the drafters intended it, that Directive prevents anyone in the European Union from introducing spectrum trading at the moment. The correction to that is part of the so-called "98 Package" of telecoms legislative changes which is going through the Council and the Parliament at the moment, and any time at all I hope we will have the possibility to make the change. We are already drafting clauses to put into the Communications Bill which we hope the Government will introduce maybe in a year's time as part of the response to the White Paper on Communications.

Mr Steinberg

  14. Mr Hendon, obviously you did very, very well indeed, and the Government has got a lot to be thankful for, but if you had tried to maximise the amount of money you could have got from the sale, how much more could you have got?
  (Mr Hendon) I am afraid I really do not know the answer to that.

  15. What do you think?
  (Mr Hendon) It certainly would have been possible to get more because, for example, if we had made it only possible for the incumbents to go for three licences instead of four, then they would have had to fight to the point where the weakest fell away, and I think that would probably have generated a higher level of income.

  16. The Prime Minister this afternoon would not tell us how much he was going to spend on the National Health Service, can you give us a figure for what you think you could have got?
  (Mr Hendon) I am sorry, I cannot. I just have no idea, absolutely no idea.

  17. I am not going to push you, it is just interesting. If you turn to page 38, paragraph 4.5, moving on slightly from what we were talking about, when I read this particular paragraph I thought this was a very suspect transaction which had taken place in the way they got the licence from Hutchison. "Bit of a fiddle", I wrote down when I actually did my notes. Why did the authority allow this to happen? Why was Hutchison allowed to be negotiating a takeover with a successful company whilst basically they were bidding in the auction? Why was Hutchison not forced to bid themselves? Surely that would have been extra finance for yourselves?
  (Mr Hendon) If Hutchison had had an arrangement with TIW to take them over when they won a licence, then we would have had to exclude them from the auction, because such an arrangement was not permissible. It was not permissible under the auction rules for anyone to change the group of bidders by a more than 5 per cent increase, I think it was. So someone could take up to 5 per cent share without it becoming a material change, but more than that and they would have had to be excluded. The arrangement they had was not a formal arrangement, as I understand it.

  18. So there was no idea that this merger was going to take place?
  (Mr Hendon) My understanding is that Hutchison had said they would take capacity on TIW's network and operate it as a virtual network operator, so TIW had some surety of some business which probably gave them confidence to bid, but in the event they arrived at a different deal.

  19. It is a bit like insider dealing though, is it not? Hutchison knew they were going to get a licence at the end of the day a lot cheaper than they were prepared to pay for it, because eventually Hutchison paid TIW £1.7 billion more than they had actually got at the auction. Why did you not get a share of that?
  (Mr Hendon) We do not know what they paid TIW, do we? We know what was paid by the two companies which joined in, KPN and NTT DoCoMo, so you can work out the valuation of the licence but I do not think we know what TIW was paid.

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