Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

WEDNESDAY 5 DECEMBER 2001

MR DAVID HENDON

  20. I am sure I read in the report—it is going to be difficult to find it now—yes, that is right, at 4.29 ". . . an implied value of £6 billion, as opposed to £4.385 billion. . ." they paid for the licence. Therefore, there is a difference of £1.7 billion so, in effect, they paid £1.7 billion for that particular licence. Why did you not get a percentage of that £1.7 billion?
  (Mr Hendon) I think that figure is derived from the amount that NTT DoCoMo and KPN paid for their shares in Hutchison 3G rather than what Hutchison 3G paid TIW. I say, again, I do not believe we know what they paid for the licence. Anyway, I do not agree that it is insider dealing, as it were, because what we had was 13 companies bidding in a very public way for a set of licences and TIW was the new entrant who kept on bidding and in the end won that licence.

  21. That is fair enough. In the strictest terms it might be insider dealing but, at the end of the day, Hutchison were not able to bid on the basis that they knew that they were going to take over a successful bidder and, therefore, did not have to come into the bidding. If they had to come into the bidding they may well have had to pay more for the licence, although it is not exactly in strict terms insider dealing, I will accept that, it is a bit underhanded, is it not?
  (Mr Hendon) I do not agree with that analysis because, first of all, they did not know that they were going to be able to buy the licence from TIW because all they had, as far as we were aware, was an agreement that they would put traffic on the TIW network.

  22. Okay. I will not pursue it because you are not going to accept that, obviously. We will move on.
  (Mr Hendon) Sorry, if I may just add. In fact, if Hutchison at a very early stage had decided to enter the bidding, presumably in place of TIW in your model, then they would still have got the licence for what TIW paid because the figure is determined by the last one to drop out rather than the one who wins.

  23. I am not going to go further down that route. I do not accept that. We will move on. On page 39, 4.10, the second little square, it says "One company cannot own or operate two 3G licences and, in the event of a merger or an acquisition, the Agency could revoke a licence and transfer the rights and obligations through the issue of a new licence to a new operator". Well, this whole industry seems to be in takeover mode, does it not? You read in a newspaper that so and so has taken over so and so on. In fact, Hutchison was taken over before it had even started. It is possible this is going to happen again in the future. We are told there have to be five licences all the time, no company can have more than one licence, but this paragraph says ". . . could revoke a licence. . .", why does it not say "should" or "would" revoke a licence. That gives me the indication that perhaps you might succumb a little bit?
  (Mr Hendon) In fact, since this report was written, we have had further legal advice on the situation where two companies merge and these two companies happen to have two licences. The licences themselves do not provide that we have the means to revoke the licence. So, if two companies join together then the question of whether they can join, whether they can have two licences is a matter for competition law, straight forward competition law. The case where we would revoke a licence would be where they were in breach, assuming the competition authorities allowed them to hold two licences, then we would revoke a licence if they were in breach of some of the conditions of one of the licences. The most obvious condition that they might breach is that they fail to roll out the network.

  24. In fact, are you saying in that event you could have one company owning two licences?
  (Mr Hendon) I think it is a theoretical possibility, yes.

  25. Is that not against the whole principle of what the whole thing originally started for? If that does happen then surely that is going to reduce competition?
  (Mr Hendon) The original plan was to get five licences so we could get competition. I think the point is we recognise that just as you are saying yourself we cannot predict what sort of structural changes there are going to be in the industry in the years that follow the award of the licence, indeed it is actually rather unwise, I think, to put into something you write on day one a condition that applies for perhaps many years and prevents companies making mergers and sales that make sense.

  26. Theoretically they could all end up with one operator?
  (Mr Hendon) No, I do not think that would happen under competition law. Another point is that they cannot treat them as one licence. If each licence has spectrum associated with it, and if a company finds itself in a position of having subordinate companies in the group who own licences, they have to run those as separate networks, they have to exploit both licences and compete with each other and they would be subject to regulation by Oftel in the same way as the rest of the mobile sector. They would not be able to use all of the spectrum for one network and if they only rolled out one network, or did not meet the roll out conditions for the second network, then we would have the means to revoke a licence.

  27. I am going to run out of time very shortly. If there was not a merger and you decided to revoke a licence, how would you then sell the next licence, would it be by auction again?
  (Mr Hendon) I really do not know.

  28. You have not thought about that?
  (Mr Hendon) That would be something ministers would have to decide but I would think that is likely, as an opinion.

  29. Right. Okay. Further on in the report, if we are to take note of the industry and what they are saying, according to the report, it has to be a worry the consumer at the end of the day now is going to end up paying for these licences, are they not? I want to turn figure 7 on page 19. What the industry is saying is that because they have had to pay so much for the licence, it may well be they will pass the cost on to the consumer. Figure 7 clearly shows how much the licence operators had to pay compared with the rest of Europe. What they are saying is indeed a worry because they had to pay a lot more than, for example, most other countries. What is the regulator going to do to watch out for this scenario where Vodafone and Cellnet decide they are going to get their money back through the consumer?
  (Mr Hendon) Okay. I think the first thing to say is that these costs here are not the entire costs of building the network, of course. The actual infrastructure cost is probably a billion or one and a half billion per network or maybe two billion, that sort of order, on top of the cost of the spectrum. As well as that, there is the promotion of the service and all the advertising and so on that goes with it which is probably a similar amount again. The spectrum cost is a big but not dominating part of the overall cost. The more important point, really, is that the price that someone can charge for something in a market place is determined by what the market will stand not by the cost, I think that is really what I would say.

  30. I accept that. What worries me again is if the regulator is not severe about this you could have a situation where a company can bid far more than one would expect them to on the basis that they know, at the end of the day, the consumer is going to pay for it.
  (Mr Hendon) But how, how do they know that?

  Mr Steinberg: Perhaps when I say they know, what they could do is they could overpay and pass it on to the consumer. We all know at the end of the day that people will want this technology and, therefore, they will buy it. Let me give you an example. Dickhead here paid a £1,000 for a mobile telephone 15 years ago. I bought one. Stupid, ridiculous but I paid it. People want this technology. I was happy to pay that at that particular time, well I was not happy but I paid it.

  Mr Davies: Did anyone phone you?

Mr Steinberg

  31. The damn thing does not work. The point I am making is the consumer will pay for it at the end of the day. We all pay for it at the end of the day.
  (Mr Hendon) I think you showed great discernment in jumping ahead in front of everyone else, who then followed you like sheep. The point is that you have five people competing here, the only way they can get their money back is by getting volume on their network. They can only get volume by competing keenly, they have to compete with the prices for the services on second generation phones, and it is really a question of the figure the market will bear.

  32. I have only got about a minute left and I have another 20 questions I want to ask you. Can I put two questions into one. Two things which really bothered me about the consequences of 3G were, that we are going to get 28,000 more transmitters and masts and at the moment in my constituency there is a huge outcry against masts which are going up and masts which are being added to, and I can imagine the outcry which is going to take place when 28,000 new ones go up. That is the first question. The second point is, in rural areas, if I remember reading the reports, it is said by 2005, 2007, only 80 per cent of the country will be covered. I still have areas in my constituency in the rural areas which cannot get G2; I have a Cellnet and I cannot get it in certain parts in my constituency and this is not on. So two questions. A lot of masts, something has to be done about that, and why on earth should people who live in rural areas not have the guarantee they will be on? You could even have dropped the bid price a little to allow them to go into the rural areas. I know the two questions might be conflicting—we do not want more masts but we want more in the rural areas—but those are two very, very main issues we are going to have to face as Members of Parliament when this comes on.
  (Mr Hendon) They are two completely different questions but I will try and answer them both quickly. We are working with operators to encourage them to share masts and we are very keen for them to do that. The Radiocommunications Agency has also tried to provide more information for people in their localities about what masts are used for and what is on those masts, and if you go to our website—and I am happy to give you the address—there is an application called Sitefinder which will enable you to look at any cellular, or 3G in due course, mast and see what it is used for and who is using it. So we are helping to provide people with information which enables them to act in an effective way when people are making applications in their area. On the second point, the rural areas point, the real problem is that it is very difficult to force people to invest in something which does not actually make sense, and some of our other experiences have been that if you do that all that happens is that the financiers see the business case is suspect and they get very worried about putting more cash in if the company is going to be forced to roll out infrastructure into areas which are not viable.

  33. You could have subsidised them, could you not?
  (Mr Hendon) It is very difficult.

  34. £22½ billion?
  (Mr Hendon) Well, you cannot really subsidise. It turns into a big question.

  Chairman: I think that is about it on that one.

Mr Rendel

  35. Can I start by saying, by way of interest, that I have and always have had since it was privatised a small number of BT shares. I have a rather more interesting interest in a way, in that Vodafone headquarters are in my constituency and is one of the major players in this whole business, and that gives me a particular interest in it. Having said that, can I turn you first of all to page 27 and Figure 14, where it shows—and I ask this question both on behalf of my shares and on behalf of Vodafone—quite clearly that the auction coincided with the moment when the share price collapsed. Is that pure coincidence?
  (Mr Hendon) I think it is pure coincidence, yes. I know Chris Gent, although probably not as well as you do, but he has never struck me as a man who does not take notice of what his share price is telling him. I think what we saw was the stock market generally beginning to catch a bit of a cold on the whole dotcom/internet world, and it just happens that from our point of view the timing was extraordinary. You can say whether it is good timing or bad timing but it just happened that was the time. I think it is a coincidence.

  36. In spite of the fact that both BT and Vodafone have since said they paid too much?
  (Mr Hendon) I do not think they have said they paid too much. If you see what Peter Erskine of mm02, which is BT of course, said in the reports in today's papers, he talks about it being—I forget his exact words, I would have to look them up—good value and will repay in the end. They did not have to pay what they paid. It was entirely up to them. We just gave them the opportunity to tell us what the market price for this asset was.

  37. Can I come back then to the question of masts which Mr Steinberg was asking you about a moment ago. I share with him, having a rural constituency, the fear we will have an awful lot of constituents who will be very angry about the number of masts but at the same time want to have the service—a very difficult situation we are in, we have to answer to both sides. Why do you not insist on all masts coming under one company and everybody sharing the masts?
  (Mr Hendon) The difficulty with that is that you are telling people who are private landowners what they may do with their land, because all these masts are on sites which are owned by numerous different organisations and companies and these are effectively their property. For us to say they could only make a deal with one company, in effect a monopoly, and then that company sells it on, it is just not a free market, is it? It would be quite difficult to do, I think. We were not attracted to that idea.

  38. I assume you could advise Government that they could have a private mast company or use it as a Government company and then sell off, as indeed you have been selling off bands, the right to be on a Government mast.
  (Mr Hendon) I think I would have found it difficult to attract my ministers to that idea. I have to admit I did not try.

  39. Can I come on to payment dates because there was a great fuss at the time about the fact that the payment dates were different and whether this was known in advance and whether it was fair. What is your view on that?
  (Mr Hendon) I am glad to say that I do not have to fall back on my own view, because I can say what the courts thought about it. As you know, recently the Court of Appeal gave out a judgment on the appeal that BT and One2One had brought about the payment dates, and they concluded that we were right. If you read the judgment, which I am sure you have not had the time to do, and it is a long and complex document which, in view of my appearance here today, I did read again yesterday, there are a number of things in there which are rather pertinent. One is that the document explains that the fact the dates of payments might be different for different licences was always explicit in the rules for the auction, and indeed it goes on to explain exactly which paragraph it is and where it is to be found and so on. So the fact the dates might be different was never in doubt. Then you get down to whether we were right to insist that the payments were made on the dates they were made, and the courts have agreed we were right. I can go into some of the detail of that if you like, but bearing in mind the Chairman's instructions to keep my answers short, I will stop there.


 
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