Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 40 - 59)

WEDNESDAY 5 DECEMBER 2001

MR DAVID HENDON

  40. While you may have been right in that it was all set up legally and you were right in the way people were told about the auction and so on, that does not necessarily mean everybody was working to the same rules, in the sense that some may have known they were likely to pay later and some sooner, and therefore the prices they could afford were different. Given that situation, would you ever want to set up another auction in future in which different bidders had a chance to bid at different rates simply because they knew they were going to pay at different times?
  (Mr Hendon) The process we followed was that we produced draft auction rules and we took them to a consultancy group called the UMTS—Auction Consultative Group, UACG—of which all the companies which won licences (maybe not TIW) were regular and active members. The same judgment records the fact that BT commented on some of the provisions in the draft rules and not on this particular provision in fact. But all of those companies were well aware of the provisions.

  41. The fact they did not spot it does not necessarily mean to say it was fair or indeed that you necessarily got the highest price because I can imagine that if you make sure in future that everybody is going to bid at the same time you might get a slightly higher price.
  (Mr Hendon) The amount involved is quite small really.

  42. It is the principle.
  (Mr Hendon) If you take the difference in dates it is something like £85 million interest for each of the licences as compared—Let me say that again. The amount that BT and One2One had to pay was about £85 million more than the amount Vodafone and Orange had to pay because of the payment date and that was a very small part of the overall sum involved.

  43. It is nevertheless something we would not, as taxpayers, want to see you throwing away?
  (Mr Hendon) No. Quite right. That was why I insisted that BT and One2One made the payments just as soon as they were eligible to receive the licences. Vodafone and Orange were not eligible to receive the licences so we were not able to insist they made the payments until the date that they were eligible.

  44. Had you, right from the start, said that there would be a certain date on which the payments would be made and had you made sure that was after the point that everybody was going to be able to make those payments, it seems to me the pricing you could have got might have been somewhat different because there would have been that much more competition. What worries me is by not setting it up in that way you may have missed out on what may be a small sum in comparison to the total amount but, nevertheless, may be a considerable sum in terms of what the taxpayer might receive back.
  (Mr Hendon) I am sorry, I do not agree with that. I think that actually what we did, by having the payment arrangements not being common, not being at the date by which we could be sure everyone would pay but the date at which they were able to pay, we actually made sure the taxpayer had three licence fees in earlier and we got £250 million more for the taxpayer than we would have done under the arrangement you are suggesting I should have adopted.

  45. Of course they, had they been fully up to the market, would have known they could not afford to pay so much given that they were going to have to pay over, so their bids would have been lower.
  (Mr Hendon) I think the bids were set by what they had to pay to get the licences not by what they could afford to pay. They had to bid the sum they had to bid to get a licence.

  46. Would you make the same arrangements next time or next time would you try to make sure everybody paid the same amount so they all knew exactly what the ground rules were going to be and they would all be treated fairly?
  (Mr Hendon) Certainly we would make the same arrangements to the extent that we would consult and everyone would know what it was the rules said. Certainly I could not say now that the rules would be exactly the same on another occasion. One of the real lessons about auctions is that you have to design the auction in the light of what is going on in the market and I think we can see from the way the 28 gigahertz auction did not work the way we expected, because the market changed, just what could happen to the 3G auctions. You can see in other countries where people have tried to follow our lead, for example in the Netherlands they tried to do the same thing but with a much smaller number of bidders and really they did not have anything like as successful an outcome. One of the principal lessons I would say is the auction has to be designed for the circumstances so, to that extent, I might well do it entirely differently another time. I do think I did it right this time.

  47. The payments were demanded as a lump sum rather than paying it over the period of the licence, why?
  (Mr Hendon) Okay. The main reason was that we did not want to have the companies treating these licences like options to do something. This was really based on advice we got from our colleagues in America. This was not the first auction in the world, it was the first 3G auction but there had been many spectrum auctions in other countries, including in particular America where they have done extensive auction work. The Americans advised us that they had run into major difficulty where a very small company, very under funded, had bid for a licence and then subsequently been unable to raise the finance to pay for it and had then sought to sue the Federal Communications Commission for the fact that the market was different from how they thought it might be and now they were not able to raise the money. This all arose because they were able to pay in instalments and so did not have to be able to finance the amount they were bidding from the start. The way we approached this was we wanted the financial community—the shareholders and the banks—to decide whether the companies were serious, both serious about their bid and able to implement what they were proposing to do, and we really relied on that.

  48. When the company in America sued the Federal Communications Commission, did they win?
  (Mr Hendon) That particular auction, I do not know, I do not believe so.

  49. It would seem extraordinary if they had won and it would seem that the Federal authorities had set up the whole thing rather badly if they had won.
  (Mr Hendon) Yes.

  50. That makes me wonder if that is really a good reason, given that presumably in that situation the licence would have gone to someone else. The Federal authority would not lose any cash.
  (Mr Hendon) In another case, though—and I am sorry I am not briefed on this—the Federal Communications Commission lost such a case and I think I last heard it is in appeal, so the American system will take some years before it reveals exactly what happens. I think in that case they took back a licence someone was not able to use and then sold it for an enormous amount of money and the company that had it originally opposed them doing that, it was something of that sort. It could not happen here anyway.

  51. Can we turn to figure 5 for a moment. This is where we see about the amounts of the spectrum being used by different people. It is page 14. The aeronautical part of that, the percentage of the total, is obviously being sold for fairly low sums. That particular area I am interested in but also other areas too. Will this licence to use this part of the spectrum be coming up again some time? Are these fixed time licences?
  (Mr Hendon) Right. The answer is different for each one of these categories actually. For me to go through the whole detail would take—

  52. Let us start with the aeronautical.
  (Mr Hendon) Okay. The aeronautical one, in that case, what we are talking about is mostly spectrum that is used for aeronautical radar, for aircraft for example to see what other aircraft are around and so on. There we are really talking about international allocations and these radars are fitted in aeroplanes from all countries. You can charge a fee for aircraft which originate from the UK for access to spectrum but there is no way we can charge an Australian aircraft company or something like that.

  53. Because it is up to Australia to do that.
  (Mr Hendon) Quite.

  54. You are suggesting, are you, that these low fees are because other countries are charging low fees and you cannot afford to be uncompetitive?
  (Mr Hendon) No, not at all. What we have done so far is introduced spectrum pricing to communications spectrum but we have not introduced it to spectrum that is used for other purposes like radar, for example, because it is very difficult to do but the independent review of spectrum management that I mentioned before, Professor Martin Cave's review—

  55. They are paying some of it?
  (Mr Hendon) Yes, well they are paying fees which cover our cost of administering that piece of spectrum because prior to 1998 our licence fees reflected just our costs of managing the spectrum. Since 1998, when the Wireless Telegraphy Act 1998 came into law, we have been charging for communications licences on the basis of what the value of the spectrum is. There has been a progressive change in value and some of these numbers here, the 2G numbers and private business radio numbers, those numbers are larger as a result of that. Some areas of use, and aeronautical is one, are still paid on the cost of covering.

  56. Suppose there was an international agreement that all these companies would have to pay for the spectrum they are using for their radar, would this not be a cheap way of enabling a lot of governments to raise quite a lot of money?
  (Mr Hendon) I suppose it is conceivable you could look at it that way but, on the other hand, it might be a good way of ensuring that aircraft did not have radars in and it would reduce the safety of aircraft significantly perhaps.

  Mr Rendel: Thank you.

Mr Gibb

  57. Do you agree with the quote in the report from Peter Cramton, who advised the NAO, where he said, on page 55: "In practice, excessive spectrum fees can have a negative impact on services. The reason is that at least in a short period of time capital markets cannot absorb an unlimited amount of debt. When there is excess demand for debt, then the terms become less attractive for the companies requiring debt. Companies may slow the pace of the build out in order to limit the acquisition of debt". Do you agree with that?
  (Mr Hendon) No. I think with the sums of money which companies have paid here what they need to do is build out sufficient network they can start to get customers and then they have to keep building up network so they can compete on a good basis with the other companies, and keep or gain market share. So I do not actually believe what he says there at all.

  58. Do you agree with this quote from the same expert. "Drops in debt ratings have also occurred . . . making it more difficult for companies to fund the cost of building the 3G infrastructure." Do you agree with that?
  (Mr Hendon) Yes, that is certainly true.

  59. So you would accept then that the way you structured the auction of the spectrum has actually damaged the future of 3G networks in this country?
  (Mr Hendon) No. You will not be surprised to learn I do not agree with that.


 
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