Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. You just said you agreed with that statement.
  (Mr Hendon) I think actually that the sums the companies decided to bid may have turned out to have damaged their business, but that was their choice, not my choice. I had 13 companies who wanted these licences and how else was I to decide which ones to give them to?

  61. I will come to that in a minute. You say you accept that paying £22 billion has damaged the industry, albeit you do not accept it is your fault?
  (Mr Hendon) What I accept is that if a company has a high debt, then it has more difficulty financing its general business. That is just a straight matter of business really.

  62. Would you agree then with Professor Negroponte, who is a US technology guru, who said, soon after the auctions, "What happened in the UK was disastrous. It is the worst thing that could have happened to the consumer. The £22.5 billion paid for the licence was unsustainable because it would translate into an extra cost of a thousand dollars per subscriber on top of the cost of providing the service. That one thousand dollars has no research behind it, no new products behind it, no new infrastructure, no new handsets, no new potential for increased access or making this widely available." Do you agree with that expert?
  (Mr Hendon) No, I do not, and in fact I am not sure if you took that from the article which was published alongside another article from me, but it gave the counterbalancing points. As I said just now, I believe what happens in the market place is that the prices which are charged are determined by what else is going on in the market, and not at all by the cost that the company has to pay for—

  63. There must be a cost underlying it. The reason why new houses cost £100,000, £150,000 rather than 10p must be based on the cost of the bricks, there must be an underlying basis to the market conditions which determine the cost paid by the businesses.
  (Mr Hendon) Yes, but the cost of building houses in Mayfair is not going to be so different from the cost of building houses in Leeds or somewhere, but the price they sell for is very substantially more, and that is not just the cost of land but because people are willing to pay a lot more for them.

  64. You have referred to this article in the FT this morning, that they are having to delay the introduction of these 3G services for an extra six months. Do you think that has anything to do with the £22.5 billion?
  (Mr Hendon) It is nothing at all to do with our auction, in fact I think quite the reverse. What has happened is that we have got five companies out there extremely hungry for advanced handsets, handsets which will enable them to deliver whizzy new services which cannot be delivered with existing handsets, and they are pressing those handset manufacturers extremely hard to get on with it. I have talked to some of those handset manufacturers and the Japanese were really looking for more capacity and their 3G networks were aimed in the first place to provide more speech capacity because their present networks were overloaded. What we were wanting to see happen was for this technology to deliver new services which our consumers did not have. So the fact our companies paid a lot for the spectrum means they are now quite aggressive in getting those advanced services, and I fully expect we will see advanced services more quickly in this country than other countries. The second thing is that I go back far enough to have been at this stage of the GSM business and I was involved in some of the early work on GSM, and exactly the same things happened there. The problem of turning a really very, very complex technology into a cheap consumer product is a very, very difficult problem, and the companies can really only do that when the standards are solid enough and certain enough that they can commit to manufacturing chips in volume to get the prices down. All of this means that everything is held up until all the wrinkles are worked out, and it is absolutely what happens in introducing this sort of technology.

  65. On that point, do you not think just having two licences for 15 MHz, as opposed to four 15 MHz—because the other three are all just 10 and apparently you need 15 if you are going to provide these video-type services—was a mistake if you are going to try and encourage those kind of extra services?
  (Mr Hendon) We gave very considerable thought to that point because we were very keen to get a new entrant and if we wanted a new entrant and we could only have four licences, by definition only three of the incumbents would have got a licence and that would have been a difficult situation for one of the incumbents, so we were very concerned about that. At one stage we expected we would have to go for four licences and we designed the auction on that basis, but then we had further technical advice which came from the international work which suggested that actually it would be possible to deliver these services in 10 rather than 15 MHz spectrum, so we discussed with the bidders in the UACG, which I mentioned just now, the idea we would have five licences rather than four. There was quite a difference of view but gradually the overall opinion moved to the idea that it would be better for us to go for five and that it was not going to affect the roll-out of these fast services. It is very unlikely that three companies would have willingly accepted a 10 MHz allocation if they felt that was going to constrain what they could do with the spectrum. So by bidding the sums they did, I think they demonstrated they—

  66. Did not the UMTS recommend 15? Is that not what they have done in Finland, Sweden, Denmark, Norway, Spain, France, Belgium, Portugal and Switzerland but not Britain?
  (Mr Hendon) That is what they recommended, yes.

  67. And that is what has been done in all those countries?
  (Mr Hendon) I am not sure if that is what they have done in all those countries, certainly in many of them but not all of them I think.

  68. That is what it says in the report which you signed up to.
  (Mr Hendon) I am sure the report is correct.

  69. It just seems concerning that we have gone against all these other countries.
  (Mr Hendon) What I can say is that if the industry had advised us that this was not going to enable them to roll out the sort of services they wanted to roll out and we wanted to see rolled out, we would not have done this. So it is based on their advice, the direct advice of the operators who were preparing to bid rather than UMTS Forum which is a trade association.

  70. That is on the record we can look at that. On page 12 of the report, it says, "The United Kingdom is bound by European Directives which require that Member States should price the spectrum only to ensure its efficient use and not so as to maximise licence revenues, and they forbid the use of pricing as a form of taxation. They permit an auction as a method of allocating spectrum to those operators who will make most intensive use of it." You have raised £22½ billion which, if you go to the Pre Budget Report, which was published last week, would pay for the budget deficit of the Government for all of 2001-02, all of 2002-03 and into the following year, 2003-04. These are substantial sums of money, if that is not taxation, I do not know what is. What figure would you regard as constituting taxation in one of these auctions which would contravene the European Directive. If £22½ billion does not, what figure would in your judgment?
  (Mr Hendon) I am not going to be drawn on any particular number because I do not think any number is more right than any other number. We set up this auction and the objectives of the auction are in the report. I am sure you will have read them. Basically we said that the objectives were to utilise the available spectrum with optimum efficiency, promote effective and sustainable competition and, subject to those above, objectives, design an auction to realise the full economic value to the consumers, industry and the taxpayer. So the raising of revenue was the third part of the third objective in the auction; the most subordinate part of all. The fact it was £22½ billion was entirely the doing of the bidders, not of us.

  71. You say that but of course you did say earlier that if you had only had three licences with four incumbents, that would have raised even more. Also in the report somewhere it says that you could have reduced the revenue by, for example, not having an allocated spectrum for a new entrant. There are all kinds of things you could have done that would have increased the revenue or reduced the revenue so if you had constructed this better you would not have raised the £22.5 billion you would have raised a smaller sum, still have achieved the objective of the report and you would not have caused the damage to the industry that you say raising £22.5 billion has done?
  (Mr Hendon) I do not see it that way. What we did, we constructed this auction to deliver the objectives one, two and three and in that order. We were concerned primarily with getting those licences out to people who would use them and in a way which would develop sustainable competition and deliver economic value to the whole of the UK. The proceeds part of it was a sort of byproduct and not the essential part of what we were designing for. In fact, we really were not interested in what the proceeds were going to be, we did not make any assessment of them.

  72. Perhaps you should have been. This was an error, a mistake, a cock-up, that has caused quite a substantial amount of damage to the industry. You said it was not the point to raise revenue but maybe you should have given more attention to perhaps over rating revenue in the way the Bank of England has to pay attention to undershooting its inflation forecast.
  (Mr Hendon) I think if we had seriously suggested to anyone that this auction was going to raise £22.5 billion and we would therefore need to tweak it a bit, people would have laughed at us.

  73. You had consulted experts.
  (Mr Hendon) It was not just civil servants and their advisers who did not understand that these sums of money were going to be raised, no-one did. No-one anywhere in the world understood that spectrum was going to be worth this sort of money. You must have seen the press comment at the time, everyone was astonished by these very large figures. The people who made the decision to pay them were those companies, people like Vodafone and so on, who had their own advisers, they had their own technical advisers, their own auction designers, their own game theory people, they knew how their business plans worked. They saw what other companies were doing. We designed our auction in a way that everyone could see what other people were up to and they reached their own decision about what sum to pay. That was the sum they paid, they could have stopped earlier if they had wanted to.

  74. Are you confident that all these five licence holders are going to stay in business?
  (Mr Hendon) Yes, I think so, at the moment I think so.

  75. You do. BT's fixed line customer, BT has had to sell their Cellnet side. Do you think they are going to pay now since the debt is staying with the fixed line element of BT, are they going to be paying for this over exuberance?
  (Mr Hendon) I think myself it is the shareholders who in the end are paying rather than the customers. All that I said before about competition in mobile applies to fixed as well. The price that fixed customers pay is determined by what is going on in the market. It is quite possible that because the management of the company decided to pay £6 billion for a licence that the shareholders will get a lesser return but that is between the shareholders and the management of the company not me.

  76. Shareholders will suffer which brings us back, does it not, to the graph on page 27 which shows that at the time of the auction the share price of all these companies was falling. You said that was a coincidence, it was not really, was it?
  (Mr Hendon) This is not a graph of the share prices just of the mobile communications companies, it is a graph of the whole high technology sector basically.

  77. You could have triggered the whole sector.
  (Mr Hendon) I do not believe that even our auction had that sort of influence.

  78. £22.5 billion is not a small sum.
  (Mr Hendon) No, but what we did was create unprecedented interest in this new technology. I think we actually gave a kick start to 3G internationally.

  Mr Gibb: Extraordinary kick start.

Mr Davies

  79. Well done for raising all that money. Can I just ask, on the question of the actual cost to the industry and the consumer, obviously the point you are making is that at the start, the expectation of your advisers I think was that the proceeds would be something like £1.5 billion and they raised £22.5 billion by using again a theoretical model that was evolved at Oxford University, is that correct? It was various academics who put this into practice. That was why people did not know what would happen, the traditional Railtrack sell off.
  (Mr Hendon) The estimate of £1.5 billion came right from the original work on the idea that we should auction spectrum at all. If you go back to the 1998 Bill then it talks on the face of the Bill about all spectrum auctions raising between £1-1.5 billion. During the planning of the auction we used the rough and ready figure of £1 billion as the place marker for the sum of money that we thought we might be able to gain from this auction.

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