Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 80 - 99)

WEDNESDAY 5 DECEMBER 2001

MR DAVID HENDON

  80. Do you know who the key game theorists behind the proposed structure of the auction were?
  (Mr Hendon) Sorry, who?

  81. Who were the people who constructed this auction?
  (Mr Hendon) Professor Ken Binmore and Professor Paul Klemperer were the two principal people, yes.

  82. Moving back to page 27 and the share value. Would you accept, obviously it is the case by definition, that if these companies started with certain expectations, firstly that they would pay a certain amount and, secondly they needed these assets for the future for consumer demand and to have a pan European presence because that was one of the driving forces, that they were in fact bid up and up and up beyond their expectations and, in fact, ended up in a situation where they had not anticipated the level of pressure they would be under both to recover money from the consumers and to cut costs and in particular jobs. Do you think they felt that?
  (Mr Hendon) We designed the auction to give them plenty of time to become aware of that. As you know, we advanced the auction in very small steps, in fact Professor Cramton criticises that but that was done deliberately because this was the first auction we had run that these bidders had to take part in. Indeed, we asked them whether they wanted us to go in faster steps and they said not to. We had these small steps. Also we provided the possibility for any bidder to call a recess day if they needed to take a pause and perhaps call a board meeting or something to rethink their strategy. Really at the end of the day it was for those companies to decide what money they wanted to pay.

  83. Sure. Do you feel, firstly, various companies like BT have shed more jobs than they would otherwise have done? Secondly, do you feel if there is any evidence of monopoly or oligopolistic abuse in the market place in terms of pricing, that the Government has compromised in regulating this, the industry will turn to them and say "We paid £22.5 billion and now you are trying to stop us recovering that"?
  (Mr Hendon) No, I do not think so. I think the downsizing that has taken place recently has been caused not by what is going on with 3G but by the fact the existing mobile market is maturing and changing its character, so the mix of staff that companies need to exploit it and take themselves on in to the next stage is different. In terms of giving the companies a soft ride, well this is not for me it is for Oftel but I think we all know the companies felt the recent review by Oftel was quite tough. Actually they are all saying it should have taken into account the costs of 3G. I think the Government is acting rather differently from how you are suggesting.

  84. Do you think, given that the output prices were so much more than expectations at the start of the process, and the net outcome is players are structurally weaker in terms of the balance sheet leaves them open to takeover and therefore, with hindsight, a rational gain might be for a prospective bidder not to bid but to wait for one of these successful bidders to flounder in the market place and then just take them over and take the licence at a much lower cost than they had bid in the auction and that is a market distortion caused by the structure of the auction?
  (Mr Hendon) I do not see any evidence of companies doing that.

  85. Do you predict then that you will not see a takeover of one of these companies at a much lower value than it was previously at which will imply—you can analyse these figures—that the licence will have been appropriated by another party for less than they paid originally?
  (Mr Hendon) I cannot predict that at all because I have no more knowledge than you have of what is going on in the market.

  86. Do you think that is possible or unlikely?
  (Mr Hendon) I really cannot predict it.

  87. Do you think the extent of sales of spectrum by the releasing of some of these wave lengths in defence and the like will annoy some of these bidders who bid on the presumption there were a limited amount of products to bid for? Then afterwards you said "There are more down here, you can buy these". Do you not think that will annoy the market and again alter what is the correct price in the market and so undervalue their bid and undermine their business?
  (Mr Hendon) If we are selling anything, and the licence is the same as privatisation in this respect, we have to say what it is we are selling, and we have to say it in terms which the city accepts. This (witness indicating) is the information memorandum which describes what we were selling. As you can see there is a lot of it.

  88. Your point is well made but at the point you sold this spectrum were the people buying it aware you were intending after the event to sell even more and by how much, because that would have determined what sort of bid they put in and whether to hold back for the next auction?
  (Mr Hendon) Yes, I believe what is said in there about our plans for further auctions, first of all, was what we knew at the time and is certainly consistent with what we are doing now. Indeed I constantly, in discussions back in the Radiocommunications Agency, turned to what we said in this document and checked what we were thinking of doing was consistent with what this document was saying.

  89. It is the case that if you were suddenly to pronounce in this room, from Figure 5 on page 14, what proportion you anticipated being sold off in the future, that could have a direct impact on market prices and share prices. That is clearly the case, is it not?
  (Mr Hendon) Figure 5?

  90. Would you not accept that the market's expectation of how much more of this spectrum is going to be sold and when, will clearly have an impact on the future auction price and the value of the current incumbent of the current wave bands?
  (Mr Hendon) Yes, and I think that is why we will not be able to immediately go and auction chunks of the spectrum if, for example, we were able to get some out of the MoD. The important point to remember is that not all spectrum is suitable for all purposes. It is a little bit like land. Some land is good for housing, some land is good for farming, and the same with spectrum. It may well be that we can run auctions for spectrum for broad band which will have no particular bearing on the value of—

  91. If we sell more and more MoD wave bands, do you think this will compromise future defence opportunities, so that when we try and launch our shield suddenly Mickey Mouse or something like that will come down the wave length?
  (Mr Hendon) I am quite certain that is not going to happen because I have talked to the MoD and they are fully cognizant of that risk.

  92. You mentioned at one point that in your view having three licences and not four meant we got more money because the sum from three would be more than the sum from four in an auction. I was a bit surprised you said that, in terms of simple economic analysis. You were saying that the aggregate would be more and the individual amounts would be less?
  (Mr Hendon) What I was suggesting was that—and of course it is all speculation—if the four incumbents had had to fight for three licences, it would have been a very competitive market because none of them could really afford to be the one which did not have a licence. So I suspect we would have generated more proceeds that way, but of course there would have been all sorts of difficulties with that in terms of our other objectives.

  93. I was concerned in your answers to Mr Steinberg on page 43, paragraph 4.29, in respect of us getting not enough money from the sale of these wave bands in terms of the sell-off being £1.6 billion more. Do you anticipate seeing more examples of that, that people will sell them on for more than we originally sold them for, a bit like Railtrack?
  (Mr Hendon) What happened here was that TIW won a licence. You do not win a licence for nothing, so the company put some money into that and they then had an asset which was a licence, and they sold that company to Hutchison who then sold part of it again to DoCoMo and KPN. The figures are known for the part they sold to DoCoMo and KPN, and that implies, as indeed this text says, a value of £6 billion for the company. I would hope that if there are further sales of companies which have licences that those companies will be worth more than the value of the licence and I hope gradually those companies will be very valuable and profitable companies, yes.

  94. Hopefully it will be an appreciating asset and it will not go downhill. I think you did say that if a company takes over another company and there are two licences held in one company, they would have to make arrangements to compete with themselves. Is that correct?
  (Mr Hendon) I think the way it works is that if two companies wish to merge and they are each active in the market, it is a matter for competition law as to whether the merger can take place or not. I am not at all an expert on this so you will have to forgive me if I cannot answer the questions in that area. In the event that the competition authorities decide the merger is allowed, then that company within its group would have two licences and it would then be obligated to meet the conditions of the licence in respect of each licence, and the only way it could do that would be to roll out two infrastructures, and if it is going to roll out billions of pounds of infrastructure then it is going to have to compete in the market place to get customers, and that means competing with itself.

  95. I have to say it seems very unconvincing to me. Moving on to masts, David Rendel made an interesting point. If it is the case that, firstly, there is a massive public outcry over the proliferation of masts, and in my area I am involved in campaigns against these masts going up, would you not agree that these companies which have given all this money in good faith, £22.5 billion, if the Government put massive restrictions on the location of masts by schools, as we have seen in New Zealand, then obviously the bidders would say, "This is unfair. We paid all this money in good faith and now you are stopping us running out network." Do you not think that is a bit of a problem for the Government if again there is a compromised position?
  (Mr Hendon) I think we can expect that anyone who buys an asset will seek to minimise the interference in the way they use that asset, so of course they will argue with anything we want to do, but that does not affect the possibility we have to place restrictions on those companies if need be.

  96. In terms of a fair solution and in terms of what David Rendel said in respect of taking back public ownership of the mast network and providing access to all the masts for everyone so there will be fewer masts, a bit like the Railtrack network—perhaps Masttrack—do you think it would be a good idea to consider having a network so we can massively reduce the number of masts and everyone could use them so everyone would have complete coverage and there would not be such a problem with people protesting outside schools?
  (Mr Hendon) Actually I am not a great believer in those sort of ventures. I think the sort of difficulties we have seen with Railtrack, which is coming from a position of being an entity, would be as of nothing compared with the difficulties we saw trying to build a company from a very large number of constituent parts, all of which are owned by different people for different purposes, where the primary use is not a mast at all, and trying to put that together would be an absolute nightmare. It is far better to let the industry get on and put in place the restrictions on planning which the citizens want, which is exactly what has been going on—

  97. If all local authorities could stop masts going up, there would be a limited supply of masts, everyone will share them, which will affect the price the consumer has to pay.
  (Mr Hendon) It is certainly the case that it is very difficult to get permission to put a new mast up at the moment, and that means companies are forced to try to share because the only they can roll out quickly is to do that.

  98. Finally, if these auction techniques to maximise income had been used when the Government sold Railtrack in 1996, do you think we would have got much more money for it? Do you think it would have made a big difference?
  (Mr Hendon) These auction techniques were not to maximise proceeds, is the first point.

  99. I know that but they did.
  (Mr Hendon) I do not think they did. Secondly, I have no idea how it would work in relation to Railtrack because it is an entirely different thing. One of the fundamental lessons we have learned is that you have to design the auction for the thing you are trying to sell and the critical point is the number of bidders. That completely changes the whole game.

  Geraint Davies: Thank you very much.


 
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