Examination of Witnesses (Questions 1
WEDNESDAY 5 DECEMBER 2001
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
(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 understoodno-one,
not even the companieshow 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
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.
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
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
(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.