Examination of Witnesses (Questions 40
WEDNESDAY 5 DECEMBER 2001
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
(Mr Hendon) The process we followed was that we produced
draft auction rules and we took them to a consultancy group called
the UMTSAuction Consultative Group, UACGof 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 comparedLet 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
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 communitythe
shareholders and the banksto 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, thoughand I am
sorry I am not briefed on thisthe 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.
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.