Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



Mr Jenkins

  100. Mr Hendon, congratulations, this must be one of the first times, if not the first time, that the taxpayer has actually won over a shareholder when we have floated something off in this country, normally it is disastrous the other way. I know the point of the auction under EU rules to operators is to raise the efficiency of the industry and you rightly said you used experts rather than the old system where we allocate the licence depending upon their proposals. I noticed in the report it says the system is to run. Government officials, even when supported by experts, very often these companies fail to hold these companies later on to account for the very optimistic promises because they fail to deliver. I find it very interesting. You got £8 million to run the auction, which was a figure which probably came out of the air and you spent £8 million, 6.1 on advisers, on experts. Since they cannot and could not pick in a beauty contest where the companies were going to go on and they were a little bit out on the price you raised, why did you spend 6.1 million on their advice?
  (Mr Hendon) With respect, you are linking two different points here. Perhaps I can address them one at a time. I think it is certainly our view that if you run what is sometimes called a beauty contest to look at the proposals that companies make and choose which one is going to be the one to have the licence, then you have to judge the promises they make as to what it is they will do with the opportunity you are giving them. Really it is a guess on their part as to what the technology will deliver and how the market will work and how the business will work and how the competition will work and it is their guess against your guess really. All that I think it is saying in this report, and certainly I entirely agree with the comments about these competitions, is that civil servants with the best advisers can do no better than the companies with the best advisers and, at the end of the day, it is down to chance and to luck and the market and goodness knows what as to what eventually turns out. When some years later you discover that the company has not been able to do what it thought it could do then you have a terrible dilemma because if you take the licence away from the company, because they have not performed, then you probably deprive the consumers, some consumers of the service, certainly you do not encourage shareholders to take technological risk again and you have not actually delivered the main objective of getting the services of the market place. That is why I do not like beauty contests even with the best advisers. The advisers we used here were not to give us the means to require companies to do something in the future, they were to give us advice on how to design an auction which would deliver the Government's objectives, the ones I mentioned briefly just now. I can go into detail about what the individual advisers contributed to the process, if you would like, but let me stop so you can ask me a question.

  101. You think £6.1 million was justified to pay people to advise you who were so hopelessly out on the figure you may as well have gone down the market and asked one of the traders down there, you would have probably got a more realistic figure of what it would raise.
  (Mr Hendon) Yes, because we did not ask them to tell us what the figure was. We were not interested in what the proceeds figure was. We had a working assumption of a billion and that was good enough, as it were. The modelling that we did was to understand the value of a licence to a company that was a new entrant compared with a company that was not a new entrant. That information led us to insist on the roaming condition. You have seen there was a roaming condition which was imposed on the second generation licensees and that was a non trivial exercise. As you know there was a legal challenge about that. The reason we did that was because the advisers told us that a new entrant would be substantially disadvantaged compared with an existing player in terms of the cost of building a business with a certain customer base. The enterprise value of the licence would be lower to a new entrant than to an incumbent. That was just one example of some advice which enabled us to make changes which were undoubtedly important in getting new entrants into the game.

  102. So your risk assessment did not take into account any income from the sale at all then?
  (Mr Hendon) I think it is probably true to say we really did not expect the income to go this high. We did not think about certainly what would happen if it went up above a few billion pounds, that was a surprise to everyone. What I would say is that nevertheless the auction was designed in a way that the process was robust and it worked, even for £22 billion, even though we originally designed it with £1 billion in mind, it worked for £22 billion, it worked very smoothly. A number of the bidders have congratulated us on the way the auction was carried out. I think that is reported in the report as well.

  103. Were these the successful ones or the unsuccessful ones?
  (Mr Hendon) I think both actually.

  104. It cut their costs down, the cost of entering into the contest.
  (Mr Hendon) It is not just a question of cost, the whole process. It was open, it was fair and they knew what was happening. It did not have all sorts of alarms and excursions, it proceeded in the way it was supposed to proceed. It just proceeded for longer than we expected it to proceed.

  105. The efficient use of the spectrum is going to be forced on, incentivised by the cost they paid. Simple. I would not have thought I needed an expert to tell me that.
  (Mr Hendon) The efficient use of spectrum is a strange concept and it means all sorts of things but in this context it means that people who have a licence to use spectrum should get on and use it and exploit it.

  106. As quickly as possible.
  (Mr Hendon) As soon as possible and indeed to deliver services which are useful to the community and which will generate economic value in their own right. We are trying to get economic activity built on the back of this spectrum.

  107. It just depends on the technology and how fast technology is moving. If I have an efficient spectrum use and by contracting my 15 down to ten I can then release five back in and there is a equity on my part, do you see the need to have a market place for that excessive spectrum or the re-siting of the spectrum? Do you feel it should come back in and the Government should play a part in holding the market and maybe taking something else in the transfer costs?
  (Mr Hendon) I think there should be a market, yes. When the changes to European law allow it, we will introduce a market. We will be introducing it in a slightly cautious way because we want this market to work properly and we do not want abuse in the market and we need to find out how to do that. There are spectrum markets in other parts of the world so we can look at what has happened in other parts of the world and try to avoid problems. I think that if one of these companies decides it has bought more spectrum than it needs then that is between them and the market rather than between them and us. If they sell it in the market to another company who buy it and then do something useful with it then that is fine. We will need to keep tabs on what it is used for though because we have to prevent interference to other users of adjacent spectrum and all of those sorts of things.

  108. The Cable and Wireless Act set up this sale of the spectrum to bring money in to fund research and development in the use of spectrum. Are you saying that we do not see it as a continuing need and we do not see a reason why we should take any element of the money on an auction price back in to the market place when they trade the spectrum to continue that research into spectrum use?
  (Mr Hendon) There is a power in the Act to enable us to do that. The proportion of spectrum that is auctioned is quite small compared with the overall amount. We have the means to fund that out of income from other licences. For example, the income this year from taxi licences and second generation mobile and so on is around £125 million. If the Treasury agrees and we have useful things to do with it, there is the basis there where we can do such research. We do not need to take it out of the proceeds that people might make in trading spectrum.

  109. I would prefer myself if I had an industry to have a knowledge that there was a secure market there. I would rather have it maintained and overseen by Government and if necessary European arrangements so I knew it was maintained rather than what could result in a chaotic situation where prices went up and down in the market place. I would rather have some stability. I was hoping you would be able to offer that in the future.
  (Mr Hendon) If we artificially stabilise something it could actually act in a quite perverse way against a market that is free floating. I think you have to let the market move on its own. If people buy spectrum at a price which is lower or higher they have to answer to the market. As I say, we will be going into this cautiously because I do not want to end up with a bad market in spectrum.

  110. One of the things which I was surprised at was your answer to masts. Did not the television companies go into this arrangement where they had a central mast agency they owned to improve the efficiency of the television transmission in this country?
  (Mr Hendon) The BBC used to have its own masts and it sold those, it privatised that part of its business. The Independent Television Companies did the same and that business is currently owned by NTL. It is Crown Castle and NTL which are the two companies which are private sector companies now running those mast businesses. Certainly I think there is a business to be made in acquiring mast sites and then selling them on to companies like 3G companies and there are companies in this business right now. I would absolutely encourage it from the point of the Radiocommunications Agency.

  111. You do not think there is any case for improving efficiency by bring set standards to the industry to allow one transmission company owned by these operators, if need be, to improve the efficiency?
  (Mr Hendon) I am afraid I do not really ever see a situation where having one entity running something improves the efficiency. Last night when I had to wait two hours for a train home I certainly did not feel the fact that there was one provider of the service was the right way to do it.

  112. I think you would find it a bit more difficult if there was more than one provider down the railway track at any one time. I would not want to take on Railtrack. There are very many examples of one provider being very efficient in the market place.
  (Mr Hendon) There are also—I do not want to argue with you—cases of rail companies running on the same track and competing with each other. I think Virgin and Silverlink for example so it can work. Anyway, my main point is I am entirely unconvinced that a single monopoly company would be the right way to provide masts for this sort of business.

  113. You see this situation over here, Air Traffic Control, it will be better when there are a number of Air Traffic Control centres rather than one.
  (Mr Hendon) I am really not competent to comment on that.

  Mr Jenkins: No. I do not believe that. Thank you, Chairman.

Mr Davidson

  114. Can I start off by saying it seems to me you have done remarkably well in getting this huge amount of money for the public sector and if you have not received notification of a knighthood or something similar you should have, considering some of the plonkers that do get them, present company excepted, I thought I would add.
  (Mr Hendon) I think somebody once said that you could say that but I could not possibly comment.

  115. Well indeed. I just want to pick up some relatively minor matters because most of the broad sweep of this has been covered. One thing which does concern me is the way in which Hutchison and the newcomer took on the market. As I understand the position, Hutchison had made a commitment to take over the entire capacity of the winning newcomer before they got the contract and while this was known to the auction authorities it was not known to the other bidders. I wonder the extent to which the new entry aspect of it was therefore circumvented. It seems to me there are almost two elements to the new entrant. It could be a huge big firm from somewhere else which was new to the British market or it could be somebody who had been put together from a number of smaller firms seeking to break into this industry. By doing it in this way it appears it might be one but in fact it was the other. Does that seem fair to you?
  (Mr Hendon) No, I do not think that is right. I am not sure that it was to take the entire capacity of the network, I think they said they would take some capacity. I do not know the details of the agreement myself. I believe that this was known by the other bidders in the auction but maybe my staff behind can tell me.

  116. This report, which as I understand it you agreed.
  (Mr Hendon) Can you tell me where?

  117. Paragraph 4.5. It says "Hutchison told us that before the auction they had signed an exclusive agreement to take all of the capacity from TIW's 3G network, and had informed the UK authorities of this." I am sure I have read somewhere else that nobody knew about this except the auction authorities.
  (Mr Hendon) I am sure this is correct. I had not seen that.

  118. My understanding is these reports are always agreed between the C&AG and the victim, as it were.
  (Mr Hendon) Yes, I agree. I am sure what this says is correct.

  119. That was not what you said to me earlier on. Okay. Given this is correct, to what extent is it reasonable to think the alleged independent newcomer was just a Trojan horse for Hutchison?
  (Mr Hendon) No, I do not think so. If there had been a formal agreement which breached the auction rules then TIW would not have been able to take possession of the licence. After the auction was over at the same time as we were determining that Vodafone and Orange could not have their licences until they demerged, and that led to the delay, we had to check also that TIW had complied with the auction and to ensure there was no agreement there which was in breach of the auction rules.

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