Examination of Witnesses (Questions 100
- 119)
WEDNESDAY 5 DECEMBER 2001
MR DAVID
HENDON
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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