Examination of Witnesses (Questions 120
WEDNESDAY 5 DECEMBER 2001
120. I do not quite follow this. Why would it
have been a breach of the rules if Hutchison had agreed to take
over TIW before the auction but it was acceptable afterwards when
Hutchison themselves were going to be a new entrant?
(Mr Hendon) Hutchison could have declared itself a
bidder at the outset but, of course, there was a complication
because Hutchison was owner of Orange, or had a large share in
Orange I think at that stage. The sale to Mannesmann was not complete
at that stage of the auction, I think.
121. But was quite clearly going to happen.
It was pretty clear down the road it was going to happen.
(Mr Hendon) Yes but the auction rules did not deal
in probabilities, they dealt in certainties.
(Mr Hendon) I believe it was not possible for Hutchison
to come into the auction because they were related to Orange at
123. Right. Let me get this clear. Hutchison
could not come into the auction because they already had a chunk
of Orange but they could arrange with TIW to buy all the capacity,
that was entirely acceptable, and then subsequently buy the firm
out. It beggars belief actually.
(Mr Hendon) They could make an agreement to take the
capacity on the network, yes, because that was not covered by
the auction rules. They could not make an agreement to buy the
company. That must have been something they did subsequent to
124. Do you think it had never occurred to them
before the auction?
(Mr Hendon) They were not able to do it before the
auction because they were still connected to Orange at the point
125. Okay. They had this firm, Orange, in this
hand that they were in the process of selling and in this other
hand they had this company that they had already committed to
buy the entire capacity thereof. It does not take a rocket scientist
to assume if they sold that and they had this firm they effectively
controlled they could buy that as well.
(Mr Hendon) It did not work like that. The timing
did not work like that. We required companies to declare their
intention to enter the auction on a certain date and those companies
had to then say how they were made up and who they were connected
to and all the other things. After that point it was not possible
for anyone to enter the auction, that was not allowed.
(Mr Hendon) At the point when they would have had
to come into the auction they were connected to Orange, as I understand
it. Subsequently, when they developed their interest in TIW it
was not possible for them to come into the auction because there
was no means to come into the auction.
127. Okay. I understand that. You are now down
to an OBE by the way. This beggars belief actually that they got
away with this. It seems to me absolutely clear this is a scam.
Just tell me if I have got this wrong. Here is a firm which owns
one of the bidders but is in the process of selling it. It wants
to remain in the market and understands completely that it cannot
sell that firm and be bidding at the same time. It can buy, however,
the capacity or make an arrangement to take the entire capacity
but it cannot buy TIW and then, low and behold, it buys it subsequently.
It just seems to me there is perhapsI will put it no stronger
than thatthe possibility of an informal arrangement, a
nudge, nudge, wink, wink, that "If we win the contract then
we will buy you out". Indeed that could very well have been
why TIW were able to win it because they knew they had Alistair
Moneybags behind them and there was a distortion of that section
of the market.
(Mr Hendon) We found no evidence of any such agreement
is all I can say.
128. If it was an informal agreement they are
hardly likely to leave it on the desk, are they? Does it not seem
a trifle odd to you?
(Mr Hendon) If there is no agreement we can see then
there is no breach of the auction rules.
129. Right. That is a very diplomatic way of
(Mr Hendon) Let me read what my advisers behind are
saying. We sought explicit assurance from Hutchinson and TIW that
there was no breach of the rules. Had the rules been breached
TIW would have been expelled from the auction or we would have
deprived them of the licence.
130. Knowing that if they breached the rules
they would be expelled from the auction, as presumably TIW might
have been, they are hardly like to tell you that, are they?
(Mr Hendon) I am sorry?
131. They are hardly like to tell you that they
had an informal arrangement, if indeed such a thing existed, are
(Mr Hendon) When we asked them if there was an agreement,
if they lied to us and we discovered subsequently that they had
lied then they would have been expelled from the auction, they
would have forfeit their deposit, which was a substantial amount
of money, and would have gone away with their tail between their
legs. It does not seem a credible thing for them to do.
Mr Davidson: If you did not catch them they
would have got away scot free with one of the licences.
Chairman: There is another note on the way.
132. Your assistant will probably get an OBE
out of this. Tell me, what is she saying now?
(Mr Hendon) I am not sure that I want to tell you
what she says!
133. She may not have passed a note across,
it may be an entirely blank piece of paper.
(Mr Hendon) What she is saying to me is that they
could also have forfeit the licence. They could have paid for
the licence and then we could have discovered that this agreement
that you are suggesting might have existed was there and then
they would have forfeit the whole licence, which would have been
quite a bad outcome for them.
134. Okay, that is one way of looking at it.
Can I ask you a question about why there was nothing built in
to make sure that if there was any sell off of the licence that
some of the profit or some of the surplus would come back to the
state. We have had examples in other circumstances where we either
have or have not had sell-off clauses, was it considered in these
(Mr Hendon) Yes, and I do not think we have any difficulty
with that. You cannot trade licences because the European Union
Directive prevents it, as I was explaining to the Chairman before,
but there is no reason why the company should not be traded and
providing the new owner continues to meet the licence conditions
then it is doing what we wanted. It is perfectly normal for companies
to be sold.
135. I understand that. There is no way then
that if a company, the main asset of which is the licence, was
sold on for twice the money, there is no way in which the state
then benefits, is that right?
(Mr Hendon) I suppose that is right, yes, but the
company that buys it has still got to implement the licence.
136. I understand all of that.
(Mr Hendon) What we are after
137. I understand that, I know that bit. Suppose
this auction had been a flop and you had ended up with a very
small number of bidders and you sold it for the reserve price
and the market had then transformed, that must have been one of
the options that you considered. Did you not consider at any stage
building in something that meant in any subsequent sell-on the
gains would come back to the Government?
(Mr Hendon) Yes. We looked very carefully at how this
market was going to work and if we thought that we would have
had a small number of bidders then we would not have used this
sort of auction. This style of auction is suitable where you have
got a large number of bidders relative to the number of things
you are trying to sell.
138. You might still have got a small price.
You told us earlier on a number times that you were not sure that
you would get as much as you did, you might have got a tenth or
a twentieth of it, which was still beyond your wildest dreams,
not as much as you eventually did, which was clearly the market
price. I just wonder did it never occur to you or were you never
advised that there ought to be an option there for Government
to allow subsequent gains?
(Mr Hendon) If you start building in those sorts of
rules for one sort of asset which is different from another sort
of asset, it is very difficult to incentivise the company to go
ahead and use the asset to the best advantage. How do you distinguish
between money made by selling the licence on effectively by selling
the company, exploiting it?
139. I appreciate it is difficult but there
are parallels elsewhere. You mentioned earlier on that you thought
nobody had any idea of how successful the auction would be. Can
I put it to you that having looked at paragraph 2.28, where Rothschild
were keen to have a fee linked to the profits raised in the auction,
they thought they were likely to get more money that way than
by the system that was eventually devised. They perhaps had a
betting inkling than yourselves of what might happen in these
circumstances. Did they never suggest that you might get as much
as you did?
(Mr Hendon) No, they never suggested it. I think everyone
expected the auction to be successful but I do not think anyone
expected the proceeds to be so high. The auction would have been
successful even if the proceeds had not been so high because what
we were trying to do was not to extract the maximum amount of
money but to put the licences in the hands of companies that exploit