The £22.5 billion auction of radio spectrum for the third generation of mobile telephones was well designed and efficient, Sir John Bourn, head of the National Audit Office, told Parliament today.

Key success factors were that the Radiocommunications Agency marketed the opportunity and consulted the Industry extensively before the auction, rehearsed it, managed the bidding process well in the opinion of bidders and kept the costs of running the auction low at £8.1million, under 0.1% of the proceeds.

Bidders’ determination to gain a licence in the first key European market to allocate spectrum, further stimulated by the Agency’s marketing, generated high demand and high proceeds. Fortuitously, the auction also coincided with the peak of the internet stock boom and an all-time peak in the share prices of telecommunications companies.

The NAO report does not aim to predict the future of the industry, but there are indications that the Agency’s auction has not harmed the future of third generation telephony. The operators will suffer to the extent that they have paid for spectrum, which in previous generations of telephony the government allocated to them at negligible cost. Their rates of return on their investments, and the value of their businesses, will be lower than they would otherwise have been. But though there has been a downturn in confidence in the industry since the auction, difficulties are not solely due to auctions and operators are still able to invest in developing services. The high cost of the licences to operators gives them an added incentive to roll-out services more quickly than if the spectrum had been given away.

Sellers in a competitive market will tend to disregard past investments when pricing goods and services. Mobile telephone services in the United Kingdom are usually priced according to what the market will bear, as opposed to simply passing on costs. If operators’ business plans prove to have been over-optimistic the main effect will be on the companies’ share prices rather than on their investment plans or consumers.

Though the Agency raised £22.5 billion, some £380 per head of population, from the auction they did not extract maximum proceeds. This was because to promote increased competition between operators and extend choice for consumers they reserved some of the spectrum, which sold for a lower price, for a new, fifth, mobile telephone operator. The operators face major technical and commercial uncertainties in developing services, but the auction should promote sustainable competition because the five licensees in this country are relatively large and strong global companies.

Auctions are not a panacea for the sale of public assets and departments should always consider alternatives. Departments should recognise that auctions are a useful mechanism for allocating resources in many situations, particularly where demand for the resource outstrips supply and the seller has little information about their worth.

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