Disincentivising overbidding for toll road concessions

4 │ INTERNATIONAL PRECEDENT FROM OTHER SECTORS
As part of this framework, the Radiocommunications Agency required bidders to make an initial deposit of £50m,
which rose to £100m for bids with a value greater than £400m. 115 This deposit was intended to protect against
frivolous bidding and default, by increasing the losses that would be faced by any firm which found itself in financial
difficulty due to overbidding. Both Binmore and Klemperer (2002) and the National Audit Office, in a report in 2000,
are in favour of the use of such a rule, but suggest that, with the benefit of hindsight, the deposits should have been
larger—and subject to further ratcheting in line with bidding values—given the eventual size of the bids:
Requiring bidders to pay substantial deposits at the outset as insurance against default provides protection for
the seller and acts as a deterrent against ill-considered bidding. Departments should provide for these deposits to
increase as the value of bids rises beyond the levels expected. 116
Auction outcome
The auction attracted 13 bidders: the four incumbents and nine potential new entrants. The first company to withdraw
(3G UK) did so in the 94th round of bidding, as the price of each of the licences passed £2 billion. This was followed
by four further withdrawals in quick succession. However, the last three withdrawals took considerably longer and
bidding was only concluded with the withdrawal of NTL Mobile in round 150.
In total, the auction raised £22.5 billion across the five licences. In comparison, development and management of
the auction cost £8m (less than 0.1% of the proceeds). 117 The winning bidders were allowed to pay the full amount
for the licence immediately upon the conclusion of the auction, or to spread the payment across a ten-year period
(with half upfront and five equally sized annual instalments to start on the sixth anniversary of the licence award). All
five companies paid upfront, on the basis that it was not viable to provide a bank guarantee against default which
was required if they chose to defer payment. Payments were made in May and September 2000, with licences
immediately awarded upon the receipt of payment.
Table 4.2 Winning bids in the UK 3G spectrum auctions
Licence Winning bidder Price (£m) Reserve price (£m)
A (largest, reserved for new entrant) TIW 4,385 125
B (second-largest) Vodafone 5,964 107
C (small) BT 4,030 89
D (small) One2One 4,004 89
E (small) Orange 4,095 89
Total 22,478 499
Source: National Audit Office (2001), op. cit., p. 18.
Some industry commentators pointed to overbidding in the aftermath of the spectrum auction—indeed, the official
pre-estimate of the licences’ combined value was between £1 billion and £3 billion (4.5–13% of the final sale value).
However, Binmore and Klemperer (2002) present evidence that the market and telecoms companies did not believe
this to be the case. First, Hutchison was able to sell 35% of its stake in TIW—which won the licence reserved for new
entrants—in a deal that valued the licence at about £6 billion in July 2000 (two months after the auction). TIW had
paid around £4.4 billion for the licence. Second, Orange (UK) was sold to France Telecom in May 2000 for £6 billion
more than Mannesmann AG had paid for it six months before the auction. This would appear to suggest that the
licence added considerable value to the company.
115 Losing bidders were fully refunded their deposit.
116 National Audit Office (2001), op. cit.
117 Ibid, p. 29.
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