Did Ofcom's 4G auction rules cost the UK an extra £3 billion?

The recent 4G spectrum auction could have raised almost £3 billion more than the £2.3 billion it did, according to new figures published by the auctioneer, government communications watchdog, Ofcom.

The tally, paid to the government by the UK's mobile operators in exchange for the right to roll out next-gen mobile internet speeds, fell well short of chancellor George Osborne's £3.5 billion budgeted estimate.

That alone was enough to worry Britain's bean counters, but it seems that, but for Ofcom's bidding rules, the sum obtained could have far outstripped the chancellor's wildest expectations.

New figures published by Ofcom have revealed that the total bids made by operators came to £5.2 billion, more than double the amount the auction will raise for the treasury.

Second bidder rules

The "theoretical" £5.2 billion would have been the amount paid by the operators had all of the top bids for 800MHz and 2.6GHz frequencies been accepted.

Instead, Ofcom employed a "second bidder" rule meaning that the winning party only had to pay slightly more than the next highest bidder in order to obtain their spectrum.

This system, which had been used in other European countries in their auctions, was outlined to ensure the bidding was harder to rig.

However, this has led to accusations that Ofcom had "over-engineered" the bidding process and as a result, the UK's purse strings will be a little tighter.

"Ofcom over-engineered the auction and it neither raised the amount that the government was looking for nor did it ensure that spectrum found its way into the hands of everybody who wanted it," a source at one bidder told The Guardian.

Reserves and caps

Ofcom has also set aside a portion of the spectrum for Three, the UK's smallest network, to ensure it received some of the spectrum, while it also placed caps on the amount of spectrum O2 and Vodafone were allowed to buy, both of which may have lowered the potential income for the treasury.

Vodafone had bid £2 billion for its spectrum, but only ended up paying £790m, whereas O2 owner Telefonica had bid £1.2 billion but ended up paying considerably £550 for the share of the pie they were able to purchase. Three, on the other hand was only asked to pay the "reserve price" of £225m for its share.

Ofcom responded by saying: "We are entirely comfortable with the rules that we put in place on the caps and the reserved spectrum to ensure that there is effective competition in future to the benefit of UK consumers and businesses."