Ifo Viewpoint No. 17: Blind in One Eye?

Hans-Werner Sinn
07 November 2000

When the European Commission sets out to forbid coal subsidies in Germany, when it forbids Italy's aid to Fiat in the form of regional assistance, and when it rejects tax credits to benefit shipbuilding in Spain, this can only meet with approval. The state aid rules in Article 87 of the EC Treaty are justified, since it is fundamentally not the role of the state to support corporations and industries. It is thus all the more surprising that the European Commission has consciously avoided taking a position on the indirect subsidies to the telecom industries in those countries that give away their UMTS licenses or sell them for less than their value. In Germany a license was auctioned for € 8 billion, in France, which had set a fixed price, the cost was € 5 billion at a validity length shortened by one quarter, and in Italy a license went for only € 3 billion. Sweden was content with a low annual user fee of 0.15% of turnover. In Germany and the U.K. more than € 102 per capita was paid for a license and in France € 82. In the Netherlands it was only € 26 and in Portugal € 10. In Spain a license was to be had for a per capita cost of only € 3 plus a low user fee.

The auctions that were used in the U.K. and in Germany were a very sensible way of awarding licenses. Firstly, the state was able to gain revenues that would otherwise have to come from distorting taxes. Secondly, the danger of preference being shown to national companies was avoided. And thirdly, the auctions helped determine which companies were in the best position to utilise the licenses. Only a company that credibly shows that it can gain considerable profits from the license will be able to raise the capital it needed for acquiring the license. When the state tries to determine the right companies by holding a "beauty contest", as in Sweden or Spain, the selection is made by officials who cannot be held responsible for their potentially poor choices. Only when the selection is made by people who are personally liable for their mistakes one can be sure that the limited number of licenses has indeed gone to the best owners.

There is also no need to fear that the companies will pass on the auction costs to the users. The providers in any case will have to set prices which maximise the excess of revenues over operating expenses. If, in light of the license costs, they aim for even higher prices, they will only hurt themselves as this will drive away customers. They can of course regain the cost of the licenses through their operations, but they cannot gain any more than they would have if the licenses had been given away. The auction costs are sinking costs which shift the stock price gains, that would otherwise have been expected, to the state, nothing more.

Of course, the companies that did not have to bear the auction costs have a considerable initial advantage from saving equity capital. Their war chests are full and can be used for rapid attacks on the markets of other countries. The fact that the former state-owned Spanish Telefonica was able to successfully keep up with the 3G bidding group in Germany whereas Deutsche Telekom came away empty-handed in Spain clearly shows the asymmetries among the countries.

In enforcing its state aid rules, the European Commission generally takes a broad view of its responsibilities. It has declared, for example, that the sale of public land below market value violates state aid rules just as much as free-of-charge access to public infrastructure. The Commission's reason for excluding the free access to UMTS licenses from its state aid rules, in which, in contrast to many cases that have received its criticism, gigantic subsidies are involved, remains a mystery. Was the Commission influenced by powerful lobbyists or was it blind in one eye?

Hans-Werner Sinn
President of the Ifo Institute


Press and Public Relations
Heidemarie Sherman
Tel. +49-89-9224-1604
Fax. +49-89-9224-1267
E-Mail: presse@ifo.de