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  • Ian Ritchie : Business AM

Telecoms sector bled dry by the chancellor's greed

Once-mighty industry has been crippled by what amounts to an advance windfall tax

THE CHANCELLOR OF THE Exchequer is normally regarded as hugely influential but I once heard Denis Healey cast doubt on this – he had been a well regarded Chancellor in the 60s. “We make very little real difference to the economy”, he said. “Look at Italy – they have had no effective Government for over 20 years and their economy continues to outperform ours”.

Thirty years on, we now know that even if Chancellors might be limited in their ability to improve the economy they are very capable of damaging it. Nigel Lawson showed this when he abandoned the personal mortgage tax relief allowance.

He created a transition period where people who bought new property got the last individual tax reliefs. All of a sudden there was a rush of unmarried couples and flat-sharers desperate to trade up while they could still get the tax break, creating a huge property boom. Inevitably, after the boom came the bust and the result was the recession of the late 80s.

One of Gordon Brown’s first acts as Chancellor was the ‘windfall tax’ on the privatised utilities - £5Bn to pay for the ‘new deal’. The companies complained a bit, but paid up, and the measure didn’t seem to do any significant economic damage. The money was there and it seems the companies could easily afford it.

So Gordon Brown must have thought it was a great wheeze when he managed to extract large payments for the third generation (3G) licenses last year from the all-powerful international telecommunications companies, a kind of windfall tax in advance. After all, these companies were very wealthy, and could easily raise the money on the back of their huge share valuations.

Mobile phone operators were told they had to bid in an auction for the new high-capacity 3G licenses. Deciding not to bid was equivalent to accepting that you were going to go out of business within 10 years when these new systems will become the standard.

Needless to say, the companies decided to ‘choose life’ and paid up. A total of £22.5Bn was raised in the UK auction, and other countries followed our lead, notably Germany.

Since these telecoms businesses are global players they soon discovered that they were being forced to pay extremely high fees for the 3G licenses all around the world, tipping them into massive debt. The UK and Germany, between them, extracted more than £50Bn in license fees.

Partly as a result of these high licenses, the once-mighty global telecommunications companies have been laid low. Most are now languishing at a fraction of the share value they had a year ago, and they can no longer raise the money to invest in the development of the 3G infrastructure to exploit the licenses that they have so expensively acquired.

The Government’s intention to make the UK “the best place in the world to conduct e-business” has been badly damaged by all this. It might even be that Europe could lose the leadership in mobile telephony that, until now, it has had over the USA.

This has also caused huge knock-on effects in the infrastructure industry. Since their customers can no longer afford to buy their kit, they have come up with a neat solution – they will lend their customers the money. It’s a bit like getting a loan from a restaurant so that you can buy a meal from them.

Nokia has agreed to lend 2Bn Euros (£1.2bn) to Orange to build their 3G network, and are providing over £450m to Hutchison Whampoa, the Hong-Kong based operator.

For fear of losing out, Alcatel, Ericsson, Siemens and NEC are all joining in this wave of “vendor financing” and although the technology suppliers maintain that these are excellent financial deals, observers have noticed that they are actually lending more than the cost of the equipment that is being bought back. Nokia’s shares fell last week as a result.

Now the haggling is on to try and help the mobile phone operators out in other ways. Germany and Britain are looking at relaxing rules on the sharing of infrastructure between competing companies and the European Investment Bank is being called in to help finance the new networks.

But Rik Daems, the Belgian industry minister, has warned against giving too much help “just because two big countries’ government made money but hurt their industry.” And since Belgium takes over the EU Presidency for the second half of this year, his views actually count.

“The Art of Taxation”, said Sir John MacDonald “consists of so plucking the goose as to obtain the largest amount of feathers, with the least amount of hissing”. Gordon Brown must have thought he had pulled it off, but just listen to the hissing noise – it’s the sound of the new economy deflating.

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