There are certain resources whose ownership resides in the State, which are scarce and which cannot be increased in quantity to meet excess demand. The allocation of these resources creates a policy dilemma for government, and the greater the excess demand, the greater the dilemma.
Examples include the allocation of FM radio licences, now under scrutiny at the Flood tribunal, and the allocation of next-generation mobile phone licences, on which the telecoms regulator announced her intentions last week.
There are two diametrically opposed approaches to the problem of allocation. One is to auction the scarce resource to the highest bidders, with the proceeds accruing to the State's coffers. The other is to award the scarce licences for free, through a "beauty contest", where the State selects the most deserving applicants on the basis of diverse attributes, with the specific exception of their willingness to part with cash.
There are intermediate approaches, for example a process which fixes the fee below what an auction would produce and selects among the contenders through a beauty contest.
FM radio licences in Ireland have always been allocated through the beauty contest method, with no upfront fees. There has been vigorous competition and disputes over the licence allocation process. The last round of mobile licences in Ireland was allocated at low, fixed prices through the beauty contest approach. Losing applicants, who were prepared to pay more than the fixed fee, complained about the fairness of the process.
The British government decided recently that the available technical capacity for the next (third) generation of mobile operators would be parcelled into five lots, which were auctioned to the highest bidder. The winners bid £22.5 billion sterling, with Eircom one of a number of companies which balked at the prices and walked away. The auction raised far more than the British government expected, and earned plaudits for the group of economists which designed the auction process.
THE shares in the winning companies actually fell subsequent to their success in the auction, since the stock market took the view that they paid too much.
It will not be possible for them to simply charge more to consumers to pay for the high bids, so the shareholders took a hit - or at least that is what the stock market appears to be saying. The British auction was the first allocation of third-generation mobile licences in Europe, so the outcome has been studied with great interest in other countries, not least by the mobile industry.
There has been a uniform condemnation from the industry of the cupidity of the British government, with allegations that the auction method forces companies to bid beyond their means and runs the risk that the high prices paid for licences will be recovered from the unfortunate consumer. Aside from the apparent unwillingness of the stock market to buy this argument, it raises two difficult questions for the industry.
The first is the implied need to save it from itself. Is it really the case that the mobile industry, the most dynamic in Europe over the last decade and hugely profitable for its shareholders, is run by people who are unable to decide rationally how much to pay for assets?
The second relates to the industry's concern to protect the consumer from, well, the mobile industry. If governments have designed the market so as to ensure adequate competition, then the companies will be unable to shift their sunk costs of licence acquisition on to the customer, unless they engage in illegal market-rigging.
An auction has just been completed in the Netherlands and the German auction begins this week. The French government, perhaps predictably, has gone for a hybrid solution, where the fee for each licence will apparently be set well below the market-clearing level, with successful applicants chosen on the basis of beauty. There have been dark hints in the Anglo-Saxon media that they will all turn out to be French.
The telecoms regulator here, Ms Etain Doyle, appears to have bought the mobile industry's arguments and announced last week her preference for allocating licences on "merit". This would mean that the four operators chosen would pay less, by perhaps hundreds of millions, than the auction price.
Her announcement was welcomed by the industry, which has persuaded a number of governments that markets will simultaneously exhibit competition and cost-plus pricing.
There are two arguments for auctioning third generation mobile licences in Ireland. The first is that these scarce assets will then end up in the hands of those who place the highest value on them. The scarcity rents attaching to these assets are captured by Government, which owns them.
The second argument for an auction is that it will avoid another beauty contest which, by definition, gives away assets for less than they are worth. It thus creates a prospective pot of gold which may be expended by the less-scrupulous applicants in currying favour or in straightforward corruption. Even with squeaky-clean applicants, the process can become a playpen for lobbyists and a temptation to both politicians and bureaucrats to indulge private agendas.
The loser in an auction can have no complaints. The losers in past beauty contests here are still complaining, as will the losers of future such contests. The political process would be healthier shorn of the prerogative to interfere in the allocation of scarce business assets, and there would be fewer calls for tribunals of inquiry in the years ahead.
Colm McCarthy is managing director of DKM economic consultants