## **Box 4: New generation telecom licenses in Germany**

<mark>Klemperer (2002) provides a complete review of the 3G licenses auctioned by many European governments in the early 2000s. For instance, the German government decided to use a</mark> _<mark>simultaneous ascending auction</mark>_ <mark>to sell ten blocks of spectrum rights. The auction rules strictly stated that any new bid on a spectrum block had to exceed the previous high bid by at least 10 percent. Mannesman, one of the bidders participating in this auction, bid 18.18 million DM per megahertz for blocks 1 to 5 and 20 million DM per megahertz for blocks 6 to 10. T-Mobile, a competing bidder, interpreted the Mannesman’s bid for blocks 1 to 5 as an offer although there was no explicit agreement between the two firms. It seems that T-Mobil understood that if it bid 20 million DM per MHz on blocks 1 to 5, and did not bid on blocks 6 to 10, the two firms would then live with</mark> neither company challenging the other on the other’s half.

_<mark>Source: adapted from Klemperer (2002)</mark>_

# _3. Adequacy of the tender design to the social and political context_

A good tender must reflect the socio-political context of the country as well as the peculiarities of the project. The procurement of PPI projects is politically sensitive. Because, PPI agreements are structured as risk sharing mechanisms, they are perceived as rent sharing mechanisms through which rents are redistributed between the project developer, the lenders, the government and eventually the consumers. The main rationale for organizing competitive tenders is to ensure fairness and equity in the way the rents are redistributed. Competitive tenders are therefore vulnerable to challenges brought by political opponents or social activists. Box 5 highlights such a situation in the case of the Cochambaba water concession project in Bolivia. Similar situations have been observed in many other countries<sup>7</sup> . In Algeria the second GSM license was caught up in political turmoil less than two years after being awarded because of the inability of the winner to quickly develop the services (Noumba, P., 2004). Similarly, the privatization of the power company in Senegal was terminated less than a year after being issued by the incoming government because of deficient performances. There are many other examples illustrating the political sensitivity of the concession of PPI projects. Competitive and transparent tenders can mitigate these political and social risks, but are not often sufficient to completely mitigate these risks. How to explain such mismatch? First, consumers and politicians have short terms goals, and make the most of their decisions on the basis of these short term goals, whereas the development of infrastructure projects

> 7 The government of New Zealand implemented a second price sealed-bid auction to sell radio spectrum. In one extreme case, the first bid proposed NZ$100,000 while the second bid only proposed NZ$ 6. The government stood by the rules and granted the radio spectrum bloc to the winner at the price proposed by the second. Clearly, such an outcome could be easily challenged by political opponents and ultimately undermine the bidding process.

10