Blow for Osborne as 4G auction raises only £2.3bn

The regulator had placed a reserve price of £1.3 billion on the 4G sale, but today's total is still much less than the £3.5 billion estimated by the Government's tax and spending watchdog in the Autumn statement.

The previous 3G auction raised £22.5 billion for the Treasury in 2000.

The bidders in the 4G version competed to buy airwaves in two separate bands - the higher frequency 2.6 GHz and lower frequency 800 MHz - with 28 lots up for grabs.

After more than 50 rounds of the auction, Vodafone was the highest bidder paying £790.8 million for a mixture of the lower and higher bands.

EE, formed from the merger of Orange and T-Mobile, already has access to 4G and was the first to offer a 4G network in the UK. It was the second highest bidder paying £588.9 million for its airwaves.

Vodafone UK chief executive Guy Laurence said: "We've secured the low frequency mobile phone spectrum that will support the launch of our ultra-fast 4G service later this year. It will enable us to deliver services where people really want it, especially indoors. This is great news for our customers."

Under the deal O2's Telefonica has won a spectrum which must provide mobile broadband services for indoor reception to a least 98% of the UK population, and at least 95% of the population in each of the UK nations - England, Northern Ireland, Scotland and Wales - by the end of 2017 at the latest.

Ed Richards, Ofcom chief executive, said: "This is a positive outcome for competition in the UK, which will lead to faster and more widespread mobile broadband, and substantial benefits for consumers and businesses across the country. We are confident that the UK will be among the most competitive markets in the world for 4G services.

He said: "4G coverage will extend far beyond that of existing 3G services, covering 98% of the UK population indoors - and even more when outdoors - which is good news for parts of the country currently under-served by mobile broadband."

The two losing bidders were Hong Kong Telecom owner PCCW and private-equity backed Buckinghamshire-based firm MLL, which supports fixed and wireless services in the UK.

BT, which paid £186.5 million for its licence, said it did not intend to build a national mobile network.

Chief executive Ian Livingston said: "Instead, this spectrum will complement our existing strategy of delivering a range of services using fixed and wireless broadband. We want our customers to enjoy the best possible connections wherever they are and this spectrum, together with our investment in fibre broadband, will help us achieve that."

Ofcom said that by 2030 demand for the mobile data could be 80 times higher than today and it was planning for a further spectrum for possible future 5G mobile services.

4G services should make it much quicker to surf the web on mobiles, giving speeds close to home broadband services and allowing consumers to stream high-quality video, watch live TV and download large files.

For the typical user, download speeds of initial 4G networks will be at least five to seven times faster than those for existing 3G networks.

This means a music album that takes 20 minutes to download on a 3G phone will take just over three minutes on 4G.

Mr Richards told BBC Radio 4's Today programme that Ofcom had not attempted to estimate how much money would be raised from the auction.

"Others did that. That is a matter for them," he added.

Senior Tory backbencher John Redwood insisted the Office for Budget Responsibility was to blame rather than Chancellor George Osborne.

"I think it was entirely predictable all the revenue figures would be high," he said. "I have been saying that for two and a half years.

"This is a rather small shortfall compared with the shortfall in income tax and other incomes. But it is the OBR doing this, you cannot blame the Chancellor for it.

"He has made an independent budget office who are meant to know about these things, and I am afraid they have been consistently wrong.

"They have consistently overestimated the growth in the economy and they have consistently overestimated the revenues."

Mr Redwood said the fundamental problem was a "stand-off" between the costs of the public sector and what funding the private sector was willing to provide.

There needed to be "realistic tax rates that the private sector can and will pay".

Asked whether Mr Osborne should be relying on revenues from selling off the 4G spectrum, Mr Redwood said: "I think he needs whatever money he can get his hands on."

Deputy Prime Minister Nick Clegg insisted that ministers were not to blame for the over-estimate in the amount the auction would raise.

"The figure that George Osborne talked about wasn't plucked out of thin air. This was actually verified by the independent Office for Budget Responsibility (OBR)," he said on his weekly radio phone-in on London's LBC 97.3.

"Of course it was a prediction, by definition, about an auction that hadn't yet been completed, but it wasn't one cooked up by politicians in Whitehall. The OBR said that was a reasonable estimate."

For Labour, shadow chief secretary Rachel Reeves said the shortfall was another blow for Mr Osborne's economic strategy.

"It shows how foolish and short-termist the Chancellor was to bank this cash in the autumn statement to make his borrowing figures look less bad," she said.

"He couldn't bring himself to admit that borrowing was up so far this year but his trickery has now badly backfired.

"Instead of more accounting trickery, what we really need from this Chancellor is action to kick-start our flatlining economy."

Culture Secretary Maria Miller insisted that the auction would deliver a "significant economic boost" to the UK.

"Spectrum use is worth more than £50 billion to the UK economy and 4G mobile broadband is a key part of our digital growth strategy so I am delighted the auction has been completed," she said.

"We worked hard through the autumn to make sure that the operators would be able to use this spectrum six months earlier than expected.

"The benefits will be seen in the UK from the summer onwards as mobile operators deliver competitive high speed mobile broadband services."

Work and Pensions Secretary Iain Duncan Smith said the Government never banked on raising the full £3.5 billion to fund its spending plans.

"The Government never set out its stall on the basis that every penny that was predicted would come in. On that basis we are planning to fund all the programmes that we have got at the moment and so is the Treasury," he told BBC News.

"Let's be honest, it was a prediction by independent experts, but the reality is until the receipts come in you don't count that money."

The OBR said it certified an estimate produced by the Government for the auction revenue, which was based on similar spectrum sales outside the UK.

A spokesman said: "In our December 2012 forecast we certified the Government's estimate of £3.5 billion for the proceeds from the 4G auction as a reasonable and central estimate.

"This estimate was based on external analysts' reports and the value of comparable spectrum auctions outside the UK.

"At the time we highlighted this estimate as an area of particular uncertainty in the December forecast. We will include the final proceeds announced today in our Budget forecast in March."