OBSERVER: Most bigger European countries have already issued 3G licences and, therefore, companies are now less interested in entering the Irish market

The Government's inability to find bidders for all four third-generation (3G) mobile phone licences illustrates again the effective failure of the State to capitalise on the deregulation and privatisation of the telecommunications industry. A review of the licensing process should now be undertaken.

Three firms, Vodafone, O2 and the Hong Kong-based Hutchison Whampoa, have applied for 3G licences. Meteor, the third mobile operator in this country, declined, resulting in an unfilled fourth licence.

The result of this situation is a failure to reach the Government's target of €394 million in fees. In Europe, where licences were issued over the past two years, €120 billion was raised, while in Britain, £22.4 billion sterling (€36.7 billion) has been raked in.

These contrasting figures highlight not only the monetary benefits to be gained from these licences but also the inadequacy of the current allocation of such licences in this country.

The Exchequer has already lost potentially millions of euros in the issuing of second-generation (2G) licences and now it seems has lost many millions more with 3G.

Why has the Republic lost out so much with the issuing of these licences? The answer lies in the process by which licences are allocated and this must surely be reviewed.

The so-called "beauty contest" process, whereby the allocation of licences is awarded on the perceived merits of each proposal, is a time-consuming and fraught process.

For example, the 2G licence was awarded to Esat Digifone in 1995, and made Denis O'Brien many millions of pounds. The third mobile 2G licence was initially awarded to Meteor but this decision was challenged in the High Court by an unsuccessful applicant, British company Orange.

The High Court found the decision to award the third mobile licence to Meteor as "objectively biased and unreasonable". The Supreme Court subsequently overturned this finding and Meteor eventually set up operations two years later than planned.

The resultant time delay had two effects: it put Meteor at a serious disadvantage in gaining market share as the two existing firms, Eircom and Esat, had this time to enhance their positions in the market; and it delayed the issuing of further licences.

The 3G licences have produced an inferior outcome as well. Not only has the State lost out on revenue but the process has been dragged out over a long period.

Most bigger European countries have already issued 3G licences and, therefore, companies are now less interested in entering the Irish market.

The beauty contest system should be revoked and replaced with a more transparent, speedy and equitable process. A straightforward auction system is one such process and it should be adopted here.

Advocates of the beauty-contest method claim it helps establish the "best" company from a range of applications and, therefore, is a superior process. Even though this seems to make sense, there is no guarantee that what is perceived to be the best firm before the licence is awarded will turn out to be the best once the firm has control over this licence. So relying solely on this criterion is fraught.

Given the initial appeal of this "best" criterion, it can still be implemented under an auction system. This is achieved by splitting the auction process into a two-stage process. In stage one, a range of companies that meet pre-determined criteria are selected from all applicants. Licences are then auctioned off to those firms.

An auction system will raise the maximum amount of revenue possible, running into millions of euros, and it will also avoid certain difficulties, such as the disagreements between the regulator and the Minister of Finance over pricing, which further delayed the issuing of the 3G licences.

An auction is the most efficient, objective and transparent system. It reduces the possibility of companies attempting to influence decision-making through "representations" or "donations", thereby upholding public accountability.

A properly designed auction system, set up to ensure companies do not collude or attempt to pass the cost onto the consumer, ensures that licences are given to the best companies that value them the most, and the consumer and the public purse will benefit.

Dr Edward Shinnick is a lecturer in economics at University College Cork