'An auction would leave the winning companies with a US$1 billion millstone hanging around their necks,' Ms Hughes said.

'Companies would be so handicapped by the initial up-front costs of just winning a licence, they would have little to invest in equipment, roll-out would be delayed, corners would be cut, and many consumers, particularly in rural areas or the outlying islands, could find they don't get offered the service at all.'

Fierce international debate has followed the high fees paid in European 3G auctions. Supporters of auctioning argue the cost is 'sunk' and has no impact on companies' roll-out plans or the price charged to consumers.

The SAR is proposing a 'reverse auction' based on, among other factors, the final price customers will be charged. Auction supporters say this amounts to a beauty parade by another name.

However, Ms Hughes said the uptake of 3G mobile services would also be hampered.

'Hong Kong consumers are very aware of the prices they are charged for telecoms services and when they see companies trying to pass on their auction costs in the form of higher prices, many will choose not to take up 3G at all.

'The end result is that Hong Kong would lose its status as the world's most competitive and lowest-priced telecoms market. Singapore would soon overtake Hong Kong as the region's best telecoms market.'

Ms Hughes is the author of a study assessing the impact of the SAR Government potentially awarding its licences on an auction rather than a merit-based system.

Using the German and British auctions as a guide, Ms Hughes said companies would spend a minimum total of US$4.5 billion at auction. By spreading out that cost on a pro-rata basis across Hong Kong consumers, the study concluded that each subscriber would have to pay at least 30 per cent more than they otherwise would for 3G services.

'But companies could put prices up even further. It would not be unreasonable to expect that prices could double. Consumers will be shocked by the price increases,' she said.

The bidding price at auction could force many domestic players to withdraw from the running, leaving Hong Kong's market dominated by cash-rich foreign players, Ms Hughes said.

'Auctions accelerate consolidation,' she said. 'The Government needs to think about just how many local companies could really afford the prices bid at auction. To compete, many of them would be forced into joint ventures with bigger foreign players who would have less interest in working with them in developing the technology and infrastructure needed for 3G. It would choke off the knock-on effect that 3G could have for the economy.'

The Office of the Telecommunications Authority (Ofta), which is in charge of issuing the licences, has said it is in favour of awarding the licences on a merit-based system. Five mobile-phone companies - Cable & Wireless HKT (now Pacific Century CyberWorks), SmarTone Telecommunications, New World Telephone, Peoples Telephone and Sunday Communications - have also backed the merit system, under which companies are assessed on submissions outlining their investment, planned service and support.

But Hutchison Whampoa, the SAR's largest operator and most profitable company, is pushing for auction - despite the confusion caused last week when it withdrew from a joint venture that had won a German 3G licence, citing concern that the US$7.6 billion price was too high.

The Government will make its licence decision by the end of the year, allowing the winners to start services soon after. The services will combine multimedia with access to the Internet, allowing consumers to watch television as well as shop and bank online via their mobiles.

'The Government could certainly make a windfall at auction by handing out the licences to those companies with the deepest pockets,' said Ms Hughes.

'But it's a one-off gain and a short-sighted approach. Over the long term, the Government would make more revenue through taxation by issuing the licences on a merit-based system. By keeping prices low, more consumers would take up the service, which would have a multiplier effect on the economy.

'Eventually the Government has to decide whether it wants a dynamic telecoms system or a bankrupt industry.'

However, some analysts say the Government could collect US$6 billion through an auction.

Auction proponents also argue that the merit system is less competitive, relying more on negotiations between businessmen and government officials.

'Ofta is very transparent in its selection criteria and process,' Ms Hughes said. 'It is recognised worldwide as a standard-setter in passing on benefits to consumers. It has a fantastically good weighting system that is very competitive and, rather than just collecting money for treasury, it insists that operators offer the lowest possible prices and the fastest roll-out to consumers.'

She also warned that Hong Kong would miss the opportunity to play a leading roll in developing 3G technology and services in the mainland if an auction in Hong Kong left companies beleaguered with debt or marginalised by foreign operators.

'In the next decade China will have the biggest telecoms market in the world,' Ms Hughes said. 'How Hong Kong handles the disposal of these 3G licences could determine what role it eventually plays in China's market. And that could determine whether or not Hong Kong becomes the world's leader in wireless Internet technology.'

'An auction would leave the [winners] with a US$1b millstone hanging around their necks'

Graphic: auct21gbz