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Select Committee on Welsh Affairs Minutes of Evidence

Examination of Witnesses (Questions 20-39)



  20. A peripheral question: it has recently been predicted that NTL may well merge with Telewest. If that happens, do you see that having an impact on running out of broadband?
  (Mr Jeffers) I cannot comment on the prediction. Since time immemorial we have been merging with everybody—that is the nature of the cable business. Whatever happens, it will not change the dynamics. We have built a first class network and have built that over a relatively short space of time with the latest technologies. That is in the ground, it is in Wales today, and we can exploit that network. It does not really come down to the structure of ownership.

Mr Ruane

  21. Briefly, I know you are NTL and not BT, but what has prompted BT's reduction of prices?
  (Mr Jeffers) NTL! I genuinely think both NTL and Telewest have very much been working towards a joint message of building broadband Britain. It has been cemented by the good work of people like yourself to promote even the term "broadband" and what it is, and at last we are getting broadband on to the retail or the residential agenda and that has encouraged people like BT to catch on and start providing competitive pricing.

Albert Owen

  22. Mr Jeffers, you said you welcomed competition and embraced that a bit now. On competition rules, you say in your submission there is an urgent need for reform of the way competition rules apply to the whole telecom sector as a whole. Can you please explain that?
  (Mr Blowers) I will try and give you a succinct view of my concerns. There are two points here. Firstly, we are operating under a legislative framework for telecommunications which goes back to 1984. Certainly a great deal has happened in my life since 1984 and I am sure the same is true for members of the Committee, and in the industry, frankly, the world is completely unrecognisable. In 1984 we were very much focused on privatisation, on ensuring that BT rolled out voice telephonic services; now we are in the world of broadband internet, the challenges are quite different. We need a new legislative framework. The Government has been promising to reform communications legislation for some time—hopefully we will see legislation this year. It is my job to keep pushing at every opportunity and to say, frankly, "the sooner the better". The other observation I would make is that as they do that there are one or two interesting challenges that they should have in mind. The first is that we find ourselves in an interesting position where we have the competition authorities who do not have detailed knowledge of the sector and then we have sector regulators who do not have the expertise in applying competition law. All of this was supposed to be addressed by giving Oftel concurrent powers under the Competition Act back in 1998. There are two points which I think it is worth focusing on: firstly, the failure of the local loop unbundling process which certainly at an early stage we as a company were very interested in, and it is clear to us that the reason that process has failed is that Oftel does not have the ability to set detailed behavioural rules on BT which act ex ante, so BT does not face a set of obligations which are absolutely clear. The problem here is that competition law is very much geared towards picking up offences after the fact and then punishing them, but what we need here is to have very detailed rules applied right from the get-go, which stop BT from saying, "Ah, when you said to us you wanted access to our local exchange, we did not realise that what you meant was that you actually wanted a man with a key to open the door for you. You are now going to have to go back to the start process and get a specific obligation which says `The man at the key will turn up at 9 am and unlock the front door'." That is slightly facetious but the actual level of detail involved in local loop unbundling is that kind, and unless you write out the rules up front you are not get going to get anywhere. Secondly, we are involved in the third calendar year of investigation into BSkyB under the auspices of the office of fair trading. That is not an issue for this Committee but it is worth alerting people to the fact that simply relying on competition law is not enough, because if it takes three years to get to the bottom of an alleged abuse which took place over a period of six months, frankly it is of historic interest to the people participating in the industry and no more. As we reform competition law and communications legislation, it seems to us that we need to have that combination of clear ex ante rules where necessary, and a very clear set of guidelines about how the competition rules are going to be applied in the sector, so we do not end up with a three-year investigation at the end of which nothing has happened. There is a lot more one could say about that but in outline that is really the nature of our concerns.

  23. Going to your submission, you say Oftel concentrates too much on consumer and social policy and that should be handed over to the Government. Do you think that would be healthy?
  (Mr Blowers) Yes. There are different models one can adopt and, if you look at what has happened in the energy sector and the Utilities Act, there is a clearer separation of powers between those aspects of policy where it is right that Government should take a view. At the end of the day the Government is elected; it has the will of the people, and it is right that the Government should take certain decisions which are effectively social policy decisions. I do not think it is appropriate to say, "Let us ask our unelected regulators to make social policy for us on the hoof". That seems to be quite inappropriate. That entanglement of different objectives is something we detect, particularly in the work of Oftel over the last couple of years. Oftel feels it does not have a clear enough mandate to focus on what I regard as its principle task which is the economic regulation of the sector.

  24. Finally, my concern is that you will come back and say the Government is interfering too much in consumer issues. How do you see a separation?
  (Mr Blowers) It is our job to push back at where we regard intervention as being inappropriate. It is the Government's right, and indeed obligation, to roll out its own objectives and commitments. As far as I am concerned, provided the form of the intervention is clear and transparent—fair enough. What I have a problem with is where that becomes entangled in decision-making for other purposes, so you think you are getting a decision from the regulator which is about economic regulation, but it has several substrata attached which are about social policy or about something else which has been in the news recently that might be in the minds of politicians.

Mr Caton

  25. You just said that you saw the solution to the problem of local loop unbundling as better regulation, effectively. We understand that Cable & Wireless have called for what they call the natural monopoly in the local loop to be separated from the rest of BT's activities. Is that an alternative approach to dealing with the same problem?
  (Mr Blowers) We worked with Cable & Wireless in the early stages of them putting together the research that underpins that view. When we started on that we were looking at a situation where BT was said to be considering a voluntary divestment of its activities so BT itself, essentially for reasons of the shareholder overhang and its debt problems, might have gone down the path of voluntarily divesting itself. If that were the case, then we would be very interested in making sure that the nature of that divestment was the one that was optimally designed to produce competitive conditions in the market place. However, if BT are not going to do that, then our company for pragmatic reasons is less convinced that forcing them to go down that route is a solution. The reason is how many years would it take, starting from here, to force BT down the track of that kind of structural separation? Frankly, by the time any benefits from that feed through into the market place, the world will have moved on. So I think there are some interesting economic arguments for going down that route. For practical and pragmatic reasons, were BT to do it, we would be interested in making sure it happened in the right way. If not, frankly we need to get on with the regulatory tools we have.

Mrs Williams

  26. In what way does the current regulatory framework encourage or discourage the provision of broadband access in remote areas?
  (Mr Blowers) The positive aspects of the current regulatory framework are that, by and large, to build out these infrastructures we require very large sums of money to be invested. The UK still seems to be an investment friendly environment so when it comes to, if you like, international capital deciding where it is going to go, if the choice is between Hungary or Vietnam or wherever, they look at the UK and they see a market where the framework is transparent and the basic incentives for investment are in place. So that is good because it means we can attract the inward investment we need as a society to build these networks. My view is that broadband will be rolled out whatever happens. The question at the moment which is puzzling people is whether we can accelerate the rate at which it is rolled out? Can we move ourselves up the adoption curve faster than we would otherwise get there purely on market mechanisms? If you believe that is a good thing, and as a company we do, then you have to look at ways and means of stimulating both supply of and demand for broadband in a way that does not already exist. So two of the ideas we have been focusing on specifically are whether it would be appropriate, if we want customers, particularly residential customers, to adopt broadband quicker than otherwise, to look at some kind of positive incentive for customers through perhaps a tax regime to encourage people to adopt broadband faster. We know from our own experience, and we have been talking about the BT price announcement, that customers are very sensitive to the price at which this service is offered, so if you can knock £5 off the retail price we would see a lot more people adopt broadband a lot sooner. So that is one way we are encouraging the Government, which understandably is reticent about adopting any fiscal incentives in this area, to look actively at that particular proposal. The other area where we would like to see more work and, if you like, a greater clarity is in the area of how the public sector itself uses its purchasing capability. The public sector has got potentially a pivotal role in stimulating the supply of broadband and also in creating a wider network effect which would encourage smaller businesses and eventually residential users to adopt broadband. If you had some benefit from using broadband in that you could go to a particular Government website, perhaps the car licensing authority or somebody like that, and download all the documents you needed from there, then you start to create network effects. I think there are barriers at the moment to the public sector's procurement of broadband; we are not seeing the full benefits yet because we do not yet have enough clarity of the way the public sector's broadband activities function. So that is something central Government is looking at. So we are very interested, not least from our experience on the ground. Were the public sector to really use its muscle to buy broadband in a very coherent way, that could potentially be very powerful from our point of view as service providers.

  27. Facts and figures show us that the amount for broadband has so far been low. For example, you tell us that, of 142,000 residential customers in Wales, only 6 per cent have broadband. Why do you think this is so?
  (Mr Jeffers) It is like any new product: we have to understand that broadband is a relatively new product that has been out there. If you take any high tech product—mobile phones, PCs and so on—you see a curve that effectively starts with the early adopters, the people who have an interest in technology. That is where the market is today. We see it shifting, and we have seen the demand for broadband this year increase quite dramatically as people say, "There is an interest here, I have to get into this. I have to find out about it". So those figures will go forward quite dramatically, without any question.

Albert Owen

  28. In your submission there is an overview of your concerns about Wales. You talk about very low economic activity rates, for example. The problem I have with many small businesses that I speak to is that the reason they are unable to expand at the rate they wish to is that they do not have broadband access. How are you going to break this mould? The demand I say is there because I speak to business and the Federation of Small Businesses themselves. I am talking about small units now that cannot expand because they cannot access the market.
  (Mr Jeffers) Really the question is about educating and stimulating the market. You are right, there is a stimulus there. Broadband I would say is a misunderstood phrase at times—"Everybody has it, therefore we have to have it". What we have to do is make sure we can work with everybody, whether it is the SME sector or the consumer sector, so we can all understand the benefits and make sure effectively it fits for the demand that is there. I would argue that, in most cases, if the incumbent supplier is already there, they can access some form of high speed technology. What broadband in its broad sense is doing is reducing its price so it is more akin, and at the moment that is focused on concentrations of employment and people, but as time moves on and the other technologies kick in that will be a spread.
  (Mr Tse) I accept fully that there are some SME organisations that want to embrace broadband services and they cannot access those services, particularly in north Wales and mid and west Wales, for example, but there are by the same token an enormous amount of SMEs that do not understand what broadband is and how they can utilise it within their business, so we see the need for an education process. "Yes, you want broadband but what are you going to use it for? What are those business processes? How are you going to re-engineer your business?". That is the part that is sadly lacking at the moment, not just within Wales but in large parts of the UK.

  29. You are working with the WDA and the National Assembly on this very issue. When is this mould going to be broken because there is this frustration in the small business sector? Finally, on education, you say that education tends to be lower than in the rest of the UK. That is not the case. If you look at `A' level routes, many of the entrepreneurs are trying to set up in the locality and it is lack of access to broadband that is one of the factors.
  (Mr Tse) There are a number of projects we are working on with the Agency and the Assembly now. One example would be the Technium Centre[5], which I am not sure if you are familiar with, but it is certainly something that the Secretary of State and the First Minister have latched on to which says how do we build these centres of excellence where an SME that could not afford broadband access on their own can actually go to a facility such as an incubation unit where they can have access to technology not just to broadband and not just 128 or half a Mega bit capacity but 155 Mega bit type services, and share that service as part of the infrastructure as the heating and the electricity and the other services of that building, for example? Now we are working with the Agency on those ideas and the Agency says, "OK, we have put one in Swansea but how do we put one in Port Talbot, Neath, mid or west Wales". Competition says it is not just about us doing it but it is about other suppliers doing it as well.

Mrs Williams

  30. Who in your opinion should take the lead then, following on Mr Owen's question? You talk about the WDA and the National Assembly, but who should take the lead to inform people in Wales?
  (Mr Jeffers) There needs to be a shared responsibility in this. Clearly we would say we play a role in that through our advertising and sales messages—we have done that with ourselves and Telewest—and similarly the activity of both the Assembly and other organisations could be more effective, without a doubt. There is an opportunity potentially for a wider working group to take on the education message to stimulate it. I referred earlier to how we now see a stimulus in the demand for the product. Why? I would say it is because people are largely talking about it in the media; organisations such as yourselves are talking about it; and we are promoting it. If you combine those forces we start to get something that is there, so I think at the moment we have a lot of people talking about it, but perhaps slightly fragmented. Perhaps there is an opportunity at the more local level to come together and promote the broadband message, as long as all our objectives are realistic and as long as we all have a shared common goal—which I think we do. We want to see broadband out there as widely as possible.

Dr Francis

  31. This is the same question put in a different way, in the context I suppose of corporate social responsibility. To what extent is the role of the service provider to stimulate that demand, for example, by providing high band broadband width content, devising new applications, or by more active selling?
  (Mr Jeffers) I think there is a mixture of answers to that. Clearly we have a product we would like to sell; therefore we promote it. It has been interesting—classical of any high tech product—that people who buy it initially have been those who understood it, the computer literate folk, the people who have an interest in gaming, the SME market that have a technology base, but we see that shifting to a more general use and we have a role in that, and local Government does, and the education system. That is where we could probably, by a combination of powers, get a stronger message out there.

  32. So do you think there ought to be a greater effort to build these private/public partnerships in those areas such as rural and valley areas where there is a need for a greater take-up?
  (Mr Jeffers) Yes, I think there is. If we exist to educate and stimulate the broadband market, it would be far better two or three players doing that than one.

Mr Wiggins

  33. You said that the cost of tax incentives to encourage early take-up of broadband would be repaid by the increase in economic activity from "moving the UK faster up the broadband adoption curve". Would you like to say a little bit more about that? To whom might the tax incentives be available? Domestic or business users?
  (Mr Blowers) It is a proposition which, as I am sure you will appreciate, is hellishly difficult to prove because you are only going to be able to prove it at the far end of the process. What the Government is saying is that instinctively, intellectually, it accepts that broadband delivers all sorts of externalities and benefits and those can be difficult to measure. However, if you believe they exist, then it stands to reason that you are making an assumption that, in 3-4 years' time, having broadband now will have led to an increase in economic activity. Actually proving that to the satisfaction of Her Majesty's Treasury is a different issue. There is a level of detail and granularity which one needs to go into. We along with a number of other providers are currently trying to provide that detail and granularity. We accept that the Government is not going to go down this route without there being good evidence that it makes sound fiscal sense to do so, so we are working on that. As to how and to whom, we believe that essentially one might target the small business community: we would like to see residential consumers targeted as well. I was trying to describe the network effects and externalities and was not doing it very well but, if you have two broadband users at each end of the pipe, then it is a great deal more powerful than if it is simply a means of businesses and Government institutions talking to each other. We would like to see, therefore, a mechanism either around the VAT rules or potentially in the form of some kind of targeted tax break, and it would be a tax break for the consumer not for the suppliers. We are not arguing for a large slug of money to be directed into our back pockets—though it would be very nice—but for the consumer to use as they will, and that would allow them to take our services or BT services or anybody else's. It would be a technology neutral approach; you would be giving the customer the money; and the condition attached to the money would simply be that they used it for purchasing broadband services.

  34. Is this being done anywhere else?
  (Mr Blowers) Not as far as I am aware. We are looking at this at the moment. The focus in other countries really has been to stimulate the supply side, if you like, to give money to providers in the form of tax breaks or concessions on infrastructure and investment. Now, that is not an inherently bad idea: it is one that in this country we tend to be somewhat wary of in comparison perhaps with continental European countries where there has been more of a tradition in recent years of intervention from the centre in that way. The idea of focusing on the consumer rather than the supplier is very much to get around the idea that this is simply a means of providing handouts to impoverished or improvident service providers. That is not why we are arguing for this. We are arguing for something that will stimulate the consumer side which we think is a more politically acceptable approach.

  35. To some extent there is a danger that tax incentives would subsidise those for whom boardband was ready available without making any impact on areas where it is not or where access is difficult, such as remote areas?
  (Mr Blowers) This is the challenge but the broadband stakeholders' group came to the conclusion that in many ways you needed to pumpprime the mass market application of broadband before you create the conditions to roll it out into the areas which may be, on current numbers, uneconomic anyway. There is a political challenge there associated with the timing of those events but the underlying logic is very strong. What we need to do, firstly, is to get mass market broadband out there; that will reduce prices across the board, it will reduce the price of the infrastructure and the price of the consumer equipment. That then makes a much larger part of the country potentially economic for broadband rollout.

  36. That takes me nicely to NTL's membership of the Government's broadband stakeholders' group. I have a question: what is your general view of their first report?

  (Mr Blowers) I have to say NTL helped to write quite large parts of it so we think it is a fine piece of work, particularly the bits that we wrote! I should say the stakeholders' group is intended to be broad church and inclusive of all of those people who are, to a greater or lesser extent, responsible for the delivery of broadband - not just ourselves, BT and Telewest but also the major equipment suppliers, the service providers, consumer groups, development authorities, et cetera. The report probably reflects that in that there are some things in there which I am, if you like, indifferent to but they represent the views of particular groups. The overall message that comes out of the reports is very clear and one to which we commend the Government's attention, and that is there is no magic bullet solution to broadband; there are, however, a series of robust practical steps which could be taken which, if they were adopted, would help us in that process that I was describing of moving us higher up the adoption curve much faster.

  37. That is really what I was going to ask about in response to the report because it has been successful and the Government is undertaking research into the pump-priming of the market to extend services to rural areas. Do you think that such a programme could be successful? Obviously you do but, if so, how will it work in practice?

  (Mr Blowers) I think that is the 64,000 dollar question. The challenge is it is possible to get a quick and dirty approach out of the door very quickly which seems to produce immediate benefits but which has some long term disbenefits. There needs to be some care taken. It is important not to foreclose competition for contracts and for delivery of services, and one of the ways in which you can do that is by making either the geographical area or the spread of the services covered by procurement activities in the public sector too broad. If you do, potentially what happens is there is only ever one supplier that can step up to the plate and that is BT, and we would argue that that is not in their long term interests. If BT are the only people who are ever capable of fulfilling a contract, that does not really do it for us because we know from previous experience that when BT is good it is very good: when it is subject to no competitive pressures it can be pretty appalling. So it is very important to keep this contestable in the way that the frameworks for procurement and for local initiatives allow the purchaser a range of suppliers to fulfil the contract.

Mrs Williams

  38. On November 1 last year the Assembly announced the programme for a broadband lifelong learning network in Wales. What are the possible benefits of such a programme, and are you going to be involved?
  (Mr Tse) There are significant benefits to be gained by connecting comprehensive schools and primary schools to a network that delivers broadband facilities. The truth is that as an organisation the time constraints were against us completely on that particular tender scenario. We received the paperwork on the 12th December and the time constraints that were set as regards (a) the return of that tender and (b) the implementation of it—I think it needed to be completed by the end of May—were totally against us as an organisation considering the geographical spread of those secondary schools and primary schools. So we were limited by our response.
  (Mr Jeffers) That said, however, the initiative has to be applauded. One of the core points on the education side has to be to involve the official education system; it has to be broadband connectivity into schools and tertiary locations and so forth, because that is going to be one of the key drivers of demand, so the overall initiative must be applauded for that.

  39. Are you involved in any projects to exploit broadband in health?
  (Mr Jeffers) A number of them. Interestingly, a lot of the projects we get involved with are almost restricted to the lab environment, and what we want to try and do is look at the mass projects that are possible out there. We can all talk about connecting the doctor's surgery to the hospital to look at things and so forth. There the service has been available and what we need to do is look at how we could extend that further and take it into a much more wholesale use of the broadband service.

  (Mr Tse) Effectively, it is how we use that broadband infrastructure for things like telemedicine type projects where, at the moment, we are providing the physical connections as opposed to the equipment that sits at the end, but there are lots of advantages to be gained by using it in the health sector.

  (Mr Blowers) If I might just make one observation on this, my colleagues tell me that having already said that there is a problem with being too generic in the way that public sector procurement is done. If it is too broadbrush then potentially you lose some of the capacity benefits. In other areas, we find that purchasing is too fragmented, and that is a criticism that has been levelled by a number of suppliers. In the health area, we have particular problems with purchasing decisions being fragmented across a number of different layers of management, and that makes it very difficult to provide the kinds of economies of scale which would bring real benefits in terms of reduced cost.

5   Technium Centre is an Innovation Centre at Singleton Park, Swansea. These are Incubation Units for "growing' and small businesses. It gives them access to the technology such as broadband, for which they are billed as they would be for rent, rates, electricity etc. The second one is planned for Baglan near Port Talbot. Back

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