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Select Committee on Welsh Affairs Minutes of Evidence


Examination of Witnesses (Questions 140 - 159)

TUESDAY 16 APRIL 2002

MR GRAHAM HAWKER, MR PATRICK SULLIVAN AND MR DAVID CLEEVELY

  140. As the WDA, do you have any feedback from potential customers in Wales?
  (Mr Hawker) Certainly generally speaking I get my ear bent regularly by small businesses in Wales. I suppose that goes with the job. There is regular questioning about the availability and pricing of broadband in Wales. It is an issue lots of businesses raise. That relates to the study that we undertook because it seemed to me at the time that we needed to get that based in terms of where we really are on broadband. There was a lot of noise around the consideration of the subject. I think that has given us a base line from which to move on and say, "OK, where can the private sector make this work for us and where does the public sector have to intervene, either on the supply or demand side?"
  (Mr Sullivan) In my view, cutting of the tariffs will also increase demand and lead to take up of services and that is then going to put pressure on other operators to examine exchanges, new exchanges, because that will also stimulate demand where services do not exist. If one can stimulate sufficient demand, that ought to be sufficient to warrant the investment by operators to invest in those exchanges.

Mr Price

  141. When you looking at major new investment projects and you are advising potential investors on their telecommunications servicing, do you look at a range of providers in that context or how does that work in practice?
  (Mr Hawker) Where there is competition, then clearly we find the companies quite capable of looking after themselves. We give them advice on what is available. I could not say that we have lost any significant inward investors through an inadequate broadband capability. That is not to say that there are not people we never hear of, if you like those who criticise Wales for some reason or other, but in terms of the major investors, we have found that we can cater for their needs. My bigger worry is around the smaller companies.

  142. Has BT seconded people into the agency at all?
  (Mr Hawker) Yes. In fact we have a secondment now within the International Division, which helps with this very point, and it has worked very well. We are keen that BT should continue doing it.

  143. Is there is not any criticism of that secondment from any BT competitors, for instance?
  (Mr Hawker) No, and it is properly and formally structured as a secondment. While that person is with us, that person is following WDA objective.

Julie Morgan

  144. Some of the evidence we have received has been critical of BT's performance in delivering broadband services. What view do you take of BT's performance on broadband for Wales for the mass market and for the larger businesses?
  (Mr Hawker) David can probably comment on this better than me but my immediate reaction is that BT will do that which is commercial. They will do the thing which makes the appropriate rate of return, as any business would, and that is why we have to look at the potential for public sector intervention. The whole role, if you like, of the WDA is to deal with market failure, and this is an area where there might be, in some parts of Wales, a market failure. That is the whole purpose of looking at the Development Plan. I am not a critic of BT in terms of their commercial obligations to make a rate of return for their shareholders because that is why they are there.
  (Mr Cleevely) I have already voiced a criticism of BT in the sense that I think they have been a little bit slow in getting to grips with some of the issues on broadband. That has changed significantly. The cut in ADSL prices, for example, is actually a very significant move. It has already made and will continue to make a very big difference to the stimulation of the market. In a sense, to amplify some of the issues of BT's own commercial position, I think it is important to understand that this broadband infrastructure and the broadband services represent quite a threat to an operator like BT. BT gets a lot of its revenue through voice services or through other existing services that it is providing. The broadband network will replace, to a great extent, much of the revenue streams that BT presently enjoys through the provision of different kinds of infrastructure and services. There is a natural tendency for any organisation to pause quite a long time before it embarks on that kind of revolutionary step. The remit of government in this, is not necessarily to be particularly sympathetic to the individual short-term tactical issues facing a commercial operator. We also have to think very carefully about the longer term and to understand that there are particular incentives in the marketplace that will prevent an operator like BT reacting very rapidly to something like broadband. We are now in a different world. In the last two or three months with BT's changes of prices, with the changing emphasis of broadband, I think we are entering a new era. We have turned the corner on it. It is an important point to recognise the commercial constraints on an operator like BT.

Mrs Williams

  145. The backhaul, the link between the BT exchange and another licensed operator's network, is a new concept to me but you say in your evidence that the OFTEL requirement is that BT charges for backhaul should be cost-orientated. Because BT's costs are distance-based and distances tend to be greater in Wales, could this not actually lead to a disadvantage for Welsh service providers compared with their competitors elsewhere?
  (Mr Cleevely) There is an additional point that needs to be made here. It is very straightforward to think about telecommunications costs being dependent on distance but I want to make another point and then come back to your point. The telecommunications costs are also very dependent on density. The cost of connecting an extra person or an extra building in a very dense urban area is actually quite low. The cost of connecting an extra building or an extra person in a very sparsely populated rural area is very high. Then there is the issue of traffic. If I have a pipe connecting a settlement and it is a very small settlement, then the cost per bit transmitted on that pipe is going to be quite high. If I have a big, fat pipe going into somewhere like Swansea, the cost per bit is actually going to be very low. Whilst you might be concerned about distance—and we will talk about that in a second—as a Committee I think you should be much more concerned about level of use, which is about economy of scale and population density where Wales faces some very particular problems. Those two things that I have just talked about have a very significant effect on the cost structure of providing telecommunications services. This idea of backhaul, that if I want to provide service, I have got somehow to connect with my network, and if I want to use somebody else's infrastructure, I need to connect up, is going to be intimately linked with distance to some extent, but I would emphasise this idea of density and the amount of traffic that is already flowing on that network. In short, what that actually means is that if you are going to be cost-orientated, you really want somewhere where somebody else has already got lots of customers, and it is a dense urban area and preferably that dense urban area is not too far away from your own network. As soon as you get into an area that has low demand, low density and quite a distance away, then the costs start to rise very rapidly indeed. As soon as you get outside some of the dense urban areas in Wales, the costs for doing this backhaul will rise very sharply. The question you then have to ask yourself is: which demand are you going to serve? Where will the competitive markets be? If the demand and the competitive markets are only in the main urban centres, then there is not too much of a problem. As soon as you start to think about certainly the whole of the population of Wales, then you start to run into the difficulties that I have just outlined.

Chris Ruane

  146. Is there a critical mass, the number of residents per acre or whatever, so that BT or NTL should be saying, "There is sufficient population there for us to invest in infrastructure"? Is there a specific number of people in, say, a town the size of Wrexham, of 120,000 population, that should have been covered by now? Are there any black spots in Wales which you would expect to have been covered because it did have that critical mass?
  (Mr Cleevely) In the work we have done for the UK Cabinet Office on aggregating broadband demand, towns like Wrexham are on the borderline at a point where you would expect a town like Wrexham to be included naturally in a financially viable roll out of broadband, but if you were in the first wave, those are the kinds of things that would get second place. The thing that tips somewhere like Wrexham from being not connected to being connected is really the demonstration of local demand. Wrexham, as you say at 120,000, is a reasonably sized market town and it is actually a good candidate for supply. It is a little bit subscale for somebody like, for example, NTL as a cable TV provider but, if there were enough local enthusiasm and demonstration of demand, then you could encourage a supplier to go into a town like that, but I think you would have to make a rather clear demonstration of demand to be able to do that.

  147. Whose job is it to create that local enthusiasm, if it is not there?
  (Mr Hawker) I think it is a joint one. There is a lot of work the public sector could do in this area. Some difficult issues have been identified in the review that I alluded to earlier. I think we can work closely with BT to do that because it is in the interests of BT and any other supplier to stimulate demand. In fact, in my discussions with BT just the other day, they thought we might actually stimulate demand in Wrexham, believe it or not. You might get the same answer from BT. There is a valid role for everybody. That is why I mentioned earlier that we must deal with the supply side but we also have to deal with the demand side because take-up is still very low. We have to create a situation where people believe it is an essential thing for them to do in terms of improving their business.
  (Mr Sullivan) I want to mention the point about whether a place like Wrexham would be of interest to NTL because when the North-Wales cable franchise was advertised with South Cheshire I had discussions with NTL about what it would take to actually get NTL's interest in applying for the cable franchise. It is not just about the economies of one urban area. They mentioned that this was false economy in the sense that if you have sparse urban areas that you have to interconnect, then you have got to actually pay for that interconnection, which is normally on top of the major conurbation. It is those economies of scale that actually for the North-Wales cable franchise set and the NTL investment criteria set as to whether it would be economically viable. It is not just being able to cable up one urban area. They then have to interconnec that urban area into their network. It is that interconnection that took it out of the investment criteria.

Chairman

  148. How would the local authority in Wrexham convince NTL, or any other provider, of the need, given that if you have not got the demand, they do not go there? How do you prove the demand is there if nobody is using it already? It is a chicken and egg situation, or catch-22.
  (Mr Sullivan) I think that is one of the dilemmas that we have certainly in the public sector in terms of how to balance demand side measures that actually stimulate demand with the supply side. If we are successful at stimulating demand but we cannot satisfy that demand because there is a lead time in terms of the investment that would be needed by telecoms operators, then we will raise expectations that cannot be fulfilled. We have seen this with ADSL where there has been a lot of publicity about ADSL. The take-up of ADSL is now increasing. That is now causing concerns to those individuals who live and work in areas where you cannot get ADSL. It has raised their expectations but these cannot be fulfilled. That brings a problem. If you then turn to the supply equation and identify where public intervention is needed to stimulate supply and you cannot raise sufficient demand, you cannot fulfil their expectations. If you invest with public funds to stimulate supply where there is no demand, then you create a white elephant. There is a fine balance. The action plan we have presented to the Assembly balances very well the demand and supply actions that would be required.

Dr Francis

  149. Competition seems to play a very big part in your approach. Telecommunication competition has now been with us for over 20 years. What impact do you think that has had on Wales?
  (Mr Hawker) I think not as much as we would have liked. That is the answer because competition has tended inevitably to happen where there are big centres of population, with the consequent effect on prices. Not just regionally based competition but clearly competition across the UK one would assume has forced prices down. People are benefiting from lower prices and that would not have happened had there been no competition. Clearly it is not helping us in the rural areas and in the deprived areas where the economics simply do not promote competition. That is why I think there is going to be a role in supply and demand for public sector intervention of some kind. I think we really need to address that. We have to be very careful though because if we are in advance of the market too far, we may actually be putting public money into a situation where, had we waited, competition might have taken care of it. This is a very delicate balance when we are starting to get into a complex market like telecoms. I have no doubt at all that some intervention is necessary.

  150. The paper that you submitted to us I found extremely helpful. Implicit in the paper are two issues. One is that there is a kind of an implicit criticism of unbridled competition. I get a sense that you are hinting at the fact that there is a widening digital divide. I also get a sense from the paper, and I may have missed it, that what is missing from the paper is part of the solution. Although you come forward with a number of very useful suggestions, you do not actually mention anything at all about the importance of social partnership. I think that is particularly so in terms of rural areas and the more remote valley areas.
  (Mr Hawker) Patrick will speak on this specifically. I guess what we are saying in the paper is that if we do not act fairly soon in some way, then the digital divide will grow.

  151. Is it growing already, though, in places like—choosing them at random—New Tredegar, Phillipstown or Glyncorrwg?
  (Mr Hawker) Logic will tell you that that is so but even where it is available, the take-up is low, so it is not as though we are seeing an appetite that is beyond all bounds. Clearly, as people become aware of the potential for using broadband, then you are going to see that divide grow. There has to be some kind of intervention, particularly in a social way.

  152. You mention Llwybr Pathways and the MARAN proposal among the projects that you would support, but you are not really saying there what the impact has been. Has it helped toward narrowing the divide or are we falling behind?
  (Mr Sullivan) From a practical point of view, may I turn the discussion away from the highways and explain what I see as an information society, which is why broadband is a prerequisite of the knowledge economy. I do not think stimulating demand by just raising awareness is enough. If we look at the stakeholders that we have in Wales, we have the private sector made up of large organisations that require specific broadband services which may be greater than ADSL, but then we have small, medium sized and micro organisations where ADSL would be very beneficial. These organisations interact with one another in terms of the supply chain. We then have 2.9 million citizens in Wales who also play different roles: they are employees and they are also consumers, and they are also consumers of public services, they could be patients. They are also employees within the public services and they could be teachers. That is a very important stakeholder group. Then we have the public sector itself, a very important player, especially with regards to helping Wales with its transition to an information society. The public sector can play a significant role by being itself a major user of information and communication technologies to improve the delivery of their services. Last but not least, as a stakeholder group, we do have communities; we have communities of interest. In Wales we have some of the most deprived communities where we see ICT as being a significant enabler to engage with individuals who are disenfranchised and where we can use ICT to help community regeneration. All these stakeholder groups interact with one another. What we are talking about in terms of an information society is where ICT is an enabler to make that interaction more efficient and more effective. If we are talking about learning, for example, or in schools, by using ICT we can bring learning materials closer to individuals. With businesses, we can get consumers procuring on-line. Businesses can make on-line procurement a possibility and that can open up their markets. This interaction cannot actually happen unless you have available broadband services, especially when looking at the short to medium term. When we talk about raising awareness and stimulating demand, we really do have to introduce programmes that actually get deep into communities where we are working on a one-to-one basis with businesses and individuals from a training point of view, or whatever. It is no good just saying "broadband is good for you" or "ICT is good for you". You actually have to develop the mechanism by which you say, "Why is it good for me? Why should I use it?" The Agency has actually identified through its (WIS) strategy various actions that could be taken forward to stimulate this demand and to work with companies and individuals. The importance, I feel also, is how we maximise structural funds because it is there to provide a mechanism for structural adjustment in Wales. Through work that the Agency undertook, the concept of the information society has been adopted within the single programme documents, certainly for objective one. It is one of three cross-fitting themes, along with equal opportunities and environmental sustainability. Our task is to ensure that that information society as a cross-cutting theme within the structural funds programme is maximised to the full so that we can actually introduce intervention, both at a training level through our work and through a programme. We are also encouraging the development of what we would call e-communities where ICT can be exploited in communities and then our businesses can exploit ICT to improve their competitiveness. If you like, it is a jigsaw puzzle of initiatives but that is what is needed, rather than just an awareness-rating programme. The prerequisite to actually getting businesses and individuals really exploiting ICT is to have advanced broadband or broadband communications available everywhere.

Mr Price

  153. We move on to telecoms, which is probably something for David. I think telecoms has probably been seen until relatively recently as one of the big success stories of privatisation and liberalisation globally in the UK. I think that has been beginning to creep in in the last few years because of the crisis in the telecoms sector across companies and within the UK, and of course NTL and BT for different reasons may have had significant problems. Do you think that the crisis in the telecoms sector could impede the wider information society/ICT agenda?
  (Mr Cleevely) I think the short answer to that is "yes". I would just like to make a case for competition and point out that we sit here in 2002 enjoying astonishingly low prices for telecommunications services. You could go back to where competition began in the 1980s and think about how much it cost to make a telephone call. Then you could not even get hold of a mobile phone, or perhaps you could as there were about 8,000 to 10,000 in the United Kingdom. They cost, I imagine at today's prices, several pounds a minute to use, well out of the range of any ordinary person to enjoy. Of course, some of that has been due to technological change but I think we have to remember that we have seen price falls in telecommunications of the order of about 60 per cent in real terms over that period. Some of that is due to regulation and some is due to technology but a lot has been due to competition. I would say that indirectly, if you were looking at Wales specifically, Wales has enjoyed that general benefit of low prices and more innovative and diverse services have resulted. The problem at the moment with the telecommunications business is the astonishing over-exuberance and over-optimism of the last couple of years. The degree to which people thought that the opening of the market (actually driven primarily from the United States in the 1996 Act) has baffled me and it has probably baffled an awful lot of people. There was great enthusiasm there which fuelled this boom of the internet, then the seemingly boundless appetite for capacity and then putting an awful lot of money in to both the fixed networks and of course the 3G networks, which the UK Government and public benefits from, at least in the short term. Those things naturally lead to the point where we have an oversupply of telecommunications in some areas and therefore prices are going to fall because people are going to find it is difficult to get extra investment and investment sentiments turn against telecommunications. That is a short-run issue. It is something which, by the time you get to the beginning of next year, will have started to disappear. If you go back over the past few years, telecommunication spend has risen pretty inexorably. It has certainly risen if you take it as a percentage of GDP. I do not see any reason why that is going to slow up significantly over the next five, ten or fifteen years. The reason for that is that the e-economy continues to change its structure. It continues to become much more information and knowledge based, much more service based and much more global in terms of its demand for competition. You are no longer competing against your next door neighbour geographically; you are competing with other regions around the world. To do that you must have an information communication infrastructure. That is fuelling long-term demand. I think there have been some mistakes made over the last couple of years, but if we look beyond that, there is long-run and hopefully steady growth—I hope we do not get into the overheating again - and demand for telecommunications, which, as far as the policies and issues that you are considering, is very important. That ought to inform you not to be blown off course by any short-term deviation but to think about the long-term economic development of Wales.

Albert Owen

  154. You touched on this in your last answer. You stress that competition in infrastructure has so far reached only a few densely populated areas of Wales. Is it realistic to expect to have any greater impact in the future, especially in the light of the current financial difficulties in which the operators find themselves?
  (Mr Cleevely) To answer this question would take quite a long time. We have not got the time to answer this question in the detail that it deserves. It is a very important question. This is a revolution. We are moving from one kind of economy that you might have seen in the Fifties, Sixties and Seventies to another kind of economy that you will see in 2020 and 2030. You are going to leave some areas of the country and some citizens behind in that process. Exactly how fast that transition occurs depends a lot on some of the short and medium term economics. In urban areas it is a lot easier to justify investment in telecommunications infrastructure; the demand is more readily identifiable; you get a virtual second helping; and you get a lot of people left behind. The poorer people are left behind rather than the As and Bs who know about these things and can afford to experiment and invest some of their time and money in it. In terms of competition then, you need to look at where you think it is going to be viable to compete. The problem with telecommunications is that we use the word "telecommunications" to cover a whole range of things. There is infrastructure and that is dominated by the economics that I was talking about. There is density, the amount of traffic flow you can put in, the number of people you are connecting up. Those kinds of economics affect infrastructure deployment a great deal, particularly density. So the ability to compete on infrastructure is somewhat limited unless you are going to embrace some of the more innovative technologies such as radio access, which enables you to reach a broad population, albeit at a slightly higher price. Radio access cannot compete with providing cable solutions—I do not mean cable in the sense of cable TV but wired or optical fibre solutions—in very dense urban areas. That would need really first class radio systems but there are lots of other segments in the telecommunications marketplace. For example, there are services. If you open somebody's infrastructure up to other competitors to use, then you could have a competitive market. You have problems, of course, with co-ordination. We all know what problems of co-ordination are like with the railway system. The problems of co-ordination are about exactly on what terms you get access, how much you pay somebody for a fair return on their infrastructure and so on. As technology improves, that is getting easier and easier. Then there is a whole series of other things that you can do. I am sorry to get really technical about this but within the issue of infrastructure and the basic services that run on it there are more sophisticated things you can do. For example, there are a lot of people coming in to the market offering single billing. The utilities will offer not only your gas and electricity but also you telephone bill. NTL will also offer mobile services, even though they do not operate a mobile network. All of those kinds of things are possible and encourage competition. We need to be very careful. You can get competition delivered to the most remote inhabitant of Wales through service competition—some of the things I have just been talking about in rural areas in Wales, you will probably find it very difficult to get that competition in infrastructure. With infrastructure we start to talk about the need to think about exactly what is meant by a competitive market.

  155. Briefly, what you are saying is that, in light of the current financial difficulties in the short term, there will be a levelling out. Are you optimistic about the future, once you have come out of the difficulties? Can we move forward in less densely populated areas?
  (Mr Cleevely) I am going to say something which may be close to heresy at this point. As far as infrastructure is concerned, I do not see any major leaps through loops in new technology that change that problem of the fundamental economics of scale and density in the provision of telecommunications infrastructure. That is where there is a significant issue. If you want to deliver high-capacity pipes at a level of connectivity to sparsely populated areas, you will have a problem. There is not a technology on the horizon that is going to solve that and compete effectively with that kind of capacity being provided to an urban resident.

Mr Prisk

  156. Mr Cleevely has been talking about pipes. Can I ask a question about satellites? Does that offer a possible alternative, given there is already an established satellite supplier in the commercial market for the public, namely digital television? Would there be a possible cross-over that might in more rural areas, and therefore less densely populated areas, offer a possible complementary alternative?
  (Mr Cleevely) Digital television is not the only form of satellite. There is a number of other commercial satellite providers and you can get two-way broadband from satellite. When I was saying that there are no technologies that can compete or get to the same kind of price levels as the wired solution, I still hold to that, but satellite and radio systems—and satellite is only a radio station stuck up in the sky as opposed to on the ground—will actually deliver broadband to you, but at an increased price. If you then have a policy that you wish to pursue, for example if you want to make sure that some of these less dense and more remote communities have access, then perhaps you might consider some way of levelling the playing field for the satellite providers or the radio providers in order to enable them to meet that demand at uniform tariff[5]. I do not want any misapprehension: these things do cost more. To be honest, surprisingly they do not cost many multiples more. They cost more but they do not cost a vast amount more. Therefore, they are potentially good, economic solutions for people who, for example, have chosen or wish to live in remoter areas. You are quite right: you should not underestimate either satellite or radio as a potential delivery mechanism.

Chairman

  157. Is there a problem at present, Mr Cleevely, with the satellite system in that it is very good for one-way in terms of the amount of information it can send—and I cannot remember which way it is?
  (Mr Cleevely) It must be down; it is easier to go downwards.

  158. But it is not so good the other way. Is that right?
  (Mr Cleevely) That is true for various technical reasons. The amount of bandwidth that you can get generally down from satellite is more than you can get up. The main use of satellites historically, certainly in terms of bits transmitted, has been in broadcast mode, but it is perfectly economic to have a return path so that you can transmit a very significant amount of information back up through the satellite and then back down to the ground again[6]. That is another point which needs to be made, that that does introduce a delay. It does not seem like very much but it is a reasonable delay and that does affect the use of satellites for some kinds of applications. That is not usually the case but it is an issue.

Mr Caton

  159. Moving on to promoting broadband, a considerable amount of public money has already been spent on the promotion of broadband in Wales and in other parts of the UK and more is planned. What is there to show what has so far been spent in terms of both infrastructure and the use that is being made of it?
  (Mr Sullivan) The DTI undertakes a study every year across the UK and is able to compare the UK's take-up of ICT compared with other countries across the world. The WDA, as part of that study, commissioned the consultants to undertake an additional survey in Wales so that we can actually compare Wales' take-up against other regions of the UK. It is fair to say that currently there is a poorer take-up of broadband in Wales but I do not think that is surprising considering the new technologies and where you get the technocrats, they are the pioneers in terms of the take-up. The recent studies have actually shown that the take-up in Wales now of broadband, e-commerce and ICT in general is accelerating at a faster pace than in other regions in the UK. So whilst Wales is actually still lagging behind, it is catching up with the other regions. On that basis, we are putting more effort into working with businesses to encourage their take-up of ICT and e-commerce. Indeed BT, as I am sure we will hear later, are part of an innovative programme to get 4,500 companies trading electronically. The message is: yes, there has been a poor take-up but that is accelerating at a quicker pace than in other regions of the UK. The gap is narrowing.


5   A tariff which is the same as or comparable to those for wire or cable based infrastructure. Back

6   Other return paths may be available, for example through the telephony network. Back


 
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