House of COMMONS







Tuesday 24 November 2009



Evidence heard in Public Questions 105 - 252





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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 24 November 2009

Members present

Peter Luff, in the Chair

Roger Berry

Mr Brian Binley

Mr Lindsay Hoyle

Miss Julie Kirkbride

Mr Mark Oaten

Lembit Öpik


Memorandum submitted by Ofcom


Examination of Witness

Witness: Mr Ed Richards, Chief Executive, Ofcom, gave evidence.

Chairman: Mr Richards, welcome. You are a regular before this Committee and today you are working particularly hard. I think you are going to the DCMS Committee immediately after you finish with us, so we must let you leave punctually. We are seeing you next week for our regular annual joint session on the role of Ofcom in general, so we will have a second bite of the cherry next week. We are grateful to you for coming and for the thoughtful memorandum, as always, Ofcom has provided.

Q105 Miss Kirkbride: The British market for broadband is very competitive, but some might say that it is focused more on price rather than on performance. Would you agree with that?

Mr Richards: I think hitherto that has been the case, that is right. That observation was precisely what lay behind our move to do some original research on speeds. When we look at this question, you can see very quickly from your own experience, you do not have to do great reams of market research to work out that people essentially make a choice about broadband on three criteria: is it available, "what is the availability to me?"; secondly, how much does it cost; and, thirdly, what speed is it? Everybody could very easily find out the answers to the first two questions by the website or making a phone call, but the third, speed, which was a crucial dimension of choice, was not really available in a transparent and objective form. It was available in the form of the "up to" advertised speeds, but we started receiving complaints, concerns, that the "up to" advertised speeds were not necessarily accurate and people were having direct experience of the limitations. We looked into the provision of information in this area and discovered very quickly that it was very difficult to produce objective information. Indeed, such objective information was not available and, therefore, we took a big decision to do some very difficult original research and we published that earlier this year.

Q106 Miss Kirkbride: Do you think it is a regulatory failure that we have relatively poor investment in broadband services in terms of the speed that they are offering?

Mr Richards: In terms of the investment profile, I do not think it is at all. The regulator and the regulatory framework has a part to play in the level of investment and the overall speeds, clearly that is the case, and if you wish to talk about that more I am very happy to do so. Let us start from where we were. Current generation broadband performance in the UK, both competition and basic speeds, and availability, if you take those together, is as good as almost anywhere in the world. The challenge now is to move to super-fast broadband, next generation broadband, and that is going to happen in different countries at different speeds. You have to accept that is going to be the case because in some countries they have decided to put a lot of government money behind it, and if you do that it is going to happen a lot faster. In other countries they have opted for monopoly provision and you tend to get faster deployment if that is the case, but I would argue that you will pay a penalty in relation to that in the long-term because of the loss of competition. What we have done is set a clear framework as a starting point and what we are discovering is that the companies that have to do the investment, because of course we do not do any investment, that have to make the decision to invest with their shareholders' money, are working out how they can do that and make a return. We cannot wish that into reality, it is driven by a number of factors, and the most important factor is people's willingness to pay for it and what combination of services can be offered and how that relates to people's willingness to pay. The current generation broadband market is very competitive so you have to offer something which is better than that in order for people to pay more. If people do not pay more you are not going to make a return on investment. What we now see is a deployment of 50Mbps by Virgin Media and that covers the whole of their footprint, which is about 48% of the country, we see a commitment from BT to deploy up to 40% and we would expect that to go further in due course; and we see other companies now expressing varying but significant interest, certainly in their conversations with us, in how they enter the super-fast broadband market. The regulatory framework needs to be part of that and needs to move with it and adapt to the interest, but we cannot click our fingers and say, "There will be super-fast broadband", companies have to make decisions to invest.

Q107 Miss Kirkbride: So you are seeing the demand for next generation broadband is there because there has been a feeling of is the market going to do it, do they feel there is sufficient custom there and is it really going to happen. You are quite optimistic from what you have just said?

Mr Richards: I am very optimistic that it will happen. I do not think I would want to promise a certain level of super-fast broadband in a certain timescale because the companies investing are working out what will work and the underlying costs and whether they can make that cheaper and, therefore, make deployment faster and more extensive and how people, consumers, small businesses, homes will respond in terms of their willingness to pay and it is terribly important. If there was a business case that was clear and obvious I think it would be happening tomorrow, but it is quite a challenging proposition. We have to remember that it is very different from current generation broadband. Current generation broadband was built off the copper network that has been in the ground for decades. This is a new investment, it is a risky investment, and it is being made in a context of uncertain demand and that is always more challenging, but we are underway, progress is being made. There is a clear commitment from us to focus on this issue and make sure the regulatory framework is clear. We have done a lot of work on that in the last 18 months and 2010 will be a very important year in embedding those principles and the work that we have done into detailed regulatory remedies.

Q108 Miss Kirkbride: The Government is intending to amend the Communications Act to include the promotion of infrastructure investment as part of your remit. Is that not something that is there already, in which case what difference is this going to make?

Mr Richards: Our overarching duty, as you all know, is to serve the interests of consumers and citizens. What Parliament did when it set us up was to then ask us in doing that to have a series of specific duties but also to have regard for a certain number of things, and one of the areas we have to have regard for in making those decisions is investment and innovation. We also have to have regard for the availability and use of high speed data networks which, in a sense, is broadband and super-fast broadband. The notion that we do not concern ourselves with investment and infrastructure is obviously not the case; we do do that. The proposal to give us a clearer duty to promote investment in infrastructure will change the emphasis. It will elevate it somewhat and, therefore, change the emphasis for us when we make decisions. As you all know, we are fundamentally nothing other than a creature of statute so what we do follows from what Parliament decides our duties are, so a change of that kind is obviously significant for us. As soon as it is passed by Parliament in whatever final form we would go away and say, "How has our framework changed? What are we being asked now to do? How do we now do it?" That question is an extremely important issue.

Miss Kirkbride: Is there anything that springs to mind as to the difference it might make? Are there any practical observations you can make?

Q109 Chairman: I am quite puzzled because your existing remit does require you to encourage investment and innovation. I do not know whether we are dancing on the head of a pin here or a substantial difference is being made.

Mr Richards: It is a matter of emphasis. At the moment we have "regard" for investment in innovation and if you changed it to a "duty to promote" it is a matter of emphasis and that will be one of the things that emerges in the parliamentary debate, what does it actually mean.

Q110 Chairman: What difference does it make in practice?

Mr Richards: What we always do in these circumstances is look at our duties, assess the duties and assess how we make a decision in line with meeting those duties. We would be saying has the emphasis we are required to place upon promotion of investment as opposed to having regard for it changed. Clearly if Parliament made that change it would have changed in some form, but to what degree is a matter for debate. To be honest, I think what would happen is we would make a judgment on that in relation to any specific detailed regulatory decision, which is obviously the form of implementation that we get into, and I suspect at some point in the process someone, a third party of some kind, will probably challenge us and say either we had excessively interpreted Parliament's intention or we had insufficiently interpreted it, and that would probably be contested in a merits-based appeal. That is what I would expect to happen. That would be examined and the appeals tribunal would decide. Clearly if there was a change of that kind, we would not be saying, "It's irrelevant" because Parliament has decided to change the wording and that has a significance for us, so we would have to assess the significance behind it and the clear implication of this particular case would be the emphasis required for us to place upon promotion of investment as opposed to having regard for it would have changed.

Q111 Miss Kirkbride: Local Loop Unbundling was brought in by Ofcom because, understandably, you could not see enough competition in the original infrastructure. Do you think that has changed in any way over the last few years?

Mr Richards: The introduction of it, broadly speaking, has been very successful. It has certainly exceeded our expectations. When we originally made those changes, firstly there was not a total absence of competition but it was extremely minimal, the availability of broadband was very, very limited and the speeds were risible. Since then we have travelled a long way. When we originally proposed it we only expected about one and a half million lines to be unbundled and we are now in excess of 6 million. It has been against that original measure that we set.

Q112 Miss Kirkbride: Why do you think it has been so successful?

Mr Richards: I think it is one of those things that has snowballed. You can model the economics of these things and predict what will happen, but you never get it quite right. In this case, what happened was that we expected one or two players, a couple of new companies to come into the market, but in one or two cases we had no idea they would come in. The one best example of that is Carphone Warehouse who were a completely new entrant to the market. They were a retailer of mobile phones on the high street and they saw the opportunity and took a decision. We absolutely did not predict that. They have driven the process, along with Sky, Orange, Tiscali, O2 and others. Of course, what has happened is they have got into a competitive process which has taken it further than we ever expected. It has been successful and I think it has set a benchmark which is a great challenge for us because it has set a benchmark that the British consumer now expects to see. It expects to see rising speeds, a better quality of service, better value for money and availability, choice between providers. That is the benchmark that, like it or not, we have set ourselves as a country for super-fast broadband and that will not happen overnight, that will take some years, but we have to have the ambition to reach the same sort of model of competition, choice and investment in the next decade.

Q113 Miss Kirkbride: How are you going to do that?

Mr Richards: I think that is back to the core decisions around the regulatory framework for super-fast broadband where we have made some big decisions, such as offering BT pricing freedom down to the wholesale level and that allows them to make a risky investment and make a return, but doing that alongside making sure there is scope for competition and making sure that some of the companies that have invested in unbundling are able to take their businesses and competition forward into super-fast broadband. One of the things we have tried to make very, very clear, at least from the regulatory perspective, and there is obviously a huge role for Government here as well, is that we think the UK can have both investment and competition and we do not need to create a false choice between the two. To be honest, my view is I think the danger of creating a false choice between the two is I just do not think the British consumer would tolerate it. They are used to real choice in their communications providers now, particularly on broadband, and the notion you would go back from that would not be tolerated by people.

Q114 Miss Kirkbride: Is it going to be the same model for fibre as it has been for copper?

Mr Richards: No, I do not think it can be because the copper network was established, it was depreciated, it was decades old. You cannot pretend that fibre is going to be the same. I think we had a very good understanding of where competition on the copper network could work and that is one of the reasons I think unbundling succeeded in the end. With fibre, it is a new investment, people have got to make those new decisions and I do not think we yet know, and I do not think the companies know, exactly what the best balance between competition and investment is. For example, we could see what we would call physical unbundling, that is remedies and access around ducts or dark fibre or in the cabinets that you see on your street corner. There is probably some scope for that and we may talk about it in due course, but we may have alongside that what we call virtual unbundling, which is where there is a wholesale service which has the electronics on it carrying the data which other service providers might take as well. Where the balance lies between those two in a fibre world, I do not think we yet know. I am certain it will vary according to where you are in the country. The more urban you are, the more densely populated the area, the more likely some of that physical unbundling will work. The more rural you are, the less likely it will work. That is what we are exploring at the moment. I know everybody has a sense of great anticipation about super-fast broadband, and I know everybody would like us to be piling into this and for there to be super-fast broadband across the whole of the UK tomorrow, as it were, and we would like that too, but experience has taught me in this area that it takes time for the mix of institutions and organisations, a range of different companies, government regulator, to explore the different options and levers and to make their decisions which finally unfold in an investment and a model of competition. It does not happen overnight because nobody knows precisely what the right answer is.

Q115 Mr Oaten: It does not happen overnight in this country, but is there any evidence that it happens quicker in other countries? Are we slower at doing this than some of the others and, if so, why?

Mr Richards: If you want it to happen very, very fast overnight you have got to spend government money on it, it is as simple as that, because that is the only certainty you can have. In every other case you have some sort of regulatory framework but, crucially, a company of some kind has got to make a decision to spend its money and that does not happen as quickly.

Q116 Mr Oaten: You were implying that it is by its nature something which takes a long time, but what you have just said is that it can be done quicker if there is government money put in.

Mr Richards: It is always quicker if government spends money, of course, because you can just start spending the money, but sometimes that takes a long time as well. That is the easier route in a sense. Let me track back slightly. We are not in a bad place on this. The notion that the UK is miles behind on this is not right. Firstly, our current generation broadband, as I said, is extremely good. Of course, it can be better and there is an upgrade going now into 75% of the underlying BT network which will raise the speeds to what is called ADSL2+ which will create a maximum at 24Mbps. That has been pushed forward alongside all the competition. Secondly, in terms of super-fast broadband, Virgin has already rolled out its DOCSIS 3 network across its entire network and that is available to nearly half the country already. That is 50Mbps. People seem to ignore this, but that is a fact. You can go and buy it tomorrow if you are in a cable area, it is already there. BT has made a commitment to roll out its network up to 40% and it is moving forward and underway.

Q117 Mr Oaten: It was not really about where we are, it was where we are in comparison to other countries. Are we behind or ahead?

Mr Richards: I was just coming to that. If you take the OECD, the European Union and so on, some countries are further ahead, some countries are further behind. The countries that are a long way ahead tend to be South Korea, Hong Kong, Singapore; those countries. What you have in those countries is a combination of two things: very strong government support and/or extremely dense populations. The economics of doing this are enormously improved where you have large numbers of people living in multi-dwelling units. You put one fibre in and you have captured 300, 500 or 1,000 people. Our topography is not like that, our geography is not like that, it is much more difficult in the UK. In those small densely populated Asian countries the economics work far better. In other countries people are experimenting with different things and we see different drivers taking place. Let us think about the US where what has happened is the telcos have done quite a lot of investment, but they have done it in direct response to cable companies who put the money in in competition. The difference there is that cable companies in the US have about a 99% reach, so the telcos have no choice. We are in a good position relative to other European countries because we have got a cable company that has done it with at least a 48% or 50% reach. In the US, it is essentially a two-player market and one has forced the other. That has a cost to it, which is essentially you have a choice between two players in the US and if you do not like the telco you go to the cable company, but if you do not like either of them you have got a big problem. We have got a much wider range of choice. We are not right at the front and we are definitely not right at the back. If you look at actual delivery in relation to Virgin and BT's plans, you can do a chart of this, which we would be happy to provide to you, which is essentially current deployment and then you can overlay on to that planned deployment and compare the two. We are not as far forward as we would all like to be but we are certainly not at the back of the pack either.

Q118 Mr Hoyle: Just taking up what you said at the beginning to Julie when, quite rightly, you said Virgin has got about 48% through the cable. The problem is you went on to say that cable is now delivering to that 48%. Are you not worried that the fact is they still only have 48%, people can only reach cable in 48% of the population, it is not growing so, therefore, what we are doing is ensuring those people who already have the benefit get even greater benefits at the expense of those who never got the original benefit of cable? That is the first point because I think that is quite interesting. The other point is, rightly, you said if we are slower we have more competition and if we are faster we have less competition. What makes you think it is better to be slower and have more competition than to be faster and have less competition but still have competition in the market? I am intrigued by that because surely the objective is to get there quicker rather than slower, yet what you are doing is slowing down the market but ensuring there is competition. Usually when we get to the end there is less competition because people buy each other out, so what have you gained, apart from being slower?

Mr Richards: Very interesting questions. The 48% cable, it is true that it is unlikely they will build out much further, but it is worth saying that they are exploring that and whether they can extend their footprint. I do know someone who is expecting to be cabled up quite soon, but I would accept that ---

Q119 Mr Hoyle: There is a shock, they have not offered me that service! What is the difference?

Mr Richards: It is at the margins. That is where we are. If the economics worked for them to roll out to 60, 70 or 80% I would hope they would do that, but the economics are very challenging and they obviously targeted the areas which were most attractive. I do not think we can anticipate it will go further. The relationship with the 50% that is not covered is a positive one because the lesson of current generation broadband was cable started and forced BT and others to respond. People forget this little piece of interesting history, which is that when current generation broadband began there was a point at the start where BT under the previous, previous regime said, "Nobody's interested in it, nobody wants it" and cable got on with it and did it, surged ahead, and at one point I think they had 85/90% of the market. That is what spurred BT and others to respond. It may be that is exactly what happens with super-fast broadband. What then happens is that the network providers with ubiquitous coverage, in that case BT and the companies with access to their network, respond and it then goes beyond 48%. What you hope is that that 48% provides a stimulus which then allows a wider diffusion of the technology over time. That is how I think that will play out. Whether that goes to 99 or 100% is another question, and I am sure we will come on to that. In terms of trade-offs on competition and investment, I probably over-stated it. We would much prefer to see it as a positive relationship and that the trade-off is generally speaking positive and not mutually exclusive. The reason I put it somewhat in those terms is because I think there are examples, not here and not ones that I would recommend, where that kind of trade-off has been manufactured or created. There is one well-known European example where the proposal was to give an incumbent essentially a regulatory holiday, so no regulation at all, in exchange for a big rollout. In those circumstances, you are saying, "You rollout and essentially we will give you regulation free for a to-be-determined period". What you are doing with that sort of pact is essentially saying, "Give me a fast rollout and I'll promise you no competition". I think that kind of proposal is a very dangerous step which people will pay for very heavily in the longer term. It is not something which I think is credible. Interestingly enough, I do not think it is consistent with European law in any case.

Q120 Mr Hoyle: We probably disagree on that, and I do not want to test the Chairman too much, but you have given us a flavour and you have moved a little bit, and that is good to see. Can I take you back to something that I did find interesting. You said the figure was Virgin was 48% but will do a 100% faster speed and I think you said, correct me if I am wrong, of whatever it be that BT is, they are now offering 40%.

Mr Richards: That is the proposed rollout. They are underway on that.

Q121 Mr Hoyle: Can I suggest that they are both in the same areas and the fact is the people who are worst served are continually worst served because they are not receiving it first. The same people who have got choice get even greater choice at a faster speed. Are you not worried that all the emphasis is going to the same people permanently? If you really wanted to be exciting you would say, "Don't go to where Virgin is already offering, let's offer it to the rest of the area". What do you do about that? Surely it is defeating your own objective? They are great statistics, but the truth of the matter is it is still only the same people who benefit.

Mr Richards: I do not think the 40% will exactly mirror the 48%.

Q122 Mr Hoyle: I do not think it will be far off. I think we both know that, Ed, come on!

Mr Richards: It will be in the same territory.

Q123 Mr Hoyle: Because they do not want to lose competition, the market.

Mr Richards: It will be in the same territory. This was exactly what happened with current generation broadband and then the network extended beyond that. Of course, it tended to start in the same areas because those were the most economically attractive but then it extended. I am not going to deny or contest the kernel of your argument in the sense that what it seems to me you are saying is there is going to be market deployment which has already gone to 48% and it may go beyond that, but will there be a section of the country who may not receive this any time fast and possibly not at all. I think that is highly likely to be the case and that is precisely what lies behind the Government's proposals about the last third broadband levy and that is at the heart of one of the proposals in the Communications Act.

Mr Hoyle: All I am saying is it would be nice for them to be at the top of the curve rather than at the bottom, but I will leave it at that, Chairman.

Q124 Chairman: Can I ask you a question about assessing demand for the size of the next generation market. What drives that demand? As some people would say, what is the killer app that requires people to have super-fast broadband universally?

Mr Richards: If I knew the precise answer to that, Chairman, I would probably be in business. I do not think anybody knows what the killer app is yet and we all wish there was one that was transparently obvious. The killer app on current generation broadband turned out to be surfing the Internet, that is what it was. We were doing it on dial-up, on very low speeds, and there was not a killer app other than people wanted to be able to do that faster and more efficiently. It may be that essentially the killer app for super-fast broadband is the same thing, but the Internet has evolved and is now full of video and audio rich services and, therefore, you need much higher bandwidth. There may be a very interesting public services dimension to it, that is possible, but it would require Government to significantly up its game on the provision, quality and attractiveness of those services, there may be something in that. There may be something around small businesses and business activity. What does a killer app mean? It means because of that service people are willing to pay more money for it in this case. I cannot see any version of that which does not have some form of strong content rich proposition because everything else people can do with what they have got now. It has got to be something that features on-demand video, those sorts of things. Those are the kinds of bundles of services which will attract people to this kind of technology and this kind of service, but precisely what it is and in what form is open to question.

Q125 Chairman: I take it Ofcom was not consulted by the Government about assessing the size of the next generation market because you cannot know how big it is going to be if you do not know what it is going to be for.

Mr Richards: No, I do not think we do. I have a strong intuition about it born of thinking about these things over some years and being involved with them over many. I have got a strong intuition that services will emerge, they probably will be things that we do not know about yet, all sorts of innovation in this area, and that will be commercial and public. I do not think we could precisely specify the size of the market at all.

Q126 Chairman: I am a Tory, I freely confess that, and I have a lot of faith in markets, which may distinguish me from some Members of the Committee, I do not know. It seems to me when the killer app emerges competition will drive the need to invest in infrastructure to provide it. I am very dubious about the need to put public money at this stage for a market we do not know the size of and we do not know what it is for. At the moment, 40% of people are not using the current broadband speeds. Surely digital inclusion is perhaps more important and to get those people on-line and get the advantages of the current generation should be a high priority for public action rather than investing speculatively in the future.

Mr Richards: Those kinds of choices between public policy priorities are a matter for Parliament and Government to take. There are important alternatives. One is definitely the rollout of super-fast broadband, that is definitely true, and how extensive it is. I think you are right, a second is the take-up of existing broadband. We have got a pretty good knowledge - not perfect but pretty good - of why people do not take up the current generation broadband and there is clearly scope for making progress on that as well as tackling the issues of super-fast broadband.

Q127 Roger Berry: I am not quite sure I recall the answer to the question about whether Ofcom was consulted in assessing the size of the future generation market. Was Ofcom consulted also on government subsidy and the method of financing?

Mr Richards: We were asked various questions about that in the formulation of policy, but we did what we always do in these circumstances which is offer essentially technical and analytical advice. We certainly did not form the policy, BIS formed the policy and it is their policy. What we do in those circumstances is we tend to answer analytical and technical questions. In a sense, one question which might lie behind this is do we think the market is going to stop at 48 or do we think it is going to go to 100 and I do not think we know the answer to that. I do not think anybody knows the answer to that. I think it is highly likely to go beyond 50, beyond where Virgin is, that is highly likely and I would be willing to back that. Do I think it will go to 100%, I think that is very unlikely.

Q128 Mr Hoyle: Where do you think it will be?

Mr Richards: It is very difficult to say.

Q129 Chairman: You go back to your answer, if you knew you would be in business doing it.

Mr Richards: It is very difficult to know precisely where. What you can know and work out is you can understand, and this is where our technical advice is quite useful, or I hope it would be, the topography of the network and how that changes. The big uncertainty is the demand-side. I have talked about this bit already. We do not know how much people are willing to pay, how many people are willing to pay, and so on and so forth. There are also some very interesting supply-side factors which we do know a little bit more about. One of those, for example, is how the density of customers in relation to a street cabinet changes. We know roughly that as you get to beyond about 75% of the population, the number of customers per cabinet falls away and that makes the economics of market provision, of commercial deployment, more challenging.

Q130 Chairman: There are companies out there that want access to the rural and semi-rural ducting. It is the suburbs which most need the services, and one company is trying to do that at present in Cornwall, as you may be aware. Why has Ofcom not opened up access to the duct network in all areas of the UK?

Mr Richards: Duct access is a very interesting question. When I mentioned earlier in response to Miss Kirkbride I said we were looking at physical unbundling and virtual unbundling. There are two principal examples of physical unbundling. One is the cabinet and the other is ducts. As a matter of fact, we started looking at duct access about a year ago. We floated it to industry and, to be honest, we had a very, very lukewarm response, general lack of interest. Not comprehensively so, but overwhelmingly we had very little interest. Despite that, we thought there was something in it potentially and we were trying to think ahead about it, so we commissioned our own duct survey. We did a survey of BT's ducts concentrating between the metro node and the exchange in order to reveal or expose whether it was possible or not, because a lot of people's views were it was simply impossible. Bear in mind, we are not talking about perfect Parisian sewers here, we are talking about ducts which vary enormously. Some of these so-called ducts are a piece of cable with concrete on top of them so, in other words, it is not a duct at all. In other cases they are in pretty good shape. We did a duct survey and discovered we thought there was something in it. We discovered there were ducts with space in them even though if you wanted to take it from end-to-end some new ducting work would be necessary. The notion that you can just pump it through is not the case. We found some interest in that, we put it in the pubic domain and we started a good dialogue with companies. Prior to all the recent interest in ducts, a few months ago we commissioned a second duct survey which looks at the duct capacity from the exchange and from the cabinet to the home, so the key last bit of access. That is in the field at the moment and we expect to receive that back in January. At that point we will be launching a couple of market reviews and we can decide whether it is an appropriate remedy or not. What has happened in literally the last couple of months is that there seems to have been a surge of interest amongst the companies. That is important to us because it is no good us putting remedies in place if companies are not interested in them.

Q131 Chairman: That surge of interest makes me suspicious about too much government intervention in the market when industry suddenly changes its mind and ups it gear, but that is another matter. BT are obviously nervous about all this, they say it is fragmentation of their raison d'etre about BT Openreach, a functional separation, there is the infrastructure and you all have equal access. They do not like this and are understandably opposed, and that could be for good or bad reasons. They could be legitimate concerns about the competition model that has served the UK so well or they could be the arguments of monopolists down the ages. They do also say it will lead to fragmentation of their network. Is that a problem? We have fragmentation of so many aspects of our lives. You get different levels of service delivery by different mechanisms in different geographies and different communities already in so many areas. Is that fragmentation of the network a legitimate concern?

Mr Richards: There are probably two points to make there. The first is back to the issue that Mr Hoyle raised, which is how much do we care about a service of this kind being available in some parts of the country but not in others, and that is a fragmentation issue, and ultimately that is one of those universal service questions which is not in our gift, we should not be making a judgment on that, Parliament should make a judgment on that. How important is this service to the people of the UK as citizens? That is the first fragmentation issue, which is clearly very important. The second is the fragmentation of networks wherever it is being provided. I think BT are very worried about this and they have a serious point in the following respect: what I do not think you want is a situation where you have pockets of different networks all using different interface systems with service providers and with different interconnect arrangements, the consequence of which might be dozens of local monopolies which cannot interconnect. That is not a good outcome. There are ways of dealing with those issues around standardisation of interconnect, interfaces and a more standard approach to business-to-business interfaces as well on the systems side. That is a better way to go than saying because those are challenges, the default position must be to just have a single monopoly provider. That would be a shame. This comes back to your duct access question. If you took that challenge about fragmentation to its logical extreme and said, "We must have no fragmentation" you could not possibly open up the ducts because that necessarily means someone else is putting a cable or a fibre in and that means potentially they will have a different kind of interface. There is a big role for us to play here in terms of facilitation on standards and we are trying to do that. We would rather do that than impose mandatory regulation on dozens of companies. It is an issue which needs very careful attention and we are paying it careful attention, but I do not think it is sufficient for you to argue that, therefore, there must be a single default provider.

Chairman: Thank you, that is very clear. We are running up against the clock a bit and we have got one more area of questioning to go.

Q132 Mr Hoyle: Given the technical difficulties in delivering advertised speeds that reflect the speed actually experienced, what alternative mechanisms has Ofcom considered to inform the consumer?

Mr Richards: This has been a very interesting period in the last 12 months on this question and it echoes the discussion right at the start of this session. We did not set out to want to get into this area. In fact, on the contrary. In other areas what we have said is we are trying to run a good value for money regulator, we are not trying to employ people for employing people's sake, we are not trying to be big, and if the market or third parties are providing something in the way that consumers need we should not bother doing it. By and large that has been the case for a lot of communication services. What we discovered on broadband speeds was that the market was not able to do it and there was a serious deficit. In a sense, it was a classic market failure. They could not get the information, it was not reliably available, it could not be communicated, and yet it was one of the three critical ways you make a decision on what to take. It was a big decision and I will tell you very straight that we met huge opposition from some of the providers who did not want us to do it.

Q133 Mr Hoyle: Which ones?

Mr Richards: I would rather not mention which ones.

Q134 Mr Hoyle: Why? Name and shame, do not let them off the hook. Let us know who is giving us a good service. Do you want us to have a bad service and not tell us?

Mr Richards: I would rather not mention it. There was serious opposition to it because I think people knew it would expose what the true situation was and that was not possible with the existing data. We did it in the face of some quite stiff opposition. When we did it we did not know what would happen. We were very interested in it but we did not quite know. What has happened is that piece of research, which is complicated and difficult, has been the single most accessed and downloaded piece of Ofcom work ever. We had a colossal demand. It was downloaded thousands and thousands of times. It has been downloaded thousands of times internationally as well as domestically. I saw the new Chairman of the FCC recently and they are enormously interested in doing something similar in the US. We have had international interest about it. We are not aware of anybody else having done anything like it anywhere in the world. It was a very serious endeavour, it took us seven, eight months to do, but it did expose some really fascinating data about what you were getting rather than what was being advertised and who was closest to what their promised speed was. In my view that was one of the best things we have done for the consumer ever.

Q135 Mr Hoyle: Who was top of the tree in delivery?

Mr Richards: Top of the tree in relation to speed delivered in relation to advertised was Virgin Media and then there was a bit of a ranking down from that. I think Virgin delivered about 8Mbps in relation to an advertised 10 and the DSL providers were at differing points. Because we normalised and controlled for things like distance from the exchange so that was not a factor, what determined the ranking of the rest of them was how much they had invested in backhaul, how much they had invested in ADSL2+. Going back to this question about investment, I think this was a good thing for us to have done in relation to consumers for information but what it also did was say who is investing in real speed, where can you get better speeds from. Before that this was all hidden. In a sense, it has repaid those people who have said, "We are going to invest on behalf of the consumer to deliver better speeds".

Q136 Mr Hoyle: Who is bottom of the tree?

Mr Richards: I honestly cannot remember but it is published and I will send you a table.

Q137 Mr Hoyle: Obviously the services customers receive depend on multiple factors, for example the infrastructure operator, service provider or the home infrastructure. How concerned are you about disputes between Openreach and Internet Service Providers over responsibility for service failures? The other thing, of course, is it can sometimes be the equipment as well. You go through these arguments, where do you believe it really ends up?

Mr Richards: This is a difficult issue and, you are absolutely right, sometimes it is the kit you have bought.

Q138 Mr Hoyle: That is right, the kit is not up to it.

Mr Richards: It is not the network's fault. The issue we have had in this area, which is a serious one and which I would say we are getting a range of complaints and concerns about, is Openreach is the core network provider which others take the service from and sometimes it is not clear, if there is a fault or a problem, and it might be the kit, whether it is an Openreach issue or a service provider issue. There is a little bit of disagreement amongst them on that.

Q139 Mr Hoyle: They both hide behind each other, that is what I seem to find.

Mr Richards: There is a little bit of that, precisely. Sometimes we get complaints from both parties and Openreach saying, "We have been blamed for this but actually it is nothing to do with us, it is the service provider" and other times the other way around. Generally speaking, what we would like to see is the company with the customer relationship taking as much responsibility for addressing the issues as possible because you are paying them directly.

Q140 Mr Hoyle: Obviously if you are at the end of the line you get the worst possible service because you are furthest away from the exchange and the box. Is it possible that this should be coming in from two exchanges because I am finding that with a new village it seemed to be from an exchange that is further away than another one but if it were to come from two ends actually you would get better broad speeds or equal broad speeds across the whole of a new village. Is that a possibility?

Mr Richards: It is a very interesting question and I would have to take it away and ask our technical people about that.

Q141 Mr Hoyle: I was thinking that may help broad speeds in other areas. The second one is: what do you think of the Swindon effect of Free?

Mr Richards: Free Wi-Fi?

Q142 Mr Hoyle: Yes.

Mr Richards: Really interesting.

Q143 Mr Hoyle: I know it is interesting!

Mr Richards: I am quite excited about it. What will it do? I do not think anybody quite knows. It is going to be run partly as a service, partly as a commercial business and you have to pay for the video reach services and out of the area. So we will see what it does. It is exciting in terms of ubiquitous mobile or Wi-Fi broadband; that is exciting. It is fascinating because, as I understand it, it is using lampposts for base stations, which is really interesting and we are looking at that now to see whether that is something that could be extended. Too early to say what it will do. This goes back to the Chairman's question about fragmentation. It is very difficult to be against that sort of innovation because it is going to take us forward and we are going to learn from it, and so long as it is not distorting competition and is consistent with state aid I think we find it very interesting.

Q144 Mr Hoyle: Swindon: the new Singapore?

Mr Richards: Who knows?

Chairman: Thank you for your evidence. If you could sort out my problems in Demon and BT Openreach I would be extremely grateful! They both deny responsibility and the line is appalling. Thank you very much, Ed, and we will see you again next week.

Memorandum submitted by Department for Business, Innovation and Skills

Examination of Witnesses

Witnesses: Rt Hon Stephen Timms MP, Parliamentary Secretary of State, and Ms Rachel Clark, Deputy Director of Broadcasting and Content, Department for Business, Innovation and Skills, gave evidence.

Q145 Chairman: Minister, welcome. We have seen you before - you wear so many hats and they change so often I get confused. Perhaps you could introduce your colleague?

Mr Timms: Thank you, Chairman. I am delighted to be here and thank you for asking me to talk about this very important topic. I am joined by Rachel Clark, who is the Deputy Director for Communications and Content Industry at the Department for Business, Innovation and Skills. If I might make a few remarks by way of opening the discussion?

Q146 Chairman: We were not advised of that but I am always a charitable Chairman, and as long as they are brief!

Mr Timms: I have always depended upon that, Chairman! I am grateful to you. First of all, I want to underline how much I agree with the Committee about the importance of this topic as we look at the UK economy over the next decade. The Digital Britain White Paper was published in June, the first strategy for the whole UK digital economy, and that really addressed three questions on UK broadband. Firstly, what is the minimum that anybody should be able to expect; secondly, what should we aim for in the future; thirdly, how do we ensure that people can take advantage of the opportunities that these services offer? On the first question, the White Paper Universal Service Commitment will ensure broadband access for virtually everybody at a good enough level for most current services. We see 2Mbps as a minimum, as a safety net, if you like. Many who are helped by the commitment will obtain much higher speeds; we think that there will be perhaps one million homes to benefit from next generation solutions being used to fix these so-called "not-spots" at the moment. Second, next generation broadband will reach 60% to 70% of UK households and businesses over the next few years but we do not think that is enough. I was the minister at the time of the initial rollout of first generation broadband and that was essentially an incremental upgrade to the existing network and our success with that required significant public intervention. Next generation broadband will require replacing large sections of the network, the business case, the economics are much more challenging and without public support about a third of UK households would not get access in the next decade. So we think it is important to do better than that and our aim is for 90% coverage of next generation broadband by 2017 and we propose, as you know, a 50 pence per month levy on fixed lines to generate £1 billion to support extending next generation access to 90% to 2017. That will put the UK at the forefront of the world's digital economy. We have addressed digital inclusion as well and I look forward very much to the Committee's questions on these topics.

Chairman: We will certainly want to take you up on your opening statement and Mr Binley will begin.

Q147 Mr Binley: I will indeed. Minister, it is always good to see you; welcome. I am really concerned and so is the industry about the definition of what 2Mbps really means. There is a lot of misunderstanding because this definition does not exist. Is it an average speed, a guaranteed minimum, the speed that you can expect to achieve at a particular time of the day, a medium speed? I could go on. It is pretty important that this is defined, is it not?

Mr Timms: Yes.

Q148 Mr Binley: And could you do so today?

Mr Timms: It is the speed which gives access to most of the services that are currently in use and in our memorandum we provided a table setting out the applications to which that level of service will give access. You are right, of course, that because of the nature of DSL there is some variability in what is provided. It can sometimes vary at different times of the day. We think it is the right level of service to give access to the applications which are currently widely used.

Q149 Mr Binley: Not a very clear answer, Minister, in truth. BT particularly is unclear and has said it is unclear, and if a company like BT is unclear then there is a real problem there and we need greater definition than we are getting. I recognise that this is work in progress but can you assure us that greater definition will come really rather quickly?

Mr Timms: What is required here is a fair degree of pragmatism. Certainly the commitment that we have made to deliver 2Mbps by 2012 will mean that virtually everybody in the UK has a satisfactory broadband service, whereas at the moment 10% or 11% of UK households do not have such a service. That is the problem we want to resolve and the commitment will enable us to do that.

Q150 Mr Binley: Forgive me, Minister, the words "satisfactory broadband service" are not good enough to an industry in which it is going to invest and our country is going to invest a great deal of money and I still plead with you to ensure that there is a real definition of what you mean by 2Mbps. The industry is crying out for it and it is clear that you do not have a clear definition at the moment. Will you do so within a very short time?

Mr Timms: I do not think there is any ambiguity about what 2Mbps means.

Q151 Mr Binley: I think we all know that!

Mr Timms: That is a speed which is clearly well defined. The commitment is that we will give virtually everybody access to a line capable of delivering 2Mbps I take your point that in certain circumstances - at busy times of the day or something - that that full 2 Mbps speed might not be delivered, but actually I think that that is a pretty clear statement of what it is we are expecting everybody to have access to by 2012 and that our funding will enable.

Mr Binley: I am happy to defer to my colleague.

Q152 Roger Berry: I do not want to flog a dead horse on this, but a line that guarantees it can deliver a certain speed is not the same as the consumer getting that speed. Is it the minimum average daily speed; is it the minimum speed at any time of day? Mr Binley raised the question and if we are using numbers in this field, as we have to, it has to be clear about what precisely it refers to, and at this moment we still have not established this morning what this number refers to.

Mr Timms: It refers to people having access to a service at 2Mbps.

Q153 Roger Berry: So that means that at any time of day ---

Mr Timms: No.

Q154 Roger Berry: Is it an average over a day?

Mr Timms: It is not a guarantee that under any circumstances 2Mbps functionality will be available because there is a degree of variability about that. But the service that is provided will be capable of delivering 2Mbps.

Q155 Lembit Öpik: Chairman, may I come in on this one? We are all labouring the point because it is so core to the whole debate. It sounds to me that with the best will in the world this is probably something that has not been formally defined because otherwise it would be easier to say it; so no criticism of you. But can I ask would the Government, in the light of the conversation we have just had, be willing to consider on the basis of this session formalising what it actually means? The reason being that in the previous session we have just had we have realised that advertisers of broadband speed take full advantage of this vagueness and can say up to 10Mbps but actually you get three. So perhaps you have identified something which would be in everybody's interests, including the Government's if we actually - not in this session but after the session - considered how we can formalise it so that the Advertising Standards Authority would also have something to go by as well as the consumer.

Mr Timms: We certainly will work up the technical specification, that will be necessary for the procurement group that we are establishing to take this work forward, and I will be very happy to make sure that the Committee has a copy of that specification as soon as it has been concluded.

Lembit Öpik: That is very helpful; thank you.

Q156 Mr Binley: Could you tell us the timeframe for that, to give us a bit more reassurance?

Mr Timms: The procurement company has now formally been set up. I would envisage us making appointments to it in the early part of the New Year and I hope it will be able to start its work very promptly.

Q157 Mr Binley: So you really do not have an idea when a definition might be sensibly arrived at?

Mr Timms: Let me ask Rachel to comment on when that particular piece of work might be carried out by.

Ms Clark: In our view the technical specification is something that needs to be done by the people with that knowledge and expertise, so we would want the procurement team in place to be advising on that and to ensure that when we make the technical specification it genuinely does deliver the commitment that Stephen talked about. So it is something we need to do when we have the team in place and therefore something that would be their top priority when they are appointed in the early part of next year.

Q158 Mr Binley: I am just getting the impression that you could be a very excellent minister, quite frankly! Let us leave it, Minister. There is a real need to define this quickly. That message has got over to you and you might come back to us when you have had a little time to think and talk with the procurement team to see when that might be because it is vital to the whole process.

Mr Timms: I would just caution the Committee about being too hung up about the definition. There is a huge amount of work to be done. I accept that the technical specification is an important part of that but there are a lot of other things that we need to get sorted out.

Q159 Chairman: You have to be obsessed with definition! If you are saying that it is a Universal Service Obligation you have to be clear what you mean by it, Minister. Of course we are going to be obsessed by the definition.

Mr Timms: Actually I think there is clarity about the Universal Service Commitment ---

Q160 Chairman: We are not clear and you have not made it clear this morning.

Mr Timms: With respect, I think I have made it fairly clear. Certainly from the customer's point of view, what this service will provide is access to the kind of ---

Chairman: You sound a little bit like a dodgy Internet Service Provider yourself over claiming for speeds! You have promised us a note and we will have to have it, but we are not currently very impressed.

Q161 Mr Binley: I think if you were selling to me I would be very worried, Stephen! Let us go on to the Network Design Procurement Group because they have a lot of work to do and they have a lot of work to do very, very quickly. For instance, we talk about under-served communities. How will they determine the location of under-served communities? What do they actually mean by that?

Mr Timms: The first priority for them will be those communities that do not have access to the service we have just been talking about, and I think the current estimate is something like 10% or 11% of UK households fall into that category. So that will be the first priority, to identify where those are, and then to devise means by which the funding that we are providing will enable those communities, those households, to be provided with that service.

Q162 Mr Binley: I do not wish to hark on this but you cannot define an under-served community until you define the target at which you are looking, quite frankly; so the two are connected and it is important. I recognise that you are coming back to us and I am perfectly happy that should be the case.

Mr Timms: I do think there is more clarity about this than the Committee is suggesting. 10% or 11% of households at the moment do not have this service and that is a fairly well defined group.

Q163 Mr Binley: Do not have any service at all?

Mr Timms: Do not have the service that we are talking about, the 2Mbps.

Q164 Mr Binley: We will look forward to your response to us, which is important. I am a businessman, or was, and I am still very proud to say so, and I would be horrified if my people were working when they procured services on the basis of a reverse auction process. I would be horrified if the major criterion was the lowest price. Can you reassure us that I am being over-pedantic in looking at words and that the whole thing will be a much wider assessment and it will not necessarily be the lowest price in a reverse auction process?

Mr Timms: I will ask Rachel to comment on this. Clearly this will be a very important issue for the group to address once it is in place and I do think it is going to be important for them to secure good value for money for the funding that is provided. Precisely what mechanism they will use for that, I agree there is space for debate, and quite an important debate, but I think that value for money is certainly an important consideration.

Ms Clark: What we have said is that a reverse auction is one option that ought to be considered. As the Minister says, it is clearly important that we get best value for money, but we will need to set very clear quality of service parameters and the technical specification that we talked about earlier will be a part of that. The procurement process will need to explain absolutely clearly fundamentally what it is we expect bidders to deliver and within that we need to look at value for money as we make decisions.

Q165 Mr Binley: The government records of both parties have not been very good in terms of this area of purchasing, and I talk about some of the government computer purchases which have been disastrous, quite frankly. How can you confirm to me, give me confidence that this process will come out with the best possible provider irrespective of the bit that it is going to be a reverse auction process, which frightens me to death?

Mr Timms: We will certainly have to apply the highest standards of good practice in procurement of this kind of service and, as you point out, there are some projects that have not gone very well and, of course, there are other projects that have gone extremely well.

Q166 Mr Binley: Thank God!

Mr Timms: And there is a growing body of well-understood good practice for procurement in this area and we will need to make sure that those best practices are rigorously applied in this case.

Q167 Mr Binley: You might keep us in touch with that because it is a pretty important part of the process. Is £200 million enough to deliver the Universal Service Commitment?

Mr Timms: I think we will need to supplement that with other forms of support and we may well be able to secure industry support; there may be funding available from Regional Development Agencies and perhaps from local authorities of the kind that has already been deployed on some of the existing next generation projects that have already secured funding. I think the £200 million will give us the central resource that we need to deliver the commitment.

Q168 Mr Binley: Again, I do not understand how you can arrive at that decision when you have not confirmed the other parameters that we talked about earlier, so I think that there is some concern and doubt here and there is a fear that this budget will run away with government, as many budgets do. So there is a need to reassure the general public that will not happen. Let me leave it with you because I recognise that we are talking early stages, but you will note that, I am sure. Can I ask why the Government is separating the Universal Service Commitment and the next generation access into two separate projects?

Mr Timms: That is a really good question. In our mind and the thinking behind the Digital Britain White Paper was that there is a need quite urgently to make sure that there is access to a broadband service for everybody. We are not there yet - we are quite close to it but we are not there yet - so we want to move quickly to fill in the current gaps in the availability of the service and we can do that by 2012 with the 2Mbps level. We recognise as well that technology is moving on apace. There are already almost half of UK households able to access next generation services through the Virgin Cable Network at 50Mbps, and they are talking about higher speeds. BT says that it will be providing next generation broadband services to ten million homes by 2012, a quarter of them with fibre to the homes, so things are moving quickly. If we take no action we will be left in a position where perhaps two-thirds of UK households would have access to those services and the remaining third would not. We do not think that is a satisfactory outcome and so we think it is necessary to intervene to speed up the rollout of next generation broadband services to those parts of the country which otherwise would not be reached any time soon. I think there are two stages to it. There is making sure that everybody has the safety net of the basic minimum level of service as quickly as possible and then apply additional resources to speed up the rollout of next generation services beyond that.

Q169 Lembit Öpik: Let us talk about next generation as it is something you have already touched on, Minister. I understand that there are various providers like Virgin developing a 200Mbps service, which is a huge step forward compared to what we have now, but it begs the question what for? I am not expecting you to be a fortuneteller. The demand for the next generation access currently is really only essential for video. For example, the BBC iPlayer, which is a pretty sophisticated service, requires less than 1Mbps. I do not want to sound like a Luddite, but so that we understand where we are heading what evidence is there that we will need these kinds of colossal steps forward in speeds?

Mr Timms: I think that is a very good question and I am grateful to you for not expecting me to be a fortune-teller. There clearly is a fair amount of uncertainty about all this. I recall, as I am sure you do, that when first generation broadband was being introduced people then were saying, "What on earth are people going to use this for?" and it turns out that there are lots of things that have been very heavily used. I think wherever you look the trend is towards increasing demands on bandwidth and one could take the view that this trend is suddenly going to stop, but my view is that that is unlikely and the likelihood is that trend of growing demand is likely to grow. Another point is that we are seeing, as you say, Virgin investing quite substantial sums to enable its customers to have 50Mbps at the moment and, as you say, higher speeds in the future, and BT is committing something like £1.5 billion to the commitment that it made, so clearly some quite hard-headed commercial assessments have concluded that there is demand in the near future for these services. I think the question is are we going to be satisfied with just two-thirds of the country getting that and the remaining third not doing so, or not? My view is that we do need to take steps to make sure that we achieve the 90% goal that I have described. One can certainly talk about increasing needs in education, in health, in public service, applications of tele-working, video conferencing from home and all of these things that are emerging which may well generate the demand that we are talking about, but I think we can be pretty confident that in one form or another that demand is going to emerge.

Q170 Lembit Öpik: Forgive me for a brief digression, but Calvin Mckenzie said to me when he brought his astrologer in to be fired he said, "I am afraid I am going to have to let you go, but you probably knew that already"!

Chairman: Name-dropping and a very bad joke!

Q171 Lembit Öpik: I apologise for one of those. There is no accounting for senses of humour, Chairman. Moving swiftly on, though, you have mentioned access a few times now and every time you say that I think of my own constituency as generally the other third. We have a very high proportion of inaccessibility - we are under-served quite substantially - and while not being parochial I recognise that in a geographical context it will be much more than 10% or 11% of the country which is under-served in the way that you say. This really risks creating a two-tier system. The first question is how did you come to the conclusion that the two-thirds target was the right one? Who did you consult, for example?

Mr Timms: Two-thirds is not the target, two-thirds is our view of what would happen without public intervention and we want to do better than that, hence the proposal for the levy. There was some quite substantial analysis underpinning that conclusion and I will ask Rachel to describe what was done.

Ms Clark: Some extensive work was done by the Broadband Stakeholders' Group, an analysis made last year - maybe a little further back than that - on the costs of rolling out broadband, and because it is the Broadband Stakeholders' Group it brings together pretty much the whole of the industry, so it has a strong industry consensus behind it, which shows that the costs of rolling out NGA, going out to just over 60% of the population tends to be around £137 per home passed, which is a figure that looks absorbable within the investment case. Then it starts to climb quite steeply and for the next 30% it climbs at around a one in two rate until it hits £337 per home passed and then at 90% it veers off straight. That is a graph which we can certainly make available to the Committee if you want to see it, it is in the public domain. This gives us a clear sense of what the investment case is going to look like and you can use those figures and various analysts have used those figures to then compare with population densities and forecast take-up rates and you can see what the likely deployment is and, in fact, the announcements that companies have made so far about rollout tends to bear that out at the moment.

Q172 Lembit Öpik: So there is a rationale based on costings as well and what you are implying is an exponential increase except in the last group.

Ms Clark: Yes.

Q173 Lembit Öpik: That really ties in to the final question that I want to ask you in two parts. First of all, having established those criteria how have you as a Government indicated to the procurement groups which communities are to be prioritised? Is it purely a financial consideration, for example?

Mr Timms: We have not indicated that yet. That will, as I was saying earlier, be an early task for the procurement group that is being set up. We have simply said that we think the priority should be those who do not have an adequate service at the moment. How beyond that the priorities are set will be a matter for them to determine and a very important judgment for them to make.

Q174 Lembit Öpik: I will tell you a case study. As it happens there is a very small community of about two dozen houses in Staylittle in my constituency and they do not have any access at all. I have been working with other technologies to see if we can get something going and so forth. What would be the process to determine whether, for example, this community of two dozen houses, some of whom want to run broadband-based businesses, would be a priority or not? Is it fair to admit that if it is not the case you have not yet established the kind of criteria to determine that?

Mr Timms: We have not yet worked out the detailed criteria. One important point is that we would envisage that quite a number of those small communities, households, that do not have any kind of broadband service at the moment, could get the Universal Service Commitment delivered by a next generation solution and go straight from nothing to a very high speed service. As I said in my opening remarks, we think that maybe a million homes could benefit from that. So the fact that a particular community does not have a service at the moment does not mean that it is going to be in the 10% that will not have a next generation service after 2017. I imagine that quite a number of communities will be able to leapfrog from nothing at all to a next generation service.

Q175 Lembit Öpik: Which would make mid-Wales the Silicon Valley of Britain - I like the idea. Chairman, just one final question about technology. We have already established that it is very hard to crystal ball gaze about what the applications would be and what we need in the future. Is there any risk that in pursuing, for example, land-based solutions at the moment we are ignoring the possibility of having, for example, the satellite-based solution with the big breakthroughs in satellite technology and so forth and so we are investing in the wrong thing. I accept that we have to invest in something, but just what consideration has been given to be flexible to other solutions which could be wireless, for example?

Mr Timms: I agree. I think that satellite and mobile could well be part of the solution and that will be a product of the tendering process where people will be invited to come forward with solutions for particular areas and particular circumstances and it may well be that non-fixed solutions will be offered and will prove to be the most cost-effective available. We are certainly not excluding those at all.

Q176 Lembit Öpik: What is the process of looking at alternative technologies?

Mr Timms: What the Procurement Group will need to do is to divide up the target group that we are talking about and it will be for them to judge how large the groups that they want to tender will be, how large the areas they want to tender will be, and then when they have decided the packages that they want to attain, they will need to go to the market and providers will bid to provide a solution for whichever packages that are of interest to them. So at that stage I would anticipate that we will have a variety of technologies being proposed and it will be for the Procurement Group to decide which ones to select.

Q177 Lembit Öpik: Will you in that process be considering ensuring a level playing field for costs? Taking Staylittle as an example, if you found a solution that involved satellite but is much more expensive than, for example, a new town, will there be any redistribution of cost between the cheaper and more expensive versions? Will you be subsidising, for example, the expensive solutions, or is that not something that you have considered?

Mr Timms: We have committed £200 million to this so clearly that will be used to purchase some of the solutions. Precisely what terms the service would then be offered on I do not believe we can say at this stage, but there will be a significant amount of public funding to reduce what otherwise would be the costs.

Q178 Mr Oaten: On that point. It would be a shame though, would it not, if the potential of satellite was lost because the Procurement Committee were very narrow minded and were treated this in pure, narrow financial procurement means?

Mr Timms: I certainly see significant potential for satellite solutions to help us in this and the technology is moving on and we will get better satellite solutions in the future than perhaps have been available in the past, so I would hope that we can take advantage of that.

Q179 Mr Oaten: Just a few basic questions, if I may. Imagining that I was a constituent and I did not have broadband at all, when will constituents of mine who do not have broadband get broadband?

Mr Timms: By 2012.

Q180 Mr Oaten: And when will constituents of mine who have slow broadband get quicker broadband?

Mr Timms: It depends how slow is slow. If they can access a service of 2Mbps at the moment then they may not see very much change by 2012. If they are in the areas - and there are a number of these - that can only get a service at the moment of only 256kBps or 512kBps then they can expect to see a better service by 2012.

Q181 Mr Oaten: If the Procurement Group has not yet set the criteria is 2012 really realistic?

Mr Timms: I think so. They have got to work hard on this. This is a big job and it has to be delivered quickly, but I think it is feasible.

Q182 Mr Oaten: And do service providers say to you that there is a cut-off point at which you need to get this in place if you want to deliver 2012?

Mr Timms: I have not been presented as yet with deadlines by service providers, but clearly we do need to get a move on and we will.

Q183 Mr Oaten: The potential to use very small local providers to fill in these gaps, how interested are you in that? We have heard of some examples I think in Cornwall and, I cannot remember, was it Derby? There were some other examples where this was being used and it was great, it was filling in the gaps but in terms of big procurement projects they may fall outside of that. Is there a danger that we could lose these very local solutions?

Mr Timms: I hope not. We have seen those local solutions providing a very important role in UK broadband since broadband started and the Community Broadband Network brings those initiatives together and I spoke at the conference in Leeds last week that the Community Broadband Network convened. I take my hat off to what they have achieved over the last decade and I think they have a very important contribution to make in the future as well. That is one of the considerations about the size of the packages that the Procurement Group puts out to tender because we do want to make sure we capture the full potential of innovative service providers like those.

Q184 Mr Oaten: I cannot see how a national procurement system is going to put a package together that would allow a very small local group to be able to compete. I cannot get my head around that, unless you were to define literally packages which broke down into small communities.

Mr Timms: I would not - and this is a matter for the group when it is in place - envisage there being a national procurement. I would not expect them to say, "Here is one project to procure the services needed for all 10% of the households that do not get it at the moment". I would expect it to be broken down into geographical packages. How large those will be would be a matter for them to determine. The other possibility, of course, is that some of those small local providers might be able to group with others to provide a consortium bid for an area which is larger than the one that they serve.

Q185 Chairman: Just before I bring in Roger who wants to deal with some of the digital inclusion issues, I just want to roll back a bit and test the underlying hypothesis of all this just a little more rigorously because I still do not see how Government can know better than the market what broadband speeds will be needed in the future. We have just had Ed Richards in and Ed said if he knew that he would be out in the private sector actually making money out of making those judgments himself. The BBC iPlayer needs, what, 0.6, 0.8Mbps? So 2Mbps gives you iPlayer, gives you ITV Player, gives you Sky, and gives you interactive video; it gives all kinds of things. It is more than an order of magnitude better than the old dial-up connections used to have. To get 2Mpbs is a fantastic achievement. Half the country can get access to super-fast broadband now, if it wanted, over cable network. These are fantastic judgments that you are making as ministers from Whitehall double guessing the market when we do not even know what the applications are that are being delivered over the network.

Mr Timms: What we do know, as you say, is that certainly half the country is going to have next generation broadband. Almost half of the country has it already through Virgin and BT is committed to rolling out to ten million homes. So that is going to happen. I think the question that ministers can answer is, is it acceptable for us to end up in a position where half or two-thirds of the country has access to these services and a third of the country does not?

Q186 Chairman: But most of the country does not live within commuting distance of a high-speed rail line. Your government is about to build another high-speed rail line - my party is committed to it to - to go up to Birmingham and Edinburgh and that is fantastic; but poor old Worcester loses out, it is nowhere the railway line. You have to take these decisions. A lot of us are too far out from the emergency departments so if you live in certain places you cannot have the same things that all of us have, and is there not a real risk that you can distort the market? We heard in the last evidence session with Ed Richards that Carphone Warehouse suddenly appeared in the broadband market and transformed it and it is added competition and added rollout. We cannot know the future. If we did you and I would not be sitting here taking flak from the media without their making money out of it. So are you really, really sure that you know better than the market?

Mr Timms: I agree that we need to make these judgments and we have made the judgment that I have set out, which is that it is not acceptable to end up with only two-thirds of the country having these services and the rest of the country not having them.

Q187 Chairman: Do you know the future of satellite technology? Will satellite actually deliver super-fast broadband across the whole country at some stage in the future?

Mr Timms: It could do now if everybody had a sufficient satellite dish and were prepared to buy them and so on.

Q188 Chairman: We had a satellite company in here about two weeks ago and they talked about a second satellite they could afford it. They are there, they are doing it. I do not understand why you know that this is going to be a third. Our witnesses two weeks ago said they had no idea how many would not get it; they had no idea what the applications were; they had no idea how much it would cost and yet you seem to be gifted with this wonderful perfect vision of the future, which, I tell you, for someone who has followed technology over the years we all know that we do not have. There could be some completely new technology coming down the track that none of us know about in this room.

Mr Timms: That is possible. I do not think it is likely. I think that we do have to do some hardheaded economic analysis and Rachel has described what we have done. There is a judgment here, I agree with you, and our judgment is that it is not acceptable to end up with only two-thirds of the country having services to which others are already getting access. If one was to take the position that the Conservative Party currently takes then we will end up with a third of the country, basically rural Britain, not getting next generation broadband any time in the next decade.

Q189 Chairman: We are getting a fantastic service of over 2Mbps almost all the things you want - BBC iPlayer is available; all except the fastest interactive gaming is available at those 2MB speeds. Get that 2MB delivered properly, at a definition - and we still do not know what it is, by the way -and then why not let the market do the rest of it?

Mr Timms: If we were sitting here ten years ago, and I may well have been pressed on this in the past, what is wrong with everybody having 9.6kBps? In ten years we have discovered that actually we do need those higher speeds. One can take the view that those demands are not going to carry on increasing but my view is that they will.

Q190 Chairman: What advantages have the very high speeds brought to South Korea?

Mr Timms: I have been to South Korea and had this discussion with people there and they would certainly point to substantial economic benefits. By the way, I am not sure that Japan has enjoyed quite such the high scale of benefit that South Korea has, and actually if you look at the comparison of broadband take-up between the UK and Japan there is higher broadband take-up here than there is in Japan. A point that was made to me by the minister.

Q191 Chairman: A great public policy achievement with more room to go and Roger will talk about more room to go. What I heard about South Korea is that the only impact has been that the movie industry has had to withdraw entirely from South Korea as it is now impossible to control piracy of movies. These very super-fast download speeds mean that Hollywood Studios can no longer make money out of flogging films in South Korea, it has just become a pirate's paradise.

Mr Timms: If you look at online computer games Korea is the centre worldwide for the development of computer games.

Q192 Chairman: So when you have masses of public money you tax pensioners to enable people to pay computer games?

Mr Timms: No, my point about South Korea is that there is a substantial industry developing those games in South Korea which has been enabled because South Korea has such good broadband.

Q193 Chairman: There are people out there listening to all this who think I am a complete Luddite. I love super-fast broadband and I want everyone to have it as soon as possible. I think it is a fantastic thing and I can see the advantage that it brings commercially and personally. I will move on otherwise I will get obsessive. I will gnaw away at the bone but we just get the same questions and the same answers. I am still not persuaded that you in Government can foresee what is necessary to be done better than the market will deliver it because content will drive demand for broadband.

Mr Timms: I think it is a simple question: is two-thirds of the country enough or not? If it is not you should not support it; if it is not then you have to support it.

Chairman: That is very clear, thank you.

Q194 Roger Berry: Chairman, I do observe market failure on a pretty regular basis and actually think that Government has a role to play.

Mr Timms: I do agree with that.

Q195 Roger Berry: Can I come to the 50 pence levy? Minister, do you agree that the 50 pence levy will fall disproportionately on older people, on people on lower incomes, whereas the benefit will be the early adaptors to NGA who are undoubtedly going to be better off?

Mr Timms: I think that you need to evaluate the levy in the light of what we have seen happening in telecom charges over the last few years. If you look at Ofcom's analysis, an average household's telecommunications bill has fallen by more than 50 pence per month in the last year and ---

Q196 Roger Berry: I am happy to come to that question but that was not the question I asked.

Mr Timms: What I am attempting to do is to give a justification for the measure that we are proposing.

Q197 Roger Berry: I was not asking for justification; I was asking do you accept the suggestion that the 50 pence levy will fall disproportionately on older people and on people on lower incomes and that the beneficiaries are going to be those who are better off? A number of people who have given evidence, for example, have observed that as being self-evident and I must confess that when you look at it it would seem difficult to deny, but I thought we would give you the opportunity of commenting on that.

Mr Timms: I would not entirely agree. We, as you know, have said that there will be a number of exemptions from the levy: people, for example, receiving the pension credit guarantee will not pay the levy, or people on Jobseeker's Allowance; and other very low income households will not be affected. So I think we would be able to design this in a way that does protect those on the lowest incomes whilst also ensuring that we have the resources to ---

Q198 Roger Berry: There would be a policy paper somewhere that would be able to demonstrate that it is not true that this will disproportionately hurt people on lower incomes and benefit people on higher incomes?

Mr Timms: Those on the lowest incomes will be protected, as I have said.

Q199 Roger Berry: Yes, any exemption for people on lowest incomes will help them, absolutely. I am just trying to get to what seems to me a pretty important conclusion: is it or is it not true that this will be a regressive way of funding the package because the people it will hit disproportionately are those on low incomes and it will benefit disproportionately people who are better off, even with the exceptions to which you have referred?

Mr Timms: I think it has been set at a sufficiently low level for that not to be the case.

Q200 Roger Berry: Minister, could the Committee have the evidence for that at some stage in the future?

Mr Timms: Okay, yes.

Q201 Roger Berry: That would be good. I am sorry, I interrupted you. You were saying that parking that issue on one side there is the issue about what has been happening to the cost of telecoms, and do you want to finish that?

Mr Timms: Simply that Ofcom data indicates that the average household phone bills have gone down by more than 50 pence just in the past year, and that is part of a continuing trend. So I think one needs to set the proposed increased of 50 pence a month against that trend.

Q202 Roger Berry: The information that we have - and it is just a question of the Department checking this - is that the cost of telecoms fell by £3.83 per annum, whereas obviously the levy would amount to £6 per annum.

Mr Timms: We have the Ofcom data to which I am referring here. I think Rachel has it in front of her.

Ms Clark: I do not have it in front of me but we can certainly write to the Committee with it.

Mr Timms: We certainly have it.

Q203 Roger Berry: You do not recognise my figures? Obviously the £6 you will recognise but you do not recognise the £3.83? But you have other figures?

Ms Clark: I do not have the exact figures here but I am told that on average the monthly bill has decreased by more than 50 pence a month in the last year for average households.

Q204 Roger Berry: If you could let us have that obviously that will help in our considerations. Like many other Members, I have had pensioners and others whose only comment on all of this has been that they do not see why they should be paying for it, for reasons that I have given. There have obviously been calls that this is financed from general taxation, which by and large is progressive - although it actually depends how you do it; it is not that progressive. People have suggested that the money should come from general taxation. Has the Treasury ruled that out completely?

Mr Timms: I think it would be very difficult given the fiscal consolidation that is going to be required over the next decade, the commitment in the Queen's Speech to pass legislation on this, and I think it will be very difficult to commit credibly to support from general taxation to this particular purpose. I think the great strength of this proposal is that it gives us a ring-fenced pot that one could be confident would continue to be available throughout the period we are talking about, and therefore confidence for investment.

Q205 Roger Berry: I think that is debateable but let us not debate that. Why not make those who benefit from this pay?

Mr Timms: They will; they will pay the 50 pence per month as well.

Roger Berry: Why not make only the people who benefit pay as opposed to those who do not benefit?

Q206 Chairman: That is actually not true, Minister, because those who are on Virgin Media will not be paying the levy, surely?

Mr Timms: They will.

Q207 Chairman: They have a copper wire line.

Mr Timms: They will.

Q208 Chairman: But if you do not use a BT line you do not pay the levy?

Mr Timms: That is not the case, you will pay. - that is why it is called universal.

Q209 Chairman: The 50 pence tax? I am happy to admit ignorance in public - I have long lost any pride in that. But if you are a cable provider and you do not use a BT service you will not pay the 50 pence levy?

Mr Timms: You will.

Ms Clark: You will.

Q210 Chairman: But there is no copper wire involved.

Ms Clark: Technically the Virgin Network is a copper coaxial double cable but the legislation is being drafted to ensure that the Virgin Media Network is included.

Mr Timms: And people who only have fibre would also pay.

Chairman: Sorry.

Roger Berry: The evidence the Committee received from Mr Stearn of Consumer Focus, where he said that he would not have to pay the levy because he gets broadband from cable, seems to be behind the question that the Chairman has asked.

Chairman: Exactly; that was my understanding.

Q211 Roger Berry: We do need to clarify precisely what is the position.

Mr Timms: I am afraid he will, yes; I am sorry to disappoint him, but he will.

Roger Berry: If Consumer Focus has got it wrong you can forgive the Committee for perhaps not quite understanding. We do need to clarify this.

Q212 Chairman: Roger asked you a question about why the beneficiaries should not be the prime contributors.

Mr Timms: The beneficiaries, that is to say people receiving next generation broadband services, at the moment there would be rather a small number of those. I think that we do require a broad-based levy in order to raise the scale of funding that is required.

Q213 Roger Berry: This does look dangerously regressive to some people, Minister.

Mr Timms: I get a fair number of letters, as you can imagine, making the point that nobody likes an additional tax. I think the question is: is this purpose sufficiently important for the country as a whole to warrant 50 pence a month on a phone line? And my view is that the answer is yes.

Q214 Roger Berry: Currently we have many people who can access broadband who do not because either they do not want to or they cannot afford it; 40% do not access it at the moment either because they cannot afford to do so or do not wish to do so. Is that not 40% a more pressing concern than next generation?

Mr Timms: That is of concern but I do not think it is a question of one or the other; I think we have to deal with both and we have a big commitment to digital inclusion. Martha Lane Fox has been doing some very good work on this for us. We set up the Digital Inclusion Consortium and it needs to be both/and rather than one or the other.

Q215 Roger Berry: I accept that. The 50 pence levy will raise about a £1 billion for next generation access.

Mr Timms: That is £1 billion over seven years.

Q216 Roger Berry: The Digital Inclusion Taskforce's budget is £12 million over three. It does suggest to me that greater parity is being given to one rather than the other, rightly or wrongly; but surely £1 billion over seven years compared to £12 million over three, if that is the extent of government effort it does seem to me that NGA has been given a very significantly higher priority than inclusion.

Mr Timms: I would point to other parts of government spending which are contributing to digital inclusion - the budget for the UK Online Centres, for example, and other things we are already doing. If you look at the targets that Martha Lane Fox, for example, wants to set those are pretty ambitious and we think that we can make very substantial progress on this. Clearly investment in infrastructure is a heavy draw on funding inevitably, but we can make progress on digital inclusion as well.

Q217 Roger Berry: We all know where the popular discussion is of public finances and it does seem to me that the reason you have given for wanting to put the 50 pence levy is that the Government is not brave enough to say, "We will finance it through taxation because that would be a fairer way of doing it." But actually lots of our infrastructure projects - hospitals, schools, et cetera - are financed by billions of pounds of government investment and yet the outcomes of those investments seem to me more obvious and the benefits are obviously more obvious than this one. Do you not think that people who are not going to benefit from this for quite some time are rightly feeling that the 50 pence levy is just unfair? Is my sample of constituents atypical and are they being unreasonable?

Mr Timms: The case that I would want to argue to them is that they will also be better off once Britain is able to take full advantage of next generation broadband. We will see a growth of new businesses; we will see an increase in prosperity; we will see better public services and everybody will benefit from that, and I hope increasingly that we will see people who write to me as well and say they are not planning to use broadband actually able to take advantage of the services and enjoying them.

Roger Berry: I think we may just agree to disagree on this.

Q218 Chairman: I am fascinated with this argument but open-minded, believe it or not, despite my aggression at some times during today. But we do not tax aspirin to build new hospitals. We do not say, "We will put a levy on every Paracetamol sold in Boots to build a new hospital in a town." I am very struck by Roger's parallel; we do not do it that way. Why is this different? You are saying that broadband access is more important than health, or the other way around?

Mr Timms: I think that the commitment of the current Government and indeed the Opposition to funding for the Health Service, together with all the other public services, is going to absorb the resources that are going to be available realistically to governments over the next few years. What is needed to make progress in this area is a clearly separately identified pot of funding. That is what the levy will provide.

Q219 Chairman: I must say that I am moving rather to Roger's view that I think we will have to agree to disagree on this. I just do not understand why my in-laws, who are perfectly wealthy, should pay another £6 a year for a service that they are never, ever, ever, ever going to take up, while my son, who is an obsessive broadband user, will get the benefit of it. If we do it this way at all why are we not taxing the users of broadband, rather than the people who do not want broadband?

Mr Timms: I do not think we can tax the users of broadband because how does one identify who they are?

Q220 Chairman: The ISPs know who they are?

Mr Timms: I think that practically taxing the users of broadband will be a very, very difficult thing to do.

Chairman: But the 50 pence levy that you are proposing is to be hedged around with exemptions, I now realise, which will make it horribly complex anyway and there will be administrative costs of this programme and it will bear down on certain specific groups and others will be exempt, so that is going to be complex too. It is such a small sum of money that we are having a row about, but it seems to me to be very odd.

Q221 Roger Berry: If the benefits of spending £1 billion over ten years are so self-evident in terms of good for business, promoting economic growth, et cetera, as you have suggested they are, then that itself will pay for it, pretty close; and if not it is a very, very, very small amount of money compared to the bigger issues that I absolutely agree have to be addressed. I do not understand why the Government wants to cause such angst about an unfair way of funding this, given that we are talking about such a small amount of money in the longer term, when the Government is convinced that it is worth doing because it will bring substantial economic benefits. I think it will bring substantial economic benefits but I just do not know why.

Mr Timms: It is a modest levy that gives assurance that the resources that are needed will be provided and other mechanisms would not achieve it.

Q222 Lembit Öpik: It seems to me that the issue is actually a strategic one and it is not really just related to IT and broadband. Many times my party has talked about hypothecating taxes and the Government has opposed it and said that is not the way you want to go. But you are here. Obviously I am quite sympathetic to hypothecation but my concern - and I think Roger's concern might be by inference - is what the rationale is to reject hypothecation in a whole raft of things even down to people who conscientiously object to paying, because they are pacifists, paying for defence and so forth; but insisting on it here, and as the Chairman has pointed out, in a way that is not absolutely completely fair. So I wonder how that sits comfortably with a Government that has tended to oppose hypothecation. Is it because you feel that this way as a minister you can manage a budget and you do not have to go into the normal rat race of fighting for the funding, or is there another rationale for it?

Mr Timms: I think that the particular circumstances of this case do justify a different approach and, you are right, it is an unusual approach. But here we need a significant sum of funding over the next few years to support a major investment project which will be of substantial economic and social benefit for the UK. Our judgment is that in this particular case, having a very clearly defined levy which will generate that resource, is the right approach to take.

Q223 Lembit Öpik: If I go to the Ministry of Defence do you think they might say to all the people who conscientiously object to paying for the war in Iraq that they could also pay a little bit less tax? Because the principle is very similar.

Mr Timms: I think the principle is different. That particular one raises a whole host of very different issues. I think the problem with trying to do it from general taxation at a time of fiscal consolidation is that you would not achieve the confidence that it will be provided and this way we can.

Chairman: The principle that you are raising, Lembit, about hypothecation is hugely important. A precedent is being set here which I think government has always resisted in the past.

Q224 Mr Oaten: And it may not be a bad precedent; there may be other models for it in the future. I may have missed it - for how long does the levy last?

Mr Timms: We have not put a date on the withdrawal of the levy; what we have said is that we think we need £1 billion between now and 2017 to hit the 90% target. One could take the view that at that point it should be withdrawn or one could take the view actually that we would want to keep the levy in place in order to generate funds for the final 10% and that is a judgment to be made a bit later in the process.

Q225 Mr Oaten: But your figures, presumably, know from how many individuals will be paying the levy at which point you reach certain revenue-raising targets?

Mr Timms: Yes. We are assuming that everybody with a phone line at the moment, other than those on social tariffs, will be paying.

Q226 Mr Oaten: What I am getting at is in three years' time how much money will you have raised?

Mr Timms: I think it will raise between £150 million and £175 million per year.

Q227 Mr Oaten: But the intention is that once it has done its job to remove the levy?

Mr Timms: Yes, I think that must be the logic of having a levy for a particular purpose, that once the purpose has been entirely completed ---

Q228 Chairman: Hang on, income tax was used to pay for one particular war, as far as I remember it, and I think we still have income tax!

Mr Timms: We are talking about decisions that are going to be made some years hence but I do not think this levy could be used as a contribution towards general taxation; it needs to be used for the purposes ---

Q229 Chairman: You are such a nice man, Minister! You are so nice!

Mr Timms: The point we can debate, I think, is whether it should carry on beyond 2017 to contribute to the cost of the final 10% next generation broadband.

Q230 Mr Oaten: My point is that if we look at the principle of hypothecation there is a very big difference between putting in place a new tax which is going to fund a service for ever more or a one-off quick hit through a levy. Which is this?

Mr Timms: It is more like the latter than the former because once the investment has been completed the purpose of the levy no longer exists.

Q231 Roger Berry: My point is not about hypothecation - I actually think that the circumstances for it are perfectly justified and the Government has done it on a few occasions - it is the fairness of this and I do look forward to seeing, as we have been promised, the analysis that demonstrates that this 50 pence levy is not regressive because it is a piece of work in which I shall take great interest.

Mr Timms: I am certainly happy to set out the case for the fairness of the levy.

Q232 Chairman: It is an interesting session. You will see that my colleagues are developing their thinking as they are listening to your answers, so you are paying a price for us being relatively thin on the ground today, but you are doing very well. On to another taxation issue now, which is rates, which is an extremely important question. I will not take you through all the detailed arguments - I have them here if you want them - but do you not think the fact that we tax these things at all, fibre systems, discourages businesses from laying the infrastructure that we need? I think that we are only one of two countries in the EU that actually imposes a tax at all. Why?

Mr Timms: We have a very long-established system of rating which applies to all business establishments, including, for example, mobile phone masts, and I think it would be difficult to justify a carve out for this particular kind of facility.

Q233 Chairman: You are setting all kinds of precedents with this - the 50 pence levy is a precedent. The Government is encouraging technology on one side and taxing it on the other. It seems inconsistent to me.

Mr Timms: I would argue that it is important in the tax system that we treat comparable things in the same way and I think it would be quite difficult to say that we should not in this particular case. Of course, if we did - and here you might forgive me if I speak for a moment as Minister for tax - there would be many other people who would say, "My circumstances are rather similar, please do not tax me either."

Lembit Öpik: So on this very point, pursuing the inconsistency point, it does seem to me that you are willing to punish - not punitively - but financially old technology that you want to get rid of, and then you want to tax new technology that you want to attract. Would it not be simpler and less of a precedent simply to say, "You can have this rate free" because then you are providing a positive incentive for what you want? If not, then I am at a loss to understand why we have just spent ten minutes talking about hypothecation.

Chairman: As a temporary measure, just to get us through to your objective, if necessary.

Q234 Lembit Öpik: Carrot rather than stick, effectively.

Mr Timms: As I say, at the moment business rates apply to everything and I do not think that a good case has been made for exempting this particular kind of facility from a system which is extremely well-established and delivers and works perfectly well.

Q235 Chairman: Let us not deal with the exemptions, let us deal with the specifics. An article that has been drawn to my attention in Computer Weekly says that a 20-kilometre extension to a small network has a significant effect on the valuation; but the same 20-kilometre extension to a large network can be considered to be de minimis. In other words, the way that the rating system works actually discriminates against the smaller network.

Mr Timms: That is not an article that I have seen. Is that a recent one?

Q236 Chairman: Yes, it is; October 29. "Business rates are killing Digital Britain" - Computer Weekly, 29 October.

Mr Timms: I think it is a somewhat misleading headline. I think what is important is that if there are concerns and practical issues about how the rating system works that the Valuation Office Agency is involved in discussing and resolving them.

Q237 Chairman: But Stephen, there have been concerns with the way that the rating system affects telecommunications for years and years and years and the Valuation Office has been spectacularly slow to make the changes necessary year after year after year. I battled away at this - before I was Chairman of this Committee I was making representations on behalf of local loop unbundling and the rates' impacts, and it is like banging your head against a brick wall because people love raising taxes in the Valuation Office. They are not interested in helping business; they want to raise taxes. Casual representations to the Valuation Office will not work. You need to make a ministerial decision and you are in a good position to do so because you wear two hats. I could argue if I was being uncharitable - and I would not to you because I like you - that you are a conflicted minister; you are torn between your obligation to the Treasury to raise taxes and your obligation to business to argue for low taxes and then instruct a roll-out. That would be uncharitable. I would say that you can use your influence at the Treasury to get things done that other ministers could not.

Mr Timms: I agree with that point and that one of the advantages of the way that my portfolio works out is being able to make progress on the levy that we were talking about earlier on. But I am in a position as well to talk to the Valuation Office Agency and there may well be a need to do so. What I would not favour is introducing exemptions or anomalies in the rating system.

Q238 Chairman: I accept that, but it seems that there is an anomaly here, that the big incumbent provider gets all the benefits and the incomers get all the dis-benefits. That is the way that the system appears to work at present.

Mr Timms: You are referring to the article in front of you?

Q239 Chairman: And also to representations that I have had over years from the telecommunications sector, and this has been a constant problem. BT is a great organisation in many ways, it does a fantastic job in many ways, but is the monopolist, it is the incumbent and it will mount every argument it can to protect its position and anything that BT says may often be absolutely right, but we must always treat it with the utmost suspicion - always. The presumption must be that BT is wrong and you must satisfy yourselves that they are not. And on the rating issue it is particularly important. Look, for example, at the way that the BT business rates bill has dropped so dramatically over the last few years. It may be that they have disposed of lots of vacant telephone exchanges and actually there is a lot less property out there being valued, but what we were very struck by as a Committee two, three weeks ago - whenever it was - is the fact that the drop in their rates bill to government of £190 million a year is coincidentally almost exactly the same as the amount that the 50 pence levy would raise. So there may be a very good reason for this because, again, the incumbents to BT have a vested interest in making these points. But it is very odd - their rates bill has collapsed while incumbents are facing huge rates bills to extend their network.

Mr Timms: I think the strength of the rating system is that it is based on objective valuations about how much things are worth.

Q240 Chairman: I said you were a nice man!

Mr Timms: As I understand what has happened with the BT rates bill, the valuation, which was very carefully and meticulously carried out, has reduced partly because of local loop unbundling and partly because of the kind of issue you have raised - exchanges being disposed of, and so on. But it is all done on an objective basis and the same rule is applied everywhere and that is an important strength of the system.

Chairman: Valuation has always been an art form and is not objective, as well you know - it is an art form. Mark Oaten?

Q241 Mr Oaten: Just on this point of rating, did the DTI not have a report recommending that there should be a de-rating of fibre in the past? Have government departments actually not recommended that?

Mr Timms: I do not know whether government departments have. I have seen suggestions of it from time to time, not from government departments but from those outside. My case is that introducing anomalies into the rating system would not be a good idea. I do not think it would be a sustainable way of supporting what all of us want to see.

Q242 Mr Oaten: You are not aware of a Government-commissioned study which has recommended de-rating?

Mr Timms: I do not think I am familiar with any study to which you might be alluding.

Q243 Chairman: I have to say that I am becoming uncharitable now. I think that you are defending the status quo and the Valuation Office rather than defending the roll-out of Digital Britain, and I think that is quite serious. I really think that the Valuation Office over the years has been Neanderthal, Luddite in its attitude to telecommunications and I think you have to challenge them very hard. Another anomaly, for example - and this comes from the Guardian, February of this year - "Dark days for fibre start-ups". This is not a quote; it is a summary of what it says. "The current rating system does not differentiate between how fibre is used. A prominent example is Sohonet, whose network services the film industry and has run projects between Sydney and Los Angeles out of London. Sohonet's fibres are exclusively for this and consequently spend large portions of time inactive, unlike telecommunication companies whose networks are always busy. Therefore, the network, while essential, is not as profitable as the same cable owned by a telecommunications company, but nevertheless is rated the same." So there is another anomaly in the rating system affecting Digital Britain.

Mr Timms: You are putting me in a slightly difficult position. Again, this is a case with which I am not familiar. All I can say is that I do think there is an important strength in the rating system in the UK and that it is based on pretty objective criteria. It may be in some instances that the criteria used are incorrect and then they can be challenged, and there have been challenges in court over this and the courts have upheld the view of the VOA. But if there are errors in how things are done then they certainly should be looked at.

Q244 Chairman: There are lots of anomalies here and I think that big changes are needed in the rating system. I think that it discriminates against innovators; I think it favours the incumbent; I think it will choke Digital Britain unless you are very careful. Can I ask one thing? BT rates bill is down - why? If you cannot tell me now I would be grateful for a note afterwards as to why BT's bill has fallen.

Mr Timms: My understanding is that it is primarily due to the value of BT's assets falling; that is in consequence of greater use of local loop unbundling. You made a point which may well also be correct, that some exchanges have been disposed of and so on.

Chairman: It does seem though to be quite a large reduction while their competitors face quite large increases. I think we will leave it there. I have serious reservations on this aspect of the Government's policy towards digital Britain.

Lembit Öpik: It seems fairly obvious to me that the problem here is that the rating system is about solid bricks and mortar and stuff like that, and we are living in a virtual world today and trying to rate a virtual world on the stuff that carries it just does not make sense.

Chairman: And satellite providers of course will not be paying business rates on their link - up links and down links, I imagine. That is another thought.

Q245 Lembit Öpik: Smart metering obviously is very important and it ties in with feed-in tariffs and everything that goes with it. Given the potential synergies here, has there been any consideration as to how smart metering and Digital Britain projects might work together?

Mr Timms: I think this is an important point and there has been some reflection on this. I think that there could well be some synergies to be taken advantage of. Smart metering roll-out is going to be a huge project - a difficult one, a challenging one; so will the roll-out of next generation broadband and we are looking in the Department at how those two initiatives could complement each other and be mutually supportive to each other's objectives.

Q246 Lembit Öpik: Wireless technology is obviously a natural consideration, not least because you do not really need to have a very high speed connection to do what they need to do with this. It is also being considered, as we have discussed before, for providing broadband in places where wireless is too expensive. Could the two programmes be merged so that if you can do the smart metering with the smallest modifications, you can also do so with broadband?

Mr Timms: I think that the objectives of the two are rather different and so I would not favour merging them, but I do think that there is scope for them to work quite closely together and to benefit from each other.

Q247 Lembit Öpik: There is also the JANET project with which you will be familiar, about connecting schools to the network. Is there a way that you could use the JANET project to also provide the communities around those schools with broadband?

Mr Timms: As I understand it, JANET is about universities rather than schools. One of the reasons that we have done so well on the first generation of broadband has been the use of public sector demand to drive out services into areas that otherwise might not happen and schools have been very important to that, along with hospitals and doctors' surgeries. There could well be scope - and I imagine that there will indeed be the possibility of that happening in the future with next generation broadband as well. JANET, as I understand it, is an academic network for universities and so there could be circumstances in which bits of that infrastructure might help a wider purpose, but I would have thought that that would be fairly limited. I am speculating only.

Lembit Öpik: I am not an expert on JANET and so you could well be right.

Chairman: That is one lady he is not an expert on, then!

Lembit Öpik: I am a specialist in other areas as well; if you want I can start asking questions about aerospace, Chairman, if you provoke me! I am not completely clear about the role within schools myself and I am not going to busk it because I do not know for sure. It does nevertheless seem in a general sense that if a provider of networks which takes information quickly from one place to another has an infrastructure that there could well be some opportunity to freeload off that.

Chairman: We understand there is a scheduled roll-out to schools of JANET and if there is such a scheduled roll-out then it seems a good opportunity.

Q248 Lembit Öpik: The very heavy and exciting commitment to roll all this out by 2012 will be great news for all my villages and all the individual communities and so forth. I do also observe that in 1997 the Government said that every house would be connected to the National Grid by 2000. We have talked about JANET; there are an awful lot of houses that are still using "gennies" to get their electricity. I wonder how assured the good people of Staylittle et al can be that really by 2012 we will be getting at least the capacity of 2Mbps, however remote their living conditions?

Mr Timms: I think that they can be very confident about that and we are determined to achieve that. I think that there is quite an interesting analogy between the roll-out of mains electricity and the roll-out of next generation broadband. The roll-out of mains electricity took some decades. I think that without public support the roll-out of next generation broadband will take some decades as well. My view is that we need to move much faster than that and that is what the levy will enable us to do.

Q249 Lembit Öpik: There is a gentleman in my constituency who said that he was involved in using the National Grid, such as it was, for radio communications in the past. However outlandish it seems, I feel obliged to reflect that what he would want me to say is that there may actually be a practical way to use the electricity network to communicate information as well, and I am sure that there will be a lot of people willing to make some compromise in terms of the line speed to have line speed at all.

Mr Timms: There have been some projects of this kind. I visited one that Scottish and Southern Electricity was piloting and, as I understand it - and Rachel might know more about this than I do - that ran into some technical difficulties of interfering with other things and so it has not made as much progress as was hoped, but there could well be potential there in the future.

Ms Clark: It is one of the technologies that they are considering in relation to smart metering because obviously there is a direct synergy there.

Q250 Chairman: Can I ask you to flesh it out, about the possibility of using smart metering roll-out to deliver a low level broadband service universally because there is a relationship there.

Ms Clark: There is certainly a dialogue between ourselves and the smart metering team. I think that there is not an ideal synchronicity of timing in that we are aiming to have reached everyone by 2012 and I think that the smart metering project deadline is 2020, and they are expecting to actually be rolling out more 2013 onwards. I am not sure what the exact timings are but I am not sure that we dovetail as nicely as one might hope.

Q251 Lembit Öpik: I used to be very involved with energy policy. The energy companies are very, very keen on smart metering and on the feed-in tariffs. Their frustration is that the government really needs to prescribe what system you want them to use and they will use it; but what we cannot have is the same as we had when videos first came out with VHS competing with Betamax and then the industry deciding which was best to invest in and to commit to. So this is one area where the industry would be grateful for a directed steer.

Q252 Chairman: If that practice had come in a couple of years ago of course there might have been synchronicity from the two programmes but we may be too late for that, but I understand that point. We are up against the wire in terms of time and I just observe, by the way, talking about electricity roll-out that my constituents would love to have gas in many parts of my constituency and the same energy you are showing for broadband would be very welcome on gas. But we are grateful. We have been a little provocative sometimes today and I apologise for that.

Mr Timms: No apology required.

Chairman: But these are important questions and what I would like to say in conclusion - this is our last evidence session in this inquiry - is that we do actually share your enthusiasm and the Digital Britain enthusiasm for next generation access and we understand its transformative power; but if sometimes we challenge and question it is to make sure that we get it right. But the principle of as wide access as possible is one that we all share in this Committee. Thank you very much indeed.