Select Committee on European Union Fourteenth Report


Mr Donald Upson, State Secretary for Technology, Virginia


The news has not been good but infrastructure companies are sound and the effects of the AOL/Time Warner merger have yet to be felt. The drop in the NASDAQ since the beginning of the year is a temporary corrective.


Mr Upson is a strong supporter of Microsoft. Nineteen states are not suing Microsoft and it is absurd that the Administration is using a 110-year-old law to deal with a 20-year-old company. There is no injury to consumers so how is it that anti-trust laws are being violated? The government seemed in two minds: the National Science Foundation had funded Microsoft and the Department of Justice had charged the company with monopoly practices. This was not the way to deal with the new economy.


Virginia wants to build the best environment for e-commerce and North Virginia has become a cluster of new technology companies. This success can be attributed to:

  • Proximity to the Federal government and the funding of research - but the government is no longer industry's biggest customer.
  • The State government has provided an e-friendly environment.
  • The privacy issue has to be dealt with but since the number of websites have grown from 50,000 in 1994 to 1.6 billion then people cannot be too worried.
  • A good tax environment. Mr Upson produced statistics purporting to demonstrate the tax advantages of Virginia over Maryland and other states.
  • The existence of Mr Upson's own position of Chief Information Officer (which he attributed primarily to the dynamism of the State Governor, Mr Gilmore who has a vision for Virginia and is determined to make it the model for the whole US) and the transfer of various States Agencies to him thus creating a new Department which links management to policy formulation.
  • The population of the Virginia (the 16th largest state) is 7 million. It is third or fifth in the technology stakes with 344,000 workers involved in new technology (more than Silicon Valley), generating $20bn dollars in wages. However, 5,000 companies have fewer than 5 employees. Virginia is 3rd in venture capital, and 1st in the growth of venture capital and the production of technology graduates.


There was discussion of Virginia's ability to implement widespread bureaucratic change when the Federal government could not. The co-ordination level in the Federal Administration is at deputies/assistant/secretary level and these are not people who have the power to make quick decisions. Governor Gilmore's reconstruction of the Virginian administration had put e-governance at the heart of it in the face of vested bureaucratic interest. A senior level inter-agency council is responsible for masterminding changes to state government procedures.

The citizen now has access through a single portal to multiple transactions over multiple agencies, creating a new "e-town hall".

The State government is proactive in contacting citizens to inform them of issues in which they have registered an interest.

Driving licences are issued, citizens given an associated PIN, and the police notified automatically—all online.

The tax system has been modernised, providing registration and advice online. This has been achieved by a deal with the AMS corporation which collects formally uncollectable revenue, retaining 90 per cent of it, over a period of 6 years. The benefit to Virginia is the 10 per cent of the revenue and a modern, re-engineered taxation system. Such outsourcing is difficult in principle because both State employees and the unions dislike it but this private-public combination created, in effect, an outsourcing hybrid.

In contrast the Federal government has emphasised the IRS, not the citizen, spending $4.5 billion on modernising the system without any real success. In total the Federal government has spent $36 billion on IT and is "still a mess". This failure is on account of the "stovepipe" bureaucracy with its poor co-ordination. In Virginia, the private sector component is present in every meeting of the State government. Within 30 days (from the date of the Sub-Committee visit) a "completely leased environment" will be in place. This will be overseen by a Council for Technical Services and will incorporate a uniform management system including e-procurement and an e-travel system for all employees. Companies do this sort of thing as a business and there is no need for the State administration to duplicate their efforts.


Mr Upson is a strong supporter of the presidential candidate George Bush Jnr. who has been liaising with Virginia over plans for his administration (if elected). Plans should include:

  • A top level e-Minister to bring the Cabinet together.
  • One-stop government, supported by an e-procurement bureaucracy.

Mr Upson has participated in a Committee set up under the Internet Policy Act to determine what should define a technology-friendly environment. The answers included targets:

  • e-Government: top 5 services online by the end of 2000.
  • Privacy: website privacy statements ie self-regulation, but with the threat of a governmental intervention.
  • Pornography: the national centre for missing and exploited children has been involved, and the idea is to add a penalty for using the Internet for pornography.
  • Spamming: This is a felony and should be pursued either by the individual attacked or by the ISP. A corollary to this is that equipment specifically designed for spamming should be prosecutable.


Telephone service. It is highly taxed but local (ie sub-state level) governments cannot bring in new taxes. The system is bizarre: local companies are debarred from the long distance transmission. Virginia has introduced a project to link these companies and introduce broadband very quickly. These measures will lead to reductions in telecommunications changes of between 30 and 70 per cent.

  • Local loop. The state is holding 6 major workshops with chambers of commerce to advise on the new technology for both B2B and B2C.
  • Mobile telephony. Mr Upson acknowledged that Europe is ahead, simply because its embedded infrastructure is not so rich as that in the US. There are difficulties for mobile telephony in the US because the siting of cell towers generates environmental opposition. Virginia is planning for a state cellular network.


70 per cent of the Virginian workforce is in IT. Mr Upson was not clear on where new IT workers will come from, admitting that more than half of the technology graduates produced in Virginia leave. A further problem is the premium that has to be paid to hold the best. Virginia pays the second highest wages in the US and new IT workers generally want to be in either Silicon Valley or Virginia. Nevertheless, there are still 30,000 unfilled jobs.

The key factor in the growth of Internet clusters is the availability of venture capital in certain areas. In California it is Silicon Valley, in Boston MIT, and in Virginia, North Virginia. The trend is now running in Virginia's favour. The number one venture capital firm—Freeman Billings Ramsay—has confirmed that 7 out of 8 deals now take place in Virginia. Venture capital follows successful clusters.

Stock options are also critical and this is an area where the public sector cannot compete. Senior civil servants are keen to embrace the new technology but find it difficult to stimulate the lower levels. Mr Upson's solution is that government should behave more like a business and this means that old ways of working have to be abandoned. He has sold e-commerce to the workforce "on the lines of a Hollywood production". He has attracted more private sponsorship than he can spend. "Worry about the rules and you will miss the vision."


Mr Upson commented that he was delighted that the EU moved at such a sluggish pace: "your delay is the closest thing to investment in the US economy".

Dr Robert Pepper, Federal Communications Commission

Dr Pepper described the FCC (Federal Communications Commission) and agreed to e-mail an organisational chart. The FCC:

  • Was created from the old Federal Radio Commission and the Radio Telecommunications Agency.
  • Has 2000 employees.
  • Shares responsibility for telecoms tariffs with the States.
  • Combines duties of OFTEL, ITC and RA in UK—except for spectrum management, which is split between the government and the private sector.
  • Acts as strategic planning agency and independent regulatory agency.
  • Is not part of the Administration: its budget derives directly from the Treasury on the recommendation of the President.
  • Is governed by five Commissioners (not more than three from same political party), appointed by the President, but confirmed by Senate. They serve their terms in a rotation system, which ensures continuity. The chairman is normally a member of the party in power.

Historically, the FCC was a backwater, which merely regulated the AT&T monopoly. With convergence this has changed and the organisation has become the subject of controversy. Its structure is changing to reflect changes in technology but such changes are limited by statute and have to be technology/competition neutral. It has created an enforcement bureau. It focuses on consumer information protection in the telecommunications sector and is in the process of consolidating all licensing functions online. If these changes succeed, the staff could be reduced to 500. With the new revolution, organisations like the FCC will lose their best people. This is being countered by offering two-year contracts in the public service for bright young people, with the hope of providing a continuous rollover. Unfortunately, they are leaving faster than Dr Pepper can recruit. Stock options are the lure.

Dr Pepper is in close touch with counterparts in the UK. In his view it is clear that OFTEL, the ITC and the RA should be combined because all telecommunications assets should be used to drive competition in a digital world. The Chairman of the FCC bangs heads together and prioritises. This would not be possible if the agencies were all separate.

Investment in networks has been doubled since 1996 and network usage doubles every 100 days. Dr Pepper quoted from a FCC handout to demonstrate the rates of investment and the ability of new services to soak up capacity. Opening up telecommunications is the necessary prerequisite to the expansion of the Internet and the new economy. The next most important factor is the availability of venture capital.

Congress has ruled that if there is competition at local level then those companies are permitted to move into long distance transmission as well. But if there is a local monopoly then the companies are not entitled to provide long distance services. This is primarily a political issue. There is plenty of fibre and co-location of routers and this enables competition to develop. The fear of competition drives innovation.

Gerard de Graaf and Patricia Moll, of the European Commission Delegation to the US, hosted by Mr Nick Westcott, Minister-Counsellor (Trade and Transport), at the University Club


In the US the e-commerce phenomenon constitutes a real revolution. Fundamental changes in technology and society are taking place. The US is strong in technology and entrepreneurial spirit. It has a dynamism, which would be difficult to replicate, and it willingly embraces risk. Other advantages are the availability of venture capital, low tax levels, a hard working workforce, share options and greed. (Mr de Graaf cited Michael Sayler's $13bn personal wealth as "excessive".)

The EU is behind but since 1998 IT penetration in Europe is growing at a faster rate than in the US. The US perception is that Europe:

  • has not yet woken up to the opportunities offered
  • has a Pavlovian reflex to over-regulate
  • has a rigid labour market. For example, the French insistence on the 35-hour working week is cited as an example of the rigidity which frustrates e­commerce.

Europe is not the US. Its culture and lack of venture capitalism are obstacles. Banks always want to see collateral, especially in the Mediterranean countries, and the nature of new IT companies means that collateral is not available. However, Europe is making some progress. For example the position over tax breaks has improved although Europe has yet to match the US system of business angels and business incubators. And some Member States actively work against any move in the direction of share options. Extreme disparities in wealth and education which are found in the US would be unacceptable in Europe. On the other hand, in the US there is a strong sense of community and the voluntary sector is strong.

The US system demonstrates that to be successful in e-commerce, government and business has to work hand in glove. There has been an ideological debate over the past two years but the need for some government role is now acknowledged. For example, there are 37 different laws at State level over digital signatures, a field where the EC Directive represents a considerable advantage. The EC's second great strength is the development of the Single Market although derogations by certain Member States make this a less-than-perfect instrument. The final factor contributing to US success is the flat telecoms rate as opposed to the European metered rate.

The EU has other advantages in terms of its Directives. The EU is ahead with the electronic signature and e-commerce framework Directives. Only two months ago President Clinton was forced to ask his Administration what the US legal framework was. The US came to a painful compromise on the privacy issue, and cannot understand why this is not adequate for Europe. The EC response is that not only is it not adequate for the EC but it also fails to meet OECD standards. There has to be a right of access for individuals and some control of data sharing. In the US there has been a backlash, for example an attempt to control pharmacies selling prescription information to drug companies. Nor are the pharmacies alone. The Department responsible for motor vehicles sells driving license information. In Maryland the State government earns over $100 million a year for this sort of activity.


This has acted as a wake-up call. Member States should concentrate on:

  • Liberalising the telecommunications infrastructure
  • Establishing a predictable legal framework, including self-regulation and co-regulation.
  • Protection of Intellectual Property Rights
  • The establishment of liability
  • Bringing about changes in professions


The issue in the US is political. The administration focuses on minority populations and on external issues such as special programs for Africa and work through G8 via the Transatlantic Business Dialogue (cf. Lord Brittan). The EC should review its aid and technical assistance programs to join the US in these activities.


Europe has a head start over the US because of the GSM standard, which provides the essential platform. The Internet will go mobile and wireless technology will be more than the current use of mobile telephones. Looking ahead to WAP and third-generation equipment, standards can also slow down innovation. Companies are international and it is not a question of national boundaries. As the revolution rolls on, it will become increasingly difficult to set standards.


US companies express considerable concern about taxation in Europe. They argue for country of origin rules. In the EC the objective is neutrality and the EC has in effect achieved this through the 6th VAT Directive (if companies sell into the EU, they do not pay tax, but inter-Europe trade is tax-rated). 25 per cent of the revenue of US websites comes from outside the US so there is an incentive for the US to compromise with the EU on tax. In the US taxation is complex and a future administration will have to confront this problem. In doing so there could be conflict between the US and the EU.


Patricia Moll agreed that the key factors contributing to a successful e-economy are:

  • Telecom infrastructure
  • Predictable legal framework
  • Consumer confidence (via data privacy, encryption etc.)
  • Determining the obstacles and eliminating them through education and access


We did not learn anything especially new from the EC representatives. Rather they confirmed what we already knew. However, meeting non-UK Europeans in the midst of a series of meetings with Americans did serve to underline the differences in attitudes and approaches that distinguishes the European and American stances on e-commerce.

Elizabeth Echols and Ron Keohane, from the White House Working Group on E-Commerce


Ms Echols started by saying that the government's role "is fundamental in a peripheral way"! Its role is to encourage, help and enforce existing law but not to interfere. There are gaps in existing legislation and the Administration is concerned about a number of issues.

  • Digital signatures
  • Prescription drugs. The Federal Drug Agency wants more authority and there is a debate about how this can square with self-regulation.
  • There is not a true single market in the US but the Internet is forcing the US to create one.
  • The Administration is awaiting the report of the Special Commission (referred to by Mr Upson) in the hope that this will simplify sales and telecommunications tax systems.


No Administration is willing to force States to act against their own interests. They have to be persuaded to agree to common codes. It is also important that industry receives benign messages about the role of government and recognises that it has a legitimate role, particularly in regard to issues such as digital signatures and dispute resolution. On the former, it is important that the draft Bill does not roll back existing protection; on dispute resolution, it is surprising to hear that industry thinks there might be a role for government. The preferred American approach is empirical, on a case-by-case basis, and is not a question of applying principle about the role of government.

Mr Keohane added that government moves more slowly than business. It is government's role to assure a level of infrastructure. However, views were changing and it is no longer possible to define the relationship as simply as it might have been a year or two back.


A huge shift in how government conducts business is just beginning. This will eventually affect everything the government does. The first step was an e-gov Directive which had been formulated in December 1999 and which set specific goals to be achieved by the end of the year 2000. These included the establishment of a government portal and the increasing accountability of public officials. Research was taking place into the possibility of expanding the new technologies to voting procedures and the placing of certain government services online (some 500 by the end of the year 2000).

The Administration is making huge efforts to co-ordinate but the problem is that Congress allocates finance in a traditional way to different "pipes". However, it is not possible to fund "silo by silo". Systems have to be interoperable and some form of cross-agency funding is essential. At the moment each agency has ideas on the implementation of the e-gov Directive. Each agency has a CIO and Ms Sally Katzen chairs the Committee of CIOs and also the President's Management Conference. This is a good start. The Y2K project was a useful pilot for cross-agency funding. There is some cross-agency budgeting in counter-narcotics but the whole issue is still very difficult.

Federal vs State government

The Federal government is moving in the same direction as Virginia. It hopes to establish a portal, for example for the issue of passports etc., but all large organisations have a similar problem. It is accepted that government has to set an example. One idea is that the agencies might retain part of the benefits from effecting change.

The EU

The key to the EU's role will be its ability to persuade Member States to agree on promoting e-commerce. Elsewhere in the world, for example Africa and G8, the US and the EU must work together. There has to be access to technology and the Internet for all. The US has perceived a change of attitude and welcomes the eEurope Action Plan. Some two or three years ago, dialogue with the EU had been much more difficult—probably due to a lack of experience and understanding on the part of the Europeans. The EU Internal Market issues are probably easier to handle than those which obtain in the US.


There has been considerable discussion in the OECD. The US position is clear: that there should be no discriminatory taxes. Collecting taxes from B2B and from the telecommunications companies is easier than B2C but the problem is sales and use taxes. The US is "pretty comfortable" with the OECD's abilities to handle this.

The future

There has been no focused inquiry into the growth of media monopolies which results from the convergence of technologies and the vertical integration of companies. All big mergers are subject to monopoly and anti-trust review. One such case is that of cable access which is not so much an infrastructure problem as one involving the control of content. There could be concern but the Administration is not contemplating a public inquiry.

Nor does the Administration seem to be making efforts to look into the future. There is a general view about the pervasiveness of the Internet but no attempt to devise scenarios.


This meeting should have been a final highlight of the visit but was strangely lethargic. Nothing new came out of it.

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