Select Committee on Trade and Industry Minutes of Evidence

Examination of witnesses (Questions 20 - 39)



  20. No doubt we will pick up some information from BT on the 19th. It was clear, when we looked at some of the exchanges involved, that some of them were remote exchanges in terms of business activity and it is difficult to correlate what they are going to be requiring with the way they were providing it. Do you think there is anything to be read into what has been reported, the decision of Ntl to disengage from this process? I mean, they are an extremely large cable company.
  (Ms Hewitt) I think the only thing to be read into it is that the telecommunications' sector is making very, very big capital investments at the moment. If you look at last year's figures in the CAPEC scoreboard that we have just published, you will see that the four top telecommunication companies, which do not include Ntl, themselves accounted for £9 billion of capital investment in the United Kingdom last year. There are very big investments here. There is a lot of different infrastructures in which to invest: there is local loop unbundling and ADSL, upgrading of copper wires; there is the upgrading of the cable networks to carry broadband; cable modem; there is the new wireless local loop with broadband fixed wireless access; there is 3G; there are all the IP-based backbone networks; and probably a whole lot of other things as well. It therefore, from my perspective, seems to make very good commercial sense for each company to look at what the priorities are for its own capital investment programme and how those relate to its business plan, whether it is acting as a retailer or as a wholesaler or, in some cases, a combination of both. Different companies will make different commercial judgments. I do not think there is anything more to be read into that.

  21. Finally, can I come on to the issue of radio data licences and the auction, which was, in a financial sense or a practical sense, not as successful as the 3G licences. Where do we stand in this particular area? Where do we go from now, in terms of the disposal of these licences and the impact that that may have upon rural areas and various geographical sectors of the United Kingdom?
  (Ms Hewitt) First of all, perhaps I can stress once again to this committee we do not hold auctions in order to raise money. All the comments about how we were expecting £1 billion and were therefore thoroughly disappointed are simply rubbish. We had no such expectation and nobody who understood the market could possibly have had such an expectation. What we were interested in with this auction, and, indeed, with the third generation mobile auction, was in getting the most economically efficient allocation of what is a very scarce resource: the radio spectrum. The result of the broadband fixed wireless access auction is that we now have licences in seven different regions covering nearly 60 per cent of the United Kingdom population, and including, of course, Scotland, Northern Ireland and the North of England, where we will have the potential for a wireless local loop giving high-speed internet access and competing with both broadband, cable and the upgraded local loop. So that is very good news. Of course I would have liked to have seen licences sold in every other part of the country as well, and what the outcome of the auction has probably told us is that there was not actually a commercial case for rolling out high-speed internet access wireless in those areas but I have asked the Radiocommunications Agency to give me a report—and they are already of course working on this—of what lessons we should learn from the auction and how we should now move forward in the remaining regions with the spectrum that has not been yet disposed of. So they are now talking not only to those who successfully participated in the auction, but those who indicated earlier in the year that they were intending to and then did not. They will learn from that how the market has changed, how people's view of that spectrum and the possibility of high-speed wireless internet services has changed, and on the basis of that we will then decide what we do with the unallocated spectrum.

  22. Perhaps give some of the spectrum away?
  (Ms Hewitt) It would be wholly improper and probably unlawful to undermine the auction that has already been held by allocating unused spectrum at less than the reserve price for the auction.

Mr Morgan

  23. Is it not the reality in many rural areas, and even in some urban areas, that there is never going to be a commercial case for firms to install ADSL or some technological equivalent? Unless these areas are going to fall behind, as they are falling behind at this very moment, is the Government not actually going to have to provide the infrastructure in the same way as it provides roads? When is the decision going to be taken to do that?
  (Ms Hewitt) I think the short answer to those questions is yes and yes. Quite clearly, in the short to medium term there is unlikely to be commercial demand for high-speed internet access on any technology in some parts of the country, and therefore there is likely to be a need for public sector intervention. We are not prepared to end up with a situation where high-speed internet access is the province of urban areas and better off areas, and the rest of the community, particularly rural areas, is simply left out. We have commissioned a piece of work from Analysis (one of the leading consultants in this area) to give us a better idea of where the commercial market is likely to take broadband. This is such an early stage market it is not always easy to see—and of course we already have cable and the upgrading of cable; we have ADSL; we have broadband fixed wireless access; we have the potential of satellite, and they do not all cover exactly the same parts of the country, although satellite has the potential to cover everything. The report that we have had from Analysis will form the basis for a meeting that I am chairing tomorrow, where I am bringing together the key stakeholders in both the private sector and the public sector, which we will use both to develop our understanding of where the commercial market will take us, but also our understanding of what is already happening in the public sector. In Wales, for instance, the Regional Development Agency is using European Union infrastructure funding to roll out broadband infrastructure into parts of Wales that are not at the moment going to be reached by the commercial market. The Department of Education has the major procurement going on at the moment to upgrade Super JANET, or to put in place Super JANET, which is the backbone internet network linking the education and academic institutions. What we need to look at is the extent of the possible market failure, and then, secondly, at what kind of levers we could have in the public sector to overcome that market failure and ensure the roll out of broadband infrastructure across the United Kingdom.


  24. Before we leave this area, maybe you could clear up in my mind the problem I have about the local loop and unbundling. You said you had a meeting in September or October.
  (Ms Hewitt) Yes.

  25. We were getting fairly fierce representations from the disgruntled players or non-players at that stage in June and July. You must have been getting letters and representations at that time as well. Would I be right in saying that until the EU laid down a fairly hard timetable which might result in financial penalties if it was not achieved, very little was being done. The concentration of minds was as a consequence of the EU and not yourselves.
  (Ms Hewitt) No, that is not the case, with respect, Chairman. A great deal has been done, because of course the European Commission draft regulation only surfaced in, as I say, the early summer. There had already been months, indeed nearly a couple of years of work, from Oftel, putting in place the licence agreement, which was agreed, I think I am right, in April and came into effect in August. That had nothing to do with the European Commission regulation at all and it was that licence amendment, agreed with BT, that provided, and still provides as of today, the legal basis for local loop unbundling in the United Kingdom. It means that we were complying in August with the European Commission's proposed regulation that of course comes into effect on 31 December. At the same time there had been a great deal of work going on across the summer by Oftel, and within the industry's roots, to start putting in place the practical arrangements for local loop unbundling. What had been happening was that the original timetable that had been negotiated between Oftel and BT was a timetable targeted on July of next year. You will remember Oftel's statements on that and, indeed, the Chancellor's statements as well. But it then became clear, as the European Commission made progress with its regulation, that that timetable had to change. It also became clear, but really at the end of August, that the industry group could not agree on the issue of the space allocation. They were all agreed that they wanted a fair system but they had conflicting views on what a fair system was going to be because they had commercial interests of their own. I will have to double-check, but I do not recall until September having the other operators coming to me and saying that they were not happy with the process. There was a great deal of work already being done but it really was given a shove, it was speeded up very considerably, after that.

  26. What about the question of sanctions on BT. Was there any means whereby you could have enervated BT to move more quickly?
  (Ms Hewitt) The first priority and the priority of the Director General was to get the licence amendment in place because, as you will recall, Oftel had no power to impose that licence amendment. Until the regulation comes into effect at the end of December, there was no power to impose local loop unbundling. It either had to be done through an agreed licence amendment or it would have required a reference to the Competition Commission which of course would have delayed matters very substantially.

  27. It depends on how early you referred them. Really what I am getting at here is this: It was not in BT's interests to move at any speed at all until there was an EU directive in place. I mean, let's face it, they have responsibilities to their shareholders; conceding part of their business to other people is not consistent with that obligation.
  (Ms Hewitt) BT had opposed local loop unbundling during the earlier consultation process. Once they had agreed to the licence amendment in April that took effect in August they were legally bound to implement local loop unbundling. They had originally agreed to a timetable with a target date of July next year. That had been part of their negotiations over the licence amendment but then of course the timetable was changed as a result of the European directive, and, as I say, it is very clear from my own discussions with BT that they completely accept that obligation, they are signed up to it, and believe it—

  28. They do not have any choice, do they? The point I am getting at is this, Minister, that it might be all right for you and Oftel to say that you have done a great job, that things are now running. We see the 10 per cent of the exchanges are now available. We also see that in the recent past, when there have been other liberalised issues which your department—not necessarily your section but your department—has been responsible, the people required to concede monopoly or near monopoly power have moved at glacial speed towards the realisation of that objective. One would have thought that, within the collective wisdom of the DTI, there would have been a memory of the recalcitrant attitude of the near monopoly players and that a touch of the cold steel might have been applied, to use Mr Jones's expression, a little earlier than it was. Some of us are not confident that the 600 are necessarily the ones that everybody wants or the ones that are most useful, or that they will even be delivered on time. We are going to see some of them at the weekend.
  (Ms Hewitt) I will come back to that point but let me underline the fact that the previous administration and the previous director general of Oftel had been against local loop unbundling. It was not part of the competition policy that they were pursuing. There was no preparatory work on local loop unbundling at the point where we arrived in government. The policy changed with the arrival of David Edmonds in 1998. He then drove through a process of consultation which he had to do, not only for legal reasons but in order to ensure that the policy was indeed the right one and properly put in place. It would have been very helpful if the European Commission had been able to do their regulation on local loop unbundling earlier. The DTI, the government and Oftel were saying to the Commission last year, when the idea of a local loop unbundling regulation was first mooted, that the quicker they did it the better. Having said that, the speed with which the European Commission has delivered agreement on a regulation that will come into effect at the end of December is almost unprecedented within the European institutions. It is very fast. Yes, if we had had it earlier, that would have given us a stronger legal basis. In a sense, that is all water under the bridge because we have the legal basis with the licence amendment that was agreed in April. We have the timetable in line with the European regulation. Everybody now understands that. I completely agree with you that the issue is not what BT says they will do; it is what they actually do. That is why I was encouraged—just encouraged—to hear from them on Monday that, on the stage of the orders where they are at for the first round of orders, they are delivering full quotations for the building work and stuff that has to be done for local loop unbundling in many cases earlier than they said they would.

  29. What if someone says, "We do not agree. We want our own builder"?
  (Ms Hewitt) That is all right. That can all be negotiated. It is up to the competitors. As far as the issue of will the competitors get the sites they want, that was a problem with the first bowwave process because they had not sorted out how they were going to allocate the most popular exchanges, which are the ones where demand exceeds supply. Oftel has now put in place a process for that space allocation. The orders are being received at the moment, or indeed may already have been placed, for the second bowwave process and clearly that is going to include the exchanges that the operators most want because they are being asked to nominate the exchanges in priority order. BT, very sensibly, is taking their own view of what they think the top 120 or some of the top 120 will be. They have already done surveys. As soon as they get orders for those surveys, they can hand them over instead of having another delay of some weeks while those surveys are done. The progress is encouraging but I am not going to let this one go away. I will continue to keep in touch with the competing operators and with BT month by month as we drive this out. We have a very clear programme from BT of the commitments they are making and we will be able to track whether or not those are delivered and, if they are not, why not.

  30. You will be publishing the results of this monitoring?
  (Ms Hewitt) I think when you see BT next week you will receive from them a table of their own commitments.

  31. You are going to be monitoring it. Will you be putting it on the web?
  (Ms Hewitt) Yes, I will certainly look at doing that.

Mr Berry

  32. One of the governments commitments is to remove the remaining regulatory and legal obstacles to electronic ways of working. When Ian McCartney in May announced the targets of placing 70 per cent of the orders necessary by the end of 2001, what would that mean in terms of the number of orders?
  (Ms Hewitt) You are focusing here on e-procurement rather than general government services?

  33. I am referring to the statement Ian McCartney made in May where he announced that 70 per cent of the orders to remove legal impediments in a variety of areas would be done by 2001 and the rest would be done by the end of 2002. When Ian McCartney made that statement, he did suggest that some departments had not identified any statutory requirements that required updating at that stage. What needs to be done? Are you happy with the speed? How many orders are necessary?
  (Ms Hewitt) I hope in a minute to have to hand a table which I think would help the Committee. Under the Electronic Communications Act, we now have the power to make statutory orders to update Acts of Parliament and remove statutory obstacles that specify pen and paper and delivery of documents by post and so on. Every government department has been analysing its own statutory and regulatory position in order to identify what orders are needed. The DTI made the first such order to update the Companies Act to allow companies to communicate electronically with their shareholders. The DETR are consulting under the Vehicle Excise and Registration Act. They have made one in relation to the Local Government Housing Act to allow for electronic filing of statistical returns. The Lord Chancellor's Department plans to issue a draft order very shortly for electronic conveyancing. The list of orders that are expected to be made before the end of 2001 is on the e-envoy's website and it is updated monthly.

  34. Why is it only 70 per cent by the end of 2001?
  (Ms Hewitt) What we discovered when we were preparing the Electronic Communications Bill was that there were something like 40,000 different statutory references to paper and pen and documents by post and all the rest of it. It is an enormous task to go back, not just through the statute books but through all the regulations, to spot the problems. Some of them are very obvious, like the issue of companies not being able to communicate electronically; some of them are not so obvious. We are therefore consulting with industry to understand what their priorities are for such orders, whether they are finding they cannot do things electronically. In other cases, there are policy considerations—for instance, in the whole field of consumer credit. We have to balance the convenience of being able to do a consumer credit transaction on-line with the need to ensure that consumers are properly protected. Some areas like electronic conveyancing may also need primary legislation. It may not be quite enough to do it all by order. We are trying to do it just as fast as we can and I think we will have hit most, if not absolutely all, of the priority areas certainly before the end of 2001.

  35. I understand why Ian McCartney did not make the announcement in May until the Telecommunications Act received Royal Assent. Presumably an enormous amount of work should have been taking place before that stage in identifying the orders that would need to be made. At that time, unless my memory is incorrect, as a matter of fact, Ian McCartney did say that some departments had not yet identified any statutory requirements which required updating which seemed a little strange. Also, in the annual report, the phraseology is interesting in that it says, "Following Royal Assent it is now essential that we move quickly to use the power in section eight." The message I am getting there is that somebody is flagging up that things have not gone as quickly as they should have gone in the past; we are now accelerating the rate of progress. Is that the case? Are you, in all frankness and candour, concerned that things have not moved more quickly hitherto, albeit obviously that this is being addressed?
  (Ms Hewitt) It is being addressed. It is true that some departments moved faster than others, before the legislation received the Royal Assent, to anticipate what they would be able to do with it once it was enacted. If you look at the summary of the orders, you will see happily that the DTI is way ahead of the game. We have identified a very large number of areas where we would want to make orders to take advantage of the Act. The DETR has done a fair amount of work. The Home Office, the Office of National Statistics and some of the others have done a lot of work.

  36. Which departments do you feel could perhaps have done rather more a little earlier?
  (Ms Hewitt) I am going to duck that one, if you will forgive me.

  37. It is a good question though, is it not?
  (Ms Hewitt) If you look at the website table, you will see the departments that appear and you can draw your own conclusions. The government departments generally did undertake a pretty widespread consultation, even while the Electronic Communications Bill was going through. Ian McCartney and his officials in the Cabinet Office were pushing this. Indeed, Mo Mowlam wrote to colleagues at least once, if not twice, alerting them to the need to do this analysis and get prepared for the arrival of the Act itself. There is no doubt at all that the speed has picked up since Ian McCartney's announcement. I think the Human Rights Act has also required a huge amount of work by lawyers in every department, checking through all the statutes and all the regulations to see whether there were Human Rights Act issues, so we have been placing rather a lot of demands upon government lawyers.

  38. You mention government lawyers, Minister. Could you tell the Committee what outside legal expertise the government might or might not be using to speed up this process?
  (Ms Hewitt) In this area, government lawyers are best placed to deal with the necessary process of drafting the consultation documents and drafting the orders. I do not think that has been holding us up. I just make the general point that a huge amount of legal analysis has been required not only for the Electronic Communications Act but also for the Human Rights Act.

  39. No legal expertise has been secured from outside?
  (Ms Hewitt) We regularly secure legal expertise not only from the law offices but also from independent counsel when that is required. In the DTI, I do not think we specifically needed that on the Electronic Communications Act. We are also working very closely with the Alliance for Electronic Business. They have their own legal sub-committee which is helping to identify priority areas and barriers that need to be removed.

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