Official Report 318KB pdf
Good afternoon, ladies and gentlemen, and welcome to the 10th meeting in 2004 of the Enterprise and Culture Committee.
Thank you. As a trade association, ScotlandIS represents the software and commercial technology interests in Scotland. We have an interest in broadband as users and as representatives of the communications industry.
Scotland On Line was formed in the mid-1990s as one of Scotland's first internet service providers. We offer a number of services to commercial companies and individuals alike. We are a private limited company and have offered fixed and narrowband dial-up services and broadband services from the mid-1990s.
On the take-up of broadband, ScotlandIS comments in its submission:
From an economic point of view, Scotland's geography is an issue. Broadband helps to remove that issue, and it is therefore in everybody's interest, not only in the commercial interest, to ensure that enabling technologies such as broadband are made available throughout Scotland. A number of major initiatives are now afoot to ensure that that happens.
We tend to agree with what Polly Purvis has said. We would like there to be more focused targeting or marketing of the business benefits that broadband services can give; it is not just about getting e-mail faster. I agree that the benefits may have been trivialised in some of the campaigns that have been run. Rather than the weak, generic advertising that is being used at present, more case studies should be generated of how businesses are using broadband; other services should also be covered.
I presume that you meet, or have contact with, people in the industry in other countries in Europe—or perhaps you do not. How are businesses in other countries reacting? What is the take-up of broadband there compared with here? The figures that we see tend to relate to capacity—in other words, they relate to the number of people who could receive broadband, rather than of those who have taken it up. What proportion of people in other countries is taking up broadband? Are we doing any worse than anyone else?
We are doing slightly worse than other countries. Last June, IDC did a study that examined the take-up of broadband in a number of countries across the world. Europe seemed to do well in that study, particularly the Scandic countries of Norway, Finland and Sweden, as well as the Netherlands. As at June last year, Sweden had a take-up rate of 15 per cent; the rate in the Netherlands was 11.8 per cent; and the rate in the United Kingdom was 4.3 per cent. There have been initiatives in other countries to encourage the take-up of broadband, and we need to examine those initiatives in more detail to see how their aims have been achieved.
You mentioned Sweden, which presumably faces exactly the same problems with geographical distance as Scotland does. I draw your attention to education and schools. Do you have anything to say on the subject of getting hold of people when they are young—notwithstanding whether they go to university or into further education—and do you think that more could be done, when young people go from education to the workplace, in the way of informing, encouraging and showcasing, which could lead to more of a roll-out of broadband in the workplace?
There are some examples of good practice in Scotland in that regard. This is a bit anecdotal, but some exercises have been run over a number of years in the Highlands and Islands to network some of the local schools, particularly small primary schools in remote areas. Broadband technologies have been used, in effect, to make class sizes bigger and to enable children to work together virtually. We should not downplay what is being achieved.
The first bullet point on the first page of your submission states:
It is fair to say that, for ADSL, we are getting close to coverage levels that would be acceptable for the whole population, although there are pockets in which issues need to be resolved. Once we start to drill down beyond ADSL level, there are serious concerns about the level of competition. On the whole, our conurbations have some competition, particularly through the cable companies, but many parts of Scotland, not just the remote and rural parts, do not have more than one supplier. That makes competition in the marketplace difficult. There are significant differences in services and varying levels of broadband; it can be as simple as ADSL or there can be a richer environment, given some of the dedicated resources that are available to our larger companies and to Government.
Would the ISP people like to say something about upload speeds as well as download speeds and what difference they make, for both consumers and businesses?
We are focused on business offerings. We try to educate businesses to understand that broadband is not a single product. There has to be some understanding about the quality of service and there has to be a service level agreement. Our problem is that BT dominates the delivery of broadband services in the UK and in Scotland. In effect, we sell broadband for BT and we have only the service level or the quality of service that it can give us. We might have coverage for broadband just now, but as the take-up starts to kick in, the contention ratios on the exchanges will come into play and the quality and speed that everyone is publicising and evangelising about will start to deteriorate. There needs to be an understanding about what broadband really is.
What actions should we take to help improve the position or prevent further deterioration?
It would be useful if other operators were able to sell wholesale broadband services. I believe that, technically, there is a way of their doing that via an inspan handover. Some of the bigger telcos are keen to do that, but I believe that the Office of Communications—Ofcom—is still considering disputes on pricing, which are preventing the other telcos from being able to compete with BT in the market.
Do you have any other suggestions for us?
Scotland On Line is involved in the Borders broadband project. One of the issues around coverage concerns the 6km distance from the exchange and the quality of the copper in the ground. With wireless technology, although line of sight would still be required, the distance is not so critical. More funding for projects that include wireless technology would be beneficial, particularly in rural areas.
I want to clarify that point. Are you talking about potential contention if demand increases and contention at the physical exchanges at the moment?
Yes. For example, in the Borders, I believe that the backhaul from most of the sites is based on a BT 2Mbps service. The published contention ratio is 30:1. Once the number of people who are using a particular backhaul service reaches a few hundred, they will be competing for a 512kbps service with 30 other customers.
For the benefit of us all, perhaps you could explain some of the technical terms in that answer. What do you mean by the 30:1 contention?
Only so much channel or bandwidth is available for traffic to go up and down. If only one customer is using that bandwidth, it is completely available for them. If 30 customers are on at one time, the bandwidth is chopped up among them. As the take-up of broadband increases, contention problems will be created.
Is contention a product of the physical exchange or does it relate to the link from the exchange to Edinburgh or wherever?
It relates to the way in which the network is designed. A significant cost accompanies backhaul from the exchange for the wireless network back to Edinburgh. That has been engineered or costed at a level that provides 2Mbps of bandwidth for every 30 customers.
What take-up percentage would have to be reached before contention became a serious problem? How long do we have?
The problem is not serious, but it must be recognised that contention is an attribute of the service. Broadband is often promoted as an always-on, very fast service, but people must realise that it is not simply one thing. Different service levels are available, and people may have to pay more for a better-quality service. A business user might be satisfied with paying slightly more money for a better service. At the moment, broadband is seen as a flat one-dimensional service. It must be understood and communicated that broadband is not one thing.
Are you suggesting that if 30 users are on at the same time, somehow or other a bigger proportion of the available bandwidth can be allocated to those who are prepared to pay a little more? Would domestic customers lose out to business users who paid a slightly higher rate?
The BT connection that we have offers two tiers of service: a residential service that is based on a contention of 50:1 and a business service that is based on a contention of 20:1. The prediction is that residential users will have a far inferior service.
We find that with remote access to Parliament services, because far too many people use it at peak times. I am sure that my colleagues will confirm that, but that is not broadband—it is only ISDN. We cannot get as far as broadband yet.
The most that we can do is help to provide case studies of good practice. Broadband is a bit like electricity for our industry. In some areas, such as central London and some parts of the States, many companies—not just in the software industry, but in the user community—expect to have access to high-quality always-on broadband. Large corporates expect to have that facility already.
Is such partnership not happening? Could co-operation between you, for example, and the local authorities and the enterprise network be improved?
We could do more to improve the take-up rates for broadband.
Have you any specific suggestions?
Rather than make specific suggestions at this stage, I would point out that we have good relations with organisations such as Scottish Enterprise and that a number of telcos and ISPs are our members. Perhaps we will have to work harder to create a community that can provide good examples of take-up.
Ms Purvis gave some statistics and mentioned the general take-up of broadband in Scotland. The figure that Scottish Enterprise has given us for business take-up, as of the start of this inquiry, is 19 per cent. How does that compare with international figures?
It is difficult to rely on one set of figures. I know that Scottish Enterprise has claimed a 19 per cent take-up rate among Scottish businesses, but BT says that the figure is 7.2 per cent. There is quite a gap between those figures. I would be interested to see the results of further exploration of those statistics and to find out what the real figures are. We have to be sure that we are comparing like with like. When IDC produced its report, it came up with a figure for take-up in the United Kingdom of around 4.2 per cent. That suggests that 7.2 per cent is nearer the mark than 19 per cent.
But that 4.2 per cent figure was an overall figure—business and domestic.
The figure was for the UK as a whole. If we bear in mind the fact that take-up in the south of England far outstrips take-up anywhere else, I suspect that the figures may not reflect the situation in Scotland.
If you do not have an exact figure, it may be difficult for you to answer this question, but how do we compare for business take-up with countries such as the nordic countries that you mentioned?
All the evidence that I have seen suggests that we are some distance behind the nordic countries, even though we have many similarities in our economies and geography. That suggests that we need to reduce the gap.
I am particularly concerned about take-up in the business sector. Last week, we heard evidence about a couple of alternative broadband connections. Electricity power networks can deliver such connections, and wireless broadband has been encouraged by Highlands and Islands Enterprise. What evidence do you have on such connections? Could they contribute to the further development of the business take-up of broadband?
That question is technical and would be better directed to Scotland On Line. However, I can give a general answer. We will have to come up with a variety of solutions to the problem of providing affordable broadband across the varying geography of Scotland, with competition in all areas. There is no one-size-fits-all solution.
I accept that, but my question was on how those alternatives could contribute. It was directed at all the witnesses, so I am very happy if either of the other two would like to take it up.
Malcolm Dobson spoke about how, in remote areas, technologies such as wireless might solve some of the problems with exchanges and some of the problems to do with the limits of ADSL technology, which has a 6km reach. I have not been involved directly in any power line carrier trials, but I know of trials that have been going on since the late 1990s using various technologies. There have always been problems to overcome. However, some of the current SSE Telecom trials seem to be bearing fruit. We await the results. That is certainly something that we, as providers, could hook into, to run services or to backhaul.
I have one further question, which relates to the ScotlandIS submission. Under the heading "Key Issues", it says:
There has been significant public sector intervention over the past few years, and it is extremely important that that should not be biased towards any one end of the market. In particular, we have in Scotland some innovative indigenous companies, which should not be disadvantaged by public sector interventions. In some of the pilot studies that have been undertaken, we have seen examples of partnership arrangements between telcos that could solve some of the problems in parts of the country. We should encourage that approach.
Whatever the percentage of the country is in which broadband is not available—I will not get involved in figures again—what steps do the Scotland On Line representatives think should be taken to begin to close the gaps?
I am not sure whether this answers your question, but one of the things that we feel is important is the development of services that run over broadband, particularly services that would not run or would be impractical on the old analogue or narrowband internet connection. That is what will drive businesses to take up broadband. Having coverage is fine, but it is of no use if businesses do not perceive the benefits. That is why we have all talked about appropriate case studies.
Are you saying that highlighting the benefits to business will be the crucial factor?
That, and developing services that work over broadband.
Thank you.
Are business organisations, from the Confederation of British Industry to the Federation of Small Businesses and the Forum of Private Business, doing enough to get their members involved? Do you have any contacts with them?
I can say only that Scotland On Line feels that the take-up among businesses is disappointing. I am being honest with you. All the talk of coverage and high-speed connectivity is misleading, because a lot of educating still needs to be done so that businesses understand what broadband is and what the benefits are.
Would you go as far as to say that the Federation of Small Businesses and other organisations have a role that they should be playing and are perhaps not playing at this stage?
I would be inclined to say that there is a role for everyone to play and that there is undoubtedly a need for co-operation. The real issue is with the SME community: large companies are heavily involved in e-commerce, which requires broadband, but to get the SME community involved, one must convince it, and it takes some convincing. SMEs would probably have to invest not only in the installation of broadband, but in information technology kit. Our industry as a whole has been guilty of creating a great deal of hype about information technology over the past few years, and people have become increasingly wary of that hype. We therefore need to demonstrate and encourage best practice, and everybody who is involved in advising the business community has a part to play in that.
You are being tactful. The FSB and others are quick enough to come to us about issues such as business rates, but do you, MSPs and the Executive not therefore have a role to play in getting hold of those organisations and telling them to look at what broadband could mean to their membership?
The more organisations that are involved in putting out the message, the more strongly it will be accepted. There is no doubt that different organisations take their influences from different parts of the country. The CBI and the FSB have a significant role to play and they should be included in all arrangements to promote the adoption of broadband.
I return to the subject of capacity. If we are successful in persuading more businesses to take up and use broadband, capacity issues will arise. Other than leaving things up to the market, is there anything we can do? By definition, capacity issues will arise in places where the market has initially delivered the capability. We are finding that demand has exceeded capacity and that performance is falling off. You referred to the fact that, in many areas, BT has a virtual monopoly in the sense that no other provider has come into the market. Will not the problems caused by capacity stimulate other providers to enter the market? Is that not what markets are all about?
There is something of a free-for-all with regard to certain broadband connections just now. The selling point focuses on faster connections and the fact that broadband is always on. A number of earlier adopters of broadband technology indulge in peer-to-peer networking and the downloading of large files. There is already evidence that some of the service providers are starting to put limits and thresholds on the amount of data that can be transferred over the course of a month, for example. Therefore, some kind of discipline will be imposed on the use of the resource, rather than providers allowing it to be trivialised by people downloading files for the sake of it.
Are you implying that prices might go up rather than down?
Definitely. One should expect to pay more for a better service.
I presume that the more successful you are in selling your products—such as the product that allows me to save my entire hard disk every evening—the quicker prices will rise.
Possibly. Wholesale pricing for internet connection has come down in recent years, but the marketing literature tends to position broadband as being cheap. That is the wrong attribute to give broadband services; it is not the cheapness that is important, but the value that one can derive for one's business by using broadband services. That should be brought to the fore.
Although one can get cheap access to broadband services, if one runs a business, one needs software solutions that are applicable to the business. Is there enough knowledge among companies of where to get those solutions, how to apply them and where training is available? Should we have been talking about that in conjunction with access?
There is not enough training—that is a common problem. We are dealing with businesses that struggle to set up the software. Inevitably, their IT consultants phone us up—you would be surprised by how often the IT consultant struggles to deal with the problems. There is a big skills gap.
I thank the panel for their evidence.
I am the director of BT in Scotland and I look after all BT's interests in Scotland.
THUS is a Scottish telecoms operator that provides voice, data and call centre services mainly to business customers throughout the UK. THUS has about 2,000 employees, of whom 60 per cent or so are in Scotland. Our interest in broadband reflects our ownership of the Demon Internet Ltd brand, which is an internet service provider that supplies broadband to small businesses.
SSE Telecommunications is the telecoms subsidiary of Scottish and Southern Energy. We concentrate mostly on infrastructure provision for broadband services throughout Scotland. We cover mainly the Scottish Hydro-Electric part of the country, but increasingly our coverage is extending to the rest of Scotland.
I will start by following up what some of our previous witnesses said—I presume that you heard some of their evidence. They are not too unhappy with the way in which broadband has rolled out to parts of Scotland—that has not been the thrust of much of our inquiry—but they are fairly unhappy about the speed at which business, and particularly small businesses, have taken up broadband. Have you comments on that? Are you disappointed with take-up? Should we do more to increase it? Who should do what? I do not know who would like to start. As we have no regulator other than me, I will leave the witnesses to self-regulate who will speak.
This is the first time that that has happened.
We in the UK can be proud of the fact that, through the regulatory regime, we have managed to have quite strong retail competition for broadband services—more so than in many other European countries. That might have taken a while to get going, but the fact that we have strong competition is driving penetration, take-up, innovation and value for money. That is a positive note that underlines the importance of encouraging competition at every step.
The cost factor is important in determining the uptake levels. Experience in other countries has shown that if the jump from normal dial-up services, which are typically £15 a month, is too large, it is difficult in the residential and business markets to encourage people to change. Work was undertaken in the States and in Europe that showed that the equivalent of an increase of about £5 up from £15 was not seen as too difficult, but that a step of £10 or £15 made the transition more difficult.
It is interesting that you talk about lowering the price hurdle. A few minutes ago, we heard what almost seemed to be a complaint—that broadband is too cheap, or, at least, that we should not be stressing how cheap it is because that is not the main point.
Price matters with any product. However, also important is the value that people get from the product. Prices have continued to fall in the UK through competition. Should you wish to buy an ADSL service, there are in excess of 150 retailers to choose from. The market is extremely competitive. However, as some other witnesses have said—and we agree whole-heartedly—coverage has ceased to be an important issue in most parts of the UK. The issues now are to do with how broadband is used and which services people will pay for. The industry is looking to introduce services right across the board. At BT, we have products that—as Polly Purvis suggested—seek to take services that a corporate organisation such as the Royal Bank of Scotland, Scottish Power or BT would have internally and make them available to SMEs at an affordable monthly cost. Such products help us to move on in leaps and bounds.
On the subject of which businesses are taking up services, our experience has shown that SOHOs rather than SMEs are far more innovative, especially in rural areas.
I am sorry, but SOHO may mean different things to different people.
SOHO stands for small office home office. In other words, it means a single person rather than a small business. Whether it is to take up a business service or to use a residential product for business, we have found that about a quarter of the people who have moved to broadband fall into the SOHO category one way or another. SMEs with several employees are likely to be more conservative in moving to new products. We heard some conflicting statistics earlier on; that may be because many small businesses—which may comprise just a single person—are not registering in surveys and so are not counted.
I understand what you are saying about SOHOs, but I want to push you a bit. You talk about SMEs. I know from experience what it is like to go to a joiners' business, a plumbers' business or a shoe shop, with one minute to convince them to go for broadband. If you good people met someone from such a business in the pub, how would you convince them, in 30 seconds, that broadband was a good thing and that they should go for it? What would your three bullet points be?
I shall have a go at answering that, by giving one, perhaps trivial, example from Cornwall. A launderette there took on broadband. You may think, "What on earth would a launderette do using broadband?" Well, when people go to a launderette, they may have nothing to do but watch their underwear go round and round and round. But now, whether they are a tourist or a local person, they can surf the net while doing their laundry. I suppose you could call the place "Surf and Surf" or something. That may be a trivial example, but the launderette has achieved some real added value. It saw a selling proposition in the use of broadband.
Convincing such businesses to take up broadband is something that I do day in, day out in Scotland. The most effective tool for that is a joiner or plumber who uses broadband. When I find one, I invite that person to speak to other joiners and plumbers who do not. That is the single best way of convincing them.
I am keen to pick up on some recent answers. I appreciate the enthusiasm and colour that the witnesses have brought to their answers on selling the benefits of broadband, but, if I may play devil's advocate for a moment, I wonder whether they are in danger of over-egging the pudding. For example, some of the phraseology in the BT submission seems to do that. It talks about broadband
The transformational aspects to which we refer can be put into five categories that demonstrate how important broadband technology is. As Malcolm Dobson said, it is about the services that are provided over broadband—the word "broadband" will disappear. Only 18 months ago, when I talked about it, people asked me to explain myself and stop using jargon. That is how quickly the term has been adopted.
Has Jamie Stone finished his questions?
I will ask a question later when we move on to a different subject.
I declare an interest, as I am a shareholder in Scottish and Southern Energy.
The term "beta test" is industry jargon for testing before the formal launch of a service. Typically, volunteer end users take the service and co-operate in ironing out teething problems before it is formally launched.
I will start with the headline figure. If all the triggers that are set on exchanges in Scotland came right, about 97.8 per cent of the Scottish population—
That is not what I am referring to.
Hang on—that is just the headline figure. The distance from an exchange at which broadband can be received varies throughout Scotland. In one place, when the exchange is enabled, the figure might be as poor as 50 per cent of the people who live in that area being able to receive broadband. However, two other exchanges might have almost 100 per cent coverage.
Will you give us an idea of the current scale of the problem?
We are undertaking detailed analysis now. Throughout Scotland, the figure is probably between 2 and 3 per cent.
There is nothing unique to Scotland about the situation, which concerns the laws of physics and how copper networks work. The situation is the same in the States, Sweden, France and Germany. All our research and development people are working together across international boundaries to find ways to solve the problem.
The problem is not just distance though, is it? The nature of some of the exchanges, and the materials that are used, are also relevant. The bulk of your exchanges, although not all of them, use copper. Some problems in reaching the wider population do not relate to distance or to the use of copper.
It is somewhat ironic that before broadband was even thought of, telephone companies around the world were steadily upgrading their networks. At one stage, optical fibre was seen as the answer to a maiden's prayer. Different places—most of East Germany, for example—were recabled with optical fibre, as were parts of Scotland and parts of England. Ironically, DSL technology does not work over optical fibre cables. We are therefore having to retrofit in order to provide broadband services. That will be done. We are very sorry about the problem for the people who live in those areas, but we will deal with it. It was one of the strange unanticipated results of having previously been too ambitious with technology.
Aluminium and what is known as TPON were used in part of Aberdeenshire, when the Westhill area was built up during the oil boom. As Sandy Walkington says, that was sensible at the time. However, we would be talking about a figure of 4,000 if everyone in such areas in Scotland were to want to take broadband.
Nevertheless, it is very frustrating for those who cannot get it. Can you give us an idea of the timescales for resolving what you consider to be relatively small problems?
I cannot give you exact timescales. Suffice to say that the problems with broadband so far have been resolved pretty quickly. Reach is a good example of that.
I think that Mr Sweet wants to respond to an earlier point.
I just wanted to make it clear that the point that we were making in our submission was that radio was an especially suitable solution for rural areas, where populations tend to be more spread out and further from the exchange. If the average percentage of households that are too far from the exchange is 2 to 3 per cent, the percentage in rural areas will be rather higher. That is why radio is a worthwhile technology in such areas.
Some of my constituents get rather frustrated when the focus is put on rural areas; significant parts of my constituency have the technical problems that we have been talking about but are not rural. However, I am glad that the providers acknowledge that there is a problem.
They are voice services that are provided over the internet. If you have a broadband service, you can get voice service alongside the data service on the link. The letters stand for "voice over internet protocol".
Is that a means of introducing more competition into the telephony market, as well as the broadband market?
The idea is already feasible; a lot of people have simple voice communication over the internet. At the moment, you generally have to have a computer at the other end in order to establish contact. In time, it will be possible to do that with standard telephony equipment.
My final question is for Bob Downes or Sandy Walkington of BT. In section 4.2 of your submission, under "Commercial Barriers", you say that
We are not yet making money on broadband. We are required to have a business case for our regulator that demonstrates that we will make money. We are required to do that because we are held to have significant market power and are therefore not allowed to introduce products to the marketplace that are not profitable. That is to allow others to compete. However, we will make money.
As you set the trigger points for individual exchanges, and as a number of them have been enabled for some time, can you give us an idea of how many exchanges are now at twice their trigger level and how long it took them to get there?
Some exchanges in city areas might have a 30 per cent take-up, which is extremely high. However, it is unlikely that many exchanges in Scotland, if any, are at the level that you mention.
The point of the question is that if we want broadband to be successful, we need to reach that point. If you or your competitors are to make the investment, there must be a return within a reasonable period of time, especially as alternative technologies might supersede broadband. It would be helpful to the committee if you could give us an indication, perhaps in writing, of when you expect that to happen.
The business case was put forward and agreed with the Office of Telecommunications. We agreed a payback period for the generality of the exchanges in the UK.
That was in anticipation of what might happen. I am looking for information on what has happened.
We can try to give you that information. We announced a set of targets for the UK. The first target was 1 million customers by the summer of last year, and we reached that target. The next target was 2 million customers by this year, and we have reached that. We said that there would be 5 million customers by 2005. We are reaching the benchmarks that we agreed with Oftel, but we will come back to you on that point.
This is an interesting panel, because it includes three private sector providers of broadband who are all in competition with one another. I enjoyed reading the submissions, particularly the one from THUS plc. Reading between the lines, I sense some frustration; perhaps the company thinks that, in Government circles, BT is in some way a preferred provider. I would like to explore that. If the other panel members want to come in, I welcome their views, but I will address my questions to Mr Sweet.
Open market tenders must be the basis for all public expenditure, to ensure that money is spent as effectively as possible. In the submission, I make the point that the way in which the project's commercial structure is framed has a big impact on the scope for private sector involvement and for subsequent competition. In the UK, we have seen a huge variety of models, but we believe that the models that maximise the scope for private sector involvement in competition are by far the most successful. The Scottish Borders rural broadband network is a good example of public sector intervention being confined to the wholesale level. The retailing of services is left to private sector companies, who purchase capacity from the wholesale provider in competition with one another.
You seem to be suggesting that the principles that you have outlined have not been applied strictly until now.
In project ATLAS, which is still subject to a decision, clearly the principles have not been followed. There are other instances in which they have been followed well. It is important to follow best practice rather than worst.
Before I invite the other witnesses to respond, I will ask you a second question in a similar vein. It relates to another issue that you raise in your submission—the question of weighting of telecommunications infrastructure. Apart from making the welcome comment that the rate of taxation is 9 per cent higher in Scotland than it is in the rest of the UK, which will be a familiar theme to committee members, you mention the fact that BT's infrastructure is rated on a different basis from that of the other providers. Will you elaborate on that point? What is the reason for the difference? How do the different regimes operate?
I will not go into huge detail. In simple terms, BT's rates are based on the profits that it makes from services. BT is unusual in the telecoms industry in that at the moment it is making a profit. We hope to do so very soon, but at the moment we and other alternative network operators are rated on a different basis. The rating authorities have come up with a way of valuing our assets that, unfortunately, is based on notional values that were determined at the height of the telecoms boom. One problem that we have at the moment is that the values—and, hence, the return that we can get from them—are lower than the rating authorities deem them to be.
I agree with much that Richard Sweet has said about intervention. Where possible, services should be procured on the basis of tender. There has been the promise of good examples of that in projects such as the pathfinder project, which seeks to procure in an aggregated manner for the public sector. We believe that that can act as a useful base for further investment in infrastructure in the areas that the project covers. We would be delighted to see the project move forward, so that action can be taken. Even on a smaller scale, in one or two of our pilot broadband projects, we have seen that simply having a few schools take service on a commercial basis is enough to provide a full business case where previously only a partial one, based on commercial customers, would have been possible.
The situation in Scotland has changed quite markedly in a year. We will have gone from 40 per cent of the population having access to broadband to something like 78 per cent of the population being covered by the end of March. Remarkably, that has been done in partnership with the public sector. For example, Highlands and Islands Enterprise represents one of the best partnership models in the UK. Parts of the Highlands did not stand a chance of getting broadband, but they do now, and that led to the partnership with THUS. As far as competition is concerned, we pioneered with HIE satellite broadband in the UK. That brought in eight other satellite providers—I do not know how many there are now—to provide a competitive service.
Various members have indicated that they have supplementaries, but as they will all get to come in later, I will wait until we reach them.
No. There has been a concession to move from approximately £1,000 per kilometre per annum down to perhaps a half or a quarter of that, which is welcome, in that it is moving in the right direction. However, for a kilometre of fibre in the south-east of England, the potential traffic density from customers is orders of magnitude greater than the traffic over a kilometre of fibre going up to the northern isles or out to the Western Isles, and reducing the cost to a half or a quarter will not address that fundamental distortion.
I want to ask SSE Telecom about the trials that it is running in Crieff and Campbeltown, using electricity power networks to deliver communications, about which we heard last week. You might have heard me ask these questions earlier. Will you say a little bit about the pilots, for example about where they are, and—if you have evaluated them—how valuable they will be in the future for rolling out broadband in rural areas?
We started off almost two years ago with the pilots in Crieff and Campbeltown, which were extremely successful in technology terms. They delivered what we wanted them to do, so much so that we invested in marketing pilots in Stonehaven and in Winchester in the south of England. On a commercial deployment level, the only question for us now is not whether it works, but whether Scottish and Southern Energy can successfully market broadband services to a level at which we break even. We have achieved that level in Crieff and Campbeltown, but now that the ADSL infrastructure has been rolled out, there are few places where there is no competition. The issue for us is how we fare in a competitive market.
You have touched on the subject of my second question, on the part of your submission that has the coloured diagram. I am not any more informed after looking at it than I was before, but it seems that you are able to set lower trigger levels than BT has set. How do we fill the gap in areas in which ADSL is not going to be available? Have you the technology to do that, and what would be the constraints on filling that gap in small chunks of 10 or 20 triggers?
With regard to the transformers that have any number of users, as long as 10 or 20 of them get together and are prepared to sign a contract, we can roll out broadband on a fully commercial basis. The question about how we would get the trigger to less than 10 is one I mentioned earlier. If there were a couple of schools or an anchor client in the public sector, we could probably reduce the trigger level of 10 to five. That is a means of getting to those final few who are not in a small community of 10 or more.
My next question is for Mr Downes and Mr Walkington. You clearly say that BT's policy is to have 100 per cent broadband coverage. Is BT able to go any further than the areas that are currently covered by ADSL, even if the trigger numbers are small? Should that be left to SSE Telecom, say, if it is already using a smaller model?
Let us get the scale right. There are 600 exchanges left in the UK, 399 of which are in Scotland. Whatever we do will require some form of direct intervention to get to the final few per cent, which could be 2 to 3 per cent or could be up to 10 per cent, depending on how quickly we want to do it.
Your submission also mentions the direct investment policy adopted in Northern Ireland. You finish off by saying that you are determined to get 100 per cent coverage and that you believe that the Executive should adopt that. Have you spoken to the Executive and found it to be unwilling to go to that level? If that is the case, do you think that direct investment is a way of bridging the remaining gap?
Yes, with public open tender. We have been in discussion with the Scottish Executive for quite a long time. The partnerships that we have talked about have come out of those discussions, as has the excellent work on demand and promotion of broadband. Clearly, the Executive is taking some care over the decision. Given what has happened with state-aid considerations, that is only right and proper.
To read between the lines of your answer and your submission, do you feel that the Executive is not doing enough, and that that could prevent Scotland from moving ahead—or catching up with—the other parts of the UK to which you referred?
If we do not act soon there is a risk that we will fall behind the rest of the UK in coverage, but the Scottish Executive and its agencies have led and have shown the way in the UK on demand promotion. Demand and coverage sit together—they cannot be separated. We have to drive demand. If we consider the coverage in the Highlands and Islands, take-up there is higher than the average for Scotland; it is one of the highest in the UK. The industry welcomes demand promotion, but it is time to get the coverage right, because that will recede as an important issue for the rest of the UK.
My last point is for Mr Sweet. Murdo Fraser said that he particularly liked the THUS paper, and that he found it to be different. I thought that it was different too—it is almost unique. Apart from the introduction, it is one long whinge. It whinges about standard charges and contract terms for siting equipment on private land. It whinges about state-aid rules and about public sector intervention. It whinges about restrictions on utility street works and about the rate of tax on telecoms fibre. Then, for good measure at the end, it whinges about BT, and says that it has a preferential position. I am not saying that those whinges are all without merit, but why does THUS identify those issues as being so serious, and why does it place so much more stress on them than it does on other aspects that we have heard about during the inquiry?
I am pleased that the paper has been so well read. So far, THUS has invested about £500 million—more than half of it in Scotland—in rolling out its network. We have delivered high-street broadband services to a large number of businesses, public sector institutions and schools throughout Scotland. We are doing our best, and all I was trying to point out in the paper is that there are measures that Government could take to make it easier for the private sector to deliver its targets, without the need for direct public sector intervention. We would like to play our part, and we will do so, but there are things that could be changed to make life easier for us and to improve the commercial incentives for us to invest.
I had probably better leave it there, convener.
I want to take a little further BT's coverage projections. BT says:
The rate at which the exchanges that we have put triggers on are triggering is astounding us. Of the 89 that triggered in the UK the week before last, 28 were in Scotland. People have had concerns about some exchanges, such as Kemnay, because they are small and appear to have a high trigger. Kemnay went through 500 registrations. That seems to be linked to exchanges where there is a high level of community activity—no matter what the trigger level in an exchange, it triggers. That may or may not land us with a bit of a problem, but we are now building up a backlog of exchanges.
If you reach the 98 per cent target, around 50,000 homes will be left without broadband—you have spoken about there being 125 households for each of the exchanges in the 2 per cent that would not be covered. Going by the averages, do you have any idea how many businesses might be encompassed?
No, I do not. The people who will probably know the answer to that question are Highlands and Islands Enterprise and Scottish Enterprise. They could give a more accurate answer than we could get from going through our customer base. Quite a lot of people use broadband at home for a small business, which would not be registered. A lot of people who take our home product are in fact businesses.
From what we have heard so far, I suspect that the answer to this will be that you do not know, but the final figure from the questionnaires that I am trying to get at is to do with the target that BT has set of 100 per cent coverage by 2005.
No, excuse me; we did not—
BT is saying that it will need input from the public sector for that. What size of cheque are you talking about?
First, I should point out that it was the Government that set the target—it was Stephen Timms, the Minister of State at the Department of Trade and Industry. Ben Verwaayen, the BT chief executive, was happy to endorse that last November.
Theoretically, the 100 per cent target is possible, if we include the satellite provision method. It is not too difficult to work out the combination of up-front contribution, subsidy and on-going costs that would need to be incurred to enable satellite usage for the people at the extremities of coverage. Theoretically, we are there, and that gives a baseline for the numbers involved.
Good afternoon, gentlemen. To go back to something that was said earlier, I have bought shoes online on behalf of my family—both Highland dance shoes and skateboarding shoes—so it is possible. I have also had the dubious pleasure, courtesy of CamVista, of looking at the St Andrews Old course, shrouded in mist, when all that I could see was a vague blob, which I think was the Royal Mail van delivering the post.
You will see that the nature of the service providers' advertising for their products has already begun to change, because they are anticipating full coverage. That applies whether you are a small business or are using it at home. We introduced flexible bandwidth—either in straight product last week, or on trial—which is the shape of things to come. It is called liquid bandwidth or turbo broadband, as I saw it referred to yesterday. It means that, when you are downloading a film, your broadband will increase for that period and then come down again. That is one example.
I suspect that we just do not know. If one looks at the mobile phone market, one sees how SMS—short messaging systems—has absolutely exploded, and nobody in any of the mobile companies gave that service a second thought. It was a thing on the side that was part of the technology, but it was not marketed. In the end, it was kids—teenagers—viral marketing and word of mouth that drove it. I suspect that in five or 10 years' time, we will all laugh at what we were forecasting today. We will be astonished by what is being done.
I find it interesting that you are not suggesting that there is anything at this stage that we or the public sector should be doing, or did I miss that?
Let me come back on that. There is an enormous amount of evidence that there is a magic dust around public-private partnerships, and we refer in our evidence to the actnow model in Cornwall, which has been astonishingly successful. There seems to be some real 2+2=10 arithmetic there, where the combination of the private sector, of higher education in the form of Cornwall College, of the local chambers of commerce and the county council has driven a take-up of broadband that is incredibly good, given the fact that Cornwall is a relatively poor area. It is the last bit of Britain that gets objective 1 funding from the EU.
My first question is for Keith MacLean and follows on from Mike Watson's questions. Your submission talked about your
The number of communities will depend on the rate of exchange activation elsewhere. The number depends on how many communities will be left that fit into that category. To be honest, I could not easily give a number, but I could provide some numbers subsequently, if you are interested.
That is interesting. I would welcome that information.
If the system is to work, it can be only a one-off investment that creates a sustainable on-going model. We need a common price. With electricity, regardless of how much more it costs to connect people in remote areas, we still charge a common rate. The public sector must think about creating that sort of environment for broadband. If we leave it too long, people in disadvantaged rural areas will ultimately have to pay more for broadband. We need a system that will create an on-going, even price structure.
I want to give the panel members an opportunity to flag up any potential barriers to development that they feel have not been covered or to elaborate on any of the specific points in the submissions. I am conscious of Mike Watson's earlier question, but I guess that one person's whinge is another person's constructive criticism—I thought that the points about the impact of street works on development and so on were interesting. I do not want you to repeat anything that you have told us already, but to mop up any issues that we have not covered—however apparently mundane they may be—that limit either the development or expansion of connectivity or take-up.
The important issue that I want to raise takes us back to the question that Christine May began to develop. First, we can take a lead in the use of broadband and public services that will benefit citizens. Scotland is uniquely placed to test these things because we have such a widely distributed population. Our size also enables us to deal with NHS 24, for example; it is a lot easier to deal with than NHS Direct. That situation provides a platform for smaller businesses to trial things as suppliers and there are wonderful opportunities to do that in education and health.
A lot of the discussion today has focused on ADSL-type broadband for residential consumers. I would also like to emphasise the importance of what we refer to as high-speed broadband services, which are typically used by business, delivered over fibre. Those services are just as important for the economic health and competitiveness of Scotland. There is a role for public sector institutions, as one of the major procurers of high-speed broadband, to take a lead in making forward-looking investments that stimulate the supply side and enable suppliers to deliver similar services to other businesses in Scotland.
I echo what the other two gentlemen have said. Projects that are under way, such as pathfinder, can make a significant further contribution to creating demand and creating an infrastructure that supports some of the weaker areas.
There are no further questions, so I thank the panel very much. It has been a long evidence session, but that is because the material has been very interesting.
Meeting suspended.
On resuming—