§ 6.28 p.m.
§ Lord Lloyd of Kilgerran
rose to move, That an humble Address be presented to Her Majesty praying that the order [S.I. 1984 No. 855], laid before the House on 26th June 1984, be annulled.
The noble Lord said: My Lords, it is my privilege to move the Motion standing in my name on the Order Paper. It relates to the proposed annulment of the order known as the Public Telecommunication System Designation (British Telecommunications) Order 1984. This order arises in view of the grant of a licence by the Secretary of State to British Telecommunications under Section 7 of the Telecommunications Act as part of the privatisation of British Telecommunications.
The conditions of the licence which will be the subject of this debate are for a period of at least 25 years, from 5th August this year. The licence applies to every description of telecommunications system within the United Kingdom as defined by Annex A of the licence. The licence deals with one of the most important industries, vital for the future of the United Kingdom economy. Its terms are of critical value to the United Kingdom industry.
The licence itself is an immense document. Unhappily, and perhaps surprisingly, its terms are of the utmost complexity; not only that—many of the significant matters in the licence are set out in the most woolly and vague way, to mention a few. Throughout the licence as, indeed, throughout the Act itself the term "fair competition" is used. There is also the term "competitive disadvantage", and in the quite monstrous and predatory terms of one particular condition one comes across the power of British Telecommunications, once it is privatised, to force potential suppliers to transfer to it patents, know-how 336 and designs, which may be the lifeblood of suppliers. I shall come to that later in more detail.
If I may say so. this is one of the most difficult documents to interpret that I have ever seen in my decades of dealing with complicated technical matters, whether they be with multinational companies, Government or Government institutions. However, as industrialists have told us, it is better to have any form of published licence than no licence at all because in some ways it will clarify, at least in part. the jungle in which the telecommunications industry has to operate. The complexity of this licence, however, adds force to many of the reservations raised by your Lordships in this House in the debates leading to the Telecommunications Act; and not only in this House, but also in the other place in the course of hundreds of hours of consideration of the Act.
However, after what may sound to the Government a somewhat severe general opening to this debate, I think it would be churlish of me if I did not at this stage, as I have done before, pay tribute to the Minister responsible for telecommunications, Kenneth Baker, for the great part he has played in information technology development in this country. I should like to include in that tribute the name of his junior Minister, John Butcher, with whom I have the privilege of being a founder member of the Parliamentary Information Technology Committee; now affectionately known as PITCOM. I should also like to offer praise to the dedicated team of supporting civil servants, all of whom have had a tremendous task in producing this important legislation. Whatever may be one's views of the result of their labours—and I must agree that at the first attempt it is very difficult to get things right on such an important matter as this—it is fitting that we should at least recognise their years of dedicated work on this legislation.
For the rest I propose to examine a few of the conditions of the licence in regard to which I may claim to have some expertise. As your Lordships have previously been informed, I have had the privilege of being a member of a small group of your Lordships from all sides of the House who considered the Bill with representatives of industry and trade unions under the able chairmanship of the noble Lord, Lord Spens. I am very happy to see the noble Lord, Lord Spens, in his place, but he tells me that he is under doctor's orders and may not be able to stay here until the end of our debate. If he were able to stay. he would tell your Lordships more fluently than I that there is one matter in relation to this licence that he would wish to raise; that is, whether or not the conditions in this licence are ultra vires the Telecommunications Act and, therefore, unenforceable. I understand that the statutory instrument itself has been examined by the statutory instruments committee, but there has been no discussion, as far as I am aware, and I think as far as the noble Lord, Lord Spens, is aware, of the vires of the licence. If I may presume to give a professional opinion at this stage, I am satisfied that certain conditions of the licence are ultra vires, but I do not propose to discuss that matter any further, and I do not expect the Government to give any considered view at this stage, since I did not have the courtesy to notify the noble Lord the Minister that I proposed to raise this point.
337 I turn to the wording of Condition 36. This condition has caused, and is causing, great anxiety to industry; more perhaps than any other condition in the licence. It deals with the transfer of intellectual property belonging to a potential supplier to British Telecommunications. Suppliers can be United Kingdom firms or foreign firms. The term "intellectual property" is defined in Condition 39 as being,patents, copyright, designs and know-how".It is usual to include trade marks in the term "intellectual property", but trade marks have been omitted from the scope of that term at the present time. In discussing this condition in detail in relation to intellectual property I shall concentrate on the position of one aspect of intellectual property—namely, patents and know-how—as they are the aspects which are of most importance to industry.
The purport of the condition is as follows. When a potential supplier is seeking a contract with this great monopoly and in the position of negotiating some arrangement with it for supplying equipment, or whatever it may be, the privatised British Telecommunications can demand from the supplier rights in relation to the intellectual property; that is, rights in the patent or know-how with which it is concerned. This kind of approach could be devastating for the commercial future of firms.
I ask your Lordships to consider a firm dealing with British Telecommunications and to consider what are its rights in patents and trade marks. I apologise, as did the Minister in the other place, for the somewhat complex aspect of my present approach. The supplier may be the registered owner of the patent and may have licensed that to some other firm, either exclusively or non-exclusively. If he has done so exclusively, he cannot deal very widely with the patent himself. The rights that the firm have may be in the form of an exclusive licence; that is to say, perhaps an American firm will have granted an exclusive licence to him under the patent, limiting him in his activities in operating the invention which is the subject of that patent.
Again, the right could be a non-exclusive licence, where the non-exclusive licensee has more scope in his rights in the inventions which are the subject of the patent. Again, there could be a contract that he has entered into with someone else in the country, or abroad, which covers know-how. He may, therefore, be limited by that contract in relation to that know-how which is licensed to him. Also, of course, he may have know-how which he himself owns and he can deal with that in any way he likes.
The patents and contracts for know-how may cover a wide range of technical matters. They may not be the only subject of the patents concerned with telecommunications, so that when British Telecommunications wants a transfer of what it refers to as the rights in the intellectual property—the patents and the know-how—those patents may cover quite different uses of the subject matter other than those in the field of telecommunications.
I therefore ask your Lordships to consider the conditions. Condition 36.1 says that. except with the 338 written consent of the director, the privatised British Telecommunications is not required to transfer to the licensee or to any other person any interest in industrial or intellectual property with a view to restricting unreasonably the freedom of the supplier of the apparatus or the provider of the service in question to exploit that intellectual property. I am advised that industry would go along with that first condition, though it is anxious about what kind of approach it should make to the director to get his written consent.
Now we come, in the same condition, to paragraph 4. I am not proposing to read it all, but merely to give the substance of it, and I hope that I can get the substance more or less correct for the purposes of this debate. It says that, notwithstanding paragraph 36.1 or any direction under paragraph 36.2, the licensee shall be free to require the transfer to British Telecommunications—this privatised organisation—or any of its wholly-owned subsidiaries of any interest in industrial or intellectual property which the director (that is, the director Oftel, concerned with this privatised organisation) agrees is necessary or desirable to facilitate the running of any of the applicable systems. Your Lordships will notice that that paragraph has swept away the position which it seems that industry would have been quite prepared to go along with. It has swept it away entirely.
It goes on to say that the privatised organisation can dispose of any of those interests that it has acquired from the potential supplier. It can require the transfer to the licensee or to any wholly-owned subsidiaries by any person any interest in industrial or intellectual property arising out of any work done in pursuance of any agreement. That is a most extraordinary situation in relation to a private company in this country.
Government departments have rights to use the intellectual property, or certainly the patents, of normal firms under certain specific clauses in the Patents Act 1977, Clauses 55 to 59. If I may say so, there are certain predetermined disciplines which Government departments must observe, and certainly they have to pay compensation when they take over those inventions.
For those of us who have specialised in this field, the use of the phrase, "for the services of the Crown", has been difficult to interpret over many years. I remember the great trouble that arose in 1965 as to whether the use of patented drugs in the National Health Service could be considered as use for the services of the Crown. It was then held by the courts that it did constitute use for the services of the Crown, and the terms of the Patents Act applied. Some of us are familiar with the kind of negotiations that have gone on for a long time between firms and the Post Office in regard to telecommunications, but I am not proposing to waste your Lordships' time by dealing with that.
Condition 36 purports to give British Telecommunications powers without compensation to demand the transfer of rights from a potential supplier. Normally when a private company wants to use patents, it has to try to negotiate a licence. If it cannot negotiate a licence, it must take a risk of using the patents without a licence, and therefore litigation may ensue; or, of course, it can make an application under the Patents Act for a compulsory licence. The use of compulsory licences is very limited, and an 339 inquiry is being pursued at the present time by the Chief Scientist at the Cabinet Offices, Dr. Nicholson, to see whether more effective compulsory licences can be created, including the transfer of associated know-how.
I now turn to the practicality of operating this condition as it stands, assuming that this condition is acceptable to a supplier. What is he going to do? There will be hundreds of contracts each month, or at any rate over the year, involving hundreds of patents. Some companies will own thousands of patents. The big firms own masses of patents. They will have to find out which of those patents are associated with a particular contract. Then they will have to have long discussions with the director general. The whole procedure is unrealistic. It can be operated by the large companies, which have large numbers of advisers. But it seems to me that it would be impossible for the small companies to deal adequately with such a procedure.
The Government are clear that there are problems in regard to Condition 36. At a meeting that the committee of the noble Lord, Lord Spens, had with the Minister, Mr. Kenneth Baker, recently (at which I was present) the Minister agreed that there were problems as to the meaning of the word "transfer". He agreed to make a statement on that matter on 17th July—last week. He indicated that on no account would the director general require the transfer of rights from the supplier to British Telecommunications.
He went on to say that if one reads Section 3 of the Telecommunications Act, which defines the duties of the director general, one will see that he would not be able to ask for the transfer of any rights from the supplier in the way that I have described, because, he says, under Section 3 the director general of this privatised organisation has to promote efficiency, economy and research and enable persons producing telecommunications apparatus to compete effectively in the supply of such apparatus, etc. His answer to the criticisms of Condition 36—which has troubled so much of industry in this country—is, "Read Section 3 and you will be able to understand that a privatised organisation cannot effect such transfers under Condition 36".
It seems to me that Condition 36 is placing a privatised company in a unique position in relation to the intellectual property rights of a potential supplier. I see nothing in Section 3 of the Telecommunications Act which enables a private company such as British Telecommunications PLC to force the transfer, without agreement and compensation, of valuable intellectual properties. I apologise for dealing with this condition at such length but industry has made the strongest representations in relation to this condition and its effect upon the operation of British industry in relation to British communications has been put in a very difficult situation. I add again—and if the noble Lord, Lord Spens, were here, he would be able to support my views—that this condition or part of it is ultra vires.
The next point that I want to raise is a topic which I shall mention only briefly because I think it will not be unfamiliar to the noble Lord the Minister. In this licence there is no adequate protection for rural areas 340 in relation to the maintenance and charges relating to call boxes, particularly in the rural areas. Also there is no adequate protection for free directory information. Condition 24 in the licence is headed:Restriction of prices for certain services".It is a very long condition covering over four sheets. Yet none of the charges in relation to rural areas' telephone boxes and the maintenance of call boxes are mentioned there. I wonder whether the noble Lord the Minister could explain why Condition 24 does not provide cover in relation to limiting the pricing and the maintenance of call boxes and free directory information.
The last main condition to which I want to refer relates to the matter which was raised in the course of the telecommunications debate, where at one stage your Lordships defeated the Government on this. That was the discrimination against people living in rural areas and on a geographical basis. I have spoken with the noble Countess, Lady Mar. I understand that she has received similar advice to that which I have received. Therefore, if I may, I will leave to her the development of that point in regard to geographical discrimination.
As there are several other speakers, I do not propose to raise any more points. It is clear from the recent speeches of the Minister, Mr. Kenneth Baker. that the success of British Telecommunications will largely depend upon the effective operation of Oftel and upon the well-known abilities, energy and dedication of the newly appointed director general, Mr. Carsberg. Therefore, may I conclude by extending my best wishes to that director general and wishing him every success in his difficult task for the benefit of the United Kingdom economy. I beg to move.
Moved, That an humble Address be presented to Her Majesty praying that the Order [S.I. 1984 No. 855], laid before the House on 26th June 1984, be annulled.—(Lord Lloyd of Kilgerran.)
§ 6.52 p.m.
My Lords, it is not the first time that your Lordships should be most grateful to the noble Lord, Lord Lloyd of Kilgerran, for opening this debate with his customary skill and, if I may say so, intellectual elegance. I believe there is no one, if wise enough, who will not benefit from considering his words with very great care. If I may say so, they are a treasure trove founded on an unrivalled experience and ability. Those words do not mean that I necessarily agree with him in everything that he has said. However, he has hit on a very important point which has cast a very great deal of fear in the hearts and minds of many in the industry. I sincerely hope that the Government, in so far as they can, will ensure that those who take decisions in these matters consider this point with very great care.
Unlike the noble Lord, Lord Lloyd of Kilgerran, and I understand the noble Countess, Lady Mar, I find it very difficult indeed to get excited about rural telephone boxes. However, on that point may I just say that if the partnership between Government, Oftel and private industry—and in that I include British Telecommunications—is the success that we all hope it will be, then I believe that in a remarkably short 341 period of time the rural telephone box will be to what is in effect the wireless telephone what the sedan chair is to the motor car.
I believe that this licence and indeed the Telecommunications Act are nothing other than stepping stones to freedom of operation in this very important field. This might sound a rather odd remark when one considers the nature of a licences. Throughout our history, first an authoritarian Government and then a paternalistic Government have removed the freedom of people to act, to move, to use or to own. They then restored that freedom to act, to use, to move or to own by granting them a licence to do this, that or the other. Generally speaking, on top of that they usually have the effrontery to charge the poor licensee for restoring the freedom of which they deprived him in the first place.
However, the granting of these licences is absolutely necessary in so many fields, although a lot of people would believe that if you have unbridled freedom you will necessarily have unbridled anarchy. The issuing of licences highlights the fundamental and very difficult role that the director general has to perform. That is to strike a balance between what is in the public interest and what is in the private interest. In doing this he has to consider not only the short-term interest but the long-term interest. In so doing he has, in a way, to police the whole of the telecommunications industry.
I very firmly believe that the degree of his success at this job is the extent to which he works himself out of his job. For I believe that there is no more effective policeman than commercial reality. I feel that the principal aim of Her Majesty's Government's policy is to produce competition to the benefit of telecommunications consumers and to encourage innovation, the creation of new employment and to encourage dynamic growth in this most exciting field of endeavour.
This aim is often lost amid proper public concern about rural telephones, inter alia. This aspect of policy is explicit in one of the guidelines for the Secretary of State and the director under Section 3(ii)(b) of the Telecommunications Act 1984, which requires them,to maintain and promote effective competition, et cetera.However, it is nowhere explicit, either in the Act or in the British Telecommunications licence, that British Telecommunications is of its nature and of its size, be it private or whatever, a monoply. This should be a prime consideration in the heart and mind of the Director General of Telecommunications. There is no way that he has to take this into consideration. In a way I think it is unrealistic to consider that he did not take it into consideration, but he by no means has to.
To put it another way, I believe the Government are saying, "We want to promote competition. We want to promote new firms, new employment, technical innovation and to gear the tempo of change". These are all very proper roles. Here is the Act and here is the licence which will enable the director general to ensure that if anyone invests in a company which will be competing with British Telecommunications—almost inevitable, given British Telecommunications ubiquity—sound business ventures will not be put in jeopardy by unfair practices.
342 The problem for the potential investors is that the Act and the licence are unproven as to the effectiveness of the director and his staff. The question that entrepreneurs will necessarily be asking themselves is, "What assurance can Her Majesty's Government now publicly give that, where the interests of British Telecommunications and those of competitors are at odds with one another, the director will give proper weight to the promotion of competition rather than to protecting British Telecommunications' monopoly?" If the Government wish to see a permanent, effective and competitive pressure in the market, then the erosion of British Telecommunications' monoply is absolutely necessary. If the monopoly is eroded and such restructuring of the market results in more perfectly competitive conditions, the theory goes that the market will be better able to regulate itself. That is an end to which we should all look forward.
On the other hand, if British Telecommunications is able and allowed to preserve its monopoly, the director will continue to provide the only assurance of fair trading. In other words, he will be the policeman. All that he will be doing is build up the size and the importance of the standing and power of his own police station. Therefore, an important question now for the longer term is how the Government see the future role of Oftel as a temporary institution to manage the transition towards a naturally competitive market or as a permanent institution to control an inevitable monopoly. To the extent that British Telecommunications will always be the largest public telecommunications operator, some policing by Oftel is always likely to be necessary. But the fundamental point is that the need for the Office of Telecommunications is directly related to British Telecommunications' influence in the market and should therefore diminish if the Government and Oftel are genuinely setting out to promote competition.
I should like to conclude by putting one or two questions to my noble friend which I do not expect him to answer now. I would, however, be most grateful if he can consider these questions and answer at his leisure. I believe that the questions are extremely important. What assurances can Her Majesty's Government give now to the new and potential telecommunications investors that the Director General of Telecommunications, in exercising his discretion under the guidelines of Section 3 of the Act, will give more weight to the promotion of new and effective competition than to the protection of British Telecommunications' existing market share? My other question is to ask how the Government view the future of the Office of Telecommunications. Do they expect the need for market regulation to diminish with the erosion of British Telecommunications' monopoly?
§ 7.3 p.m.
§ The Countess of Mar
My Lords, once again I declare my interest. For a number of years, I was an employee of the Post Office and British Telecom. I have retained my links with the British Telecom unions. It was your Lordships' will that we should see and be able to debate the contents of the licence before it came into effect. The comprehension of this lengthy document is complicated by its legal language. 343 Although it now incorporates many of the amendments agreed by your Lordships and requested by the British Telecom unions' committee, there are still a number of points that give concern. The protection of the rural user of telecommunication services was of prime importance to many of your Lordships when the Bill was passing through this House. Condition 17 incorporates the wordsincluding in particular persons in rural areaswhere it deals with the prohibition of undue preference or undue discrimination. It would appear that Mercury will not wish to compete with BT in the rural areas, and it is unlikely that the cable companies will extend their networks beyond the urban conurbations for many years to come. BT has already reduced call charges on a number of its busiest trunk routes where it faces competition from Mercury; but rural subscribers do not have access to these routes and therefore cannot benefit from competition. The noble Lord, Lord Bruce of Donington, will doubtless deal fully with the anomalies of the price restriction conditions. I shall therefore not elaborate except to say that I too am not entirely satisfied that they meet the expressed wishes of your Lordships during the passage of the Bill.
Another factor affecting rural users, not so much now but in the future, is the facilities available to them. Despite the title of Condition 1—Universal Provision of Telecommunication Services, the new rural telephone exchange, the UXD V5 is unlikely to provide more than five of the "star" services that will be available to urban subscribers served by System X exchanges. This is a form of discrimination not catered for in the licence. We rustics have every reason to expect such facilities as are available to our urban counterparts. The licence contains phrases such as "reasonable demand" and "reasonable in the circumstances". I spent a good deal of my time as a Telecom sales representative explaining to doctors with rural practices that they could not have subscriber controlled transfer of calls because the exchange to which their telephone line was connected did not have suitable equipment. They were penalised for living and working in the country. It is reasonable in this age of fast improving technology that the service should be truly universal.
The licence falls very short in the obligation by BT to continue its present operator-controlled calls service, used particularly by the elderly and the disabled. Condition 3 needs to be strengthened to ensure that no customer is charged for Directory Enquiries until the director of Oftel is fully satisfied that the arrangements for exempting or rebating those unable to use paper directories or other visual means to obtain directory information have been developed. It is probable that directory information will be made available through the Prestel service or another kind of visual display unit well before the expiry date of the licence. Those who cannot afford or do not wish to have the necessary equipment should be safeguarded against prohibitive charges. Apart from the emergency or 999 service which BT is obliged to provide under Conditions 6 to 9, there is no obligation upon BT to continue with any of the operator services that it currently provides. They are unremunerative but very 344 socially necessary. A new condition requiring the continuation of these services at least until they can be obtained automatically by all subscribers should be included in the licence. Charges should be included in the RP1–3 formula.
The subject of public call offices has been well aired in recent months as has the doubt that rural kiosks with takings of less than 185 a year will be removed. British Telecom, in my experience, has always paid close attention to the needs of the public when considering the removal of a kiosk. I have no reason to believe that it will behave differently under the new regime. There are those who will think that Conditions 13 and 14 that apply to the connection of other systems and the conditions governing interconnections do not allow sufficient freedom to competitors. Under the terms of the Act and this licence, BT is obliged to provide a number of unremunerative services. To require BT at the instruction of the director, to interconnect regardless of BT's commercial or technical judgment is a direct threat to BT's revenue base. The stability of this base is essential if BT is to be able to continue to provide loss-making services. Where there is a dispute between BT and another operator, the director should be required to carry out a full and independent survey of the effects of interconnection on BT's revenue base, and the results should be published.
When the Telecommunications Bill was passing through this House, we were assured that the unremunerative services would be funded by access charges. This would also ensure that other operators took their share of the cost. The experience of the United States of America over access charging has proved something of a fiasco. This may be the reason for the rather loose terminology of Condition 19. Neither BT nor the Government seem to be in favour of the implementation of access charges. BT must contribute itself on the same basis as other operators, and as it will be the main user for some time, collection and administration would prove to be too costly an exercise. While accepting the wisdom of this and not wishing to see a repetition of the American experience, I am seriously concerned about the source of funds for the unremunerative services especially when Conditions 13 and 14 are taken with this one. Access charges will become increasingly important in the future as competition increases. There are no details in the licence as to how they will operate. There is no adequate list of services to be funded by access charges and no means by which they will be levied or defined.
There has been heavy stress placed upon the dominance of BT in the market and upon the implicit danger to the company being allowed to manufacture equipment. I think these dangers have been exaggerated. Conditions 21 and 22 give the director a certain amount of flexibility, and I hope he will bear in mind the following factors: BT's current financial strength; its current network operations; research and development facilities; and the economies generated by its size. They should be harnessed to give its customers the best possible service at the lowest price. An artificial barrier to prevent BT from manufacturing would not only hold back the development of modern technology in this country but would prevent us from exploiting overseas markets.
345 Telecommunications are a truly international concern, and we must expand our horizons if the industry is to survive in this country. We need the size of BT to be able to compete with AT & T and ITT. The established United Kingdom firms have shown that they are not innovators or financial risk-takers. In an atmosphere of success, perhaps they will be spurred into action.
BT has for many years had a superb reputation for its research and development. Many of its current range of aids for the handicapped have taken years to develop. I am worried that the commercial criteria laid down for BT—that all R and D projects should show a profit within 18 months—will adversely affect the research into aids for the disabled in particular, and other necessarily long-term projects. Condition 31 needs to be strengthened to ensure that research and development of aids for the disabled continue at their present level.
Condition 35.3 prevents BT from giving discounts for quantity, or making special offers. These are common marketing practices, and BT's competitors will no doubt engage in them. To hamstring BT in this manner is not only unfair to BT; it is unfair to its customers. I understood that the licence was meant to protect customers, not competitors.
Touching on the theme of benefits to the consumer, Condition 53.5 as it stands could have a far-reaching impact. To limit BT's obligations to the provision of voice telephony only, and to lay down that any other service need be provided only if the customer is prepared to pay the full costs, goes against the principle of universal service. This will strike particularly at rural industries; for example, agriculture and dairying. Computers are playing an increasingly important role in rural business, and these need sophisticated telecommunication links. Will the demand of a dairy farmer on a remote farm for a computer link be regarded as (that word again) unreasonable, while that of another, near to an urban centre, will be reasonable? Technology must be available to all if this country is to prosper.
I must apologise for having taken up so much of your Lordships' time. The debate in the other place, on Tuesday 17th July, was allowed only an hour-and-a- half—barely sufficient for a licence which is to be in force for the next 25 years and which will have a considerable impact upon British industry. The hard work of all those concerned with the drafting must be applauded. It is a great improvement upon the original, but still shows some glaring deficiencies. Finally, I should like to wish not only the director but BT and its staff all the best for the future.
§ 7.13 p.m.
§ Lord Orr-Ewing
My Lords, I think it is recognised in all parts of the House that this is an important licence. It is a licence for 25 years. Originally, it was not going to be discussed; and then, as your Lordships will remember, this House had one of its minor revolutions of 1984. On that occasion it was led by the noble Lord, Lord Weinstock. We defeated the Government; we insisted that the licence should be debated in Parliament. We pressed at that time for an affirmative resolution, but in a spirit of co-operation, 346 when the Government offered a negative resolution, we accepted that as a compromise.
I remember predicting in March—it was at the Report stage that this was altered—that this debate would take place in the very last week before the Recess, probably late at night, and that the order would probably be dragooned through the other place around midnight, at about the same time. As the noble Countess, Lady Mar, has pointed out, the other place was restricted to an hour-and-a-half's consideration of a very complicated licence—a licence which, as I have underlined, is going to last 25 years and is quite difficult to alter. Here we are going to have a short debate—and I am glad that the usual channels have agreed.
But we are not in a negotiating position. We are told, understandably, that this is the last week of the Session. We are not able to alter the licence; we have either to throw it out or accept it as it is. The Government must get on, they say, with their privatisation measures. They say, "To hell with competition; don't worry too much about that. Oftel will have to keep that in line; and in any case, on the public telephone telecom network the only competition will be that Mercury are allowed to have 3 per cent. up to 1989 and the other 97 per cent. will remain in the hands of BTel". So it is a fairly hollow competition, and it is sad that it should be so. It could have been more robust.
I, like others, wish Oftel well. They are the first regulatory authority of this type that we have set up. It has long been a practice in the USA to have regulatory authorities. We wish them well, and we hope that they attract a really efficient and dedicated staff; because they have got to look after the small boys as well as the big ones, who will look after themselves.
Meanwhile, cross-subsidisation has been going on in quite a manner, and a certain number of what I have to call dirty tricks—there is no other answer—or uncompetitive practices have been taking place. If BT supply equipment, the cost of installation, commissioning and maintenance charges will be X, Y and Z. But if one insists, as a customer or client is allowed to insist, that one has rival equipment made by somebody else, then BT quote 2X, 2Y and 2Z; they double the costs all the way along. That is not very fair competition, because we, the consumers, are paying. Either the price is X or it is 2X. I hope this is one of the aspects which will be cleared up eventually. Therefore the industry is now saying, and quite understandably, "For God's sake, get on with it". It may not be a perfect licence. They have their anxieties, which I and others will underline, but they say, "Don't delay it any more; let's get on with it".
I want to say a word about cross-subsidisation, which Oftel will now have to judge. They cannot judge very well until BT can produce more detailed accounts. I would say that this year's accounts are a great improvement on those of last year. To start with, they are not qualified by the accountants to the extent that they have been for many years, when they had very substantial qualifications. There are no qualifications this year, and that is an improvement. We are beginning to see a breakdown, although it does not carry on to the profit and loss, on the various sections of BT's business. 347 But this will have to emerge, and I wonder whether we are not being too generous in this licence in saying that BT should get on with it and present their accounts, properly detailed, in order that we can judge whether there is cross-subsidisation. They are given until April 1987; that is the fall-back date. If that is when they start detailed accounting of this sort, it means that the public are not going to have access to those figures until the autumn of 1988; that is, four-and-a-half years from now. Is it really necessary to give BT quite so long to sort out their costs and their standing charges?
Clearly, no competitor is going to get the information about these costs to lay before Oftel. I hope that Oftel will start with great resolution on day one—that is, 5th August—and will start collecting information and asking questions of BT. For instance (I believe my noble friend Lord Glanusk may enlarge on this) where are the charges for Martlesham to fall? That is the biggest of their R and D establishments, employing 2,200 people, with a budget this year of £180 million. Where is that going to fall? Is it going to be properly charged, and are the transfer prices going to be correct? I hope so. They have got to be, if these are going to be honest accounts.
I ask myself, "How will the costs of corporate advertising fall?". We have all seen the advertising until fairly recently on our televisions at peak time. I believe that the budget for corporate advertising for building up BT exceeds £25 million this year. There will be a great deal more—I believe it is £50 million—towards privatisation. That is clearly BT's expenditure and should be apportioned between the various elements of its business. I wonder why there has not been a condition laying down that BT must separate its supply and its systems business from its other business. Condition 21 lays down pretty strictly that production—that is, the manufacturing side of BT—has to be separated and accounted for separately.
I must declare an interest here—it is not a pecuniary interest—as honorary secretary of the All-Party Group, under the noble Lord, Lord Spens, studying this subject. We have been talking to industry. I think that they have real anxieties. They drew our attention particularly to the wording of the restrictions in many of the prohibiting conditions in this licence. It is open to rather wide interpretation and therefore the conditions will be awfully difficult to police. I take as one example Condition 17.2 of this 100-page licence, which states:The Licensee may be deemed to have shown undue preference … if it unfairly favours to a material extent a business carried on by it… so as to place at a significant competitive disadvantage persons competing with that business".What exactly do the words "unfairly", "material", and "significant" mean? Those words are pretty vague. They are subjective words. What might be insignificant to the licensee, with its gigantic turnover of thousands of millions of pounds, is very significant indeed to some small competitor who may well go to the wall while the matter is being sorted out.
More important perhaps is Condition 18 (taken in conjunction with Condition 20) which, although titled "Prohibition of Cross-Subsidies", does not in fact 348 prohibit the licensee from such practices but simply admits of the director's power, where he believes the licensee is unfairly "cross-subsidising", to direct the licensee to take such steps as may be required to remedy the situation. Moreover, the licensee is not obliged to record "any material transfer … at full cost" between the businesses until, again, April 1987. Why not now? Why not from day one? Do we really say that they have no control over their costs or transfer pricing? It has been a long time since very able accountancy firms have been there in substantial strength trying to sort this out. Thus not only is the potential remedy for cross-subsidising post facto and subject to delay inherent in the director's investigations and actions, but accounting records will not even be available for a further two and a half years after the licence takes effect and even then will be based on ill-defined terms.
If I may summarise this issue, the industry believes that the omission from the licence of a requirement to separate at a very early date the apparatus supply business is a major shortcoming which has the dual effect of, first, unduly complicating a number of licence conditions which in any case cannot be comprehensive, are loosely worded and will be difficult to interpret and administer; secondly, providing wide opportunities to the licensee to exploit competitive advantages and further entrench his domination of apparatus supply, to the detriment especially of the small or emerging high technology company.
We are not going to try to defeat or throw out this licence. Reluctantly, we have no alternative but to accept it, but we now utterly depend on the new Director General of Oftel, Mr. Carsberg, and we wish him and his staff the very best of good fortune and dedication in the cause of seeing fair play—as fair as conceivably possible—between BT and its multifarious competitors.
§ 7.25 p.m.
The Earl of Halsbury
My Lords, I should like to enlarge a little on some of the points made by the noble Lord, Lord Lloyd of Kilgerran, with respect to the injustice which the iniquitous Condition 36.4(c) could inflict on small businesses. As I shall be talking about patents, may I remind your Lordships that patents are concerned with making, using and selling what is disclosed in the specification. It does not convey any right to do that because it is a common law right inherent in the subject to be free to make, use or sell anything you please. What the possession of a patent does is to give you the opportunity to prevent anybody else in the world at large from making what is disclosed in the specification by giving you locus standi in court as plaintiff in a suit for infringement. The defence will, of course, be that your patent is invalid. There are broadly 14 different items which can invalidate a patent of which the Patent Office examines for three. You would thus enter court to enforce your rights with three points established in your favour and 11 points unknown. Nobody will want to go into court under those circumstances if he can avoid it, but he may be forced to.
A patent in isolation is, as a rule, a rather ropy affair. When the claims are broad, they are usually weak. 349 When they are strong, they are usually narrow. A good patent with both broad and strong claims is quite a rarity, but it does happen. But from time to time some small business finds itself in possession of such a patent on which it could build. How can it exploit its ingenuity? It can exploit its position restrictively by simply going on manufacturing, licensing no one and bringing suit for infringement, with all the legal uncertainties that that represents, against anybody who infringes. But it may decide not to manufacture. It may be too big a thing. It may have a wide licensing policy with licences at reasonable royalties for all comers. That is how the late Sir Harry Ricardo built up a magnificent business in licensing the entire industry of this country which makes internal combustion engines—on devices of his fertile brain.
But there is no reason why you cannot do both. You can manufacture yourself and perhaps pick a sole licensee whom you regard as someone with whom you could work. He, as sole licensee, will be willing to pay you quite a good rate of royalties—much higher than you would get by having many licensees. But, of course, he will insist that he will not pay you the royalties agreed in the licence unless you pursue infringers. This you may be very reluctant to do. You may find yourself driven by necessity into granting him not a sole licence but an exclusive licence by which he now has the right to bring suits for infringement in his own name, while you are excluded from exercising your rights under your own patent to manufacture—not a very satisfactory situation. You might prefer to assign the patent for a lump sum—a royalty-free sub-licence with freedom to manufacture. The small-scale patentee is in a very poor bargaining position. Condition 36.4(c) makes it much worse.
At this point, I turn to the woolly language referred to by the noble Lord, Lord Lloyd of Kilgerran. What does "transfer" mean? The term of art used in this field is "assignment", Does "transfer" mean "assignment", and if not, what does it mean? If, on the other hand, it means "assignment", why is it used? Why does not the licence put "assignment", which is an understood term? Who settles the terms of this? What sort of bargaining position will the wretched patentee occupy after the director agrees that the transfer is necessary and desirable? What is "desirable"? Is it not a rather subjective term? BT can require it. How do BT enforce what they can require? Do they go to the court for an order of the court, or what? I have no idea. I cannot find any reference to it.
I do not want to make a long speech; I do not think I am able to this evening. I hope that the Minister, who has been reasonable all through, will give the House an undertaking that he will draw the attention of the director general to our proceedings this evening with a recommendation that they be studied carefully.
§ 7.31 p.m.
§ Lord Glanusk
My Lords, perhaps I may first declare an interest as I am chairman of an instrument company, 25 per cent. of whose output is normally sold to BT in any one year. While I am in favour of this order and would not wish to see it annulled, there are in the licence a number of points of detail, some of which have already been mentioned, which are most unsatisfactory. I am in full agreement with the noble 350 Lord, Lord Lloyd of Kilgerran, on what he says on Condition 36, which has been emphasised by other noble Lords, including the noble Earl, Lord Halsbury, and also with my noble friend Lord Orr-Ewing on the question of cross-subsidisation.
There is mention in Condition 20 that separate accounting units will be formed, but no mention is made of British Telecom's research at Martlesham in Suffolk. As my noble friend Lord Orr-Ewing said, the sums involved are considerable, with a budget of £180 million a year, which is some 20 per cent. of the manufacturing costs of all the equipment bought by BT. If added to the purely manufacturing costs, it makes quite a difference in the competitive world.
It is therefore essential that Martlesham should be a separate accounting unit and should have separate costing on all development projects that it undertakes which can later be transferred to the supply division. At the moment this is not happening, and there have been examples, in particular with the most recent telephone handset produced by British Telecom, which was developed at Martlesham and transferred to the factory in South Wales for manufacture. So far as British industry can see, in those costs there is no reflection of the development charges. They are purely the labour and material content, with the overheads of the factory in South Wales only. Therefore they are heavily undercutting British industry.
Another weak point in the licence is that the director appears to have no powers to demand figures from British Telecom; he has only the right to ask for them. In the early years BT can claim they are not available, and in later years can drag its feet and say that it is difficult to get them out of the system. It cannot be overemphasised that Oftel has a superhuman task to regulate this industry, and it is imperative that the Government do all they can to ensure that the director and his staff have all the necessary weapons in their armoury to fulfil their functions.
§ 7.34 p.m.
§ Lord Mottistone
My Lords, I too should like to offer my thanks to the noble Lord, Lord Lloyd of Kilgerran, for praying against the order which is under debate. Like the noble Lord, and indeed like other speakers, I am most concerned at the loose language of the licence. I hope that my noble friend the Chancellor of the Duchy can assure us that this will be as much of a benefit to the director in interpreting the rules in favour of competitors, as I fear it may be to BT's management. I agree with my honourable friend in another place Mr. Richard Shepherd, who said that the licence's success would depend entirely on the expertise and dedication of the director.
I also have a few words to say about Condition 18 and cross-subsidisation. There is no reference in Condition 18, nor has there been any mention in this debate, of cross-subsidies between international calls and long distance and local domestic calls which already occur on a massive scale. As by far the majority of international calls are made by businesses, this imposes a penalty on them in operating competitively in the world market. I should like to ask my noble friend the Minister whether he will comment on this and say whether the director will be able to intervene regarding this cross-subsidisation even 351 though it is not mentioned in Condition 18; or perhaps he might be able to do so under some other condition.
I now turn to Condition 34, on numbering arrangements. Conditions 34.4, 34.5, and 34.6 appear to put numbering within the director's control. However, 34.7 immediately removes 34.6 from such control until 1990, and 34.8 and 34.9 appear to shift control to BT's management. Numbering is one of the keys to liberalisation, particularly so far as industry is concerned, because ideally the user would like one number regardless of the system to which he is connected. Numbering is certainly complex, but there is a high risk that the logic of a national numbering plan would be obscured by a technical dust cloud. Fair competition demands that the control of numbering be vested absolutely and at once in the director. I should be grateful if my noble friend the Minister could give me some reassurance on that point, too.
With regard to Condition 46, on private circuits, this goes a long way towards what I sought during the passage of the Telecom Bill. I am grateful to my noble friend, and indeed to the Minister responsible, for this fact. I recognise that in the hands of the unscrupulous, simple resale services as defined in Condition 46.3 could be used as a clandestine public telecom system. Before 1990 such a system would be contrary to the statement of my right honourable friend Mr. Kenneth Baker on 17th November 1983. However, because that part of the statement was issued to protect both BT and Mercury, I think that the phrasetake all reasonable steps to prevent",goes too far. It should be left open to the BT management to negotiate some type of simple resale service with reputable customers if it wants to. I wonder whether my noble friend the Minister can tell me whether he thinks that Condition 53 would allow such action.
Turning to Condition 53 itself, I find it bewildering. It starts by excusing the BT management from the impossible and then goes on to excuse them from many of the obligations elsewhere in the licence. I suggest that Condition 53.12 is not sufficient to restrict the excuses, and it will take a lot of practical testing. with much unnecessary work for the director, to find out just what BT can, and cannot, do. I suggest that it would be most helpful if my noble friend the Minister could publish an explanatory note to clarify the intentions behind Condition 53. I should be most grateful if my noble friend would care to comment on that when he replies.
In conclusion, there is a serious risk that small, enterprising firms could be squashed, or deterred from starting, by enthusiastic and newly-entrepreneurial BT middle-management exercising monopoly power in all markets before it could be detected and prevented. The director will have a difficult task and he and the Government must be acutely aware of these dangers and their consequences. I should he most grateful if my noble friend could give some reassurance on this.
Though I am fearful of what its management might do—if your Lordships have listened carefully, you will have noticed that in this speech I have almost always referred to "BT management" and not "BT"—I think that BT as a whole, and especially those of its junior 352 employees who must be most bewildered by all the changes, deserve good wishes from us and from this debate. I end, as have others, by wishing the director every success in his most daunting task.
§ 7.42 p.m.
Lord Bruce of Donington
My Lords, we on this side of the House should also like to thank the noble Lord, Lord Lloyd of Kilgerran, for having introduced this Prayer tonight. Our reasons for supporting the Prayer are not quite as specialised as those of the noble Lord, nor indeed of the noble Earl, Lord Halsbury, who dealt with a highly specialised segment of the whole operation with which I am afraid I am not competent to deal.
Our objection to this order is based on far simpler grounds. We would say about this order—as with other orders that will be made in due course—that the balance of probability is that had all the information been available that is now available, it might well have been that the Bill would have been rejected in its entirety. At the time that the Telecommunications Bill came to this House and went through Committee, and at the time of the draft licence which forms the basis of the current licence comprised in this order, we had one set of accounts to work upon—the accounts for the year ended 31st March 1983. This becomes a point of some significance. as the noble Lord, Lord Orr-Ewing. pointed out, for the state of the accounts appeared to be far from satisfactory. As the noble Lord, Lord Cockfield, will undoubtedly remind me—at least he would be grossly remiss if he did not—I predicted in the course of the debate that if proper accounting standards were kept and the proper procedures of the Stock Exchange were employed it would be doubtful if this issue would get off this year. It now appears that I was wrong, for the reasons that the House may well imagine, but upon which I shall enlarge.
The position now is that we have four different sets of accounts. There is perhaps a chance that one of them may be right. We have the accounts that were issued for the year ended 31st March 1983. and more recently in the last week—I see the audit certificate was signed on 9th July—we have the report and accounts for the year 1983–84.
Your Lordships will be aware that one of the requirements of the Stock Exchange for an issue of this kind is that there should be a disclosed profit record extending back over at least four years. According to the 1983 accounts and covering the years 1980, 1981, 1982 and 1983 the profit record showed a net profit expressed in terms of current cost accounting—I shall come back to that presently—of £102 million, £124 million. £458 million and £365 million respectively. Your Lordships will find those at pages 54 and 55 of the 1983 accounts.
When we come to the 1984 accounts, which also contain references to the previous results, working on the same current cost accounting basis, we find that no figure is put in for 1982. Instead of £124 million for 1981, there is a figure of £58 million. Instead of a figure of £458 million for 1982, there is £384 million and instead of a figure of £365 million for 1983, there is £440 million. I cast no imputation of any kind upon the professional accountants and/or their advisers who are responsible for the auditing of both sets of figures.
353 Clearly, there is scope in the notes for variations to be made according to the information discovered at a later date or possibly a different basis of accounting. I am quite sure that all these have been dealt with, albeit in small print, but small print is not what the public see.
What is very interesting is that the whole proposition of the privatisation of British Telecom was based on the public—and the House—having a limited amount of information as to its profitability. They were given to suppose that the rate of return on capital was rather low: 1.5 per cent., 6.7 per cent., 6.9 per cent., 8.3 per cent. Any Member of your Lordships' House or of another place could easily have said on that basis—if they were not versed in the considerable intricacies of the spidery current cost accounting methods—"This is not a very big return on capital; it is probably a good thing if we privatise it. Let it be turned over to free enterprise. Let's have all the energy and drive and let's push up the return on capital. Quite clearly, as a public enterprise it has not been doing very well." This is an opinion that the House might affirm. In fact, to my certain knowledge, sections of your Lordships' House formed that view, that if that is the best BT can do, why should it not be privatised?
But, when it comes to the 1984 accounts and to the reports that have been published by Messrs. de Zoete and Bevan, and Messrs. Hoare Govett, acting on behalf of British Telecom and no doubt acting on behalf of the Government, we find that for some reason they abandoned the current cost accounting figures for the purposes of assessing profitability and re-assessed the four years—and indeed the current year—on the basis of historic cost. It can of course be adequately explained in technical terms but means nothing to the ordinary individual in the street.
This produces an entirely different result. So that instead of having £102 million, De Zoete and Bevan, in their report, put the figure at £554.8 million. That is a very big difference. Instead of £124 million, Dc Zoete and Bevan put the figure at £641.6 million; instead of £458 million in 1982, De Zoete and Bevan put it at £999 million; and instead of £365 million in 1983, De Zoete and Bevan, in their published report, put it at £991 million, which they later revised, in conformity with the figures certified in the accounts of British Telecom, to £1,031 million. So that miraculously, overnight, as it were, we suddenly find that the rather dully profitable British Telecom, upon which so much not entirely disinterested scorn had been poured by those who sought to pick its bones, has its profits, for the purposes of the investor, for the purposes of attracting money to privatise the thing, stated on the basis of historic costs—being, indeed, the only logical way of doing it.
Instead of having returns on capital employed of the order of 1.3 per cent., 6.7 per cent., 6.9 per cent. and 8.8 per cent., we now find that the returns on capital which the investor is going to be invited to contemplate are 8.5 per cent., 13.5 per cent., 16.2 per cent., 16.3 per cent. and 14.4 per cent.—rates, I might say, earned by British Telecom before it is privatised, in excess of the return on capital produced by AT & T in America, which was adversely compared during the 354 course of the debate with what was thought to be a mundane performance by BT.
My Lords, these are matters of some seriousness. There is the question of good faith. Is it right that the British taxpayer, and, yes, the British consumer, should be told one story for the purpose of bringing in the nationalisation Bill and then, for the purposes of "flogging off" its assets to private enterprise, should be presented with a different story? I am quite sure that the frankness with which I have spoken will not prove agreeable to a number of noble Lords opposite, but this is the constitutional function of Her Majesty's Opposition which I propose to exercise.
§ Lord Mottistone
My Lords, if the noble Lord will allow me, I think the only thing that is disturbing me is that I thought we were debating the licence, and what the noble Lord is talking about does not seem to have anything to do with it at all.
Lord Bruce of Donington
My Lords, we are debating the order. I am objecting to the order going through because, had the facts been known as are now known, there is quite a chance that the Bill would never have gone through at all. This gives me every right; but if the noble Lord finds it too embarrassing, I will cease tormenting him.
Lord Bruce of Donington
My Lords, I have. May I also tell the noble Lord—and also, through this debate, inform the taxpayer—that on the basis of the historic cost profits that have been projected by De Zoete and Bevan and also by Hoare Govett, the total capital worth on an earnings basis of the whole concern is something between £9 billion and £12 billion, and that one-half would be £4½ billion or £6 billion, according to whichever figure is adopted—six to eight times the net maintainable revenue—as against the £3 billion that is now being bruited about. There is therefore a chance, on disposal, of the taxpayer being mulcted not only of the future dividends that he could have received from British Telecom but also, as a taxpayer, of a substantial amount of money that would otherwise have gone in relief of taxation.
I now pass, if I may—and, I am sure, much to the noble Lord's relief—to the licence itself, and, in particular, to Condition No. 24, which deals with the RPI minus X formula. This has undergone modification in the course of the discussions with other interests, presumably, since the draft was originally prepared. In the original proposal Mr. Baker himself assured us all, the public, in a letter to the Economist, that there would be an RPI minus X formula which would ensure that customers' charges would go up at less than the rate of inflation.
That was envisaged at the time the debate took place in your Lordships' House, and was incorporated in the draft—except, of course, that there was a little bit of small print under Condition 24. Condition 24, at the 355 end, has a note—a note which did not receive the particularly meticulous attention of your Lordships—saying that the possibility of adding trunk-call services to the relevant services is still being studied. They can say that again!
What has now happened is that the basket of charges has been enlarged by the inclusion of trunk calls and by the statement that residential rentals will be allowed to rise by 2 points above the rate of inflation. With the rate of inflation at 6 per cent., another 2 points on top of that would be 8 per cent. on rental bills, which are already £56 per annum. But at the same time, in order to preserve the total RPI minus X within the basket, BT would be permitted to lower its trunk-call rate, which, in any event, it will have to do to remain in effective competition with Mercury. So what happens is that the ordinary residential subscriber who does not make many trunk calls will find that his rental will go up and that the remainder of the charges, taken together with it, will ensure that he will be paying far more than he was before, rather than the RPI minus X. I invite the noble Lord's comment on that.
§ Lord Orr-Ewing
My Lords, if the noble Lord will allow me to intervene, does he recall that the independent Carter Report looked at this very carefully? They recommended that BT's telephone charges ought to fall by 5 per cent. every year for the next five or 10 years. That is rather a different viewpoint from that which he has been enunciating to the House.
Lord Bruce of Donington
My Lords, all that I am concerned with at the moment is the understanding of the House on the basis of the draft licence then before it and the explanation given at that time by the right honourable gentleman the Secretary of State in putting forward the RPI minus X formula. All that I am saying is that the draft now before us gives a little more latitude; and it does not mean—and now does not guarantee—that those who have residential telephone connections will pay less than they were paying before. It will, in fact, in many cases mean that they will be paying substantially more because of the increase in the rental charges. So I think we should like to have the noble Lord's observation on that.
I turn now to Condition No. 11, which is concerned with public call boxes. Originally, we were given to understand—and the noble Countess, Lady Mar, has already referred to this—and it was originally thought when we were debating the Bill and when we were debating the draft, that the safeguards were going to be quite adequate on the basis of the understandings between British Telecom and POUNC. What we now find in the new Condition 11.2 is a whole series of exemptions. I hope my reading of the law is correct. The noble Lord, Lord Cockfield, is legally trained in these matters; I am not and perhaps he will be able to enlighten me and I shall immediately accept his correction with due humility.
As I see Condition I 1.2, paragraphs (a), (b), (c), (d), (e), (f), (g) and (h), are all independent and stand on their own. After the end of each paragraph there is not inserted the word "and". For example, in paragraph 11.2 (a), it is permitted to cease to provide public call box services if their continued provision is 356 impracticable. That stands on its own. The next condition is paragraph (b), regarding the revenue from the service provided from the call box in any period of 12 months ending not more than six months before the cessation has fallen below the minimum figure, and so on. There is no "and" after the end of paragraph (a), and I would therefore assume that under this licence the licensee—in this case BT—can terminate the call box service purely on the grounds that its continued provision is impracticable.
The noble Lord may tell me otherwise, but I observe that beween paragraphs (g) and (h) there is inserted the word "or", which implies some alternative between conditions (g) and (h). I would be glad if the noble Lord could inform us directly and simply if it is the case that in Condition 11.2 the satisfaction of any one of those conditions on its own is sufficient for the public call box service to cease. This may be a matter of discretion.
I now pass to Condition 3 which deals with directory information. There are two points I have to make on that. The position of certain disabled people, the blind and so on, is made quite clear here: they will be provided with certain facilities free of charge. In so far as the disabled person within various categories is concerned, the words "free of charge" are inserted. The inference I draw from that—and I trust the noble Lord will not think I am too suspicious—is that the remainder of the directory information services specified in Condition 3 are not free. Otherwise it would hardly be necessary to mention "free of charge" in the case of the disabled people. Am I therefore to take it that the directory information services which are at the moment provided to a wide range of subscribers and others free of charge are now to be charged for?
Also, there is no mention in the new licence—and I endeavoured to deal with this although the time was rather late in Committee and again on Report—of any obligation that I can find for the provision of printed directories to each individual subscriber free of charge. Maybe it is unnecessary to put it in because, of course, in the old days with British Telecom—as it is now, and until it is privatised—it was always possible to raise these matters in Parliament. There was always the ability to put down a Parliamentary Question. But it will now be privatised. May we please be told by the noble Lord whether under the provisions of the draft licence, or under the provisions of the Act, it is legally obligatory for British Telecom to continue to provide printed telephone directories free of charge to individual subscribers? It should be possible to answer that.
I now refer to Conditions 31, 32 and 33 which deal with the supply and connection of apparatus for the disabled. Perhaps the noble Lord with his far greater knowledge and immersion in the detail of this document can advise me—I would be very grateful if he would correct me if I am wrong. It seems to me that the only obligation in regard to the connection of apparatus for the disabled on the basis of this particular condition is an obligation on the licensee to consult. Conditions 31.1, 32.1 and 33.1 do not appear to lay any obligation on the licensee to connect. It may well be that I have got it wrong; it may be that it is somewhere else in the legislation; but if so I should like to know.
357 The final point I have to make has already been dealt with and I shall not enlarge on it to any great degree. It is concerned with Condition 53 which deals with the exceptions and limitations on the obligations which British Telecom has under the entire Schedule No. 1 of the licence. What I am not clear about is this. What obligations does BT have to the ordinary telephone subscriber beyond that of providing voice telephony and ordinary directory inquiry or information services? Should one construe Condition 53 as exempting it from the responsibility of installing, on request, a whole series of the other services that are now becoming available? I am talking now of the dial-a-service, of conference calls, all those kind of things, including Prestel and all the rest. Will there be an obligation on BT to make all these kinds of services available or are they to be left to what I will term, without any disrespect, for the moment as the "fringe services", the fringe competitors who are now seeking to insert themselves into what used to be BT's market? I think some explanation would be helpful, if we could have it.
The hour is late, I have been heavily engaged in your Lordships' House the whole day, as indeed has the noble Lord, Lord Cockfield, with whom I deeply sympathise because his task is far more responsible than mine. I should be greatly obliged and so, I think, would the general public, if he could give a frank and, as usual, honest reply to the questions I have ventured to address to the Government tonight on behalf of the consumers and taxpayers.
§ 8.10 p. m.
§ Lord Cockfield
My Lords, to-day's debate is the direct outcome of one of the amendments to the Bill made in your Lordships' House and now incorporated in Section 9 of the Act. I think we can all take satisfaction in the number of important amendments we were able to make to the Bill while it was before your Lordships' House. Many of these changes are reflected also in the licence we are now debating. It is of course primarily the licence that we are debating, and while nobody would wish to stop the noble Lord, Lord Bruce of Donington, in the full flight of his indignation and rhetoric, I think a great deal of what he said was more appropriate to a re-run of the Second Reading debate on the Bill as it then was. I hope therefore he will understand if I do not follow him down that particular path, but confine myself to the licence.
It was recognised on all sides of the House that the success of the regulatory system would depend in large measure on Oftel and on the quality and personality of its director general. My noble friend Lord Morris very rightly referred to:the fundamental and difficult role of the Director-General".Oftel is now in business—its staff were formally appointed on 1st July—and Professor Brian Carsberg has been appointed director general, The powers under the Act will come into effect on 5th August. Professor Carsberg is Professor of Accounting at the London School of Economics—a matter which, I am sure, will give the noble Lord, Lord Bruce of Donington, great encouragement and reassurance. Professor Carsberg has been Visiting Professor to the 358 University of California at Berkeley. He was a member of the panel which advised on the licensing of value added network services and he brings a wide and varied experience to his appointment. I was glad that so many of your Lordships—in fact I think your Lordships were unanimous—have wished him every success in his appointment; and I most warmly join in those good wishes. I would think that his first task will be to read the report of this evening's debate, which he will find both interesting and helpful in the future discharge of his duties.
During the passage of the Bill, I made it clear that we would ensure that the staff and resources of Oftel would be sufficient to enable it to discharge its functions effectively. That point was raised by my noble friend Lord Glanusk, and perhaps I might remind him that I told your Lordships on 27th June, in reply to a question from the noble Lord, Lord Bruce of Donington, that we are providing for an increase in the staff to 84 by the year end. We expect expenditure this year to amount to £2,530,000 and the future annual cost is expected to be between £3 million and £3,500,000. Provision is made to supplement in-house expertise with expertise brought in from the outside.
May I now move immediately to the question of intellectual property rights, which was raised at the commencement of our discussions—now a very long time ago—by the noble Lord, Lord Lloyd of Kilgerran. The noble Earl, Lord Halsbury, also raised the same point. I say this as a perfectly genuine comment: I wonder whether there might not be some fundamental misunderstanding here. British Telecom have no rights of compulsory acquisition of patent rights or of intellectual property. They have no right of compulsory acquisition under this Bill or under the licence. What the licence conditions do is something quite different. They cut down the contractual rights that British Telecom would otherwise have. The original Condition 36 did not in fact deal with intellectual property rights at all, except possibly by inference. What we have done now, is to insert specific provisions in Condition 36, dealing directly with intellectual property rights. The general thrust of those provisions is to prevent British Telecom abusing its competitive position by insisting on the acquisition of such rights where it is not necessary or reasonable to do so: that is, to insist on that acquisition under contract.
There is, as of now, some dispute between the lawyers acting for the interests for which the noble Lord, Lord Lloyd of Kilgerran, has been speaking and the lawyers for the department about the precise effect of these provisions. Disputes between lawyers are part and parcel of everyday life and we must leave it for them to try and resolve their differences. What I propose doing at this juncture is to give a clear reassurance about what the Government had in mind in including the new provision relating to intellectual property rights in Condition 36. The objective was to ensure that British Telecom was not in a position to demand the transfer to it of industrial or intellectual property rights when it bought telecommunication apparatus, so as to gain an unfair competitive advantage. That is the effect of the prohibition in Condition 36.1. 359 What concerns the noble Lord, Lord Lloyd of Kilgerran, is that some of the let-outs in Condition 36.4 may undo the effect of Condition 36.1. As he knows, the Government's view is that that is not the case. The necessary involvement of the director, acting, as he will be, in conformity with his duties under Section 3 of the Act, in determining whether, for example, any transfer is "necessary or desirable" or "reasonably necessary" for the purposes specified, will, in the Government's view, ensure that the constraints on British Telecom will be effective.
As the noble Lord will recall, we debated at length the director's powers to enforce licence conditions during the passage of the Bill. As from 5th August. when the licence comes into effect, if a firm has evidence of British Telecom unreasonably demanding the transfer of any interest in industrial or intellectual property, such a firm should refer the matter to the director for his information as a possible breach of the licence.
At the same time if, after further legal scrutiny of the licence conditions, those concerned continue to feel that its drafting does not reflect the general policy that I have outlined, they should refer that matter to the director, so that he may consider whether he should exercise his powers to make licence modifications. May I leave the matter on that basis? I would be most grateful if the noble Lord, Lord Lloyd of Kilgerran, and the noble Earl, Lord Halsbury, would study what I have said, and if they then wish to come back I should be happy to communicate with them again.
I should like to turn now to the question of rural areas. This was raised by the noble Lord, Lord Lloyd of Kilgerran, by the noble Countess, Lady Mar, and also by the noble Lord, Lord Bruce of Donington. Amendments were made to Clauses 3 and 8 of the Bill to strengthen the protection afforded to rural areas. These are reflected in the conditions incorporated in the licence which is before us today.
Under Condition 2, British Telecom is required (subject to certain conditions) to provide services in rural areas for all who ask for them. Under Conditions 25 and 26. British Telecom is also required to continue for at least five years its present practice of uniform charges throughout the United Kingdom for maintenance of the customers' exchange line and for installation of lines where the work takes less than 100 hours. Those who live in the country will therefore pay no more than those who live in the town for the same service. In addition, Condition 17 of the licence prohibits undue discrimination against any customer, with a specific reference to those in rural areas. British Telecom has publicly committed itself to maintain and improve rural services. That commitment, together with the requirements of the Act and the conditions in the licence, as well as the powers vested in the director, provides effective safeguards for all rural users.
Perhaps I may now come to the question of public call boxes, which was also raised by the noble Countess, Lady Mar. I was very glad that she said there was no reason to believe that British Telecom would behave in future any less responsibly than it has in the past: and that is a sentiment which I entirely share. Of course, public call boxes are important to both rural 360 and urban communities. The relevant provisions are to be found in Condition 11. For the first time, British Telecom is obliged to provide public call boxes, and the licence makes obligatory the continuance of the hitherto voluntary agreement between British Telecom and POUNC, which in fact has worked very satisfactorily. The minimum takings guideline of £185 is the same as that adopted in the past, but a new safeguard is now being introduced. In future, there will also be an allowance of 25 per cent. of the actual takings to take account of non-cash calls. This means that cash takings need amount to only £138.75 a year to meet the minimum guideline figure of £185.
The noble Lord, Lord Bruce of Donington, raised the question of the various conditions which are set out in Condition 11.2. It is the case that each of the paragraphs (a) to (h) is sufficient in itself as against the other paragraphs, and the word "or" between paragraphs (g) and (h) has that effect. But the noble Lord referred specifically to the use of the word "impracticable" in Condition 11.2(a). That condition is not sufficient in itself, because it is also subject to Condition 11.3 which requires British Telecom to provide a call box nearby, if possible. The word "impracticable" refers to the case where, for example, a road is widened and the existing call box has to be removed. But what is said then in Condition 11.2 is backed up by what is said in Condition 11.3, which then requires BT to provide an alternative call box nearby and, in connection with the general duty of the director, that means that the director will have control over questions of this kind.
Perhaps I may go on from that to the question of prices. Under Condition 24, British Telecom is obliged to keep increases in the prices of a basket of services to three percentage points below the rise in the retail price index. The services in the basket consist of business and residential rentals, local calls and trunk calls. They account for well over half—57 per cent., in fact—of British Telecom's revenue. There was some criticism when the Bill was before your Lordships that the formula RPI minus x was indefinite and might well give British Telecom undue freedom to increase charges. Now that x has been fixed at 3—so that it is RPI minus 3—I am sure your Lordships will agree that this is a very effective restraint. It will mean that for most telephone users there will be a decrease in real terms in their telephone bills over the next five years. In short, the consumer has the best protection that he has ever had in this and in many other important respects.
The next question to which I should like to refer is that of directory inquiries, which was raised by the noble Countess, Lady Mar, and the noble Lord, Lord Bruce of Donington. Condition 3 of the licence sets out in considerable detail the directory information which British Telecom is obliged to provide. Under Condition 3.1, British Telecom is required to provide an inquiry service for telephone numbers and dialling codes of its customers. Condition 3.2 ensures that British Telecom's customers will be able to obtain the numbers of customers on other systems, such as Hull's. Subsequent paragraphs cover overseas systems.
Condition 3.5 contains protection for blind and disabled people. It ensures that directory information must be provided in a form, 361appropriate to the needs of such people".For example, it must be in audible, rather than in visual, form. It also ensures that if British Telecom introduces charges for directory information services, blind and disabled people will continue to be able to obtain them free of charge, or with appropriate compensation. No charges can be introduced until arrangements for achieving this have been made. I hope that that gives the noble Countess, Lady Mar, the full assurance for which she asked—
Lord Bruce of Donington
My Lords, will the noble Lord just answer the question? Is it, therefore, the case that unless a person is disabled, there is no reason under this licence why he will not, in future, be charged for directory inquiries?
§ Lord Cockfield
My Lords, there is nothing to prevent British Telecom from charging if, in fact, it so wishes. But the most important point is that it requires to give satisfaction to its customers. It is essential, from a commercial point of view, that it should make its services available as widely as possible, and it is in the commercial interest of British Telecom to ensure that its customers' needs are met in the best possible way. The conditions which have been introduced make it quite clear that the case of disabled people must be dealt with properly before there can be any question of charges being introduced. That is the important point which was raised in your Lordships' House, which we have met, and which is fully dealt with in the licence conditions.
My noble friend Lord Orr-Ewing, as well as my noble friends Lord Mottistone and Lord Glanusk, raised the question of cross-subsidisation and the effect of Condition 18. They suggested that Condition 18 is, or maybe, ineffective in stopping British Telecom from cross-subsidising various activities; in particular, its apparatus supply, its apparatus production, its mobile radio services, and so on. That is simply not the case. Condition 18 has been substantially redrafted, compared with the original draft licence, and has been very much strengthened. It gives the Director General of Telecommunications a very wide power indeed to require British Telecom to take whatever steps he judges necessary in order to remedy any unfair cross-subsidy that is identified.
My noble friends Lord Orr-Ewing and Lord Glanusk both raised the question of Martlesham. Martlesham does work for several of BT's separate businesses. That is, it does research for the systems business, for apparatus supply and for mobile radio. Condition 18 requires transfers into any of these businesses from the cost of the business—that is, from Martlesham—to be recorded, so any cross-subsidies will be clearly identified.
My noble friend Lord Mottistone also raised the question of the numbering arrangements. I agree with him that the allocation of numbers is very important to the promotion of competition. In the short term, numbering arrangements are fixed by the way that the British Telecom network is wired up. It is too expensive to change this, but in future the digitalisation of the network will introduce flexibility. Under Condition 34, the numbering plan will be 362 subject to the oversight of the director and to consultation with all interested parties. Condition 34 also empowers the director to oblige British Telecom to adopt a numbering plan determined by him which ensures that sufficient numbers are available to other operators. In other words, Condition 34 ensures that British Telecom cannot use the numbering plan anti-competitively, that sufficient numbers are available to meet all reasonable demands and that the director has the final say about numbering arrangements.
My noble friend also referred to Condition 46 and the prohibition of simple re-sale. Simple re-sale is not just a specialised service but involves the running of a telecommunications system, and as such will need a licence under the Act. Nobody can therefore provide simple re-sale unless he has a licence from the Secretary of State. The Government have said that their present intention is not to license simple re-sale until July 1989. Condition 46 simply reflects this intention and ensures that B-Tel collaborates with the Government in securing its implementation. However, at the same time I would refer my noble friend to the statement made on 20th July by my right honourable friend the Minister for Information Technology which also indicated very important areas in which re-sale will be permitted.
My noble friend referred also to Condition 53. I accept that Condition 53 is a complex provision. This is true of many of the provisions contained in the licence. As the noble Lord, Lord Lloyd of Kilgerran, will know, when lawyers come to draft a document it tends to get rather long and rather complex. The Finance Bill, which it was our pleasure to debate a few minutes ago, is an example of what lengths lawyers can go to when they draft provisions of this kind. The reason why Condition 53 is longer than its equivalent in the draft licence, where all limitations apply to all conditions, is that Condition 53 is more selective in that only some of the limitations apply to only some of the conditions. The net result, though longer, is beneficial to consumers. If my noble friend has any particular difficulty about understanding how Condition 53 works, he will find the cross-reference in Condition 53.12 to the condition he is seeking. This will tell him which limitations do in fact apply.
We have covered tonight an immense number of subjects. I realise that there will be many points which I have not answered in detail. Tomorrow I shall read in the Official Report what has been said this evening and will ensure that, so far as possible, replies on individual points are sent to every noble Lord who has raised them. There is, however, one point of great importance which I do want to raise. The noble Lord, Lord Bruce of Donington, and others have very legitimately raised the question of parliamentary scrutiny over the activities of British Telecom. The Act itself specifically provides, in Section 55, for the director at the end of the year 1984 and of each subsequent calendar year to make a report to the Secretary of State. The Secretary of State is then obliged under Section 55(3) to lay a copy of every report made by the director before each House of Parliament and to arrange for every such report to be published. This means that it is open to both Houses to debate that report, if they so wish, so that the full weight of parliamentary scrutiny can continue to fall 363 on the activities of everybody who comes within the ambit of Oftel and the director general.
Having said that. I am sure that it would be the wish of all of your Lordships, irrespective of political view, to wish British Telecom and all who work in that great organisation every success in the future.
§ Lord Lloyd of Kilgerran
My Lords, when we met the Minister for Information Technology as members of Lord Spens' group last week, he was good enough to say that he thought that a debate in this House on the licence would raise a number of useful points. The Minister has graciously endorsed the view that this debate has been of considerable use. Therefore, I do not propose to prolong it. In making that decision, I am fully conscious of the fact that the Minister has had a hard day. He has taken part in two major debates, listened to 19 or 20 speeches and interspersed those speeches with three major speeches of his own. Accordingly, I merely thank the Minister most sincerely for his reply, given with his continuing courtesy and tolerance, and conclude, as did the Minister, by wishing British Telecom and all their staff a very fine commercial success in the United Kingdom and abroad. I beg leave to withdraw the Motion.
§ Motion, by leave, withdrawn.