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Where Broadband half-truths cost rural customers and shareholders!
1:12pm - 22/09/2014

The UK Government sponsored rural fibre rollout is gathering pace.  These past two weeks have seen the new head of BDUK provide a mini-interview to ISP Review, , and a BT written article giving its perspective on the rural programme dismissing concerns about value for money.

The BDUK interview confirmed no significant changes are needed with the BT arrangement but for the first time let it be known that there should be significant savings to be re-invested from the BDUK Framework pricing.  This is good news and contrasts with BT’s presentations to the Public Accounts Committee during 2013 that the BDUK Framework pricings contained all the operational efficiencies and leanings from the commercial rollout. 

At least it is becoming increasing clear, whether it is the NAO, PAC or BDUK,  BT did inflate its costs to match the budgets available while refusing to provide reference costs for what is a state aid project.  There will be savings and there will be claw-back but only after BT Group has finished billing everything it can. It needs to be noted that even in the absence of transparency the job of extending fibre to 30,000 areas will be done or mostly done.

There is much to agree with the BT article; however, it suffers for the half truths.  Telling more of the truth would be better for customers and shareholders alike. 

The article states BT has invested more than any other company, £3bn the article says, and it is astonishing what has been achieved is the sentiment.  The cost is overstated while the astonishment by definition is understated. The capital investment for BT’s commercial rollout came in at between £1.3bn and £1.6bn as notified to BT’s analysts,  not the £2.5bn used by BT Group public relations. Furthermore, the commercial roll out was 18 months ahead of schedule, which is terrific.  The latter is not in dispute but the claim of 19m homes passed will be overstated given the selective roll out and the impact of long lines .  The latter is detail.  Astonishingly for an infrastructure project, it was cheaper and delivered faster than predicted.  Applying that learning,  and given the need for affordable wholesale broadband it points to the maximum BT capital investment per premises passed for the 5.2m premises contracted for upgrades in rural areas to be in the £300-£350m range– most in the form of capitalised labour not cash,    not the £1bn of extra capital BT promised very publicly for rural areas.  BT investment in rural we learn from PAC hearings is self-certified, which is unfortunate.  From a shareholders perspective it must be absolutely airtight and transparent if BT is to avoid calls for additional regulatory measures on passive infrastructure access.

BT total capital investment is not £3.5bn (£2.5bn commercial + £1bn extra capital promised for rural)  but less than £2bn which is even more astonishing  and includes BT investment in the final third of £300-£350m.  It includes delivering a uniform wholesale broadband price nationally,  an outcome worthy of mention  but not referenced.  BT could only invest £1bn in rural if it could increase its wholesale prices, as it this would amount to three times the amount invested per premise passed in urban areas.

The BT article goes on.  We do understand people want to know now if they’re getting fibre, and we recognise our duty to keep them informed, but we can't do that through guess work. With an infrastructure project this big and complex, we need to survey every area thoroughly before there’s any certainty about the build.  With £1.2bn of public money to create some 30,000 fibre paths and cabinets  where BT’s commercial investment of £1.3-£1.6bn delivered c50,000 fibre paths and cabinets suggests this line of argument is convenient if not lazy for BT Group.  The publicly paid for surveys are not published so we have no idea whether a duct needs clearing or whether 10km of new duct is needed. We have no idea if BT is providing new fibre or re-purposing existing fibres laid for the previous £1bn of public money spent to connect education establishments.  The excuse is irritating and insulting to rural users and unworthy of the BT spokesperson, given the nature of the job in hand and budget available. BT will be forgiven for a great deal but not assuming their customers are stupid.  The surveys and their costs should be published.  There is no competitive or commercial reason for not doing so.

So we come to value for money and we have the argument that ‘other companies walked away from the process’.  The Communications Act 2003 makes clear BT has an enduring monopoly in rural access networks (hence the Act), and in 2012 Ofcom’s Business Connectivity review confirmed limited demand or need for passive infrastructure access,  thus reducing the prospect of companies like Fujitsu  participating meaningfully in the BDUK process.  Unfortunately, the total lack of meaningful competition was missed or not understood by PAC and the NAO,  permitting some to discredit their efforts and draw fire away from the value for money issues.  But for the BT Group spokesperson the question must be asked as to what aspect of enduring monopoly is not understood?  Do any of the ‘others’ have or had a single residential phone line or telegraph pole to hang it from?   BDUK needed to run a competition as part of a tortuous process to get state aid approval.  The BT spokesperson could have said,  “we understood  our strengths and the process needed to get state aid approval. Given  state aid only pays for incremental capital costs,  we decided to provide the Government our reference costs so there would be no ambiguity or suspicion that we might take advantage of the situation.  We expected others to bid,  but only BT had any network in rural areas to build upon and an existing national wholesale broadband infrastructure. It is very unlikely others could win any of the bids.”  This particular approach was not chosen but the sentiment has been used by BT management in reporting the deals to shareholders.

The article goes on.. ‘BT was willing to accept terms that others wouldn’t, because we believe fibre’s essential to the communities we serve. Our investment will take well over a decade to pay off, and various contractual clauses ensure we’re bearing most of the financial risk.’ The Communications Act and Ofcom’s market review makes clear there would be no others.  BT has decided its investment in rural areas will be self-certified and so there is no absolute way of verifying what should be a £300-£350m capital contribution.  Taxpayers are perfectly entitled to ask what financial risk exists where the subsidies in the form of  milestone payments for premises passed went from c£70 per premise passed during early engagements in Northern Ireland to over £170 (split, 50/50 central and local government) per premise passed for most of the 44 rural contracts signed. There are explanations for some of the difference particularly how the USC of 2Mbps was contracted, but the aspect will need to re-negotiated or released for more NGA activity.

BT spokesman could have said,  “Given BT’s extensive experience in the commercial rollout of NGA and our near monopoly access network in rural areas, we outlined the conditions we wanted to do the job,  which would not impede our other ambitions and responsibilities. We have agreed a process for payment which is consistent with the state aid measure agreed in Brussels,  and if the milestone payments are too high, the means exist to pay that money back.”  This could have worked but only if BT provided a set of reference costs.  This was not done.

We nearly get there.  BT goes on ..’To explain - if BT delivers a local project under budget, the savings are reinvested to extend coverage further or boost speeds. Similarly, if take-up beats the forecasts, more funds will be released to help boost coverage or speeds. ‘

More accurately it should state something like… “The BDUK milestone payments are set generously (c£170+ per premises passed,  as were Cornwall’s ) and it will allow us to go further than planned as actual costs are significantly less, but we need to allow for exceptions.  We aim to switch from milestone payments to actual costs as soon as possible.  Waiting for an extensive cost reconciliation process would delay the rollout,   keep many rural locations under evaluation for a long time, and would prevent us employing more apprentices to finish the work on time.  Furthermore, if the take up is good,   we can re-invest even more. It is a win win position, the more efficient we are the further we go and we have the upside of taking costs out where we do Fibre To The Premise.”

 This approach was not chosen. There is no win win. There appears to be no motivation to be efficient, and every reason to bill whatever can be billed using confidentiality agreements to do so. The latter are used to enforce silence creating a level of consent which induces fear and mediocrity of a profound nature.  After two years and half years there is no evidence of a switch from inflated milestone payments to actual costs.  Why is Virgin Media’s network being overbuilt in some suburban areas with public subsidy meant for rural areas?  Why are subsidised cabinets appearing in business parks where duct exists to take fibre all the way?  Why no switch to actual costs in the two and half years since the Framework was signed? 

Finally  BT states ..’So when it comes to broadband, we believe we’re doing everything we can to safeguard Britain’s economic success’.   BT will do a reasonable job but at a cost higher than it needs to charge because it’s power in the market permits it to do so.  The Government wants the job done within one Parliament so is forced to take what’s on offer and tackle BT Goup excesses where it can.  But BT Group is not safeguarding Britain’s economic success,  nor it’s own. It could be argued that by BT holding back or understating the astonishing story that is the connectivity revolution,  BT will force regulators and policy makers to act in a manner that will permit others to deliver the full benefits of an ongoing revolution in connectivity. City authorities are embracing City-Fibre to find a way around BT.  More regulation and calls to split BT up seems a high cost for taxpayers, customers and BT shareholders to pay for the sake of proper and full transparency of the cost metrics of the rural Broadband programme.  Opening up the latter creates more opportunities for BT than it imagines.  BT can ask for more money as long as it asks for no more than the incremental funding needed.  As an assumed supplier of last resort, it has every right to request re-use of unused licensed spectrum.  It would have every right to negotiate changes in the cost recovery regime for fixed lines so fibre access could be added.  It could remove the cost of maintaining unused phone boxes in exchange for more broadband access.  To do so BT needs to tell the full story,  not the half  being selectively used to pursue a short-term commercial goal,  where even the pursuit of such a goal is at odds with its medium and long term commercial objectives.

It is two years since my departure or escorted exit from BDUK. The effort to get the inflated cost issues dealt with internally were interrupted by a leak by parties unknown.  The National Audit Office and the  Public Accounts Committee have done useful work investigating the rural broadband programme.  BDUK now points to significant potential savings, £400 to £500m in my opinion out of the £1.2bn, which will only be realised following significant investment in analysing and proving to  BT Group  its bills and work practices do not qualify for state aid.  This is sub-optimal all round and impossible for Local Authorities who have no benchmarks to compare any incoming invoices against.   Rather than having confidence to invest more,  the Government is being forced to play a BT cost game called,  catch us if you can,  a game familiar to all regulators.  The reliance on BT is such that only an internal BT review of the ethics and the governance of the deal is likely to bring about the change. This is unlikely as it would involve unpicking 12 months (May 2011-May 2012) of changes in their cost modelling,  which go unnoticed in any ERDF audit.  The alternative is a change to BT’s Undertakings to Ofcom,  where in the presence of state aid BT’s existing discretion on cost allocations would be curtailed and its obligations to reveal costs are expressed more definitively. This would allow Ofcom economists or preferably auditors access to the costs to approve the incremental costs permitted under state aid.  The latter needs a 10 minute bill or early day motion supported by rural MPs.  This is a terrible nuisance to those who have to have to put up with the current status quo,  but it is needed if rural Britain is to glean the full benefit of the investment the Government has made available.  A simpler undertaking might be to ban BT Group personnel from any involvement in the rural NGA programme, putting the onus on Openreach to account for their costs in their  regulated accounts. I do agree with BT,  the transformation in connectivity possible is astonishing which is why it should not be denied any part of Britain’s rural economy.  It certainly should not be denied, delayed or slowed down by half-truths, and blagging.  The difference between doing a reasonable job and a great job will be the vigour with which BT will be forced to reveal its true incremental costs thus permitting the state aid available to be stretched as far as possible.  If that is done it will be possible for far more people to be astonished rather than disappointed.  It is not about safeguarding Britain’s economic success but ensuring short term corporate bonus taking does not inhibit growth and innovation in the nation’s most challenging geographies.

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