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Will the UK’s Rural Broadband programme get an amended state aid measure?
2:47pm - 28/06/2015

Can the renewal of the state aid measure enabling the UK’s Rural Broadband Programme increase the level of transparency of who is paying what?

On the 30th of June 2015 the state aid measure governing the subsidies paid for the UK’s Rural Broadband programme is to be renewed by the EU competition commission.  The measure governs the gap funding payments to BT of some £1.7bn in state aid in exchange one hopes for a capital contribution averaging 30% of the total capital cost. The project involves upgrades to some 6m premises in total across some forty four contracts with English Local Authorities and the three Devolved Administrations.

At stake in this review is the connectivity upgrades to some very 15,000 UK rural communities currently at the fringe of the network rollout, and whose probability of receiving a network upgrade is cloaked in the gamesmanship conducted under the confines of commercial confidentiality agreements.

Progress on the network build is good, 2.5 million premises passed in April and some 12,500 cabinets of the some 30,000 needed were completed by April 2012.  Importantly there is also some FTTP being delivered.  The project is proceeding at the rate of 40,000 premises passed a week or some 200 green street cabinets installed a week.  This engineering work and the engineers doing the work need to be congratulated.

There is an appetite to increase the progress but they are concerns about the secrecy under which the programme is being conducted and whether the state is getting value for money.  These pressures act against each other.  The former tempts more money to the thrown at the problem with reduces the tendency in scrutinising how that money is spent or asking questions as to where is BT’s capital contribution?  Value for Money in terms of a return on investment is not in question, but who is contributing what costs to the project is a concern as it impacts how far the money will go.

The granting of state aid is governed by the principles of providing the minimum gap funding needed, the subsidies are to not act as a substitute for private investment and the arrangement would be transparent. 

The test on transparency cannot be compliant as there is no comprehensive reporting of who is paying what.  The Oxera report on state aid compliance published in May does state there has been a reduction in BT’s planned commercial footprint but does not quantify it.  One billion pounds matched funding was promised by BT and documented during Parliamentary Select Committee hearings,  while the National Audit Office(NAO) in its first report estimated the matched funding would be £353m  or some £60 per premise passed.  Audit Wales found a BT capital contribution as little as £35 per premise passed in its report on the Welsh project.  The principle of gap funding suggest that BT would pay more where there are centres of population and less in the harder to serve areas.  This allows the project to be called a rural broadband scheme as most of the money would be spent in the harder to reach areas, not the housing estates of large county towns.

BT claims it has spent now £3bn on some 50,000 cabinets passing some 19m premises or 380 premises passed per cabinet in its commercial programme.  This would suggest average street cabinet and the fibre connecting it to the network cost £60,000 each,  and BT was willing to invest some £157 per customer passed to put this infrastructure in place.

In theory gap funding works as followings.  BT commercial business model supports 380 premises (19m premises / 50,000 cabinets) passed per cabinet at a total investment of £60,000, provided the public relations and BT’s representations about the project can be relied upon.  In January 2015, the NAO found the total average cost per cabinet and fibre path for the first publicly funded cabinets and fibre paths to be less than £25,000 and each cabinet served 200 premises.  The latter included significant costs in extending networks in Highlands and Islands where the costs per cabinet is over £130,000 for each cabinet.  If BT numbers could be used consistently then under state aid rules the state would pay nothing until the number of premises passed dropped below 159 premises.  BT reported state aid receipts of some £126m in 2013/14 and some £390m in its accounts in 2014/15,  for delivering no more than the first 12,500 cabinets serving some 2.5m premises to April 2015.

Where is BT’s investment?

BT public relations has increased the £2.5bn invested to £3bn,  but also announced the cabinet deployment programme finished 18 months early in April 2014 and while reducing substantially the focus on Fibre to the Premise (FTTP).  FTTP is the more expensive part of the fibre programme.  This suggests the £2.5bn refers to some capital envelope or allocation while the actual sums invested will be substantially less. The access network supporting fibre to 50,000 urban cabinets and fibre paths will be no more than £20k each which is a £1bn and we should allow another £500m for systems development.  It much more likely BT’s investment is £1bn for the access network or £52 for each customer passed.  This is not too far from the number identified by the NAO in its 2013 report.

Applying this number to rural programme would suggest that BT should have made an average contribution of £10,000 to each cabinet passing 200 premises for the project so far.  There is no visible sign in the reporting process or in the sums reported in BTs accounts that BT payments are being made.  Emails from Surrey County Council, a pre-BDUK contract suggest they are receiving a capital contribution from BT, so it is possible.  If other County Councils are seeing these sums being deducted from their bills then it would be unlikely to be a need for Superfast Extension Projects.  Money could be rolled over from the existing contract given the NAO reported in January that BT’s cost models has been inflated substantially at the time of the BDUK Framework.  We would also expect to see a lower number being recorded for state aid receipts  in BT’s accounts in 2014 and in 2015.

Will the EU state aid measure be amended so BT’s capital contribution is secured and available to County Councils to plan and spend improving the rollout?  

We will have to wait and see.  The impact of any change goes beyond the state aid measure and the rural broadband programme.  The change would plain to a great many that this infrastructure is cheaper and simpler than being portrayed.  £3bn being re-written to £1.5bn would show there is no excuse for businesses anywhere to be suffering poor broadband.  I am certain it would mean the Connecting Somerset and Devon project would not have to do battle with BT over the next 5% but perhaps the last 5%.

Failure to tighten the state aid measure would mean many more unhappy County Councils struggling to contain BT’s commercial ambition.  Nobody in the UK will admit to hoping a few unknown EU officials will do what UK officials, and indeed UK regulatory officials have struggled to do which is to enforce the state aid conditions,  and in so doing  secure a fair and transparent BT capital contribution while visibly preventing distortion in other markets.

It is deeply unfashionable to admit error or request help in the form of an amended state aid measure,  so it will take quite a bit of courage and cunning to request assistance in a form that will permits the network upgrades to continue but with the increased  level of transparency. This would remove the blagging,  bluffing and the bullying evident in MPs representations about BT at the Westminster Hall debate on June 24th.  Any change does not remove the resource challenges, but these and the relaxation in timescales have to be also acknowledged if the rural project is to achieve its full potential.

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