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
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
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.