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UK Fibre access role out , representations made and relied upon and the emerging truths!
1:01pm - 08/07/2015

Chronology of events 2008-July 2015

Some rural communities may wonder why they are not yet on a list for receiving a fibre based service.  The following is a public record of representations made between 2008 and 2015 and subsequent truths found by a number institutional audit functions.  The progress to date needs to be saluted,  approximately 15,000 street cabinets installed and 3m homes passed,  but more progress is likely if a normal level of transparency was applied in exchange for some £1.7bn of subsidy.  This analysis suggests communities must not give up on their quest to receive an upgrade.  The Government and Local Authorities have committed significant resources and it is only the secrecy under which the contracts are being managed that is preventing a more ambitious roll out to be delivered.

The dates and references are all a matter of public record but the comments are my opinion. This piece is part of that public record,  written in the hope more can be done with the funds already committed.

July 2008[1] BT announced they would invest £1.5bn in Fibre to the cabinet technology (FTTC)  to” pass” some 10 million homes. By “passing” was meant that they were to invest £1.5bn in bring Fibre Optic Cable as far as many of a roadside cabinets (FTTC) – which is claimed would be sufficient investment to meet EU/UK targeted Broadband penetration. It is important to note that BT reduced its commitment to FTTP during the course of the programme,  despite achieving very good results in Cornwall.

BT Investment would be subject to pricing freedoms from Ofcom which meant the pricing of the FTTC service would not be subject to a regulated return.

The investment was presented as new investment and not a natural progression of upgrading the access network funded from an adjustment to the cost recovery regime for the telephone network. This arises from the peculiarity of being overly bound by Ofcom market definitions which largely ignore the nature of the civil engineering work needed to repair or upgrade an access network.

In reality, the figures show that BT’s total capital envelopes did not increase over this period.  Allocating available capital budgets (made up of at least 60% capitalised labour), is as much a decision as to how to allocate the available labour and contracting resource as it is a decision on the purchase of new equipment.  For instance, in this period 2011-2015, missed appointments grew to some 60% for wholesale clients like Sky and Talk Talk as resource was used for installing cabinets.  The figures show that the capital investment for the partial rollout of FTTC was not new, but a re-allocation of existing capital envelopes.   

This investment is still - as of 2015 - being reported and treated for public relations purposes as incremental investment by BT, Ofcom and the British Government.  This is clearly misleading as the investment is not only not new but overstated.

2009[2] UK Broadband Stakeholders Group/Analysis Mason estimated a UK wide fibre to the cabinet FTTC rollout would cost £5.1bn,  while a full rollout of Fibre connectivity right to all consumers premises would cost an estimated £28.8bn.

By 2015 the estimates have been reduced to less than £3bn for FTTC and some £13bn for FTTP,  where the UK Government is subsidising  £1.7bn of the £3bn and BT has announced there is "no need for FTTP",  given other as yet unproven copper based solutions such as G.FAST and FTTrn.  It can be argued that this self serving and is driven by the comfort of the existing cost recovery regime on copper,  while charging significant margins on private circuits using dedicated fibre. 

The major lesson from the BDUK and LA activity so far  is that  fibre network  upgrades are a very cheap form of infrastructure compared to any other utility infrastructure like water, gas, or electricity.

March 2010[3] BT announce a further £1bn commercial investment to extend UK rollout  to 2/3 or 19m premises "passed" by end of 2015.

At this time,  BT still had plans to deploy FTTP as part of its solution,  and the £2.5bn now allocated was to include a proportion of FTTP.

June  2012[4] – BT promise House of Lords, Communications Select Committee that BT will commit additional capital of £1bn to match Government investment in the final third of premoses.

The offer was unambiguous and very public.  BT had 14 days to change the public record and did not do so. 

July 2012 – UK Government agree BDUK procurement Framework where  BT and Fujitsu will bid for £1.2bn of subsidy for upgrades in service to the final 1/3 or 6m premises in 44 local authority contracts.

July 2012 –Fujitsu announce their withdrawal from Cumbria and North Yorkshire contracts and indicate the difficulties they are having in making the case.[5]

September 2012,  - It is suspected that a Local Authority official leaked a BDUK discussion document showing how BT inflated it subsidy requests from some £12,000 in bringing fibre to a cabinet in Northern Ireland in 2010 to allowable cost budgets of more than £40,000 to bring a the same fibre and install the same cabinet in the BDUK Framework!  The contractor who authored the BDUK discussion document had his contract terminated.[6]

This contractor sacking leads to the investigations by the Public Accounts Committee and the National Audit office. The leaked discussion documents show BT inflating costs in all bids up until the Framework pricing was agreed.

November 2012[7] – EU issue state aid approval in SA 33671.

March 2013 – Fujitsu announce publicly they do not intend responding to BDUK Framework bids having not bid for any Framework contract since the state aid measure was approved.  They did bid for work in Cumbria and North Yorkshire before the Framework was finalised.  By the time of Framework was completed, Fujitsu had decided it would make no further bids.  The prices BT offered on the Framework could not be subject to any competitive pressure as claimed by BT as Fujitsu were planning to build a network from scratch rather than overlaying fibre on an existing network.[8] 

December 2012,  Olivia Garfield,  the then CEO of BT Openreach,  the division in charge of BT’s access network, publicly stated each cabinet cost £100,000 and millions per exchange![9]

While BT has attempted to distance itself from this comment, the contract for Wales,  which Ms Garfield was directly involved has a total subsidy pot in excess of £205m for no more than an expected 3,000 cabinets.  It was a clear attempt to talk up costs by an a key executive whose job would have included reviewing the costs of the commercial programme,  where comparative costs of less than £20,000 per cabinet and fibre path would have been readily apparent.

April 2013,[10]  The BT application for unmetered power for BDUK funded cabinets confirmed some key numbers associated with BT’s commercial programme. It confirms key quantities. It references 30,000 commercial funded cabinets installed at that date and the commercial programme was to be completed in April/May 2014 with a total of 50,000 cabinets.  Resource would then switch to the rural programme.  It is important to note that BT’s commercial programme was funding solutions serving 200 premises and thus shows BT willing to invest up to £100 per premises "passed".

It was reported separately that the final year,  April 2014 to April 2015, the programme constituted increasing coverage from 15m premises to 19m premises "passed", provided premises are within the 1,000 metres of the installed street cabinet.  This suggests the 4m premises passed were served by 20,000 cabinets or 200 premises per cabinet on average in the final year of the commercial rollout. This suggests if the gap funding principal of state aid measure was being applied in the current BDUK programme,  very little subsidy would be needed for major towns and associated housing estates,  leaving more of the subsidy for very rural areas.

July 2013[11] – The first National Audit Office report done in support of the first Public Account Committee hearing on the Rural Broadband contracts raises significant concerns with respect to value for money,  transparency and lack of competition.

At those hearings BT confirmed the £2.5bn commercial investment,  the offer of £1bn and re-assured the committee BT had not inflated its costs, and had allowed no more than a 5-8% as a contingency.[12]

Broadband Delivery UK (BDUK), the Government department charged with the procurement process  claimed in the first National Audit Office report  that they received value for money based on the information provided to them by BT,  while ignoring other industry data and ignoring the much lower public subsidies paid for the same solutions in Northern Ireland in 2010 and 2011.  

September 2013 Iain Livingstone, the then BT CEO announced to its analysts, that BT’s commercial project to achieve 2/3 coverage (19m premises) would finish 18 months ahead of schedule and comfortably under budget.  £2.5bn is not revised,  and BT continue to portray the costs as higher than actually incurred.[13]  This continues today where the £2.5bn has been increased to £3bn, but with no additional roll out claimed.

March 2014 – The second Public Account Committee hearing, continued to be critical of the lack of transparency,  the misuse of confidentiality agreements , the lack of scrutiny on BT’s costs and the reinforcement of BT’s monopoly.[14]

April 2014.  BT published accounts record £126m in state aid receipts.  This is subsidy received by BT from BDUK and Local Authorities for the rural broadband programme.[15]

This was a very large sum of money when most of the work consisted of planning by BT resource.  Using the rural broadband project to generate free cash flow is a feature of the current implementation of the scheme.

November 2014.   BDUK announce progress of 1.5m homes "passed", provided these homes are within 1,000 metres of the street cabinet.  The weekly progress is claimed to be 40,000 premises a week "passed" or approximately 200 completed street cabinets are activated. To date most of these are located in towns and housing estates around the centres of population and are in receipt of 100% subsidy!  There is a real concern that BT in claiming a 100% of costs and with BDUK permitting them to do so under the state aid measure, this will result in BT consuming subsidy meant for more rural areas,  while then seeking to put forward ever higher costs as areas become more difficult to serve.[16]

Autumn 2014,[17]  The first Superfast Extension Projects (SEP) extending the rural projects were announced.  This permits BDUK and local authorities to extend the scheme by creating a new contract with a newly defined intervention area not covered in the initial contract.  These contracts go against the wishes of the Public Accounts Committee as they allow more money to be spent with BT with no new transparency measures. First indications are that OMR (Open market Reviews) were being used by BT to announce reductions in their planned commercial footprint.  There is a new state aid category being used called ‘Conditional White’ in the UK to cater for what was previously notified as a commercial areas.  It is not uncommon to find greater than 15,000 properties being categorised as ‘Conditional White’ for state aid purposes in each local authority area.

This practice breaks another fundamental principle of state aid which is that aid is not to act as a substitute for private investment.  These ‘Conditional White’ areas previously marked as commercial areas are now being added to the UK scheme at the expense of more rural areas.

January 2015.  The second National Audit Office report completed for the third Public Account Committee hearing confirms that BT had inflated project cost models by some 38% in the BDUK Framework. It also stated that BDUK were now not certain they had BT’s most economic price.[18]

The 38% inflated costs finding is consistent with the findings in the leaked discussion documents, and contrast with the evidence used by BDUK in the first National Audit Office report.

The NAO report confirmed a total average cost per cabinet and fibre path of less than £25,000. This was also confirmed later in the Oxera report on state aid.

Rather than acknowledging the excess costs in the models and re-planning the coverage target it is likely the excess modelled costs will be portrayed as efficiency savings for public relations purposes.

March 2015.  Ofcom publish their conclusions to a consultation on Financial Regulatory Reporting for BT.  In it they turn down the opportunity to create a public record of the investments in fibre access and instead opt for secret reports on how BT will allocate an expected £1.7bn in state aid in its accounts.  The consultation was begun in late 2012.[19]

BT’s actual investment and how subsidies are allocated in its accounts are to remain secret.

This was one of many attempts to use Ofcoms consultation process to achieve more transparency.  To date these efforts have been unsuccessful.

April 2015[20] BT published accounts make reference to some £390m in state aid receipts in 2014/15.  The notes to the accounts make no reference to a possible future capital contribution needing to be paid for these assets.  This amount is well in excess of 100% of costs for the project conducted to that date.  No more than 12,500 had been installed to pass 2.5million premises.  The total costs would not have exceeded £300m for all work done for BDUK in that period and this is before the capital contribution from BT.

May 2015 – Oxera reporting on BDUK’s compliance with the state aid measure fails to report on the total subsidies available to BT and only reports against the central Government funding of £750m not the total of £1.7bn. This is very disappointing as it means the bid cost data in the report cannot be used as it is understated. The report states that BT cannot claim more than 100% of cost  while there is a clause that suggests BT may make no capital contribution for 36 months.  The report confirms some overbuild of Virgin media and confirms the possible reduction in BT’s planned commercial rollout but fails to quantify either.

The truth is emerging very slowly, through the various public hearings and reports and great care is needed in checking what is meant to be an independent report but are written so the project continues rather while the poor practices are explained away and forgiven.[21]  Silence is indeed consent.

May 2015.  Audit Wales reported that BT is charging a cost per premise "passed", with the usual distance limitations,  not actual costs, to be reconciled later with the actual cost. This allows BT at least temporarily to claim more than 100% actual cost and will permit any future capital liability to be disputed.[22]

June 2015.  The current CEO of BT, Gavin Patterson claimed BT has invested £3bn in 50,000 cabinets and fibre paths to serve 19m homes.[23]  This suggests each cabinet and fibre path costs  £60,000 each,  while the National Audit office report total average cost at less than £25,000 each for the BDUK work conducted so far. See footnote 11.

The £3bn number was used by the UK Minister Ed Vaizey at the House of Commons debate on rural broadband on June 24th.

The arguments above illustrate at the very least the BT capital contribution to the final third of £353m should be verified and must be secured by amending the state aid measure.  If this is not secure and this is likely to be the case, then the prices,  the coverage targets and the reconciliation process in the UK Framework for Broadband assume no direct contribution from BT at the time the work is taking place.

The table below sums up in purely monetary terms the extent of the potential fraud intended for the rural economy but are unlikely to reach it.

Nothing can compensate the lost business opportunities, frustration of rural communities and loss of hope.  The denial of potential is the most galling and this network upgrade is cheaper than BT can confess too.  We should not deny any EU rural economy the opportunity of providing itself with an infrastructure - particularly as in this case the funds are already in place.

Table 1 Summary of BT NGA and Government Investment for FTTC element

(illustrating the gap in representations made versus actuals)

 

Claimed capital

Investment

Homes Passed

Street Cabinets installed (est.)

Implied Cabinet and fibre path cost

Est. Capital

Investment est. and fair subsidies for FTTC element.

Actual average unit cost per cabinet

BT Commercial

£3bn

19m

50,000

£60,000

£1.5bn

£20k

Central & Local Government subsidy

 

BT matched funding

£1.7bn

 

 

 

£1bn

6m

35,000

c£60,000

<£600m

 

 

 

£350m

£25k

At risk

BT matched funding

Public Funding

 

 

 

 

 

 

£350m

£350m

 

All this table demonstrates is the gap between what BT wishes us to believe a cabinet and fibre path costs and the actual costs now being reported upon by the NAO.  The costs are consistently between one third and one fifth of those in statements supporting BT’s public policy and commercial goals.  The analysis can be extended from FTTC to FTTP but the resourcing issues for FTTP need to be considered.

Consequences

By consistently overstating costs and overstating investment BT is denying the UK economy the full benefits of a resource (fibre access) which has greater capacity and a lower long term incremental cost.  It is doing this to optimise short term cash flow from the poor administration of the state aid measure,  paticularly the enforcement of the gap funding measure, which if enforced would allow the programme to retain its original focus on rural areas.

BT can also add years to the lifespan of their private circuit products as solutions for overcoming the shortcomings of copper access where a business is more than 1,000 metres from a cabinet or is not in an area where FTTC is available.  This is a UK wide issue and impacts the City of London as it does rural areas.

The extent to which any of these matters are with dealt with in either the new state aid measure (EU),  the Digital Communications Market Review (Ofcom) or the newly formed All Party Parliamentary Committee on Rural Broadband remains to be seen.


[1] http://www.thinkbroadband.com/news/3617-bt-announces-1-5bn-fibre-broadband-rollout.html

[2] http://www.broadbanduk.org/2008/09/05/bsg-publishes-costs-of-deploying-fibre-based-superfast-broadband/

[3] http://www.broadbandanalyst.co.uk/bt-broadband/bt-extend-fibre-broadband-coverage/

[4] June 12th, House of Lords records;  ‘We are willing to spend a further £1 billion  (in addition to the £2.5bn) or so of BT’s capital to match Government funding to do that, to roll it out into the final third, and to get as far as we possibly can into the final third….’ Sean Williams, BT Group Strategy Director.  This was in the month the BDUK Framework was signed.

[5] http://blog.broadbandpolicy.co.uk/2012/07/fujitsu-further-developments.html

[6][6] http://www.theguardian.com/technology/2012/oct/03/whistleblower-sacked-bt-broadband

[7] https://www.gov.uk/government/news/broadband-roll-out-moves-into-top-gear--2

[8] http://www.ispreview.co.uk/index.php/2013/03/fujitsu-withdraws-from-all-remaining-broadband-delivery-uk-procurements.html

[9] From Strike UP Broadband BBC Radio4 December 13th and 16th  ‘Like hand crafted carpentry,  that’s what fibre is like. It’s (you know) billions of pounds, it is not a few thousands!

If you want to just fibre an exchange it is a few million pounds.  Each individual street cabinet that is fibred is £100,000.’ 

The significance of this is that the CEO would have been reviewing costs showing less than £20k per cabinet and fibre path for well over two years.

[10] www.elexon.co.uk/.../2012/11/SVG147_06C_Charge_Code_Applicatio… · PDF file

Purpose Application to obtain UMSUG approved charge codes for Openreach Superfast Broadband communication cabinets.

[11] http://www.nao.org.uk/report/superfast-rural-broadband-programme-update/

[13] From recordings on www.btplc.com q3 results recordings of conference call.  The amount of commercial investment relied upon by BT in it’s representations is £2.5bn.  This is controversial as the then CEO of BT in his 2013 third quarter results conference call provided the following information in answer to a question posed on this matter.

“So the answer is, yes, we found savings elsewhere but, yes, we’ve found savings in the programme. We're comfortably within the £2.5bn that some people thought that we would overspend by billions. We're comfortably within it and we will continue to look for greater savings in that.”

[14] http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/834/83402.htm The proceedings and the report are available at this site.

[15] See BT final accounts 2014/15 available on www.btplc.com

[16] http://www.broadbandbuyer.com/news/2628-bduk-fibre-broadband-network-passes-1-5m-premises-milestone/

[17] http://www.ispreview.co.uk/index.php/2014/10/suffolk-sign-uks-first-superfast-broadband-extension-contract-bt.html

[18] See footnote 10 and see updated report.

[20] Financial Statements available from www.btplc.com,  Q4 transcript includes confirmation in Q&A session where answer to question from Citicorp confirms BT do not expect to make capital contribution. Notes to the accounts confirm more than £390m in state state aid receipts.

[22] www.audit.wales/system/files/publications/Broadband_2015_English.pdf · PDF file 

[23] http://www.theaustralian.com.au/business/technology/nbn-co-unites-with-british-telecom-on-secrets-of-speed/story-e6frgakx-1227368826268

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