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UK Rural Broadband programme, the importance of Rutland!
3:50pm - 13/07/2015

A report this morning shows BDUK reporting ‘savings’ of £1.07m in  a state aid project of £2.3m.

The importance of this report to the other 43 UK rural Broadband projects should not be under estimated as it may provide an opportunity to challenge some of the orthodoxy BT is trying to impose to preserve its legacy assets.  It may provide some impetus to locate BT’s capital contribution a requirement of the state aid measure.

To August 2014, BT had installed an estimated 48 street cabinets and fibre paths in the Rutland area.  In January the CEO of Rutland CC was complaining of BT withdrawing planned commercial investment, and now this report shows that 48 cabinets have been delivered with £1.07m less subsidy than the £2.3m allocated. This suggests £1.23m subsidy was given to BT for 48 cabinets, or £25,625 each.  This is a bit more than the total average cost reported by the NAO in January, so this ‘saving’ is not saving but monies left over with BT having submitting all the costs it can generate.  The reported number is unlikely to include a capital contribution from BT and this is over three years after the contract was signed.  So we have yet to see what I believe should be about £500k direct capital contribution from BT.

Across all projects,  I estimate that there will be at least £400-£500m of these ‘savings or excess budget costs’ available to reinvest and to this we need to add whatever BT capital contribution can be extracted from BT.  If the state aid measure is applied according to the gap funding principles this should add a further £353m to this investment pot.  Why is this occurring?

The total Government expenditure of the £1.7bn and the BT capital match of £353m provides a programme of £2bn.  Spread over 18 quarters or 4.5 years we would to see work and effort matching £110m worth of expenditure a quarter.  In BT’s accounts we can see £90+ million of state aid being billed a quarter, while the work delivered for 200 cabinets a week (40,000 premises passed) is no more than £65 million a quarter.  The latter is based on the costs analysed by the National Audit Office in January 2015.  BT’s decision to resource to deliver the minimum level of cabinets,  while billing all it can under the 44 discrete confidentiality agreements,  to meet its contracted service levels will result in much less intense activity that the funding available permits.  Rather than intensifying the roll out so the full benefits of fibre access can be enjoyed, time will be spent in disputing BT’s capital contribution and engineering some procurements from the investment fund if that is what Local Authorities want.

This has two immediate impacts, significant funding may end up in this illusive investment fund, the workings of which are not yet clear.  The second is that while premises passed by a cabinet will be high, there will significant areas left without service because the projects were resourced on the possible assumption that BT could bill in line with the costs it supplied BDUK in the summer of 2012 thus absorbing all the funding for the service levels agreed. Billing using proxy costs like those evident in the Wales project is an example of not paying actual costs.  The Public Accounts Committee working in tandem with the National Audit have put paid to some of these potential excesses and so these ‘savings’ which are nothing more than evidence of inflated costs are emerging in the process.

The Rutland article is showing an example of how the state aid receipts of £90 million a quarter for all 44 BDUK contracts appearing in BT’s accounts needs to be reconciled with what will be no more than £65 million worth of effort based on the January NAO report,  for example the effort and cost of 200 street a week times £25,000 each.   But where is the BT capital promised which is an integral part of the state aid measure?  It and the effort it could pay for is still looks to be missing.

 In simple terms, the contracts should be reporting about £8.5m a week worth of effort.  We are seeing billing for £7m a week in BT accounts and effort on the ground is about £5m a week.  The £5m a week (200x £25k) is good to see  but it is currently less than is being paid for and less than expected if the BT capital contribution was to be included.  This analysis is crude and the numbers are only meant to be representative to show the scale of the gap.

What practically can be done? 

The most important element is to ensure the funding available remains available and visible and not lost.  This is a real risk.  BT has received big premiums for the Universal Service Commitment, where very little service has been delivered. In the early projects, like Wales, BT imposed proxy per premise passed costs as opposed to actuals.  This is likely to mean Wales are in effect paying £40,000 a cabinet and fibre path, as opposed the working total actual average of circa £25,000 identified by the NAO and used in 35 of the 44 projects. The same number emerging in the Rutland project as BT’s network is homogenous and is either equally well or equally badly maintained as other parts of the country. The BT capital contribution in theory gets released through a clawback mechanism and reconciliation process,  but this has not been reported in Rutland.  Thus, the new revised state aid measure is needed to ensure counties get direct access to BT’s promised capital contribution.  It should really be in the form of some £50 per premise passed and received in the form of a reduction in the invoices submitted to each county. 

If the BT capital contribution,  and the excess modelled costs identified in every BDUK Framework by the National Audit Office in January 2015 was reported upon, then it is clear that far more communities could be added to the roll out plan. This should happen now.  This leaves the issue of dates and resources to complete the work.  BT has engineered its resources to deliver some 200 new street cabinets a week.  Is it willing to do more?  Can it do more?  In Cornwall it has managed to do 85,000 FTTP premises from a population of 253,000 premises.  It had a total £53m subsidy so its suggests that while 20% FTTP would be too big a target,  many of the BDUK projects could support a 10% FTTP rollout and this could increase further if BT’s capital contribution was available.

 The BDUK Framework contracts and the supporting state measure support the delivery of affordable broadband.  This includes the possibility of communities being allowed access to the subsidised infrastructure so they can extend duct themselves or organise contractors to do it.  Furthermore BT is required to support fibre on demand, not just at business pirces but at wholesale rates compatible with the state aid measure.  The current offer of Fibre on Demand for a business service is in breach of the state aid condition on the affordability bases if the state aid measure was fully enforced.

This is tough work as the further you go, the more expensive its gets and the more reluctant your supplier is to keep resources in place.  Politicians will also lose interest as most of their constituents will have got most of what they need.  This sort of effort will require BDUK and Ofcom to force what are very detailed and prescriptive issues.  Either this happens soon or the clawback funds will be accruing and eventually returned to Local Authorities and HM Treasury.

BT does not appear constrained in any way by the current theoretical workings or principles of the state aid measure so counties are either making do or beginning to find ways to contract with someone else for the most remote areas or acquire some FTTP from Gigaclear.  Is this a suitable way of deciding what is critical piece of UK infrastructure?  BT, the regulated incumbent operator with a universal service obligation in fixed line telephony, who owns and controls the only complete UK network,  can pretty much do and behave as it pleases and is doing so.  There seems no counter balance to BT’s market power.  Government and Ofcom seem content to parrot BT’s press releases without questioning the numbers given them to repeat.  The £3bn commercial funding (implies a cost of £60k a cabinet rather than £20- £25k), £1bn matched funding (implies subsidies of £166 per premise passed for rural,  but Audit Wales reports £35 per premise passed), no inflation of the Framework prices ( yet NAO find 38% inflation of its cost models), etcetera!  Neither is there any discussion on how the existing Ofcom market definitions could be amended so fibre access which has a lower long run incremental cost could be incorporated into BT’s annual network maintenance and upgrade plan.  Counties are being left to do the best they can with the overstated Framework prices governing the coverage planned for phase 1 delivery, while BT’s resource plan remain unchallenged.  In the meantime we will see ‘efficiency savings’ being claimed rather than being called evidence of the over inflated costs identified and reported in 2012.  By being overstated, the money like BT capital was not available to plan a greater roll out.  This is a significant denial of opportunity for the UK rural economy.

An amended state aid measure which focuses on enforcing gap funding would make BT’s promised capital available to County Councils.  It could also force more transparency and would result in more communities being added to the roll out lists.  BT may not be able to provide delivery dates but they could confirm the work would get done sometime.

If excluded Communities cannot be added to the lists of areas to be upgraded, the investment funds monies and BT capital contribution could be used to fund communities to contract with alternative network providers which is very peculiar given the original objectives of the BDUK Framework was to hold BT to account.  This matter, like BT’s capital contribution is still not at all clear.

Finally, these events beg the question as to the role of commercial confidentiality agreements in this case. The NAO has helped us understand the total average costs, and these are much lower than publicly portrayed by BT.  Given we now understand as much of the costs as we need too, is it legitimate for BT to use commercial confidentiality agreements to hide the material nature of its capital contribution, when the principles of state aid make clear BT is entitled to no more than the minimum amount of gap funding? Furthermore, such arrangements are to be transparent to be compliant with the principles of state aid!  We should at least acknowledge there is a conflict between BT commercial interests versus a legal requirement to meet and to be seen to meet the state aid requirement.  The answer to the latter seems obvious, but it has yet to be championed by any public institution and there is nothing in the Rutland article to suggest this is about to change.

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