A report this morning http://www.ispreview.co.uk/index.php/2015/07/rutlands-uk-fibre-broadband-rollout-finds-1-07m-in-savings-to-reinvest.html
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
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.