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The Bit Commons’ reaction to the National Audit Office report on the UK’s rural broadband programme.
12:01am - 05/07/2013

NAO reveals BT’s rural ransom demand to the Government

The Bit Commons welcomes the publication of the National Audit Office report on the UK’s rural broadband programme. 

The Department for Culture, Media and Sport said it would spend £530m to subsidise investment in broadband infrastructure in rural areas of the UK.  Its primary objective is for the UK to have the best superfast broadband network in Europe by 2015.  The programme will constitute upgrading some 30,000 existing  access network paths by overlaying optical fibre and adding a new green cabinet containing VDSL equipment.

The publication of the NAO report will be the first time many operators, equipment suppliers and community activists have the opportunity to comment on the proposed subsidy levels. This initial step of transparency is much needed and very welcome.  This note provides the Bit Commons initial reaction to the findings of the NAO report into the UK’s rural broadband programme.

We are not surprised that Value for Money could not be confirmed. 

The NAO has confirmed that the total public investment pot for rural broadband is £1.2bn,  which is a fantastic achievement given the search for cuts.  The Government, Local authorities and devolved administrations deserve huge credit for raising this amount in the middle of a recession.  Spread across some 4.6 million properties referenced,  this works out at £260 of subsidy per premise passed.

The estimate provided for BT’s investment of £356 million  (Figure 14 on page 37) is at odds with the commitment given by BT at the Select Committee on Communications on June 12 2012 where the following was transcribed. Sean Williams  BT Director of Group Strategy confirmed, ’We are willing to spend a further £1 billion  in addition to the £2.5billion 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.’  We will have to wait for BT’s clarification on this particular point.

It is not clear whether this investment calculation is hardwired in the contract or whether it is a calculation derived from BDUK Framework model of what BT needs to spend to meet its stated targets.  It cannot be reconciled with the numbers in BT’s press releases for the 20 or so contracts announced unless perhaps BT is including its all its operational costs in the calculation.  The latter is confirmed later in the tables.

The NAO identified that there was a cost contingency in the model but BT was unwilling to reveal the amount.  The NAO also found that BT had negotiated a premium for take-up risk,  but the amount was not identified and it stated risk seemed overstated given the performance of existing contracts.

The NAO further concluded that subsidies paid in Northern Ireland were less than those negotiated by BDUK for the FTTC component of the rural broadband in the rest of the UK.  This would remain the case if Belfast was removed from the analysis,  as DETI have made clear rural constituted 66% of their subsidy and 70% of the total cabinets.  BT claimed other capital costs in England were more than twice those in Northern Ireland.  One would expect the opposite.  The BDUK estimate of the Northern Ireland subsidy is not revealed but the press releases suggest a subsidy £14,000 a cabinet and path.

The NAO has analysed 18 contracts and published the average cost for a cabinet and path upgrade and they reveal a split.  This analysis will need another step to ascertain the component costs.

From Figure 11.  Street cabinet enablement costs account for 36% of total costs of path

Capital Costs

NAO Finding

Average

Street cabinet enablement costs

36%

£28,900

Costs associated with connecting a premise to a cabinet

4%

£3,211

Other technical solutions (predominantly enabling fibre direct to premise)

20%

£16,056

Other capital costs (mainly project management and improvements to BT’s backhaul infrastructure/core network

17%

£13,647

Capital Total Costs

77%

£61,814

Operational costs

23%

£18, 464

Total per average path studied

100%

£80,278

 

Average Public Capital Subsidy per path

77%

£47,596

Average BT Capital contribution per path,  

23%

£14,217

Total

 

£61,814

 

The Northern Ireland Subsidy calculated from the initial deployment of 1,100 cabinets points to a subsidy of £14k.  This is based on calculations from DETI press releases.  BT data is not publicly available.

An SLU operator has supplied data to the Bit Commons suggesting their equivalent cost to the £61k is £25k. This operator does not have the efficient supply chain that BT possesses and it has to make  substantial payments to BT to use its access network.  Another operator has priced some 64 very remote locations and he has provided very detailed costings averaging £34k.  The gap between BT’s costings and those of the small operators is so large that I will need other operators to comment and I am sure they will.  This discrepancy needs to be resolved. 

The 20% allocated to other technical solutions will also need to be questioned.  An operator would not deploy two solutions in the same location, and the cabinet and path solution also includes the majority  of what is needed to cater for ‘fibre on demand’ extensions.  Fibre access experts would struggle to itemise the incremental components costs to the number identified above.

It is also worth noting BT’s own very good work with communities.  Although BT mention gap funding they never provide any evidence of the gap.  The equivalent of the £28,900 for a single cabinet is  £11,000 to £13,000.    Invoices and press releases are available from several Parish Councils.  I am not saying that this is an absolute,  but when taken with other data it cannot be ignored or dismissed.

Suggested Next Steps

The  NAO was unable to confirm that value for money has been secured.  The NAO do not appear convinced by the clawback mechanism,  but working on their own without help from Ofcom it is perhaps as much as BDUK could get.  A proposal is outlined below for the Public Accounts Committee to consider.

The six month planning period that BT is taking to schedule the rollout in each local authority area should be used to perform a full cost analysis using the invoices available. The production and publication of a rate card for the 12to15 main cost variables would help to verify that Value for Money was being delivered. This is one layer of analysis below that identified by the NAO today.  There is nothing in the report to suggest this could not be done.  BT has the data.  The Bit Commons hopes that the Public accounts Committee will use the evidence in the NAO report to progress additional cost transparency measures identified above where state aid is now providing the bulk of the funding.  The ultimate sanction would be for Parliament to call on Ofcom to amend BT’s Undertakings where,  in the presence of state aid,  full cost disclosure is required.

It is abundantly clear from the NAO report that if BT can be managed the Government can exceed the 90% NGA target.  This is the outcome that government, local authorities and devolved administrations deserve.  BT at present is dictating the time schedule, imposing the costs its wishes while from this analysis BT is actually reducing its promised investment.  A joint plan by PAC, BDUK, Ofcom to call BT to account is needed.

The Bit Commons’s search for publicly sourced data on the costs of next generation access (NGA) rollouts has been available at http://www.thebitcommons.com as a free resource for Communities, Local Authorities and Central Government to use.  It focuses on identifying direct and incremental costs.  The benchmark is only as reliable as the data that has been collected and volunteered.  Much of the information comes from BT statements and presentations, equipment suppliers and SLU providers. Critique and peer review is always welcome on each cost component.  The data is updated as new verifiable information becomes available.  Inputs have been received from some 15 suppliers and service providers, positive feedback has been received from 200 people and some 12,000 downloads of this material have been recorded.  DCMS have stated the Bit Commons Northern Ireland data is not complete. Indeed, but if combined with other data available on the thebitcommons website,  BDUK could begin to calculate the scale of the contingencies that the NAO had sought to identify. There will be a large body of BT employees rolling out NGA everyday wondering why these costs could be so high.  Some of their material is available online.

My interest in the benefits of a UK FTTP transition plan,  and the pro-competitive measures needed to support such an aim in urban areas,  does mean that I believe policy makers will need to make additional investment incentives available to network operators in the years’ ahead.  Where public funding is involved, this is best done in an atmosphere where value for money is assured and seen to be assured.  The NAO report published this morning is an important step in the right direction. 

A more detailed review will be available next week.

I would like to dedicate this blog to the memory of the late Colin West, from the Northern Fells Broadband Group in Cumbria.  Colin was an avid connectivity enthusiast and broadband campaigner for his community.  He and his friends with his wonderful wife Ailean could have written the NAO report in 2011. I was trying to convince them otherwise. 'This time it would be different'.  I now need PAC to prove me right and Colin wrong!  We still owe Northern Fells the connectivity they need.  If you ever wonder why maps of the Northern Fells features in all discussions on the 4G coverage obligation, you need to look no further. How exactly this came about is not for now. A wonderful man.

Mike Kiely July 5th 2013.  Founder,  The Bit Commons 

 

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Hello Mike.  Good first analysis. Looking forward to more.  Do you Tweet?

Miles Mandelson
Comment by casual : 05/07/2013 18:42
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