BT’s offer of £1bn investment in rural connectivity is much diminished.
This is blog is number two of four on the details of the much welcomed National Audit Office report on the £1.2bn rural broadband programme. These are meant to assist those wishing to increase their understanding of the costs of the NGA rollout programme, so the public monies can be used to achieve the best outcome for all rural users. This includes BT shareholders who may fear some of these subsidies once understood could be challenged by the EU Competition Commission as illegal with big fines. The author assumes by virtue of its enduring monopoly in the local access network BT will receive the £1.2bn available in state aid. This increases the need for full transparency and scrutiny of BT’s costs.
On June 12th, 2012 Sean Williams BT Director of Group Strategy stated in public evidence to the House of Lords Committee on Communications. ‘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.’
BT with many weeks to prepare and fourteen days to make any amendments to the witness statement make clear this is additional capital expenditure. It does not include operational expenditure. It is matched funding.
The impact of any such statement on other companies contemplating investment in the UK could not be clearer. £1bn capital investment is the entry fee.
The NAO report on the rural broadband programme made available on July 5th, could not find this offer of £1bn of capital expenditure. Instead it revealed on Page 37, Figure 14, that BT’s capital investment is likely to be £356m. Clause 3.17 (page 36) states that while the capital costs of the programme have remained the same, ‘the Departments estimate of the supplier funding they would be able to attract has proved too optimistic’. Their original estimate was not the £1bn on offer from BT, but their own, some £563m. This has now been reduced to £356m. Is this shocking? I think it is!
BT PR has responded to the effect that the £1bn includes operational costs, which was not part of what was offered and made clear to the House of Lords. NAO identifies that operational costs amount to a further 23% of costs BT is allocating to the project. Apart from the press release supporting the Kent NGA project, the inclusion of operational costs in the count of matched funding is not immediately evident in the press releases supporting each Local Authority project.
The notion that DCMS has a model which reduces the required BT investment to £356m of capital; where £1bn was offered begs a question or two. You might think that this would be BT’s model, while a DCMS model would show an increasing contribution. However it worth looking at the £356m capital to see what might be included?
To do so you need to examine evidence in BT’s accounts and statements supporting the much trumpeted £2.5bn private investment by Spring 2014 covering the first two thirds. The BT’s accounts for 2011 mention £600m of the £2.6bn had been spent. The notes supporting BT’s Q2 results in 2012 states the project is 18 months ahead and the project is comfortably under budget. Q4 presentations point to £300-£400m being spent on NGA through to Spring 2014. This points to a spend of £1.5bn to £1.8bn which is fantastic and to be appreciated but it is not £2.5bn. However we need to go further as at least 50% of all capital in Openreach is capitalised labour. The latter is acceptable in terms of accounting practices, but 50% of £356m identified by NAO is now only £178m from which the following items can be deducted.
There is an unknown contingency to cover cost overruns.
There is an unknown amount to cover a 20% take-up risk which the NAO identifies as a low or non-existent risk.
The 20% of contract value on other technical solutions must be questioned as you either have one solution or another. Preparation for FTTP exists as soon as FTTC is put in place. A little bit more may be spent but not 20%.
NAO clause 3.16 bullet point on Other Capital (project management and backhaul) costs (17 per cent of the total) shows other these costs to be twice that found in Northern Ireland and then there is the 23% operational costs where no benchmarking has occurred.
My next blog will look at the unit costs of cabinet and path in more depth so we attempt to reconcile Northern Ireland subsidy with the average subsidy calculation by the NAO, but the information here is sufficient to seek definitive answers to the following questions.
1.) When did the BT offer of £1bn capital investment change to include its operational costs?
2.) If the final bill is £1.5bn capital as modelled by BDUK, why not half each as per BT’s offer?
3.) How much of the remaining £356m investment is actual cash as opposed the capitalisation of labour and allocated common costs?
4.) Do the open access conditions change if private sector investment reduces substantially? Does the right to confidentiality of costs reduce if the private capital investment component is reduced to 23% or less?
5.) Will the missing information be provided to the Public accounts committee by July 17th, so the cost stack and thus the private investment is better understood.
The only clarity we have at present is the £1.2bn public investment.