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NAO findings on rural Broadband Blog number 3 – The Subsidy for a Cabinet/Path. Submitted for peer review.
6:22am - 10/07/2013

NAO findings on rural Broadband Blog number 3 – The Subsidy for a Cabinet/Path.   Submitted for peer review.

This is post number three of four about the National Audit Office report on rural broadband published on July 5th 2013.  We will attempt to reconcile the FTTC (Fibre to the Cabinet) subsidies in Northern Ireland with those in the rest of the UK under the BDUK programme.

The NAO report on rural broadband notes that, by its own admission, BDUK costs an enabled cabinet 12% more in the UK than in Northern Ireland without any explanation as to why this is the case.  The question ought to be why 12% more, but instead the question posed is, is it only 12% more?  And more importantly what is the difference in the subsidy paid on the cabinet and associated upgrades to establish a fibre path to connect the VDSL cabinet?.

My findings are such that I need to submit this for peer review in the hope I am wrong but fearing I am correct.

The NAO does not publish all the actual figures so we have to work from what the information that is available in the report and in the public domain.  One thing which we can now dismiss are the  statements from the CEO of Openreach, who is recorded on ‘ Strike Up the Broadband’,  BBC Radio 4 on Dec 13th and 16th 2012 stating that each cabinet costs £100,000 and the upgrade will cost millions in each exchange.  The NAO analysis confirms that the costs are significantly lower than this, but as yet they cannot be sure these lower costs reveal the true picture.

Table 1 shows the capital costs associated with upgrading a single cabinet to FTTC.  The NAO has detailed the total proportional spend to enable a single path identified by the NAO in Figure 11 on page 33 of their report.  In the next column, those proportions are applied to the average cost of cabinet/path identified in paragraph 3.14 on the same page.

Figure 13 of the NAO report states that the average cost per cabinet enabled in Northern Ireland is 12% below the average BT bid in England, but is within the range of values seen in England. This findings are represented in the last column.  The NAO did not go on to calculate the difference in the subsidy levels or the difference in the total cost of the path.  I have now those for review.

Table 1

Capital Costs

NAO Finding

Average identified by NAO

 

NAO identified Total Cost of Cab in Northern Ireland

Street cabinet enablement costs

36%

£28,900

 

£25,432

Costs associated with connecting a premise to a cabinet

4%

£3,211

 

This has not been identified separately

Other technical solutions (predominantly enabling fibre direct to premise)

20%

£16,056

 

BET has been deployed but not identified separately.

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

17%

£13,647

 

NAO identify BT NI costs are 60% less for this item – see 3.16 bullet point 3 on page 36 of NAO report.

Capital Total Costs

77%

£61,814

 

£37,787*

Operational costs

23%

£18, 464

 

 

Total per average path studied

100%

£80,278

 

 

 

* £37,787  (£47.8m/ 1265 cabinets) is valid provided BT Northern Ireland have not counted opex in its matched investment number. If BT NI have included opex then a bigger gap needs to be explained.

Table 2 – Derived subsidy estimates based on data in public domain

 

NAO confirmed

For 18 BDUK Contracts

Cost Per Cabinet/Path

Derived from the NAO average over 18 BDUK contracts.

Proportion

Public subsidy

Private investment

 

DETI & BT press releases average for first 1,265 cabinets/path

Average Public Capital Subsidy per path

77%

£47,596

37%

£14,229

 

Average BT Capital contribution per path,  including core, handover points

23%

£14,217

63%

£23,557

 

Total

 

£61,814

 

        £37,787

 

 

DETI confirm in a separate note that 66% of their investment and 70% of cabinets are rural (not greater Belfast so the NI subsidy number is slightly overstated .  The DETI has invested £18m (of which £2m on promotion and marketing), and BT has contributed around £29.8m.Hence the total funding in Northern Ireland is £47.8m.   The £47.8m has been re-stated as £51m in some presentations  but this does not change greatly the analysis.  Additional cabinets have also been added under a new contract for the final 10% activity, but these do not change the fundamental findings.

Note: Fibre On Demand will be available in Northern Ireland without the 20% extra investment per path,  although it is clear BT did invest in BET technology and this is included in the above subsidy calculation as well.

Should these costs look the same?  Yes they should if state aid is applied in a consistent way and if costs are gathered and allocated in a consistent way.

How did we get from a cabinet enablement differential of 12% to a subsidy differential of more than 300% per path?

By focusing on attempting to reconcile on one number – the cabinet enablement cost –   and not working through the implications of 1) the total path cost and 2) the drop in BT investment (capex and opex) you will avoid revealing or miss the increase in subsidy.

But for now, the principal point for critical peer review is that the subsidy for what is the same solution, the BDUK Framework subsidy, is now on average per path/cabinet three times higher than the Northern Ireland subsidy.

This supports the notion that BDUK Framework costings need revising during the six-month planning phase. The revealed BT costs need to be sufficient to score twenty out of twenty in BDUK cost assessment rather than the eight out of twenty score revealed on page 29 clause 3.6 in the NAO report. This unexplained gap in subsidy levels is unsafe.  It is also unsafe for BT shareholders who may suffer a state aid challenge later in the implementation phase if this is allowed to go unexplained.

This will be expanded upon in posting 4 where the £61,814 (UK) and the £37,787 (Northern Ireland)  is analysed and compared with Sub Loop unbundler provider costs and the Bit Commons estimates. The latter were considered optimistic in the NAO report by BDUK, but without publishing the analysis to support such a claim. I will restate the evidence identified so far in the hope any errors in that evidence can be pinpointed with supporting evidence being then available in the public domain.

Clearly this does not apply in places like Highlands and Islands but they do apply in everywhere else.

10/7/2013.

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