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UK Connectivity. Are we creating or losing the opportunity for a national competitive advantage?
2:29pm - 03/06/2014

It has been an interesting couple of years in the UK Broadband industry.  BT has completed its commercial rollout of fibre to the cabinet some twenty plus months ahead of schedule and at cost ‘comfortably’ less than the £2.5bn originally planned.  If BT presentations to analysts are to be believed then the capital cost (equipment and labour) totalled no more than £1.3bn to serve some 19m premises from some 55,000 cabinets.  This logistical achievement is to be applauded.  It provides a significant increase in broadband speeds for many while leaving legacy PSTN and private circuit revenues intact.

The 4G roll out is happening and Parliament saw fit to request a coverage obligation of 98% by 2017 and 95% by nation.  This provides for a sufficiently strong signal strength to support an indoor mobile broadband service of 2Mbps.

Public authority decision making to invest a total of £1.2bn and a further £450m all of which is likely to be spent through BT should be a cause for celebration in so far as it should not only pay for the remaining 30,000 cabinets and some pole mounted manifolds to be installed in some very unlikely places but permit a significant amount of FTTP to be deployed. This investment which is mostly in civil engineering and will build upon the £1bn spent in the last decade putting in place the optical fibres to BT exchanges so every school could get the connectivity they needed. 

The stage was set for something quite special to occur if the state aid available were to be spent as gap funding alongside BT’s own commitment to match the Government funding.  An National Audit Office report and two Public Account Committee hearings and reports later suggest what should be an easy win for the country is being put at risk by BT’s need to create a war chest to invest in the rights to broadcast live sport.  The public subsidies per fibre path and cabinet including all project costs and premiums for a take-up risk and the universal service commitment are now being reported at £47,000 each on average for each of the 25k to 30k rural fibre paths.  This is well in excess of three times that observed for the same subsidised components in an earlier Northern Ireland programme.  At that level of public expenditure,  however it is justified, you would not install a cabinet solution in a great many cases but push on to deliver fibre to the final distribution pole and create a more radical opportunity for transformation in both cost and services delivered.

BT will certainly deliver new fibres to new green cabinets,  25,000 to 30,000 of them in some unlikely places and indeed some unexpected places. The latter plus the subsidy level is a concern.  The planned effort on its own will bring great economic benefit and the UK will compare well with any comparison Ofcom does with the mature economies of France and Germany,  but some of the unexpected places and the subsidy levels need to be challenged.  Some of the unexpected locations include entrances to business parks where duct is available to carry fibre all the way to the business premises. In this case the subsidised cabinet becomes a barrier to further progress as BT will seek to recover its costs and inflate the costs of its fibre on demand product,  something it has already done having increasing the wholesale rate from £38pm to £100pm.  This is poor by any standards, but remains unchallenged. The issue is complicated further by the presence of Virginmedia and Voda/C&W in some of these business parks who have not notified local authorities of their assets and will now be overbuilt with monies that should be spent going deeper into rural areas.  Furthermore,  there will be plenty of locations where the ease of claiming a subsidy for installing a cabinet will outweigh good engineering practice of pushing fibre further out on to poles from where entire clusters of premises could be switched to fibre access.  Being best requires a transparency of operations where decisions and costs can be challenged.  BT has chosen to hide much of what it is doing behind confidentiality agreements with very few even in BT having a clear understanding of what is being billed,  let alone what BT might be contributing in the form of capital which remains self-certified. BT will indeed send its invoices to be paid but in the worst tradition of the £100 to change a light bulb public sector contracting.

The difference between a good and a great result is the earnestness with which the subsidy levels and the quality of the planned solution are managed.  Currently there is no transparency on either the subsidy or the quality of the proposed solutions.

It has long been established that the long run costs of running a fibre network would be less than running a copper network.  BT has not hesitated in investing in fibre for submarine cables or for its core network. Fibre is cheaper and easier to maintain and it delivers more information.  Investment in its commercial ‘superfast’ rollout started in areas served by Virginmedia where new customers would justify the incremental investment.  It proved cheaper and quicker to rollout, and the £1.3bn on some 55,000 cabinets amounts to a fully allocated cost per path of no more than £23,000 each, all in. 

When the chairperson of the Public Accounts Commitments said, ‘Rip off’ with respect to the rural contracts she was not kidding.  When the Minister responded ‘Not a rip off’,  he was possibly referring to the economic case which remains good for the general uplift in productivity and associated economic welfare.

Most users and most economists and the latter includes Ofcom economists would begin to struggle to identify real economic benefits for connection speeds of 10Mbps or more.  This is to be expected where a little more than 10 years ago we could find it hard to imagine needing 2Mbps.  So why should we stretch and push for 100Mbps access speeds?  If you in the most rural 10%,  then clearly the cost of exclusion is very discernable, you will struggle to work from home or and it is more difficult to sell or let your property, or run a business, so the need to push for the most efficient and transparent rollout is not in question.  The issue for others is about the potential and if a business  in another country can gain access to a 100Mbps service for a wholesale price of £20 pm which permits the user to migrate legacy services to the new platform why would you not wish to avail of such an opportunity given the scale of the public investment.  If the only barrier for many was the secrecy under which the publicly funded works were being conducted then there must be a way to resolve the matter.  A change in BT Undertakings to unpick what is not in fact commercially secret to BT,  but expedient for the purposes of billing for as much as state aid as possible is not that hard.  It is not as complex as negotiating our future relationship with Europe or calculating the consequences of an independent Scotland.

The possibility of being best,  to create a national competitive advantage in connectivity services is being forfeited for no real reason other than the convenience of a few executives,  some of whom have already gone to new pastures.   The combined efforts of central, local and devolved administrations have raised more than £1.65bn, for investment in rural connectivity, which is an astonishing achievement,   more than BT could ever have imagined or dreamt possible.  Yet BT’s response has been the pervasive and pernicious use of confidentiality agreements, self-certification of their capital funding such as it is,  and inflated subsidies impossible to hide given the scale. The question is not if money intended for investment in the network is being diverted to the rights to broadcast live sport but how much?  If our systems of Government, Regulation, corporate governance and ethics cannot correct this simple issue,  then how do we make things better than they currently are?

It also raises the question what will UK users do if they need more than BT wishes to provide?

The idea that BT, Government and Ofcom are suggesting that optical fibre in every street, village and hamlet is job done is reinforced by the direction being taken in Ofcom’s fixed line access market review where Fibre access is seen as a premium and largely unregulated service.  There is no allowance in the cost recovery regime for 2014-2017 to replace copper access with fibre where a copper loop cannot support the level of connectivity now expected.  It is not even considered, so many of our city centre businesses served directly from exchanges will either make do or  pay for private circuits,  while those in rural areas not within 1Km of a new cabinet,  will continue to be frustrated.

The notion that Fibre access might be a premium at all, given once installed,  it is cheaper to manage and maintain is another peculiarity. This presents an opportunity for an alternative model to be proposed which has become a feature in the French market and something which had wide support from policy makers and their regulator ARCEP.  The ‘building operator’ model is supported by the regulatory position that Fibre access is a new market and to create a vibrant competitive market it was decided that building owners and landowners would own the passive infrastructure in and through their land and buildings.  This changed the network demarcation points pushing the network operators to the boundary of the premises,  while permitting other network providers to connect to the buildings infrastructure.

Will the UK need to innovate in this direction to reduce what will become an increasing BT stranglehold?  There are a number of projects, from a BT supported project in Fell End, Cumbria, the Fibre Garden project near Sedbergh, Cumbria,  the Ba4rn project in Lancashire to Perseverance Works in Shoreditch where folk are having to go the extra step to get what they know is possible. There is an opportunity for economic development officers to follow their example by informing  Ofcom of their connectivity ambitions during the current Business Communications Market Review.  They need to make clear that the distance from an exchange problem should not be avoided by reference to some out of date market definitions for Business Communications.  My submission on this subject is available from the download page.  Feel free to use and develop as meets your needs.

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