UPD2 PAC Report Attacks UK Gov for Giving BT a Monopoly on Broadband

The Public Accounts Committee (PAC), which works alongside the House of Commons to examine public expenditure, has today published its final report into the £1.2bn Broadband Delivery UK (BDUK) scheme and it accuses the government of allowing BT to build a “quasi-monopolistic position which it is exploiting by restricting access to cost and roll-out information“.

At present BDUK aims to make fixed line superfast broadband (25Mbps+) connectivity ISP available to 95% of the country by 2017, which represents a recent revision from the previous target for 90% by the end of 2015 (here). This followed confirmation that the government expected to fall a little way short of its first target and would instead achieve around 88% coverage by the end of 2015.

But BDUK’s framework has made it difficult for smaller ISPs (altnets) to engage in the process and all of BT’s original competitors, such as Fujitsu UK and GEO, have since dropped out due to economic and competition concerns (here). The lack of support for business provision via dark fibre / PIA access also made it even harder for rivals to enter a market where BT already dominates.

The result of all this is that BT has been left as the only viable option. BT and local authorities have also been accused of maintaining a stranglehold over vital coverage and speed data, which caused a number of altnet schemes to stall under state aid rules (i.e. they’re not allowed to overbuild other superfast networks but that’s hard to plan for if you don’t know where BT’s rollout is going). Thankfully that issue has begun to be resolved (here) but some feel that the data now being published remains inadequate.

Today’s report therefore predictably echoes July’s assault on BT’s dominance of the government’s national broadband scheme and essentially repeats many of the same lines (here), which sadly includes some of the arguably more politically motivated and even a few incorrect remarks (e.g. the 2 year delay is in practice closer to 1 year). At the same time it also sheds a little light on some of the better known problems with BDUK’s approach and suggests a way forward.

Rt Hon Margaret Hodge MP (Labour), Chair of the PAC, said:

“The programme to extend superfast broadband to rural areas has been mismanaged by the Department for Culture, Media and Sport. The sole provider BT has been placed in a quasi-monopolistic position which it is exploiting by restricting access to cost and roll-out information. The consumer is failing to get the benefits of healthy competition and BT will end up owning assets created from £1.2 billion of public money.

All of the 26 contracts let by June 2013 had gone to BT and the remaining 18 are likely to follow suit.

Overall, BT is supposed to provide at least 90% coverage in rural areas but it is preventing local authorities from publishing proper information on the areas the company will and will not cover. Details of speed and coverage in each local project are also being kept confidential, preventing other suppliers from developing schemes aimed at reaching the remaining 10% of premises and stopping communities and others from identifying alternative ways of providing superfast broadband.

This together with the Department admitting the programme will be delivered in 2017—two years later than planned—means that consumers are getting a raw deal despite the generous public subsidy.”

In fairness, BT is a commercial company and thus few could blame them for trying to extract the most beneficial position. The onus has always been on the government, Ofcom and local authorities to ensure that any necessary roll-out information is being correctly published. Until recently many councils were reluctant to do this, perhaps partly because some were concerned about a backlash from the last 5-10% who wouldn’t benefit.

Elsewhere the talk of BDUK being delayed by two years is arguably a misrepresentation because the 95% target for 2017 was an EXTENSION from the original 90% target for 2015 and, as we said earlier, they currently only expect to miss the first 2015 target by 2% and that’s not bad for such a complicated scheme (see here for more BDUK myths). On the other hand there’s still no firm plan for achieving 100% coverage of superfast broadband, which is important because the EU expects 100% of homes to have access to speeds of 30Mbps+ by 2020.

Margaret Hodge continued:

“The Department’s approach to procurement failed to deliver any meaningful competition to drive down prices and maximize coverage. Without that competitive tension, it is crucial to have full access to the single supplier’s cost information to check that BT’s bids are reasonably priced – but the Department failed to negotiate that access with the company.

We now have a situation where local authorities are contributing over £230 million more to the programme than forecast in the Department’s business case, while BT is committing over £200 million less.

The lack of transparency over BT’s costs is a serious risk to value for money. Local authorities are prevented under the contract from sharing cost information which weakens their negotiating position with BT.”

Ultimately the outcome of BDUK is arguably more a result of Ofcom and historic government regulation of the national UK telecoms market, which is just as much the fault of Labour as the current coalition. In this climate, natural market economics will always make it extremely difficult and very risky for rivals to take on an established incumbent like BT. Examples, such as Digital Region (here), serve as a potent reminder of how you can build an alternative network but still struggle to make it commercially viable.

On the other hand some alternative operators, such as B4RN, Hyperoptic and Gigaclear (not to mention the large number of fixed wireless ISPs), have managed to deliver seemingly viable products by strictly focusing on areas where BT has failed to reach with adequate connectivity. But worryingly some of these may now face a threat from BT again via BDUK funding, which does underline a few of the PAC’s concerns. For example, B4RN are already concerned about BT’s FTTC/P rollout using BDUK to encroach upon areas (e.g. Dolphinholme) that have been on their plan for a while.

Malcolm Corbett, INCA’s CEO, said:

“The Public Accounts Committee has performed a hugely valuable service in highlighting the problems in this programme. INCA members are keen to help the government solve some of the problems uncovered, promoting greater competition, investment and value for money for the taxpayer.”

So what does PAC actually recommend to solve all of this?

The PAC Recommendations for BDUK

* Recommendation 1: The Department should not spend any of the further £250 million of public money [allocated for the post-2015 to 2017 period] until it has developed approaches to secure proper competition and value for money for improving superfast broadband after 2015.

* Recommendation 2: Before contracts are awarded for additional broadband coverage from 2015, using the additional £250 million, the Department should improve its modelling work and, when negotiating levels of private sector investment, the Department should push for contributions that take account of the long-term value of the assets to the supplier.

* Recommendation 3: The Department should insist on a higher standard of cost transparency before contracting. Where contracts are not yet signed for the current Programme, the Department should secure BT’s agreement to improve cost transparency, for example by omitting the non-disclosure agreement between local authorities.

* Recommendation 4: The Department should set out how it has assured itself that local authorities will be adequately resourced and supported to carry out adequate checks on BT’s costs and take-up rates during the project.

* Recommendation 5: The Department should, as a matter of urgency, publish BT’s detailed roll-out plans so that other suppliers can get on with trying to reach the remaining 10% of the population that will still be without superfast broadband.

* Recommendation 6: As part of its current review of the broadband market, Ofcom should explicitly address the impacts on competition of BT’s wholesale pricing structure and of the terms and conditions attached to accessing BT’s infrastructure.

The closing recommendations arguably represent a more coherent range of suggestions than the reports initial commentary, which at times appeared to focus more on the pursuit of politically advantageous sound bites and pandering to the mass media than constructive criticism. By contrast it’s difficult to disagree with many of the above recommendations.

At the same time we wouldn’t want to see the rollout being held-up again by yet more long-winded reviews, although their focus on the “extra” £250m – instead of BDUK’s budget as a whole – suggests that there is still time to make improvements before the money needs to be spent. Quite how much of a difference any of this would make is harder to answer because the main programme is already well into deployment.

A BT Spokesperson told ISPreview.co.uk:

“We are disturbed by today’s report, which we believe is simply wrong and fails to take on board a point-by-point correction we sent to the committee several weeks ago.

We have been transparent from the start and willing to invest when others have not. It is therefore mystifying that we are being criticised for accepting onerous terms in exchange for public subsidy – terms which drove others away.

The taxpayer is undoubtedly getting value for money.BT faces a payback period of around 15 years on its rural broadband investments in spite of the subsidies available. The Department for Culture has imposed a rigorous auditing process that ensures every penny is accounted for.

Rolling out fibre is an expensive and complex business but we remain committed to the programme. The network we build will be open to all our rivals, who will be able to sell services to consumers, paying us the same prices we charge our own Retail division.”

A DCMS Spokesperson told ISPreview.co.uk:

“We disagree with the views expressed by the PAC which are at odds with the findings of the NAO. They found our approach reduced the cost to the taxpayer and reduced risk. We put in place a fair commercial process and encouraged different suppliers to bid. We are disappointed that the PAC fails to recognise that thousands of rural premises who have never had a decent broadband supply are now getting one, something that is vital for farmers, rural businesses and all those who live outside major cities.”

Meanwhile efforts are already being made to restructure BDUK and to support the release of more roll-out information, although the specifics remain somewhat thin and we’re still hearing concerns about a lack of detail in the published coverage data.

At the end of the day most consumers just want a fast and affordable connection and so long as they can get that then who supplies it tends to be less of a concern.

UPDATE 2:37pm

Some comments are now coming in.

Dana Tobak, MD of Hyperoptic, said:

“The role of the Government in subsidising superfast broadband infrastructure to rural areas is absolutely essential however, as the Public Accounts Committee has pointed out, the project has been mismanaged. Handing out contracts to BT, and ultimately giving them ownership of £1.2bn of public assets, demonstrates a lack of understanding of the risk implications associated with their decision.

Yes, the UK is in urgent need of a future-proof solution to overcome slow broadband speeds, however there is only one approach to achieve this quickly and effectively: enforce a level-playing field to allow innovative providers with a proven track record to roll out Gigabit services. This will not just provide healthy competition but also offer a contingency plan to ensure the overall objectives of the project are met in a timely and cost-effective manner.”

The public report itself is also now available here.

UPDATE 30th September 2013

We thought some people might be interested in precisely what BT told PAC in their “point-by-point correction” of the initial hearing. We also added a comment from the government’s department of culture, media and sport (DCMS) above.

BT’s Point-by-Point PAC Correction

1. Guarantees of value for money in rural broadband programme

The PAC failed to take on board evidence that there are strong guarantees of value for money. There was competition between BT and Fujitsu at the crucial stages of the process when prices were set. We guaranteed that our costs would be consistent with our own costs for our commercial fibre footprint. We have been prepared to accept a payback on our rural broadband investment of 15 years, which is even longer than the payback we expect to achieve on our commercial programme.

2. Concern over transparency of BT’s costs

The PAC failed to understand the key fact that BT bills the taxpayer AFTER it has spent money deploying rural fibre broadband and has to show receipts and time-sheets. There is no lack of transparency. The NAO report notes the risk that we will be providing so much information that the government and local councils will have to staff up to deal with it all.

3. Publication of details about which areas will not be reached by the current plans for rural fibre broadband

The position reflected in the report is wide of the mark. The information in question is owned by local councils and BT is not standing in the way of publication. Northamptonshire has already published and we understand more councils will be doing so.

4. PAC says there is a lack of transparency about the amount of contingency BT has built into its calculations

The committee failed to take on board important evidence. The plain fact is that BT is not able to charge the taxpayer anything for contingency. We can only charge for our actual costs.

5. Concern that BT is on course to win all the subsidy for rural broadband with no competition

There was strong competition from Fujitsu at the crucial stages, meaning there was competitive pressure on prices. The terms on offer from government were so challenging that other companies did not show interest and eventually Fujitsu walked away too. You can get a measure of how challenging the subsidy terms are when you realise BT faces a payback period of around 15 years on its rural broadband investments.

6. PAC says the fact BT is putting in less in funding than promised (claiming BT is putting up £356m when it was supposed to be £563m)

Again, this is inaccurate and we explained this to the committee. In fact, BT has to date committed around £700m to the rural broadband schemes in question and is on course to meet its promises.

7. The PAC says the rural broadband programme is now running late

This criticism is fast becoming out of date. Independent research house Point Topic has just reported that the UK is actually on course to have fibre broadband available to 90pc of premises by the end of 2015. Prior to that the government said that the threatened shortfall was just 2 per cent – i.e. that fibre would be available to 88 per cent rather than 90 per cent by the end of 2015. That’s hardly a delay.

8. The PAC is concerned about £1.2bn of public subsidy going to one company

BT takes its responsibilities seriously in using the money. You have to see this in context – Crossrail requires a subsidy of £4bn and public spending on High Speed 2 is likely to be far greater than that. The government, councils and BT are working together to get fibre broadband to 90 per cent of premises for far less than is being spent on those schemes.

9. The PAC says in return for the subsidy, BT ends up owning the infrastructure that’s built with the money

But the network BT inherits will continue to need maintenance, investment and upgrade – owning it is not a cost-free business. Again, you have to take on board that BT faces a payback period of around 15 years on its rural broadband investments because the business case is so tough, despite the subsidy available.

10. Overall the PAC report demonstrates concern about the state of the rural broadband deployment

As our rebuttal document makes clear (submitted to the committee in August and published on the committee’s website along with their report), the PAC is wrong in many crucial respects. Independent research now places the UK second in the G8 for average broadband speeds and ahead of all major EU states for availability and price. This lead is growing. Things have got to the stage where Australia now wants to copy key features of the British broadband rollout. Our rebuttal document is in the PAC report as an appendix and gives a point by point rebuttal of PAC concerns.

11. The PAC says the wholesale prices BT charges rival companies for using its network need investigating by Ofcom

Ofcom already keeps our prices and terms under review. We charge rival companies the same prices we charge our own Retail division for use of the network. Our rivals manage to make healthy profits using our network – as confirmed recently by the chief executive of TalkTalk when she addressed investors.