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UK Gov Confirm £129m Clawback Reinvestment to Boost Broadband

Thursday, July 30th, 2015 (9:25 am) - Score 1,884
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The Government’s Broadband Delivery UK project, which is predominantly working with BT to deploy superfast “fibre broadband” (FTTC/P) services to 95% of the United Kingdom by 2017/18, has confirmed that the take-up rate of their roll-out has exceeded the forecast and as a result they’ve activated their clawback mechanism to reinvest up to £129m.

Understanding take-up is important because most of the related BDUK contracts have a clawback mechanism, which means that take-up beyond 20% could trigger a return of some of the original investment and that can then be used to extend coverage or improve service performance.

Anybody who read our report on BT’s latest quarterly results this morning (here) will already know that the operator’s FTTC/P network, which covers 80% of the UK, has now delivered around 4.6 million connections (roughly 20% of those passed).

BT said this “means we have now achieved our original fibre business case take-up assumption” and as a result they increased their “base-case assumption to 28% penetration, with 30% in [BDUK] areas.”

At this point it’s worth noting that BDUK has always appeared to have a surprisingly low assumption of take-up. Oxera’s report in May 2015 found that, as of Q2 2014/15, overall take-up by premises passed as a result of the scheme was 8.2% compared with BDUK’s expected take-up of 1.8%. Meanwhile the general roll-out progress has kept to target (here).

The question thus becomes, what impact might this have upon BDUK projects and their associated clawback mechanism? Thankfully BDUK has been quick to respond and provide us with an answer, which states that clawback is being activated sooner than originally predicted and should result in BT handing back up to £129m for an expanded roll-out.

John Whittingdale, DCMS Secretary of State, said:

It’s fantastic to see that the rollout of superfast broadband is delivering for customers and for the taxpayer. The Government was clear from the start that as levels of people taking up superfast broadband went beyond our expectations in areas where we invested public money, BT would reimburse the taxpayer for reinvesting into further coverage across the UK. This now means that BT will be providing up to £129m cashback for some of the most hard to reach areas.

Our £1.7bn superfast broadband programme is on track to reach at least 95 per cent of the UK by 2017, and it is great to see homes and businesses making the most of everything that superfast speeds have to offer.”

Gavin Patterson, CEO of BT, said:

Seven years ago, in the depths of recession, we embarked on our multi-billion pound fibre investment to bring faster broadband speeds to the UK.

BT’s fibre network is accessible to more than 23 million premises. Four out of five UK homes and businesses can access it and 4.6m are now connected. We’ve hit our original take-up assumption and have rolled out ahead of target and on budget. This is a real success story for the UK.

We are delighted to be able to share that success by making up to £129m available to extend the roll-out to more BDUK homes and businesses, earlier than planned and at no extra cost to the taxpayer.

BT will work with local bodies over the coming months to identify where these funds can be provided early to enable the local bodies to invest in increased fibre coverage sooner than would previously have been the case.”

So it’s good news, although BT’s separate financial results also added that it would “still be many years before we recover our investment“. Elsewhere you can see a break-down of uptake in BDUK areas using the data in our May 2015 report (here), which shows that quite a few areas are now beyond 20% (Rutland, Herefordshire and Gloucestershire, Northamptonshire, Surrey etc.).

The big question now is how far will this reinvestment take us? The figure of £129m might sound like a lot, but connecting those in the most digitally isolated or slowspot areas (both urban and rural alike) can often be significantly more expensive.

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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27 Responses
  1. Avatar TheManStan

    25% of the mooted £500M for the final 5%

  2. Avatar FibreFred

    And some said it would never happen 🙂

    • Avatar fastman

      think that money can only be spent in a bduk area contract

    • @Fibre Fred – Great to see, some would not confess to this possibility. I would speculate this was a pre-condition to the new state aid measure being agreed.

      It looks a little big for clawback on take-up alone, at 3m homes passed, it is £43 per premised passed for the first 3m.

      At 200 homes per cabinet, that’s a £8,600 capital contribution to the total average cost identified by the NAO. This is good progress.

  3. This is great to see these funds emerge. There is more to come.

    • Avatar GNewton

      Agreed, good to see funds coming forth. It would still be good to see more transparency in this process, and not for councils and BDUK project to hide behind confidentiality clauses.

      Another question: Must these fund be re-invested with the same telecom provider? Or can they go into Phase 2 and Phase 3, possibly with other more appropriate providers especially for rural areas?

    • Avatar TheManStan

      During the project it’s invested into a fund which they draw down and any residual is returned at the end of the contract. The supplier also tops the fund up monthly based on 2% pa interest above BEBR.

      See Schedule 5.1

      https://www.whatdotheyknow.com/request/bdukbt_contract_2

    • @theManStan the workings of the investment fund have not been tested, but the SEPs look peculiar when there was so much excess costs in the budgets, BT capital had to play a part.

      Either way this is welcome progress, and the focus for now will be on resource and the need for a more pro-active plan on FTTP in-fill.

      There is more to come.

    • @GNewton In theory the money could be spent with an altnet. I think this is too much for clawback on take-up, but it represents some of the capital contribution promised.
      Does this arrive in the form of cedits on BT’s bills or does BT write a cheque for some investment fund.
      I would imagine we will learn more when the new state aid measure emerges or next quarters state aid receipts reported in BT’s accounts. The whole schemes state aid clearance went out of date a month a go.

    • Avatar themanstan

      I agree, this likely represents the clawback on lower capital and project costs.
      It is showing as a deferral on BTORs capital accounting, so accrued 100M GBP (29M GBP from previous) on this quarter for use in the future.
      I too think there is a fair amount more to come.

    • @The Man Stan, I hope some headroom is created for the resource issue to be resolved and the rush for timescales does not undermine the opportunity to get the best outcome.

    • Avatar themanstan

      Timescales is a political issue and pretty much every government is a timeline and tick box fantasy paradise… resourcing is an issue, BTOR needs a sustainable employment plan, but the expertise is not really out there in the contractable market at the levels needed.

    • @themanstan I guess it was oversimplistic to state 2,000 fibre access apprentices in 2012. The money was certainly there for that and could still be found if BT fielded the right people.

  4. Avatar Patrick Cosgrove

    “BT will work with local bodies over the coming months to identify where these funds can be provided early to enable the local bodies to invest in increased fibre coverage sooner than would previously have been the case.”

    But it’s not their money!

    • 1. Your correct.
      2. There is much more funds to come if the state aid measure is enforced and BT held to account.
      3. It is less about planning your area and more about getting the resource in place.

  5. Avatar Patrick Cosgrove

    I think we might see a three-way tug of war over these various sums of money that are on their way. BT is trying it on by saying that they will work with local authorities to put it to good use (and will probably become very uncooperative if they’re not allowed to). BDUK says that savings from underspends must be reinvested into further provision with whichever providers the local authorities think are best, but claw-back from take-up must be used on further investment in infrastructure unless there is no further investment to make. Cash-strapped authorities may use the last bit of the previous sentence, or any other excuse that springs to mind to divert the funds to other uses, and leave the left-over rural areas with something inferior. Here is an opportunity for a rural renaissance, but there’s no apparent central or local planning, let alone strategy, for how these very significant sums of money will be used.

    • You should also be aware of Whitehall officials, who get significant praise and awards for returning monies to the all powerful HMT. Treasury is a government within a government and Treasury even ex-Treasury offcials treat all other officials like second class citizens. That BBC deal for pensioners takes most opportunities for change away from any review by DCMS or Ofcom.
      The danger or possible consequence of setting the bar low, a function of BT pushing costs into the models and setting targets low using premises passed from cabinets, presents the opportunity for officials to hand money back and pick up a CBE.
      Teas at the Palace is more convenient that tea in deep Shropshire.

  6. Avatar Patrick Cosgrove

    But we have some lovely tea rooms in the Shropshire Hills.

  7. Avatar MikeW

    If true clawback, then the money can go to BT, altnets, or back to treasuries.

    BT reassessment of base-case assumptions sounds like something different to clawback; perhaps an attempt by BT to pre-empt future clawback (not yet achieved in most projects) by a scheme that keeps the money to BT itself instead of risking it being swept aside to an altnet.

    Is the money shared amongst all projects? Or just the framework counties?

    It is hard to see how any changes to the EU state aid approval will have a retrospective effect on contracts already signed, and known to have a lifespan well in excess of the original grant period. No sane company (or LA, for that matter) would sign a contract if the EU could enforce a significant, detrimental, change of terms mid-life.

    • @MikeW All contracts and their administration would have to comply with the state aid measure and the principles upon which the measure is based.
      You may find that the state aid principles take precedence over how BT may wish to implement the contracts.
      The principles can be easily abused if officials need to get the job done and are bullied and blagged at under confidentiality agreements.
      However the excess modelled costs in the 2012 BT models could not stay hidden as the NAO were instructed to keep probing and will continue to do so as the USC premiums are sitting somewhere, probably in BT’s accounts.
      Likewise the lack of BT capital could not be hidden when the scale of the state aid must be reported in BT’s accounts each quarter.
      This presentation of clawback looks odd as an increase in take of 10% might equate to 8% of the allowable costs. This would work if the original costs has not been inflated by 38%, but every county in addition to this clawback will also be reporting underspends. The BT model wishes to impose is fundamentally at odds with the bottom up numbers, which are quite easy to undestand. The cabinet and the electronics are massed produced, everything else are labour rates. POwer is perhaps the biggest variable.
      The c30,000 BDUK funded cabs will cost no more than c£700-£900m before BT make a contribution. This leaves a big budget for FTT dp for in-fill, which is yet to be resourced. Alt-net capacity is at best 5% more likely 3% of the capacity needed.
      This announcement looks like an interim step before the models and targets are re-set. At least I hope so.

    • Avatar Gadget

      However State Aid does allow capitalised labour for specific activities, so you cannot simply take the cost of the cabinets in order to provide a working service there is also the exchange equipment and the backhaul to a handover point in terms of physicals for example.
      In terms of calculation of a gap funded solution there is also the effect of not only the take-up but its profile over time which will affect the DCF calculations.

    • @Gadget – Of the less than £25k total average cost identified by the NAO, then cabinet and its installation is less than £10k including power leaving the remainder to cover the capitalised labour costs for clearing duct and pulling fibre.
      Do not start on operational costs, the current cost allocation consultation by Ofcom shows the maintenance in GEA-FTTC as tiny.
      What is interesting is that BT would typically allocate duct costs across 14 product groups, so the state sponsored duct activity is benefitting 13 other groups.
      This is a good to see but it is only a start.

    • Avatar Gadget

      @NGA – I wasn’t talking about maintenance costs but in instances (especially for rural exchanges) where the cabinets are parented on a remote exchange and the VLAN handover is not in the local exchange. Under those circumstances the cost of the fibre back to the handover is not trivial.

    • Avatar TheFacts

      Back to my question of the typical cost of installing subduct and clearing blockages for eg. 5km, including labour, equipment and traffic lights etc.?

  8. @Gadget – Glassing through exchanges is good. So the spine costs are paid early, if inter exchange fibres are not already available to be reused. The Scottish Audit suggested unit costs per cabinet will drop for the reasons you provide. Planning costs are also paid early.

  9. @facts for BT commercial it looks lile £8k average for the cabinet/power/tie cables based on the 3 PG groups in the Cartesian analysis for 2013/14 and thus £9k for the installing and connecting the fibre. It looking like c£2.50 – £3m per m including clearances. I would predict this breaks down at c90% coverage. This is average but we need an upper and lower bound.

    The £9k is the total average duct repair, fibre and fibre install install for the commerciak activity, not the allocation of duct costs across the 14 products groups. We need to add FTTC service development costs.

    Sure, lots of exceptions and BT will add a generous PMO, a generous planning cost, a even more generous management charge and obscene change request costs, but all these cannot hide how cheap this is. Surely a good thing.

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