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UPDATE3 UK Gov Moots TAX on Broadband ISPs to Fix Internet Slowspots

Thursday, July 23rd, 2015 (11:08 pm) - Score 1,079
pile of pounds sterling currency

The Government is allegedly anticipating that it will need another £500m to bring superfast broadband (24Mbps+) connectivity to the final 5% of premises across the United Kingdom, which may well be achieved through a new “levy” (TAX) on broadband ISPs. Warning, we’ve been here before.

The current Broadband Delivery UK programme and related projects, which are broadly overseen by the Department for Culture Media & Sport (DCMS), aims to make fixed line “super-fast broadband” services available to 95% of the population by 2017/18 (rising to 99% by 2018 when you include mobile and other fixed wireless solutions).

So far a significant chunk of this investment has come from the BBC TV Licence fee (Digital Switchover Budget), while local authorities have also stepped in to match with the central Government’s commitments. But squeezing future funding from the BBC will be challenging due to the proposed cuts and many councils are also braced for another round of tough austerity, which will similarly hinder their ability to commit funding.

Furthermore it’s well known that reaching the final 5% will be an expensive business and that’s why seven Market Test Pilots (MTP) are currently being conducted as part of the £10m Innovation Fund, which is experimenting with various fibre optic, Satellite and fixed wireless technologies in order to identify the most viable alternatives. Never the less even some of these may struggle unless more investment can be found.

On top of that the Government has also proposed, albeit not yet committed to, raising the legally binding Universal Service Obligation (USO) from slow dial-up speeds to 5Mbps. Plus there’s an ambition for bringing “ultrafast” (100Mbps+) broadband to “nearly all UK premises,” although BT and Virgin Media can probably achieve most of that without state aid (save for the ‘UK Guarantees Scheme’ of course).

So where might the extra funding come from? According to an FT source, “That is very much the Treasury view, why should we find £500m to do the last 5%? … An industry levy is the direction of travel.” The word levy is of course, in the eyes of most people, merely political speak for a tax.

The report alleges that the Government is considering two options, either raising the funds through taxpayer money or imposing a levy on the industry (broadband, mobile and phone providers etc.). At present the idea of an industry levy appears to be winning favour and Ofcom’s CEO, Sharon White, has also suggested that such an option might be plausible (see last week’s Strategic Review Document for some vague and unspecific mentions).

At this point the Government has said that they’re “not going to comment until decisions are made,” although they might want to check their history first and engage closely with the industry before rushing into anything. One of the reasons for that is because we’ve been down this road before with the pre-2010 Labour Government and it didn’t end well.

The Labour Government of the day controversially proposed to put a 50p +vat per month tax (Next Generation Fund – generating up to £175m per year) on all fixed phone lines to help fuel the roll-out of next generation broadband services, which was bitterly opposed by ISPs and generally disliked by members of the public as well as other politicians.

In the end the idea was shelved just before the 2010 General Election, which saw the then coalition of LibDems and Conservatives come to power and fund BDUK through alternative methods (BBC Licence etc.).

Some Reasons Why the 50p Tax Flopped

* Internet providers would have ultimately put up their prices to compensate, thus effectively imposing a new tax on consumers by stealth and nobody likes stealth taxes.. except perhaps the headline writers for several major newspapers.

* It risked discouraging new connections from those in lower income brackets, as TalkTalk often warned; although most ISPs increase their prices by well above the level of inflation each year, so this was always a tricky argument.

* Many feared that, once the targets had been met, the Government might keep the tax in place and simply pocket the revenue for use in other non-telecoms related sectors.

* Questions were raised over the difficulty in gaining fair distribution of the money.

* Another big question mark hung over how the government might define a fixed phone line in the first place (did it include mobile and what about broadband-only lines? etc.) and if smaller ISPs would also be hit by the levy.

* Will £500m even be enough to do the job? This is currently a difficult one to answer definitively because it will depend upon technology choice and contract / tender flexibility (i.e. being very open to altnets).

Ironically the Conservative Party effectively pledged to scrap the 50p tax and now it seems to be reconsidering via a potentially similar approach, which could be described as somewhat of a U-turn. However at present it’s not known what form such a levy would take, although imposing it on consumer “phone lines” might not be the best tactic.

UPDATE 11:33am

The UK ISPA has responded to the concerns and also made a good point about undermining the investment of private altnets.

ISPA Secretary General, Nicholas Lansman, told ISPreview.co.uk:

Whilst we have not seen any policy detail, we note that the Treasury under the Coalition Government scrapped the previous Labour Government’s plan, as part of the Digital Britain Review, to use a levy to pay for superfast broadband rollout with the current Chancellor describing the idea as an “archaic way” of achieving investment in broadband infrastructure. A Parliamentary Select Committee at the same time also said the idea for a levy was regressive for placing a disproportionate cost on the majority who would not benefit.

A number of providers are currently working to rollout superfast broadband across the country. A levy could undermine this ongoing investment. Delivering the final 5% is a challenge, but BDUK has been undertaking some encouraging work with industry through technology trials. Government would be better off focusing efforts on encouraging investment and competition.

Furthermore, broadband is an enabling industry that underpins the wider economy, so there is a case to be made for public investment to help support rollout to the 5% where the benefits will be most transformative.”

UPDATE 12:57pm

A few more ISP comments have come in.

A Spokesperson for Entanet said:

So in essence the situation is this… As the Public Accounts Committee found in 2013, the Government created an effective monopoly for Openreach who have delivered late and over budget; so now they consider imposing a regressive tax which will fall disproportionately on poorer households to prop up Openreach’s failings. We cry foul.”

Adrian Kennard, MD of AAISP, added:

BT are almost certainly best placed to spend this extra money making the last 5% better, so the money goes back to BT! Will it then be enough to pay the investment needed, who knows.

As you say, there is a huge question on “what is a phone line”. If the tax was on consumer lines, we’ll install business lines instead. If the tax is only on lines providing telephone service, that will create a problem for BT as they sell lines and things like call barring – they would have to have a way to charge 50p less for lines with all calls barred. In the end that would make our “broadband only” lines even more appealing as another 50p cheaper than getting a normal phone line from someone else.

Finally, you have the issues of what is trying to actually be achieved here. Whilst “superfast” 100Mb/s or even 20Mb/s is really “nice”, it is more than you need to have people “connected”. It is more than you need for streaming video even. There is a social need for the country to be properly connected, but the higher and highers speeds are more of a luxury and not something we should be taxing everyone else to pay for, surely?”

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he is also the founder of ISPreview since 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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16 Responses
  1. Bob2002

    I hear International Development has a massive budget(second largest aid budget in the world after the US) for no apparent reason … but gormless George has ring-fenced it.

    • FibreFred

      Yeah I see this as crazy, I’m not one of those (like UKIP’ers) that think we shouldn’t be giving international aid at all, of course we should but a reduction should be looked at especially for some countries who are happy to take foreign aid with one hand but have enough money to develop a space programme

  2. Patrick Cosgrove

    Far be it from me to argue against further funding for rural broadband (so I won’t), but I am puzzled by the lack of news about local authorities making plans for two, or maybe three or maybe four sources of future funding from current arrangements. Firstly there are the savings from underspends by BT when Phase 1 contracts come to and end. We’ve already heard from Mark on this site (13th July) that Rutland has a£1.7m to reinvest. Next there is claw back once take-up exceeds a certain percentage – generally presumed to be 20% – and that money will trickle in for ten years from the date of Phase 1 commencement. Next there is the mysterious contribution from BT for all Phase 1 contracts. Does it exist? Are there audit trails? Finally, in their review of State Aid Compliance, will the EU uphold the suggestion by the NAO last January that some costs were inflated? And if they do, what will then happen? Shropshire Council isn’t answering questions on these matters. Are any other local authorities?

    • Steve Jones

      BT pay all up-front costs for BDUK phase 1 and are then only reimbursed (by the contractually agreed formula) based on the submissions of actuals triggered by milestones. Many people take this as meaning that BDUK pay all the actuals (which they don’t), and they also assume that all BT contributions will be capital (which is not necessarily the case). The BDUK contracts are for capital and operational costs over 7 years. That means the gap funding covers any forecast shortcoming in the recovery of BT’s capital and operational costs against revenues over the period. As the actual terms of each contract are confidential, then it’s pretty well impossible to measure what BT’s contribution actually is, especially as it covers both operational and capital elements over the contract period.

      The best that can be done is to look at the level of Openreach’s capital investment which does, of course, cover a multitude of things. Then look at the BDUK grants received. Auditors will have access to all BT’s actuals (submitted bills), but they’ll only have access to the operational cost elements submitted in the bids. I don’t think they’ll get to audit BT’s internal operational costs beyond what can be reasonably justified in the bids. So if BT find ways of reducing operation costs, then that advantage will acrue to BT alone. Claw-back is, of course, based on over-recovery rules based on the original operational costs.

      So for those expecting full transparency of BT’s internal books, then you’ll be disappointed. However, when Ofcom finally look at regulating GEA-FTTC pricing, then those internal books will be available to them. If BT are over-recovering, then it’s perfectly possible that Ofcom could enforce wholesale price cuts. So in that sense, BT would not benefit and consumers would see it (at least in principle) as reduced prices from ISPs should wholesale costs be reduced.

    • @Steve, so it is all too hard to understand so let’s not try is a poor arguement!

      NAO report 1 suggested BT capital might be £353m out of the £1bn promised. The scope should be about 30,000 cabinets, so it should not be too diffcult to spot BT paying the first £10-£11k of capital. There is no evidence of this in BT’s accounts.
      That leaves £650m for operational costs, or £3k operational costs per cab and fibre path a year. This is nuts when a VDSL card is $500.
      BT state aid paid payments were in excess of £390m for 2014-15 which is more that total cost needed to pay for what was installed where the run rate is 200 cabinets a week plus some work in progress.

      Let’s hope the new state aid measure addresses the transparency issues, and BT’s capital becomes verifiable and the nation gets a plan and resources worthy of the monies being made available.

    • @Steve – I need to salute the 200 cabs a week being installed. It’s good progress, but that is £5m a week of subsidy, not the £7m that looks to be billed, while the budget available £1.7bn (BDUK) + £353m from BT should fund a £8.5m a week project so the FTTP-in fill gets done.

      I doubt most people will mind the project being late, but we could at least get the project on a proper footing where indicative numbers make sense. Currently that is not the case.

      Start with the idiotic claim that £3bn of capital was spent on 50,000 commercial cabinets and fibre paths! BT Group cannot re-write the NAO work detailing total average cabinet costs of less £25,000 and this includes 60-70 cabinets in the highlands and islands averaging £140,000 each.

    • FibreFred

      Have you actually wrote to anyone about this £3bn? Instead of posting 15-20 posts on the subject why not save time and just do it once to those that can do something about it?

      You’ve more than made your point that you don’t believe that figure, its well documented on this site, why not take it further with those can can look into it further?

    • @Fibre Fred That’s been attenpted several times, but it needs to be pursued until the numbers are corrected and made public. Item discussed in Ofcom Financial Regulatory Report consultation in March. Ofcom decided against creating a verifiable public record of the actual investment but did opt for secret reports on BDUK subsidies are allocated in BT’s accounts, see chapter 5. It is a start but only that.

      The matter (the costs and BT’s matched investment) and BT’s representations are fundamental to this discussion. It is essential those numbers can be easily verified.

  3. Steve Jones

    I believe that a levy raised against all ISPs to fund provision for “not spots” has a great deal of merit. Personally I see no reason why broadband as a whole should receive public financing as it surely generates enough revenue to be self-sustaining. The problem is that Ofcom’s regulatory environment works at maximising competition which inevitably means that there are no excess profits in low cost areas to be used to cross-subsidise the more expensive ones. (Of course, there’s an alternative, which is to abandon the de-facto national pricing model).

    In any event, given the structure of the market, an explicit levy would at least mean the costs are borne by the broadband industry as a whole. Of course there’s a highly political issue over how any such revenue would be disbursed, and to whom. Would it only be used to cover capital investment, or would some have to be used to subsidise the higher operational costs in more rural areas?

    At least this goes some way to addressing the structural issues of the market as Ofcom encourage it so there is some merit. Of course, those in urban areas might start asking why should they subsidise more remote areas, but the actual amounts would not be huge. A pound per month on fixed line broadband connections would raise £250m per year (and, initially at least, more capital could be raised against the promise of this fixed income).

    • Steve Jones

      Nb. to make clear, I oppose the original Labour party policy of a charge against voice lines only. It should be against all fixed lines (fibre, copper pair or co-ax). I don’t think there’s enough fixed wireless to bother about.

    • @Steve, The issue ar present is not funding but resource. BT is resourcing 200 cabs a week or 40,000 premises passed, and charging c£7m a week in subsidies, for looks to be £5m worth of effort. That aside.
      The £1.7bn of current subsidies + BT capital contribution of £353m could support work of £8.5m a week over 18 quarters, so the intensity and pace of the existing effort could be increased if the resource or the ambition in the form of service levels was correctly set.
      BT gave up on planning to resource FTTP in-fill from the available fudning thinking it can use its confidententiality agreements to blag and bully its way to as much of the £1.7bn as it can for cabinet only or cabinet mostly solution.
      This BT Group plan for the rural economy would always work against shareholders and customers interests as the plan, evident in the billing for Wales project which is not based on actuals. This demands our public institutions find a way to lessen BT’s desire to abuse its dominant position.
      BT should at least make a start and make clear £3bn BT capital has not been spent installing 50,000 commercial cabinets and provide a number consistent with the total average costs reported by the NAO in January for areas which by definition are more expensive to serve. It then needs to make clear the proportion of the capital cost it is contributing to the rural in the present programme and present the resource challenge and any plan to address that challenge.

  4. GNewton

    This again highlights the BDUK farce, and the wrong broadband policies in the UK in general. Some of the errors done here:

    – fibre or copper VDSL should have REPLACED ADSL in their respective areas
    – The whole BDUK process (costs, see NAO reports) should have been more transparent
    – BT should have never been given taxpayer’s money for no ROI

    Rather than introducing this new tax, it would have been better to introduce anti-cherry-picking laws for e.g. BT. For example, when it invests in VDSL or fibre, to do it for a whole local area (town and country-site) as a replacement for old ADSL services (to ensure a higher takeup), and allow it to charge more realistic wholesale market prices (which are probably too low at the moment).

    • TheFacts

      What other government funding gets a ROI?

      ‘charge more realistic wholesale market prices’ – that may be the key issue.

    • FibreFred

      Anti cherry picking laws, hahahahah oh that’s priceless.

      So… basically your model is to force telco’s to deploy where the returns are low or over a very very long period.

      What a strange mindset – Virgin media go roll out loads of co-ax into Wales… not much in it for you but.. you have to do it!

    • Steve Jones

      BT are not allowed an ROI on any capital provided by BDUK. On a more general point, they are also not allowed ROI on excessive construction charges either.

      So BT will not get X% annually on whatever BDUK provided to subsidise capital expenditure.

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