The rural broadband programme - Public Accounts Committee Contents


1  Competitive tension and funding

1. On the basis of a Report by the Comptroller and Auditor General,[1] we took evidence from the Department for Culture, Media and Sport (the Department) and Ofcom on the rural broadband programme (the Programme). We also took evidence from BT, UK Broadband, the Independent Networks Co-operative Association (INCA) and Talk Talk.

2. The Programme is designed to help get superfast broadband to largely rural areas. A programme supported by public subsidy is required because rural areas tend to be less commercially viable for suppliers. The Department estimates that 4.6 million premises will benefit from access to superfast broadband as a result of the Programme, taking total coverage to approximately 92% of UK premises. The Department predicts that roll-out will be completed in March 2017, 22 months later than originally planned.[2]

3. Under the Programme, the Department expects to give £490 million of its total £530 million Programme budget as grant funding to 44 local bodies (local authorities or groups of authorities) to procure superfast broadband services. The Department is also seeking matched funding from local authorities and capital investment from the supplier, BT. By June 2013, 26 of the 44 local bodies had signed contracts to procure superfast broadband through the Programme.[3]

4. The Department developed a national procurement framework, and held a competition for suppliers to be on that framework. The intention was that local bodies would use the framework to procure suppliers competitively. The Department did not mandate the framework's use and some local bodies are not using it.[4] The Department told us that the approach it adopted was lower cost and lower risk to the taxpayer than alternatives and that it had devised a range of safeguards to try and ensure value for money from the Programme. But there were clearly trade-offs that reduced potential competition. [5]

Competitive tension

5. One safeguard intended to ensure value for money was to promote competition between suppliers to deliver the rural broadband infrastructure. However, only three suppliers submitted final tenders for the national framework and only two—BT and Fujitsu— were appointed to the framework. In March 2013, Fujitsu announced it did not intend to submit any further bids for contracts, leaving BT the only active participant. By June 2013, 26 of the 44 local bodies had signed contracts with BT as their supplier. BT is also likely to win all 18 of the remaining contracts.[6] There is scant evidence of any satisfactory competition to enable prices to be driven down taking place.

6. UK Broadband told us that the geographical area covered by each contract was too small to enable small companies to build a viable business, and that, because the contracts were not put out to tender at the same time, companies could not plan to bid for multiple contracts that could give them the scale required to make the operation viable. In addition, witnesses from the industry told us that the complicated procurement process, State aid restrictions over the technical requirements and regulatory access conditions all disadvantaged smaller providers. BT disputes some of these claims.[7]

7. UK Broadband also told us that the Department's target for how much of the UK should be covered by superfast broadband has had an impact on competition. In December 2010 the Department published "Britain's superfast broadband future" which stated that the European Commission's target of 100% access by 2020 was a challenging target but the right one.[8] UK Broadband stated that companies bidding for the North Yorkshire contract were required to submit a bid to reach 100% of the population. However, in May 2011, after modelling the coverage it could achieve within its available funds, the Department announced a target to provide superfast broadband coverage to 90% of premises by 2015.[9] UK Broadband told us that BT would be able to reach 90% of premises relatively cheaply by expanding its existing network, whereas aiming to reach 100% of premises would require innovative approaches to delivering superfast broadband, which would have helped other potential suppliers to produce competitive bids.[10]

8. The effect of designing a programme which only reaches 90% of the target area will make it more expensive at a later stage to cover the final 10%. It will also make it less commercially viable for anyone other than BT to bid, as no-one else will have existing infrastructure to bolt it on to, matters are made worse by the fact that BT is preventing local authorities from publishing plans showing which areas will not be covered which would enable other, often community based consumers from filling the gap and ensuring 100% coverage. The Department has a commitment to meet the EU objective of superfast coverage for all by 2020.[11] In the recent Spending Round covering the period 2015-2019, £250 million of additional funding was allocated to the Department to help it reach more premises. However, the Department does not yet have an estimate of how much it might cost to reach 100% coverage. Witnesses from the broadband industry told us that potential investment by competitors had been lost. For example, UK Broadband has spent none of the £150 million it had allocated for the Programme. Fujitsu had also stated an intention to invest £1.5 billion which has not been invested. In total, INCA estimated that the investment that had been foregone was at least £2.7 billion. The Department responded that its aim was to achieve the most possible with the given funding, not to lever the maximum amount of private investment.[12]

9. INCA told us it believed that the Secretary of State for Culture, Media and Sport was keen to engage on issues such as competition and transparency of information, but that officials had been less receptive. For example, in January 2013, ministers engaged with the sector over proposals to inject more competition into the Programme, but witnesses told us officials had not acted on the information they had submitted. The Department has agreed to investigate any such comments about its officials. [13]

Funding

10. In 2011 the Department's business case anticipated that suppliers would contribute £563 million to the capital cost of the rural broadband programme (36% of the total capital cost of £1,547 million), and local authorities and the Department would each contribute around £490 million (32%). Separately, in June 2012, BT told the House of Lords Select Committee on Communications it was willing to invest £1 billion of capital in the Programme.[14] However, the Department now projects that BT's capital contribution will total only £356 million. This is only 23% of the total capital cost of the Programme and £207 million less than the Department had anticipated in its business case.[15] At the end of the project, BT's balance sheet will benefit from some £1.2 billion of public funding.[16]

11. Local bodies are investing £236 million more than the £494 million originally planned at a time when many budgets are being severely reduced. The overall public sector contribution to capital costs has increased from 64% to 77% (from £984 million to £1,220 million), but for some contracts the public contribution will be as high as 89%. The public sector is putting in a higher proportion of funding than other countries have for their rural broadband coverage.[17] Witnesses told us that in Sweden rural broadband schemes have a much lower public contribution—about 25-33% although BT subsequently claimed the detail of the scheme in Sweden was different.[18]

12. The Department told us that the difference between early and current capital cost projections was partly due to inaccuracies of early modelling. The model was based on industry data and analysis from the wider broadband community so it is surprising that there is such a large difference between the modelling and the current projection of BT's share of capital costs. The Department stated that the difference was also because local authorities have chosen to put in more funding, sometimes choosing to seek more than 90% coverage. For example, in Cambridgeshire and Peterborough the local authority had put in £16 million, compared with the Department's and BT's £7 million contributions. The Department estimates that superfast broadband will be accessible to 92% of premises by the end of the project in Cambridgeshire and Peterborough.[19]


1   C&AG's Report, The rural broadband programme, Session 2012-13, HC 535 Back

2   Q 324; C&AG's Report, para 18 Back

3   C&AG's Report, para 8, Figure 14 Back

4   C&AG's Report, para 2.7  Back

5   Qq 180-185 Back

6   Qq 118, 247, 261-264, 280-285; C&AG's report, para 8 Back

7   Qq 2-6, 11, 31, 35, 36, 99, 185; Ev w15 Back

8   Qq 2, 3, 9, 298, 309, 310 Back

9   Qq 103, 271-275, 296, 309 Back

10   Qq 134-135, 204 Back

11   Qq 135, 178, 298-99, 324 Back

12   Qq 1, 11, 217, 233, 320-324; Ev w7 Back

13   Qq 129, 131-134, 180, 182, 341-342 Back

14   Qq 38 - 39, 258; BT evidence to House of Lords Select Committee on Communications for 1st Report of Session 2012-13 Broadband for all-an alternative vision, 12 July 2012 Back

15   Qq 241, 253, 258 Back

16   Qq 48, 49, 221, 236 Back

17   Q 233 Back

18   Q 220, Ev w24 Back

19   Qq 233-245, 259- 260 Back


 
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Prepared 26 September 2013