Broadband - Business, Innovation and Skills Committee Contents

Supplementary memorandum submitted by the Department for Business, Innovation and Skills

  Thank you for the opportunity to give evidence in front of the Select Committee last week. I promised to come back to you and your colleagues to clarify a few points, raised during the discussions.


  The Committee asked for a definition of what "a line capable of delivering 2Mbps" means in practice. As I stressed during the hearing, we expect this to be made clearer once the procurement team, with the necessary experts, are in place. However, we do expect that a connection provided by the Universal Service Commitment to be a 2Mbps downstream connection for practical purposes, and deliver 2Mbps most of the time, allowing for the occasional drop in headline speed, as is common with some technologies that deliver broadband.

  It should look and feel like a 2Mbps service as customers in areas served by the market would understand it, and allow the consumer to access the services you would expect over a 2Mbps connection. I would also like to stress the priorities of the USC—that is, to deliver a service to those without a broadband service currently, and where possible to do so using next generation solutions. We will of course keep the Committee updated with developments on the procurement process, including the procurement mechanisms.


  The Committee asked for the evidence used to determine that unaided, the market will only deliver to 60-65% of households in the UK. This assumption is based on analysis done by consultants during the Digital Britain process, primarily using work carried out for the Broadband Stakeholder Group by consultants Analysys Mason.

  In summary, NGA is already available to around the 50% of the population who live in Virgin Media's footprint. It is reasonable to assume that BT's investment plans, scheduled to reach some 40% of the population, will to a large degree overlap with Virgin's footprint. Beyond this, there has not been any extension of the cable footprint for more than a decade and we have no indication this is likely to change.

  Further investment without government intervention is therefore likely to fall either to BT or, in some areas, alternative providers such as H2O Networks or community-based projects such as Alston Cybermoor or Lightspeed Derby.

  We therefore need to take a view as to where this private investment is likely to be targeted, and the limits of where it might reach. The Analysys Mason study showed a fairly consistent cost per home until you reach this point, whereby the cost increases. Below is an overview of these costs, and the full report can be found at,com docman/task,doc download/cid 1036/

Source: Broadband Stakeholder Group.

  Our analysis was that, even assuming the upper end of the range of expected take-up levels and monthly premium for an NGA service, the payback period for an investment to reach homes past the 65% mark would become extremely unattractive to investors. There might be some areas within the final third where exceptionally high take up rates or innovation in deployment might alter the investment case, but overwhelmingly we believe subsidies totalling £1 billion or more will be needed to bridge the investment gap such that a return can be made in a period investors will find attractive, although a properly constructed reverse auction process should ensure that the Government needs to provide only the minimum subsidy needed to deliver the service.


  I discussed with the Committee whether I believed the tax is fair. We believe that it is essential that we act now to ensure that the final 30-35% of the country that we do not believe will be served by the market, which is predominantly rural areas, are not left behind. That would be damaging for local businesses and for consumers—not least as more and more government services, such as tele-health and medicine and education, move to more online delivery. That is why we have decided that a way must be found to generate the necessary funds to incentivise the market to deliver NGA into the majority of these areas.

  The public finances are, as a matter of record, facing considerable demands to support the entire range of government activity. We therefore took the decision that an additional source of funds should be found to pay for an investment in this crucial element of our infrastructure.

  The new levy has been designed to be:

    (a) relevant, in that there is a clear link between the source of the tax and the purposes to which it will be put;

    (b) simple and transparent, in that consumers are clear how much they are to be charged and the tax can be applied in a straightforward way; and

    (c) affordable, in that set against the context of overall telecoms bills, and other demands on household budgets, 50p per line per month is a modest amount.

  On this final point, I promised the Committee I would provide further details of my statement that expenditure on telecoms services has fallen by more than 50p per month. The Ofcom Communications Market Report August 2009 (p 242) said that average monthly household spend on telecoms services in 2008 was £65.01, down from £68.84 in 2007. The average amount spent on interne services was down from £11.37 to £10.71, while the average amount spent on fixed voice was reduced from £23.49 to £22.26. This continues a trend of broadly similar reductions since 2005. In other words, for an average household which subscribes to either fixed line telephony or Internet services or both, a 50p levy per month would be less than the decrease in prices per month.

  The chart below illustrates this, and the full report can be found at htto:l/

Source: Ofcom/operators/ONS.

Notes: Includes estimates where Ofcom does not receive data from operators; adjusted to CPI; includes VAT.

  Despite the generally affordable nature of the levy, we remain mindful that some groups of people rely on telephony and require support to maintain a service. We were therefore clear that those who subscribe to social telephony tariffs would be exempt. Social telephony tariffs are available to those who are in receipt of Income Support, Job Seeker's Allowance (income-based), Employment Support Allowance (income based) and Guaranteed Pension Credit.

  I hope that this clarifies our position, and thank you again for the opportunity to set out the Government's position.

30 November 2009

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