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 USCthat 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 http://www.broadbanduk.org/component/option,com
docman/task,doc download/cid 1036/
Source: Broadband Stakeholder
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 consumersnot 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/www.ofcom.orci.uk/reseamhIcrn/cmr091
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
I hope that this clarifies our position, and
thank you again for the opportunity to set out the Government's
30 November 2009