Broadband - Business, Innovation and Skills Committee Contents

Memoranda submitted by East Midlands Development Agency

  This is a joint response on behalf of the nine English Regional Development Agencies (RDAs) prepared by EMDA in its capacity as lead RDA on Broadband and ICT. In our earlier response to the Digital Britain (DB) consultation the RDAs argued that we are already living in a DB and that the challenge for the UK is to facilitate the shift to what we described as a Next Generation Digital Britain characterised as a modern 21st Century Low Carbon Knowledge Economy.

  To deliver the Government's vision the UK needs to ensure appropriate and timely investment in the economic architecture of a digital economy. This requires investment in both the underlying digital infrastructure and in our businesses and citizens capacity to exploit these digital opportunities (but also to mitigate the threats).

  The way we respond to these opportunities will have a major role to play in steering Britain out of the current economic downturn and will play an increasing role in delivering a low carbon economy.

  This response seeks to follow the broad questions as set out in the consultation document.

1. Whether the target for universal access to broadband at a speed of 2Mb/s by 2012 is ambitious enough?

  The RDAs would commend the Government for its proposal to establish the principle of a Universal Service Commitment (USC) for broadband. This aspiration sends a powerful and welcome signal to the market.

  However, we would question whether focusing on a specific speed is appropriate and sends the right investment signal to the market. In a rapidly changing digital economy the Government's objective should be to future proof infrastructure investment not peg it to an arbitrary speed. We are concerned that setting a 2Mb/s [asymmetric] service requirement for the USC sends a specific market signal that economically rationale organisations will translate into specific technology choices. We drew attention in our DB response the resounding and continuing silence on the role of symmetrical services which, although not widely utilised today, we should expect to become significantly more important in the future. Set at 2Mb we can expect to see a further extension of the UK's reliance on networks based on elements of the old copper telephone network as distinct from a market signal that encourages a transition to a dedicated optical fibre network.

  Our position is that we already live in a DB having moved, in a very short period of time from zero to near 100% availability of first generation broadband and where the internet is for many of us woven into the fabric of our lives as businesses and citizens. We accept entirely that the public sector is generally not well placed to second-guess what the specific applications or services will drive next generation broadband—the market will determine these. However, it is reasonable to expect that as the UK economy seeks to transform itself into a low carbon knowledge economy that the demand for bandwidth will increase exponentially. A knowledge economy is bandwidth hungry because it is built on the trading of ideas (regionally, nationally and internationally) and the interplay and exchange of information—where the basic commodity of exchange is digital data.

  Even were these seismic changes to the structure of the economy not to happen it is worth noting that the entire public sector is driving traffic growth through the adoption of web based channel management strategies and the pioneering of new service delivery arrangements both of which have implications for bandwidth. It is a concern that no one public body has responsibility to reflect, in a national broadband plan, the economic and social implications of the cumulative impacts of the demand for bandwidth arising from the wider eGovernment agenda let alone the demand arising from these structural changes to the economy.

2.   Is the Government right to propose a levy on copper lines to fund next generation access?

  In our response to the DB consultation we accepted that there is much disagreement around the timing of investment in Next Generation Broadband (NGB) infrastructure but we urged the Government should adopt a precautionary principle and, at a minimum, set out a transition timetable—an approach broadly accepted in the DB report.

  At issue for the RDAs was the fact that transitioning to NGB was, in financial terms, orders of magnitude bigger than simply "piggy backing" a broadband offer over an existing telephone network.

  The problem has always been one of funding.

  The RDAs do not take a position on the role of the levy we do, however, take the view that any public sector solution has to: (1) future proof investment; (2) provide regulatory certainty; (3) deliver vfm; (4) be equitable and; (6) acceptable by the public at large.

3.   Will the Government's plans for next generation access work?

  Success will be measured by the country's capacity to deliver a "fibre rich" next generation broadband network in a timely manner.

  The analysis in DB suggests that the market will deliver to two-thirds of the population, leaving public intervention to support a Final Third project to deliver "at least 90% coverage"—all of this to be completed by 2017. The Government identified £200 million to deliver the USC and proposed a Next Generation Fund with a c.£150 million annual funding stream arising from a proposed supplement on all fixed copper lines to deliver the Final Third project.

  This approach raises three concerns: (1) funding; (2) timing; and (3) commercial confidentiality.

Regards funding—the Broadband Stakeholder Group estimate that the cost to deliver next generation broadband is in the range of £5 billion-£29 billion[83] depending on which technology is chosen. DB identifies £200 million funding for the USC and (taken up to 2017) c.£1.2-1.4 billion through the Next Generation Fund. BT for their part have made public plans to spend £1.5 billion on NGB but we note that a recent article by Analysis Masons suggest that a funding gap is likely to endure .[84]

  Timing—our principle concern in the joint RDA response to the DB consultation was to urge the Government to commit to a timetable that would see NGB available across the UK. RDAs broadly accept the DB analysis that much of this investment will rightly be made by the private sector leaving a Final Third [or maybe more] requiring public sector support. This approach, however, means that NGB will primarily be delivered to the mass market by decisions taken largely outwith the public sector. It is a concern that Ofcom's recent consultation on Next Generation Networks published on 31st July 2009[85] drew attention to what amounted to a major strategic review by BT of its plans for 21CN. Ofcom suggested that the effect of this change, along with the current difficult market conditions, appears to have brought considerable uncertainty into the timing of future investment by the wider market. Whilst the UK market digests what this means the DB report provided examples of how our international competitors are pushing ahead with broadband roll-out plans.

  Our position remains that it is difficult to quantify the economic returns [or costs from any delays] from the timing of the roll-out of NGB across the UK. But—if as we argued—that connectivity is a critical infrastructure for a 21st Century Knowledge Economy, then timing is an important factor that should not be left to the vagaries of the market. Given the long lead-in times for civil works there is a case to argue that the UK should adopt the precautionary principle and create an investment climate that accelerates investment now rather than wait for the market to discover that competitors have secured commercial advantage in this new digital economy.

  Confidentiality—it remains the case that in its planning for NGB the public sector is frequently handicapped by confidentiality issues and a general reticence by the telecoms industry to share information. If the DB analysis is correct and the public sector has a role to play in delivering something like a final third this can only be achieved with a much more open approach to the sharing of information—if only to comply with state aids requirements. A much broader exchange of information and openness is required across industry if private and public bodies are to work effectively.

4.   If companies are providing the speed of access which they promise to consumers?

  RDA's believe that the consumer is sovereign in the broadband debate. The recent report from Ofcom on broadband speeds confirmed that actual broadband speeds are significantly below the advertised headline speeds.[86] It remains unclear what, if any, impact the voluntary code of practice on broadband speeds introduced by Ofcom has had on actual service performance.

  It remains the case that a customer in a bar would not expect to pay for a pint only to then receive a half. We see no reason to argue that the market for broadband should be materially different to any other market. In a nascent market the principle of best endeavour that applied to first generation broadband may have been acceptable. However, we might expect that in a NGB market with consumers offered significantly higher speeds, we should expect consumers to be more discerning about quality of service issues. Indeed QoS may expect to play a much more important role in differentiating (and monetising) NGB services. An economy in which connectivity is a marginal activity is fundamentally different to an economy where connectivity is a critical infrastructure.

5.   The extent to which current regulation strikes the right balance between ensuring fair competition and encouraging investment in next generation networks?

  The European Commission has made much of Functional Separation as a means to overcome competition problems and specifically cites the positive impact this structural change has had upon UK experience, where: "…it triggered a surge in broadband connections". We would not disagree that functional separation has accelerated the market and significantly improved competition in the UK but we would caution that experience in the UK suggests that where competition exists it is typically focused on price and constrained to specific geographies. We are concerned that, in the absence of countervailing forces, this structure does little to help accelerate the transition to next generation broadband and, at a practical level, encourages a climate of secrecy that inhibits the sharing of information between incumbents and public agencies interested in understanding the economics of transition.

  It is also worth noting that the 2003 Communications Act gave Ofcom the specific responsibility of ensuring that a wide range of electronic communications services—including high speed data services—is available throughout the UK. Given that the Government's argued in the DB report that we have a structural problem with the UK broadband market whereby at least a third of the market is not likely to be served by NGB it is reasonable to conclude that in some locations the regulatory environment has served the competition objective rather better than the investment objective and that in these poorly served locations the right balance has not always been drawn.

6.   Any other views stakeholders think the Committee should be aware of.

  It is interesting to note that in its efforts to remain completely technology neutral the DB report does not articulate the potential benefits of a UK fibre to the home (FTTH) strategy. This is perhaps not surprising given that this would be the most costly of all the NGB solutions—estimated by the BSG at around c£29bn. It is unquestionable that taking fibre to every premises in the UK would be costly and that in practice any NGB solution will utilise a range of technologies. The BSG, however, usefully summarised the advantages of fibre in their Pipe Dreams report which argued that:

    FTTH is regarded as the ultimate next generation broadband solution. FTTH would be a one-off investment that could be exploited for many decades to come. Continued innovation in fibre optic technology means that once an end to-end fibre connection is in place, the local access layer would no longer be a constraint in the network. FTTH is regarded as more secure than other options as it does not require active street cabinets and the long-term operating costs would be lower than for other technology solutions. However, the up front capital costs of deploying fibre would be very significant.[87]

  The critical factor for policy makers to understand about fibre is that its carrying capacity is virtually limitless and, in contrast to all other broadband technology solutions, once installed the investment is future proofed. When the country invests in roads or rail infrastructure these assets are amortised over 30 or even 60 years not three years that are typically applied to assets in the IT industry. It seems clear that, were we able to apply the same investment logic used in road or rail to a FTTH [or fibre to the premises] investment there would be a compelling economic case, particularly for a public sector determined to secure both the competitiveness of Place and value for money in its investments.

  On the 17th Nov 2004 BT announced it had connected its first homes in a FTTH trial. In 2007 Steven Timms observed that: Unlike elsewhere, there are in the UK hardly any fibre to the home connections In fact, I don't know of a single one[88] Remarkably, two years on, as Japan nears the point where over half its population is connected by fibre,[89] here in the UK we are still piloting FTTH and await a substantive announcement of any major roll-out programme.

  It is widely accepted that c.60% (maybe more) of the cost of fibre is related to the dig. In an area where local government has significant powers related to building control, planning and the regulation of streetworks it remains frustrating to note that as yet there is little evidence that they are using their powers through, for example, the coordination of street works either public or private to facilitate the roll-out of fibre. Equally, it does not help the nascent FTTH market that, even on green field sites, it cannot be assumed that FTTH will always be the default connection of choice by the incumbent supplier.

  The Government's Transformational Government agenda assumes that public services will increasingly be delivered by virtual channels. There appears a powerful logic to this. Indeed, recent research by Socitm suggests that the cheapest channel is the web at £0.27p per transaction compared with £3.22 for the phone and £6.56 for face-to-face. However, even in a DB we should not expect to serve our citizens only virtually—a point well made when the Business and Enterprise Committee examined the future of Post offices.[90] But to see this simply as either virtual services or traditional misses the point. The whole public sector will have to innovate to maintain, indeed improve, models of service delivered in what will be a much tighter fiscal climate and this alongside huge demographic pressures. No doubt some services will shift online but many will still have a person on the front of them—at the point of contact.

  In the future we should increasingly expect to see our public servants needing to rely more and more on the connections they have to their respective back-office networks in order for them to do their job effectively and efficiently. Whether these services are delivered in person, at an office or in a home, or online, they will all be underpinned by technology where the role of broadband connectivity becomes more not less important.

21 September 2009

83   Final report for the Broadband Stakeholder Group, The costs of deploying fibre-based next-generation broadband infrastructure, (8th Sep 08) Back

84   Digital Britain: tax shock funds fibre, Analysys Masons (1st Sep 09) Back

85 Back

86   UK broadband speeds 2009, Ofcom (28th Jul 2009) Back

87   Pipe Dreams? Prospects for next generation broadband deployment in the UK, Broadband Stakeholder Group, (2007). Back

88   Speech to Broadband Stakeholder Group-Next Generation Access, Commonwealth Club, 18th Sep 2007 Back

89 Back

90   HC 371-I., P/1., Post offices-securing their future (23rd Jun 2009) Back

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