Conclusions and recommendations
1. The
Programme is designed to help get superfast broadband to areas,
predominately rural, where commercial broadband infrastructure
providers currently have no plans to invest. Under the Programme
the Department provides grant funding to 44 bodies (local authorities
or groups of authorities) to subsidise them to procure the superfast
broadband services for their areas. The Department has developed
a framework contract for local bodies to use and also offers them
support in negotiating with the supplier to provide the infrastructure
required to fill in the gaps in commercial coverage. The Department
has allocated £490 million in grant funding to local authorities
for the Programme until 2015 and is also seeking matched funding
from local authorities and capital investment from the supplier,
BT.
2. The Department's procurement approach for
the rural broadband programme failed to deliver meaningful competition
for the letting of local contracts. The
Department appointed only two bidders - BT and Fujitsu - to the
framework contract. By June 2013 all of the 26 contracts agreed
by local bodies had gone to BT and, following Fujitsu's March
2013 announcement that it would not be bidding for any more local
contracts, BT is likely to win the remaining 18. Witnesses from
the broadband industry told us that the way the Department designed
the Programme reduced competition. In addition to the current
programme, the Department has allocated a further £250 million
to increase coverage of superfast broadband in the 2015-19 spending
period, but does not yet have a clear plan for reaching 100% superfast
broadband coverage.
Recommendation: The
Department should not spend any of the further £250 million
of public money until it has developed approaches to secure proper
competition and value for money for improving superfast broadband
after 2015.
3. The Department's assumptions in its 2011
business case about the respective capital contributions of the
public and private sectors were wildly inaccurate.
BT is committing £207 million less (£356 million rather
than £563 million) in capital funding than the Department
anticipated in its business case, while local authorities on the
other hand are contributing £236 million more (£730
million, rather than £494 million). Nevertheless, BT will
still benefit from owning assets created from £1.2 billion
of public funding once the Programme is complete.
Recommendation: Before contracts are awarded
for additional broadband coverage from 2015, using the additional
£250 million, the Department should improve its modelling
work and, when negotiating levels of private sector investment,
the Department should push for contributions that take account
of the long-term value of the assets to the supplier.
4. The lack of transparency over BT's costs
is a serious risk to value for money, particularly as BT is the
Department's single supplier. The Department's
reliance on self-certification by BT (that its prices are comparable
with those in its commercial roll-out of superfast broadband)
does not represent an adequate control. The standard contract
between BT and local authorities includes a clause that prevents
the local authority from disclosing the costs involved to other
local authorities who are negotiating contracts. This means that
other local authorities' negotiating positions are weakened by
a lack of comparable cost data against which to assess BT's bid.
In addition, the Department does not know how much contingency
BT includes in its bids, and estimates vary.
Recommendation: The Department should insist
on a higher standard of cost transparency before contracting.
Where contracts are not yet signed for the current Programme,
the Department should secure BT's agreement to improve cost transparency,
for example by omitting the non-disclosure agreement between local
authorities.
5. The Department has not revisited its approach
to implementation controls in the light of the limited competitive
tension and transparency. The importance
of robust checks on actual costs is heightened by the lack of
competitive tension in letting contracts and the limited transparency
over bid details. Local bodies will have open-book accounting
over actual costs once projects go live. But about 40% of the
capital costs relate to labour and project management costs, which
are hard to fully assure. BT's estimate for the number of premises
that will take up the superfast broadband infrastructure will
also require close monitoring.
Recommendation: The Department should set
out how it has assured itself that local authorities will be adequately
resourced and supported to carry out adequate checks on BT's costs
and take-up rates during the project.
6. Overall, BT is supposed to deliver at least
90% coverage in rural areas but the Department did not secure
sufficient transparency from BT about precisely where it intends
to roll out superfast broadband within each area. Other suppliers
are inhibited from developing complementary services so 100% coverage
is secured in rural areas. Details about
speed and coverage are treated as commercially confidential in
each local project. This has prevented other suppliers from developing
proposals for schemes aimed at reaching the remaining 10% of premises
that will be without superfast broadband. The Department welcomed
BT's statement at our hearing that it has no objection to publishing
this data for finalised contracts. But we are very concerned to
hear that local authorities and community based organisations
have since continued to encounter resistance from BT to publishing
detailed roll-out plans.
Recommendation: The Department should, as
a matter of urgency, publish BT's detailed roll-out plans so that
other suppliers can get on with trying to reach the remaining
10% of the population that will still be without superfast broadband.
7. BT's competitors have legitimate concerns
about the scope for them to compete effectively under the current
regulatory regime. Despite Ofcom introducing
requirements for BT to allow wholesale competitors access to BT's
physical infrastructure, the conditions attached have deterred
any other providers from exploiting this access. There are also
concerns that existing regulation has allowed BT to set its wholesale
price too high, so alternative suppliers find the margin between
wholesale and retail prices is squeezed to the extent that they
cannot operate profitably. Ofcom is reviewing the broadband market
this year, which presents an ideal opportunity to reconsider whether
the regulatory regime is doing enough to promote competition.
Recommendation: As
part of its current review of the broadband market, Ofcom should
explicitly address the impacts on competition of BT's wholesale
pricing structure and of the terms and conditions attached to
accessing BT's infrastructure.
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