1 Competitive tension and funding
1. On the basis of a Report by the Comptroller and
Auditor General, 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.
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.
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.
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. 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 twoBT
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. 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. 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.
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. 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.
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. 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.
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.
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.
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.
At the end of the project, BT's balance sheet will benefit from
some £1.2 billion of public funding.
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.
Witnesses told us that in Sweden rural broadband schemes have
a much lower public contributionabout 25-33% although BT
subsequently claimed the detail of the scheme in Sweden was different.
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.
1 C&AG's Report, The rural broadband programme,
Session 2012-13, HC 535 Back
Q 324; C&AG's Report, para 18 Back
C&AG's Report, para 8, Figure 14 Back
C&AG's Report, para 2.7 Back
Qq 180-185 Back
Qq 118, 247, 261-264, 280-285; C&AG's report, para 8 Back
Qq 2-6, 11, 31, 35, 36, 99, 185; Ev w15 Back
Qq 2, 3, 9, 298, 309, 310 Back
Qq 103, 271-275, 296, 309 Back
Qq 134-135, 204 Back
Qq 135, 178, 298-99, 324 Back
Qq 1, 11, 217, 233, 320-324; Ev w7 Back
Qq 129, 131-134, 180, 182, 341-342 Back
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
Qq 241, 253, 258 Back
Qq 48, 49, 221, 236 Back
Q 233 Back
Q 220, Ev w24 Back
Qq 233-245, 259- 260 Back