The rural broadband programme - Public Accounts Committee Contents

2  Transparency


13. The Department's initial evaluation of BT's financial model gave it a score of only 7 out of 20 on cost transparency, below the minimum necessary to allow BT onto the framework contract and be able to bid for specific contracts. After BT provided further information, the Department awarded BT a score of 8 out of 20, the minimum acceptable score, even though information to "enable understanding of key cost drivers" was still limited and the relationship between cost drivers, unit input and output costs was not clear. The Department secured contractual assurance from BT that the costs within its bids would be consistent with its commercial superfast broadband roll-outs. However, BT did not grant the Department access to its books so it could check this consistency, and the Department went ahead despite the lack of access.[20] This is of particular concern in the context that BT is in practice the monopoly provider in this programme.

14. When negotiating contracts with BT local authorities should be able to benefit from comparisons with other local authorities to ensure they are getting fair treatment from BT. However, the standard contract with BT includes non-disclosure agreements which prevent local authorities from discussing their contractual arrangements with one another.[21] The Department told us that it has sought to provide each local body with some assurance that its bid is in line with others through bid comparison reports. The reports identified errors in BT bids, such as overcharging by £3 million in one bid. However, local authorities themselves cannot access this information to be better informed and thus be in a stronger negotiating position when discussing contract terms with BT.[22]

15. A comparison between the Great Britain and Northern Ireland programmes, both delivered by BT, indicates that the Northern Ireland contract was delivered much more cheaply and with less public sector funding than the British bids. BT gave a number of reasons why Northern Ireland costs were lower, including lower labour costs, cabinets without power meters being cheaper to install, and the topography of the networks.[23]

16. Specifically on the cost of installing the cabinets which link individual premises to the wider network, the NAO report showed the Northern Ireland cost to be 12% below the average BT bid in England. The range of cost estimates for these items makes it difficult to draw conclusions on the amount of contingency being included in BT's bids.[24] The CEO of BT Openreach had stated in December 2012 that each cabinet costs £100,000, whereas, at our hearing, BT told us the approximate average cost for a cabinet in the publicly subsidised programme was £29,000. BT told us that the amount of contingency it builds into individual bids under the Programme varies, but it is typically between 5% and 8% of the total cost. Other sources of estimates for the cost of cabinets suggest much higher levels of contingency in current Programme bids. The Department does not have strong assurance that the level of contingency included in BT's bids is reasonable.[25]

17. As well as the costs of building the infrastructure, the take-up rate and retail prices are an integral part of whether value for money will be achieved.[26] Under the contracts, BT bears the risk of take-up of superfast broadband being less than it anticipated. BT told us that it uses a 20% take-up assumption for both its commercial programme and its publicly subsidised one. However, 20% is a lower take-up rate than that achieved in Northern Ireland and elsewhere. If BT's take-up assumption has been conservative, monitoring this take-up and recovering any excess profits will be important to the value for money of the project. The Department and BT could not tell us what premium the Department has paid for transferring the risk of low take-up to BT.[27]

18. The limited competition and lack of transparent costing make it even more important that the Department and local authorities have good controls over the actual costs of the Programme during implementation. The Department has not, however, compensated for these limitations through strengthening processes to control costs. The Department told us that the range of safeguards it designed from the outset are sufficient to assure value for money.[28]

19. BT told us it will grant the Department full access to invoices supporting the capital costs it incurs on the Programme. However, the project in Cornwall alone has generated 18,000 separate invoices, and the NAO report highlights the need to ensure that local authorities have sufficient resource and capability to deal with such a large quantity of invoice information from BT. BT estimates that about 40% of capital costs will relate to labour and project management, which will be harder to assure than capital costs. BT told us that it will support its invoices for labour with timesheets to improve transparency.[29]

Roll-out plans

20. BT's detailed plans for roll-out of superfast broadband are part of the contract agreed between BT and local authorities. The contract includes a clause that the details about when and where BT will be installing superfast broadband remain confidential between the parties.[30] Consequently, other suppliers have insufficient information to enable them to develop plans for other projects to reach the 10% of premises which will not be covered by the current programme. Even the Rural Community Broadband Fund, part funded by the Department and focussed on small community projects, has been stalled by the lack of disclosure of BT's plans, as the projects cannot prove that they do not overlap with the existing Programme.[31]

21. We were concerned about the commercial confidentiality clauses potentially giving BT the ability to disrupt other suppliers' broadband projects. Witnesses from the industry cited examples where other suppliers had abandoned plans to provide superfast broadband when BT had subsequently stated its intention to include the area in its future roll-out. Witnesses also told us that suppliers' plans were stalled while waiting for BT to confirm that it did not intend to cover that area. They also reported instances such as BT saying that roll-out to an area would be delayed if local authorities supported alternative infrastructure providers. BT subsequently told us that such delays would be the result of dealing with the necessary changes to its contracts in the area concerned, to accommodate the other scheme.[32]

22. A small minority of counties such as Northamptonshire have chosen to publish information about where it expects BT to deliver superfast broadband. BT told us that in other areas, once the contracts are finalised, potential suppliers could ask local authorities whether specific areas are included in BT's plans or not. BT told us that it was a matter for local authorities whether they released the information or not. INCA told us that, contrary to a European Union directive, local authorities would not release the information on the grounds of commercial confidentiality, even in response to freedom of information requests.[33]

23. The Department has access to all contracts, but it is not a contract signatory. BT stated that there is no commercial impediment to the information being made public once the contract was signed, which the Department regarded as a significant step forward. The Department said it was sympathetic to releasing the information but was not in a position to make a firm commitment on this without first consulting ministers. [34] However we have been concerned to hear that since BT's assurances to us, it has still been refusing local authorities the permission to release detailed roll-out plans.

20   Qq 65, 100, 108-111, 114, 125, 182, 187, 282-285 Back

21   Qq 67, 77, 287 Back

22   Qq 124-125, 291-293 Back

23   Qq 50-54 Back

24   C&AG's report, para 3.15 and Figure 13 Back

25   Qq 56-63; C&AG's report, para 13 Back

26   Q 28 Back

27   Qq 119-121, 231 Back

28   Qq 280, 281, 285 Back

29   Qq 66, 112-115 - 119, 123, 144 Back

30   Qq 11, 21, 182 Back

31   Qq 5, 11, 75 Back

32   Qq 11, 13, 19, 20, 70-75; Ev w14 Back

33   Qq 23, 67-81, 146, 331-332 Back

34   Qq 82, 84-89, 145, 327- 340 Back

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Prepared 26 September 2013