2 Transparency
Costs
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
|
