Analysis: Is the government's fast broadband delivery strategy starting to fall apart?

Frustration with the government's approach to rural deployment is growing

In the coalition government’s October 2010 Comprehensive Spending Review, Chancellor George Osborne paid a great deal of attention to the rollout of superfast broadband in the UK. He announced the allocation of £530m of public money to complement private investment in next generation networks.

Osborne declared that by 2015 the UK would have “the best superfast broadband network in Europe”, with hard-to-reach rural areas receiving special attention from government and network operators, in the hope that 90 per cent of people in each local authority will have next generation access.

Four pilot areas – Highlands & Islands, North Yorkshire, Cumbria and Herefordshire – were selected to be “models for public and private sector collaboration on high-speed broadband networks in rural Britain”. The main aim of the pilots is to help the government and ISPs understand the commercial challenges associated with rolling out broadband infrastructure in rural areas, and each scheme was allocated up to £17m from the £530m pot.

This money is being distributed by Broadband Delivery UK (BDUK), a government body set up to establish a framework agreement, whereby suppliers will only have to bid once to be selected for anywhere between 30 and 50 potential broadband rollout projects. It is hoped that this will lower procurement costs for local authorities and suppliers.

It has now been more than a year since the government put its rollout plans in place and it is becoming clear that significant hurdles remain in ensuring universal broadband in the UK.

Last December, a freedom of information request submitted by rural Britain campaigners the Countryside Alliance (CA) revealed that very little progress has been made establishing next-generation broadband networks in the four pilot areas, with much of the money still unspent. The information showed that to date Highlands & Islands had not spent any of the money at all, Cumbria had spent just £20,000, Herefordshire £50,000 and North Yorkshire £500,000.

Culture Secretary Jeremy Hunt responded to this criticism in the new year by warning that local authorities could lose their BDUK funding if they do not sign broadband contracts by the end of 2012.

Head of policy for CA, Sarah Lee, believes the findings indicate that the local authorities do not have the necessary expertise to deliver such a large technology rollout.

“We are very disappointed that it is taking so long to improve rural broadband. We have got local authorities sitting on massive amounts of money but they just don’t know what to do with it,” says Lee.

“Local government does not have the in-house skills or knowledge on how to deliver broadband, and asking them to provide the technology without any guidance is a huge task,” she adds.

Lee argues that the government should be asking the authorities what is holding up the pilots, and suggests that experts and businesses need to work with the public sector more to support the process.

North Yorkshire – the authority that has so far spent the largest amount of the money available to it – says that it has been able to make more progress than the other councils because it is delivering broadband through a public/ private enterprise that employs telecom experts.

NYnet was set up in 2007 to serve the council, police, fire stations and schools, and also rent spare capacity to community broadband providers who then sell it on to businesses and residents. The venture has an annual turnover of about £8m.

“County council IT people can’t necessarily buy telecom networks because they don’t always have the right skills,” explains John Moore, corporate director of finance and central services at North Yorkshire County Council.

Moore argues that by creating NYnet, the council can now use an organisation with the correct skills to deploy broadband in the area.

“NYnet is different – it is telecom people working on behalf of the county council, and because of that, we have got higher credibility with the telcos,” he says.

The issue of skills, or rather the lack of them, is not the only think holding back the pilots, however. For some ISPs, the commercial case for getting involved in supplying fast broadband to sparsely populated areas just does not stack up, given the lengthy and expensive procurement processes involved.

Cable & Wireless, for example, has engaged heavily with BDUK but has decided not to participate as a contractor in the framework. Brian Woodford, Cable & Wireless’ managing director of public sector and partners, believes not enough funding is being made available for the ISPs to make a return on investing in rural broadband. He fears that once the networks are complete, customers will not be willing to pay the high prices for next-generation broadband that ISPs would need to charge to fund further rollouts.

“I think of it as a see-saw, where on the one side you have all the capital requirements needed to make universal rollout of broadband work, and on the other side you have all the sources of funding – EU, government, local authority etc,” says Woodford.

He argues that in order to make the see-saw balance, and consequently make rural broadband a feasible commercial option, a “delta has to be filled” – the delta being the amount that people are willing to pay for superfast broadband services, which is effectively the return on investment for ISPs.

“Are people going to pay £50 a month for these services? Probably not. That’s what makes this model a problem, the funding is insufficient. That’s the discussion that should have happened to make this policy work,” says Woodford.

Analysis: Is the government's fast broadband delivery strategy starting to fall apart?

Frustration with the government's approach to rural deployment is growing

“We should have been talking about this first. Rather than running procurement, which costs everyone a lot of time and money, the government should have carried out a lot more market testing. They should have had mature conversations with suppliers at a senior level.
“We all would have done that, and this would have helped everyone truly understand the economic model.”

Geo Networks cited the failings of this economic model when it decided to withdraw from the BDUK framework at the end of 2011. Geo argues that it is not just the government funding that is insufficient, but that it is almost impossible for any network operator to effectively compete in the bidding process unless it has the same cost base as incumbent telco BT.

Access to BT’s ducts and poles

Ofcom recognised in October 2010 that for smaller networks to compete, BT would have to open up its infrastructure and let other ISPs install sub-ducts in its ducts or attach equipment to its poles so that huge capital investments were not required by the smaller players to set up their own infrastructure.

So-called duct and pole access, or physical infrastructure access (PIA), prices were released by BT in January 2011, but were met with huge criticism from across the industry. This led to a review of these prices, which were revised downwards and released again in October 2011. The revised prices are still considered too high by BT’s larger competitors, but experts disagree.

Ovum analyst Matthew Howett argues that BT had “pulled out all the stops to make the pricing as attractive as possible”.

However, pricing is not the main complaint from network operators such as Geo. BT’s PIA product only allows ISPs access to its infrastructure for the final drop – from the local exchange to somebody’s home. Ofcom has not required BT to also open up its backhaul network, which would allow operators to connect wireless networks to BT’s core infrastructure and offer services to mobile operators – a potential revenue stream that would make the business case for rural rollout more attractive.

The PIA product, due to stipulations outlined by Ofcom, can also only be used to offer services to consumers. Geo, for example, would not be able to offer broadband to local businesses or councils. Competitors to BT argue that this again puts them at a commercial disadvantage, as BT is able to offer services to the whole market.

“The one thing we knew was that unless we could roll out optical fibre across rural areas at the same cost as BT, then we just wouldn’t be able to beat them in the marketplace,” says Chris Smedley, chief executive at Geo Networks.

“For us to compete in that market the regulator needs to give us the right access to BT’s ducts and poles so that we could install our own cable on it, and get access to its backhaul to offer a wide range of services to a wide range of customers. The current PIA product limits this,” he adds.

Analysis: Is the government's fast broadband delivery strategy starting to fall apart?

Frustration with the government's approach to rural deployment is growing

“Businesses and the public sector serve between a third and a half of the value of the whole market, so we would be competing against BT who can provide 100 per cent of the market and we would have a higher cost base. Our business case was blown out the water.”

Smedley argues that this benefits BT in the bidding process as it can put forward a case to BDUK where it is investing more of its own capital, as it has more customers it can serve, and a lower cost base.

Issues with PIA trials

Virgin Media has complained that because BT is not committing to timeframes and service level agreements in the PIA trials, this could have a knock-on effect for smaller network operators looking to take part in the trials with a view to possibly putting forward bids to offer rural broadband services. The trials are seen as key to the entire broadband rollout as they provide an example of best practice for further rollouts.

Under the BDUK tender process, ISPs are bidding for funding to roll out networks in rural areas. But if the ISPs do not meet the bidding deadlines within the BDUK tender process, they could suffer financial penalties, which the smaller networks cannot afford. This, Virgin Media argues, gives BT another unfair advantage.

“For companies committing many millions of private investment, a best-efforts approach to PIA, where no SLAs or timeframes are followed, is not enough,” says Duncan Watts, Virgin Media’s head of network expansion.

Service level agreements, for example, on how long it takes BT to start and finish a trial with a new operator, may give smaller networks a clearer idea about timeframes and costs when bidding for BDUK money.

“As it stands, no service level agreements or guarantees will be agreed until March 2013 at the earliest and this exposes operators to significant risks when bidding for BDUK money. This needs to be resolved quickly,” says Watts.

BT says it expects to develop SLAs, but it would be “unusual and inappropriate” to put any in place up front, due to the uncertainty and complexity of PIA trials.

However, it isn’t just its competitors who are complaining about BT. Computing spoke to a senior employee of one of the pilot councils who believes that “BT is playing a very crafty game” and could be doing much more to ensure a universal, competitive, broadband rollout, such as opening up its backhaul infrastructure.

“You have got to ask this question – how does a Cable & Wireless or a Geo beat BT in a rural area like the pilots? How do they do it?” said the senior council employee, who asked to remain anonymous.

“BT has got the entire infrastructure and can offer all the services. Unless others can use BT’s backhaul these network operators have no chance,” he added.

“BT holds lots of cards, and only people who are trying to put competitive bids together against them understand what it is doing. The government needs to do something if they want competition in the market. And it’s not for the BDUK people to do, it’s central government. It needs to come from the top.”

BT shrugs off criticism

When we put these criticisms to BT it responded by saying that it has carried out all Ofcom’s and the government’s requests, such as opening up its ducts and poles for other networks to use, and that even though it is a former incumbent, this does not benefit it in securing funding for rural broadband rollout.

It also pointed to Fujitsu’s successful trial of the PIA product last year as an indication that network operators can make the costs associated with PIA work without connection to BT’s backhaul.

“Ofcom has defined the regulatory parameters of the PIA product and clearly stated in its review of the Wholesale Local Access market that the primary use for PIA is for next-generation access,” said a BT spokesperson.

“There is therefore no regulatory requirement for BT to allow other companies to use its ducts and poles to provide backhaul services. Also, some of the major players, such as Fujitsu, are making good progress,” they added.

“I don’t think our history as a monopoly gives us any real advantage in this process. However, we do have a successful track record working with government to address rural broadband issues.”
Quocirca analyst Rob Bamforth believes that BT does still benefit from being a former incumbent in the rural broadband process, because of the size of its core infrastructure, as this does allow it to offer more services to more people, making the return on its investment easier.

“BT enjoys the economies of scale of a former monopoly, and the only way around this is going to be increasing pressure through regulation,” says Bamforth.

The government faces a big challenge in balancing its desire for the UK to have the best superfast broadband network in Europe by 2015, with the need to clip BT’s wings and promote more competition in the market, knowing that if it fails to deliver a future-proof broadband network within the next few years, the country’s economic outlook will just get bleaker.