Striving to be the best in Europe
The government has made broadband internet provision a key public policy priority. In many predominantly rural areas, covering almost one third of UK premises, commercial providers have no plans to invest in the enhanced infrastructure required to deliver improved broadband speeds because these areas will yield lower returns. The government has therefore decided to intervene in the market and make subsidy available to stimulate investment.
The Department for Culture, Media and Sport (the Department) is responsible for government’s broadband policies. Its objective for the UK is to have the best superfast broadband network in Europe by 2015. Before June 2013, the government aimed that by 2015, 90 per cent of premises in each area of the UK would have access to superfast internet speeds of above 24 Megabits per second (Mbps) and for all premises to have broadband speeds of at least 2 Mbps. In June 2013, it announced its intention for 95 per cent superfast coverage by 2017.
Effect reduced by delay
The Department is currently forecasting that it will complete the programme 22 months later than originally planned, reaching 90 per cent of premises 12 months later than originally planned. Experience from similar projects suggests that government is not strong at taking remedial action to guard against further slippage. At the end of the Programme, BT’s wholesale infrastructure is likely to have benefited from £1.2 billion of public money. Active involvement from Ofcom and the Department will be required to monitor the impact of the Programme on BT’s position in the sector in the longer term.
Helpful, but limited analysis
The Department has compared tender prices between local bids, which has helped local bodies. A key control during local procurement is the comparison of supplier bids to other costs. Most local bodies did not have competitor bids to compare. The Department instead provides local bodies with comparisons to other local bids and the financial model from the framework bid. Such comparisons have identified a few errors in BT bids, resulting in financial savings for local bodies, but the analysis is limited, as it does not link bids to unit costs or to wider benchmarks.
The Department commissioned analysis to benchmark unit costs through building a ‘should cost’ model but was hampered by lack of detailed data. The framework required suppliers to submit to a cost benchmarking study, as part of which the Department commissioned a consultancy firm to develop a ‘should cost’ benchmark model. A first draft of the report was completed in late May 2013, by which stage half of local body contracts were already finalised. The benchmarking report indicated that one supplier bid is in line with market expectations but has so far been unable to conclude on a second bid due to limited transparency over its complex technical solution.
There has been limited competition to BT within the Programme and, currently, no prospect of competition for the remaining framework procurements. Nine companies pre-qualified to submit tenders for the national framework, but only three submitted final tenders and only two suppliers – BT 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 in the framework. All local projects operating outside of the national procurement framework which have chosen a supplier have chosen BT. By June 2013, 26 of the 44 local bodies had signed contracts and all 26 had selected BT as their supplier.
Cost structure not entirely reasonable
The Department does not have strong assurance that the level of contingency included in BT’s bids is reasonable. BT is required in the contracts to bear the risk of overspends. This arrangement limits public risk but may incentivise BT to include contingency in its bids. During the project, BT may only claim payment for evidenced expenditure. For 36 per cent of the costs BT has included in its bids, there is a range of benchmarks available against which the reasonableness of BT’s bids can be assessed. But these benchmarks would lead to different conclusions about the amount of contingency included. For a further 41 per cent of costs, there is only limited benchmarking available and there are indications that there may be contingency in some of these amounts. For 23 per cent of costs, there is no benchmarking available.
Modelling assumptions to be discussed
The Department has secured in-life controls such as analysing actual costs in invoices. But no open book procedure is perfect and some risks remain. The process that the Department and local bodies will operate appears robust and should allow local bodies to validate that all equipment has been correctly costed and is separate from BT’s commercial programme. However, BT’s labour and project management costs, likely to comprise around 40 per cent of total costs, will be more difficult to fully assure. The Department is working with BT to introduce detailed assurance procedures, and is helping local bodies to focus invoice checking on the key risk areas.
The Department has transferred much of the downside risks to BT although BT would benefit from some upside risks. BT bears the risks of costs being higher, or revenues being lower than modelled, including the risk of future price regulation. The public sector will benefit from capital costs being lower than modelled. However, BT would benefit in full from any efficiencies it can make in operational costs. If take-up, and therefore wholesale revenue, is higher than expected, the public sector would share the benefits from volumes being higher than expected for the ten years of the contract. After that point, all wholesale revenue will go to BT. Experience to date suggests a possibility that BT’s take-up assumption of 20 per cent may be conservative. The Department has not modelled the upside and downside risks that BT faces to determine whether the price paid for the balance of risk is reasonable.
Implementation controls to ensure value
The Department is seeking to deliver the government’s rural superfast broadband objectives in a market dominated by one supplier. The Department is relying on a combined package of value-for-money safeguards to provide assurance. However, competition was limited and assurances over costs and take-up assumptions have been hampered by the complexity of the solution and lack of cost transparency. The Department does not have strong assurance that costs, take-up assumptions and the level of contingency in supplier bids are reasonable. Ensuring value for money for the £1.2 billion public investment now relies heavily on whether the Department can effectively implement the in-life contract controls it secured for the Programme.
This report examines how well the Department designed the rural broadband programme and the extent to which the operation of the combined set of safeguards provides assurance over value for money for the subsidy. It also considers whether the Department is making sufficient progress in rolling out superfast broadband to rural areas. It does not consider wider aspects of UK broadband policy.