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The Public Accounts Committee publishes its 24th Report of this Session, The Rural Broadband programme.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, said:

"The programme to extend superfast broadband to rural areas has been mismanaged by the Department for Culture, Media and Sport. The sole provider BT has been placed in a quasi-monopolistic position which it is exploiting by restricting access to cost and roll-out information. The consumer is failing to get the benefits of healthy competition and BT will end up owning assets created from £1.2 billion of public money.

All of the 26 contracts let by June 2013 had gone to BT and the remaining 18 are likely to follow suit.

Overall, BT is supposed to provide at least 90% coverage in rural areas but it is preventing local authorities from publishing proper information on the areas the company will and will not cover. Details of speed and coverage in each local project are also being kept confidential, preventing other suppliers from developing schemes aimed at reaching the remaining 10% of premises and  stopping communities and others from identifying alternative ways of providing superfast broadband.

This together with the Department admitting the programme will be delivered in 2017—two years later than planned—means that consumers are getting a raw deal despite the generous public subsidy.

The Department’s approach to procurement failed to deliver any meaningful competition to drive down prices and maximize coverage. Without that competitive tension, it is crucial to have full access to the single supplier’s cost information to check that BT’s bids are reasonably priced – but the Department failed to negotiate that access with the company.

We now have a situation where local authorities are contributing over £230 million more to the programme than forecast in the Department’s business case, while BT is committing over £200 million less.

The lack of transparency over BT’s costs is a serious risk to value for money. Local authorities are prevented under the contract from sharing cost information which weakens their negotiating position with BT.”

Margaret Hodge was speaking as the Committee published its 24th Report of this Session which examines the rural broadband programme.

The Programme is designed to help get superfast broadband to areas, predominately rural, where commercial broadband infrastructure providers currently have no plans to invest. Under the Programme the Department provides grant funding to 44 bodies (local authorities or groups of authorities) to subsidise them to procure the superfast broadband services for their areas. The Department has developed a framework contract for local bodies to use and also offers them support in negotiating with the supplier to provide the infrastructure required to fill in the gaps in commercial coverage. The Department has allocated £490 million in grant funding to local authorities for the Programme until 2015 and is also seeking matched funding from local authorities and capital investment from the supplier, BT.

The Department’s procurement approach for the rural broadband programme failed to deliver meaningful competition for the letting of local contracts. The Department appointed only two bidders – BT and Fujitsu - to the framework contract. By June 2013 all of the 26 contracts agreed by local bodies had gone to BT and, following Fujitsu’s March 2013 announcement that it would not be bidding for any more local contracts, BT is likely to win the remaining 18. Witnesses from the broadband industry told us that the way the Department designed the Programme reduced competition. In addition to the current programme, the Department has allocated a further £250 million to increase coverage of superfast broadband in the 2015-19 spending period, but does not yet have a clear plan for reaching 100% superfast broadband coverage.

Recommendation:  The Department should not spend any of the further £250 million of public money until it has developed approaches to secure proper competition and value for money for improving superfast broadband after 2015.

The Department’s assumptions in its 2011 business case about the respective capital contributions of the public and private sectors were wildly inaccurate. BT is committing £207 million less (£356 million rather than £563 million) in capital funding than the Department anticipated in its business case, while local authorities on the other hand are contributing £236 million more (£730 million, rather than £494 million). Nevertheless, BT will still benefit from owning assets created from £1.2 billion of public funding once the Programme is complete. 

Recommendation: Before contracts are awarded for additional broadband coverage from 2015, using the additional £250 million, the Department should improve its modelling work and, when negotiating levels of private sector investment, the Department should push for contributions that take account of the long-term value of the assets to the supplier.

 
The lack of transparency over BT’s costs is a serious risk to value for money, particularly as BT is the Department’s single supplier. The Department’s reliance on self-certification by BT (that its prices are comparable with those in its commercial roll-out of superfast broadband) does not represent an adequate control. The standard contract between BT and local authorities includes a clause that prevents the local authority from disclosing the costs involved to other local authorities who are negotiating contracts. This means that other local authorities’ negotiating positions are weakened by a lack of comparable cost data against which to assess BT’s bid. In addition, the Department does not know how much contingency BT includes in its bids, and estimates vary.

Recommendation: The Department should insist on a higher standard of cost transparency before contracting. Where contracts are not yet signed for the current Programme, the Department should secure BT’s agreement to improve cost transparency, for example by omitting the non-disclosure agreement between local authorities.

The Department has not revisited its approach to implementation controls in the light of the limited competitive tension and transparency. The importance of robust checks on actual costs is heightened by the lack of competitive tension in letting contracts and the limited transparency over bid details. Local bodies will have open-book accounting over actual costs once projects go live. But about 40% of the capital costs relate to labour and project management costs, which are hard to fully assure. BT’s estimate for the number of premises that will take up the superfast broadband infrastructure will also require close monitoring.

Recommendation: The Department should set out how it has assured itself that local authorities will be adequately resourced and supported to carry out adequate checks on BT’s costs and take-up rates during the project.

Overall, BT is supposed to deliver at least 90% coverage in rural areas but the Department did not secure sufficient transparency from BT about precisely where it intends to roll out superfast broadband within each area. Other suppliers are inhibited from developing complementary services so 100% coverage is secured in rural areas. Details about speed and coverage are treated as commercially confidential in each local project. This has prevented other suppliers from developing proposals for schemes aimed at reaching the remaining 10% of premises that will be without superfast broadband. The Department welcomed BT’s statement at our hearing that it has no objection to publishing this data for finalised contracts. But we are very concerned to hear that local authorities and community based organisations have since continued to encounter resistance from BT to publishing detailed roll-out plans.

Recommendation: The Department should, as a matter of urgency, publish BT’s detailed roll-out plans so that other suppliers can get on with trying to reach the remaining 10% of the population that will still be without superfast broadband.

BT’s competitors have legitimate concerns about the scope for them to compete effectively under the current regulatory regime. Despite Ofcom introducing requirements for BT to allow wholesale competitors access to BT’s physical infrastructure, the conditions attached have deterred any other providers from exploiting this access. There are also concerns that existing regulation has allowed BT to set its wholesale price too high, so alternative suppliers find the margin between wholesale and retail prices is squeezed to the extent that they cannot operate profitably.  Ofcom is reviewing the broadband market this year, which presents an ideal opportunity to reconsider whether the regulatory regime is doing enough to promote competition.

Recommendation: As part of its current review of the broadband market, Ofcom should explicitly address the impacts on competition of BT’s wholesale pricing structure and of the terms and conditions attached to accessing BT’s infrastructure.