In a blow for the credibility of the UK Government's stated objective to have the best superfast broadband network in Europe by 2015, a report of the National Audit Office (NAO) (15 July 2013) into the Government's rural broadband programme (Broadband Programme) has revealed that only four out of the 44 regions covered by the Broadband Programme will have completed their roll-out programme by the target date of May 2015. The report was also highly critical of the procurement framework established for the Broadband Programme and raises concerns over lack of competitiveness, value-for-money and cost transparency. 

The UK's Rural Broadband Programme

The Broadband Programme involves a £530 million investment by the UK Government, over the current spending review period, in the UK's rural broadband network.  With additional funding from local bodies, total public sector funding is expected to be £1.2 billion. The Government's initial market analysis had concluded that BT had a strong market position in the provision of superfast broadband but, with competitors also intending to invest, it opted for a competitive framework approach.

Under the Government's approach, a number of broadband providers (or consortia of providers) were to be appointed following a competitive process to a framework (or panel) which would be available for local authorities to use to "call-off" contracts for local broadband projects.  The aim was to provide local bodies with a ready-made and straightforward process for tendering amongst the suppliers appointed to the framework.

But, what was supposed be a competitive multi-supplier framework now has only one supplier, BT, the former national monopolist.   All other bidders for the framework pulled out, arguing that the design of the Broadband Programme had hampered their ability to compete against BT because:

• The procurement model did not underwrite market risks and thereby favoured companies with secure revenue streams;
• Consortia were required to be led by a member acting as a prime contractor which has the financial strength and capability to bear key project risks alone; and
• The existing state aid and regulatory conditions are not sufficiently attractive to allow competitors to BT

In addition, local broadband projects established outside the scope of the national framework have all been awarded to BT. As of June 2013, 26 of 44 local bodies had signed contracts with a supplier: all 26 contracts had been awarded to BT. 

In June of this year, the Government announced a revised target to complete its roll-out by March 2017 which would result in 92 per cent of premises covered by the Broadband Programme having access to superfast broadband.  The European Commission's Digital Agenda for Europe has set broadband targets for Member States including download rates of 30Mbps for all European households.  The UK's plans for achieving the 30 Mbps target are unclear but it is likely that this will require further network upgrades and, to the extent these upgrades rely on public sector funding, BT is likely to be in the strongest position to compete.

The NAO's concerns

Given the circumstances the NAO has raised concerns over various aspects of the Programme, notably:

• value for money;
• risks associated with the lack of competition;
• lack of transparency relating to costs, progress and delays.

The Government's strategy for ensuring value for money for local projects was heavily dependent on the competitive process between framework suppliers at the call-off contract stage.  With BT the only supplier on the framework, there will be no competitive call-off stage to drive value for money.

The NAO considers that the only remaining way to ensure value for money for the £1.2billion public investment is to effectively and actively implement the in-life contract mechanisms imposed on BT. This will require active scrutiny of BT's ongoing costs and ensuring the accuracy of its modelling assumptions, a potentially burdensome task for the Government and local bodies to undertake over the life of long-term projects.

The NAO considers that the Government has successfully ensured that the supplier will bear any downside risks, whilst the public sector may benefit from any upside risk. However, the robustness of BT's bid assumptions on take-up and profit margins are critically important to this assessment. The NAO considers it is currently too early to assess whether the modelled assumptions are accurate. 

Ultimately then, it remains to be seen if the Government and local bodies will be able to ensure value for  money for taxpayers through the in-life contractual controls that are in place.

There are also significant concerns regarding the transparency of the costs in BT's bid to be appointed to the framework.  BT declined to provide a detailed cost model during the framework competition, citing commercial confidentiality and a high degree of complexity.  Although, following clarifications with the Government, BT did provide (just) sufficient information to avoid exclusion from the competition, concerns must remain about the robustness and completeness of the information available to the Government and local bodies for monitoring BT's costs in local projects.

Delays to the Programme have also been compounded by the need for the Government to obtain state aid clearance from the European Commission.  Negotiations with the Commission over state aid clearance took much longer than the Government had anticipated.  Features of the Programme that were introduced in order to secure state aid approval from the Commission, such as technological neutrality and obligations to provide wholesale access to other providers, are also said to have reduced the commercial attractiveness of the Programme to providers other than BT, thus contributing to the lack of competition – a somewhat paradoxical result since the purpose of such requirements is supposed to be foster competition using the state-aid infrastructure.

Conclusion

It is apparent from the report that BT has a lot to gain from the programme. A lack of competition has meant that by the end of the process it is highly likely that BT will own all of the assets and infrastructure created using £1.2billion of public sector money. It is as yet unclear how this will effect future competitiveness in the wholesale broadband market However, the NAO's conclusion that BT is likely to be in a strong position should there be any further public sector funding in this area goes without saying. 

Interestingly, Ofcom, the UK communications regulator, told the NAO that it was not surprised that BT had won all the contracts to date, given its advantages in economies of scale which allow it to operate more cost effectively than other operators.   This raises a question over whether the Government's competitive framework strategy was right in the first place.

Absent competition, the principal concern is whether or not the objective of providing the taxpayer with value for money will be achieved and a lot will depend on the robustness of the contracts combined with the willingness and ability of local contract managers to operate and enforce the contractual controls that have been put in place. 

Finally, some critics – including BT's own former chief technologist – have expressed concern that the 'super-fast' broadband speeds of 24Mbps are, in a global context, already too slow and suggest a lack of ambition from the Government. A further concern is a failure to invest in bi-directional broadband. This lack of 'future-proofing' may result in further public expenditure being required in the not too distant future as the way the public uses broadband continues to evolve.

Nick Pimlott and Paul Graham are Partners, Field Fisher Waterhouse LLP