Serious questions raised over Welsh superfast broadband project

The contract for ‘superfast broadband’ that the Welsh Assembly Government (WAG) has signed with BT will deliver less than politicians have promised in public statements, and appears to deal with BT and Openreach as a single entity in violation of a BT regulatory undertaking to “functionally separate” the two.

It also raises questions about the legitimacy of the money given to BT because of how it will be used.

These conclusions come from broadband consultant Richard Brown who has already asked the European Parliament whether the WAG can use SuperFast Cymru money to overbuild the FibreSpeed coverage area which has already received state aid.

Brown obtained a heavily redacted copy of the ‘Superfast-Cymru‘ contract after an eight month battle using the Freedom of Information Act (FOIA). He says the financial, coverage and timing details of the contract are missing, but what remans is still revealing.

He notes that while the contract is between BT Plc and the WAG, it is signed on behalf of BT by outgoing Openreach CEO Liv Garfield.

“There is a legal governance issue (imposed in theory by Ofcom) that each part of the BT group should have ‘Chinese walls’ between them to prevent unfair exposure to competitive information leaking from one wholly owned subsidiary to another,” Brown says.

“There is a fundamental concern that if Openreach is supposed to be a functionally separate organisation, and the CEO of Openreach is the signatory to the contract then information must (by definition) be being passed between Plc and Openreach, in a manner that has been expressly forbidden by the legal undertakings given to Ofcom.”

Brown says WAG ministers are guilty of overpromising in public what the contract will deliver in terms of speed.Ofcom has accepted the European Commission’s definition of “superfast” to mean download speeds of at least 30Mbps.

“The Welsh Government have not contracted BT to enable the delivery of superfast broadband to premises in Wales, simply that the core infrastructure (exchanges and cabinets) will enable a measurement of premises passed to reach a total of 95% for up to 24Mbps speeds,” he says.

This view is confirmed in Clause 21.4 of the contract: “The Grantee acknowledges that the Welsh Ministers will not pay any contribution or subsidy to the Grantee in respect of the Last Drop Connection” ie, the link between the street cabinet and the premises. This rules out WAG support for any fibre to the premises.

The contract commits BT to meet three targets by 30 June 2016 or at the latest by the ‘Drop Dead Date’, which has been redacted:

1. 90% coverage of all premises in the ‘intervention area’ at >30Mbps PPiR and a minimum of 2Mbps CIR (committed information rate)
2. 95% at >24Mbps with a minimum of 0.5Mbps CIR
3. 40% coverage with >100Mbps with a minimum of 10Mbps CIR.

Brown says Target 2 is dismaying. “At no stage have the ministers ever claimed anything lower than 96% coverage for superfast broadband under this contract. It is clear that there is a degree of wishful thinking by the ministers that BT will choose to deliver more than they are contracted to do.”

Brown estimates 30,000 homes and businesses may be disappointed if BT fails to meet the 96% coverage target claimed by ministers. No-one knows who they might be because the post codes of the coverage area are secret.

Brown further believes there is a difference between what the WAG told the European Commission it wanted state aid permission for, and what it is buying from BT. The European Commission’s 2005 decision on state aid in the case of UK’s Rural Broadband Access Programme made it clear that only capital costs are eligible for state aid.

It said “Eligible capital costs such as investments in communications networks and equipment necessary to provide the requested broadband services have to be directly attributable to the project and incurred during the period of the Broadband Service Agreement. No operating costs will be financed.”

According to Brown, the works that are required under that contract appear to enforce requirements on BT that are explicitly not being paid for.

The Superfast Cymru contract requires BT to supply “Operational Works” that consist of maintenance and wholesale services and the sales and support of wholesale services.

Maintenance covers “updating, maintenance, fault management, performance optimisation (when required) and capacity augmentation.” Wholesale services covers “services to enable retail service providers to provide retail services over the network.”

“The inclusion of the clauses compelling BT to deliver such ‘value added’ services, as opposed to them being part of the funded delivery, lends weight to the likelihood that the ministers have assisted BT in being as tax efficient as possible,” Brown says.

Brown believes taxpayers will have to pay BT’s costs to sell them broadband. Clause 16.6 states “…The Welsh Ministers shall only pay Financial Contributions in respect of those marketing activities that the Welsh Ministers have approved in accordance with the Marketing Plan.”

This clause is wholly inappropriate, says Brown. He says Page 4 Section B makes it clear that the grant is a capital grant to BT on the grounds that infrastructure is being purchased.

“Such a commitment by the Welsh Government gives BT a disproportionate market advantage over other wholesale providers, and as such would be considered a significant influence into the market dynamics.”

Brown questions how much money BT will actually contribute to the Superfast Cymru project. The contract caps The WAG’s contribution at £195m. He notes BT has indicated its total investment in Welsh broadband, including its commercial rollout, is £220m. At Clause 21.5 the ministers “acknowledge and accept that the Grantee has made a contribution of a sum at least equal to the Maximum Grant.” That suggests BT’s extra contribution to Superfast Cymru is just £25m.

On the question of VAT, at Clause 21.11 WAG and BT agree between themselves the the contract does not cover payment in consideration of services to the ministers and that the deal is therefore exempt from VAT.

“BT are compelled to deliver wholesale services as a result of this contract (even to the extent that the Ministers have chosen to engage in price manipulation in the market space). Wholesale service provision as a requirement of the contract, does not allow for the contract to be considered as a ‘capital investment’ only contract,” says Brown.

Summing up Brown says the 96% coverage ministers claim will be delivered “does not represent a percentage of homes and businesses that will receive superfast broadband/fibre broadband. The measurement is solely on premises passed. Premises passed is a measurement of presumed capability that considers only the core infrastructure.

“This utterly ignores the capability of the line between the exchange/cabinet and the premise to deliver the faster services.”

Brown referred to the Aus$24bn Australian National Broadband Network, which also used premises passed, and which the head of BT’s NGA rollout Bill Murphy has branded a failure on Twitter.

Brown says “In August the industry press was awash with headlines … which suggest that there are approx. one third of all the (Australian) premises passed that are unable to gain access to the increased service speeds.

“Premises passed is simply not a measure of the amount of the population that will be able to gain access to improved services. It is simply a measure of the capability of the core network – something that will not change Wales’ future, but will certainly enhance BT’s.”