Legal uncertainty about how the Valuation Office rates
optical fibre networks is depriving the UK of new investors in high
speed fibre networks, says Philip Virgo, spokesman for Eurim, the
cross parliamentary-industry group.
Writing in his
Computer Weekly blog, Virgo says business rates charged on
optical fibre networks are slowing the roll-out of cheap fast
broadband in the UK. This is undermining one of the main goals of
the
Digital Britain report, namely for every home to have a 2Mbps
internet connection by 2012.
The way the Valuation Office rates fibre networks, whether lit
(active) or unlit (dark), is subject to legal challenges in the UK
and Europe.
But "the real issue is political, not technical," Virgo says. He
is referring to a complaint now going through European courts that
BT, the UK's largest fixed network operator, is effectively
receiving state aid from the way it is rated.
The origin lies in a dispute between Vtesse Networks, a small
network operator that provides fibre connections to clients, and
the Valuation Office, which sets business rates.
Vtesse disputes the Valuation Office's contention that it should
pay the same price for fibre network infrastructure that it rents
as for what it owns.
tesse CEO Aidan Paul says the valuation system provides deep
discounts to large fixed network operators. This raises the
relative cost for smaller operators and creates a barrier to market
entry for new investors.
In the run-up to the Digital Britain report, Vtesse sent a
confidential note to Francesco Caio, author of the review of the
UK's broadband capability, that set out the background to the
dispute.
Quoting BT figures from its annual report, Vtesse said BT had
gone from having around three million fibre-kilometres in 1997 to
some 10.8 million in 2008. Its rateable value during the period had
stayed steady at around £500m a year, it said.
"Had this been any other operator, the rateable value, and the
tax paid, would have tripled," Vtesse wrote.
Paul says, and the Valuation Office confirms, that BT has a
special dispensation in that it does not pay rates on unused
property such as empty exchanges. This is a financial loss to
taxpayers, Paul says, and a disincentive for BT to reuse or sell
property it no longer used. This also prevents new operators from
gaining easy access to towns and suburbs.
The business rating system is based on a legal notion called
hereditament and dates from the Poor Relief Act of 1601. Judicial
decisions, some going back to 1833, have refined it since.
Vtesse first raised what it saw as a distortion in the rating
system with Oftel, the then telecommunications regulator, in
2001.
In 2002 the Broadband Stakeholders Group (BSG), a group of
vested interests dominated by network equipment suppliers and
operators, reported on barriers to the roll-out of broadband in the
UK. It noted the rating system appeared to lay an unfair burden on
fixed line operators compared to cable TV and mobile network
operators. Ministers at the time promised to review the situation,
but have never published their report, Paul says.
In 2003 Vtesse raised the rating system with the European
Commission, which had determined that there could be a breach of
the rules governing state aid to locally-owned companies. "The
complaint was formally registered on 17 February 2004," Vtesse
wrote. The complaint was passed from the Office of Fair Trading to
Oftel, which claimed administrative preference, and then to the
then Department of Trade & Industry (now Business, Innovation
and Skills).
The commission decided on 12 October 2006 that BT was not in
receipt of state aid as it could "find no advantage".
Vtesse appealed to the European Court of First Instance saying
the commission found nothing because it didn't look. BT and
Kingston, a Hull-based network operator, intervened for the
commission, while smaller network operators Global Crossing, Thus,
Gamma Telecom, Viatel Abovenet and Exponential-e supported
Vtesse.
Meanwhile, Vtesse challenged its rateable occupation of rented
fibre in early 2004, and won. The Valuation Office appealed to the
Lands Tribunal, which overturned the decision.
Vtesse took its case, RA/50/2004, to the Court of Appeal, which
upheld the Lands Tribunal's decision.
Vtesse is still pursuing its cause both in Europe and the
UK.
The BSG, which says providing fibre to every home in the UK will
cost around £30bn, is now setting up a new body, COTS (for
commercial, operations, and technical standards). COTS will look at
the Digital Britain recommendations on network interoperability
standards. It hopes these standards will allow community broadband
networks to access national core infrastructure networks run by BT,
Virgin Media and other large network operators. This will spread
and hopefully lower the cost of building Britain's broadband
capability.
Virgo believes that the tax lost by derating fibre would be made
up from VAT, corporation and income tax from new operators as they
built and ran their fibre networks.
"But the adverse impact of business rates on investment in
plant, facilities and supporting infrastructure goes much wider
than broadband roll-out," he said, in a pointed reference to its
withering effect on job creation.
He said he looked forward to seeing how the MPs who join
parliament after the 2010 election respond to the barriers that
prevent broadband from reaching their constituencies.