Funding Full Fibre Networks - what if BT cannot afford its share?

On February 2nd the chairman of BT Openreach finally admitted that they have seriously under-invested in upgrades and maintenance over recent years  . On February 3rd Mike Kiely blogged on how much they have been overcharging local authorities and are liable to refund.  His figures look similar to those lost in Italy. Meanwhile BT has a pension fund deficit to cover and is still trying to take on Sky’s content business. In July 2016 I wondered whether BT was likely to change its investment priorities but it is as well to remember why those priorities were as they were.

In July 2015, in a blog on Ofcom’s Strategic Review consultation, I pointed out that BT strategy was an all-too-rational response to Local Loop unbundling.  LLU might have saved the cable companies from being sold to Sky for a pound, leaving the US bondholders with nothing. But it nearly destroyed BT. And it certainly led to the collapse in investment which followed.

Now Ofcom has changed its priorities in the light of that review but can BT still afford to invest on the scale necessary? Both Mike McTighe and Mike Kiely appear to think it can. I hope it can. But I strongly suspect it can only do so by divesting its content operations – and accepting the £8 billion service contract (£800 million a year for ten years) offered (on a platform during the Conservative Party Conference) by Sky to help raise cheap leasing finance for investment in a divested Openreach.

The above gives context to the recent DCMS Call for Evidence on “Extending Local Full Fibre Networks”. I have received copies (usually confidential) of several of the submissions. I also promised to make my own available – because those trying to reconcile some very different issues will benefit from public debate on areas that many players unwilling to discuss in the open. I should also take this opportunity to say thank you to  all whose material I have plagiarised without attribution. My excuse is that most of you said you did not wish to be quoted and I cannot remember who was willing.

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Funding Local Full Fibre Networks – personal response from Philip Virgo

This response looks at the issues from the perspectives of:

  • Business users (all shapes and sizes) who are willing to pay internationally competitive prices for future ready, world class, reliable, resilient on-line access to global markets.
  • Investors wishing to invest in companies building, operating and maintaining open access infrastructure businesses, underpinned by medium to long term contracts to meet the connectivity needs of medium to large business and public sector users and the backhaul needs of both network operators (local/national fixed/mobile) and cloud/OTT/IoT service providers.
  • Those seeking to harness the growing support for Neighbourhood Plans, Business Improvement Districts, LEPs and Smart Cities, in co-operation with Local Authorities, to identify demand and supply and enable risk investment and fragmented procurements to be collated into co-operation to access/leverage the many sources of funds available for contract-backed utility investments.

This submission does not reflect the collective views of any of the organisations with which l am associated but my understanding is that most are willing to work together on follow up.

Summary of key points

  1. The cost of building, equipping and maintaining full-fibre networks has fallen sharply over the past decade. Meanwhile access and wayleave charges appear to have risen sharply. Costs and charges vary so widely, according to local geographic and market conditions, (including the willingness and ability of local authorities and property owners to enter into arrangements to reduce prices and costs on all sides), that national averages are of little value.
  2. The UK is unusual in that a single player still dominates network (including mobile backhaul) construction, maintenance and operation across most of the country. The UK led the way in telecoms liberalisation but has been overtaken by most other nations. Many communities around the world are still served by local monopoly telco, mobile, cable or broadband services but such services commonly run over open access infrastructure facilities built and owned by others (including public-private partnership, co-operatives and municipal enterprises) and maintained by specialist contractors (some local, others global).
  3.  Effective infrastructure competition (not just reselling of monopoly services) is essential to the promotion of investment. The BEREC Report “Challenges and Drivers of NGA Rollout and Infrastructure Competition” noted “that infrastructure investment takes place when investment incentives are such that non incumbent players enter the market. A competitive response is then triggered and the incumbents also invest.”
  4. The key to getting value for money from public funds is to mandate the sharing of information on supply and demand by all bidding for public sector business and/or support central or local. Accurate and meaningful information at all levels is essential to enable effective planning, procurement and customer choice. Voluntary sharing is better but those bidding for public funding/support and/or supply contracts should not be given a choice.
    Introduction and General Points

1. The cost of building, equipping and maintaining full-fibre networks has fallen sharply over the past decade. Meanwhile access and wayleave charges appear to have risen sharply.  Costs and charges vary so widely according to local geographic and market conditions, (including the willingness and ability of local authorities and property owners to enter into co-operative arrangements), that national averages and estimates are of little value.  

 The scale of world-wide communications network construction, accompanied by technology advances and competition from China mean that equipment and fibre costs have fallen sharply since the late 20th Century guesstimates still used for most regulatory purposes and business rate valuations. The effect is to over-value the networks of the incumbent operators and under-estimate the ability of new players to build more reliable, future ready, networks at a fraction of the costs commonly quoted – provided they can agree access and wayleaves.

The price of most items of equipment used in full-fibre networks fell by up to 80% in the decade to spring 2016, although they have since risen around 10% with the post Brexit fall in sterling. The cost of construction varies widely according to the co-operation of landlords and local authorities, including to time work to coincide with other building, refurbishment or maintenance programmes. Hence the focus of many of the competitors to BT on deals with those property owners and local authorities who will help “join up” activities in return for being offered better service at lower cost.

Access and wayleaves charges are now commonly the main cost component, except where these are reduced or waived in return for better services at lower cost to property owners (including local government and public authorities as well as commercial landlords) and their tenants. The rise in charges has been fuelled by negotiations between those intermediaries who offer to get better rates for property owners (sometimes more than double) than the national agreements in return for commission and those intermediaries who assemble access routes and/or handle negotiations for network builders and operators. 20% from either side (or sometimes even both) is not unusual.

There are various current national and local exercises to address this problem. Some are linked to the revision of the electronic communications code. They are complicated by the desire of property owners for treatment of network operators and their contractors to be compatible (including timescales for agreement, appeal, installation, access and removal) with those for other tenants and their contractors. Pricing arrangements are complicated by desire of those controlling current or potential choke-points (including masts and ducts) to exploit their assets and the willingness of others to offer cheap or free access in return for services. The situation is further complicated by the position of those who already have large numbers of agreements in place (e.g. BT and the other Utilities) and have limited, if any, flexibility with regard to discounting their prices or offering differential service.

2. The UK is unusual in that a single player still dominates network (including mobile backhaul) construction, maintenance and operation across most of the country.

 The UK led the way in telecoms liberalisation thirty years ago but has now been overtaken by most other nations. Monopoly telco, mobile, cable or broadband services still serve local communities in many parts of the world but they increasingly run their services over infrastructure utilities which they do not own and which have their own maintenance arrangements. Such utility networks are often built and owned by mutuals (public-private partnerships, co-operatives etc.) or municipal enterprises and maintained by specialist contractors (according to the technologies used and local conditions).

The local access utilities are then linked by competing national back haul operations to shared switching centres (many also acting as internet exchanges and/or peering centres). Those running major server firms and data centres increasingly seek to connect direct to such centres, using multiple back haul providers, to ensure their internet connectivity does not pass through single points of failure. This is also helping drive the plans for more exchanges in the UK: perhaps one or more for every aspiring “smart city” with a University super-computer complex and cluster of data centres.

Provided the backhaul and exchanges observe international open access standards, most customers, (both business and consumer) then have a choice of network operator (e.g. Verizon, AT&T, Liberty etc. in the US), OTT content services (e.g. Facebook, Google, Time-Warner, Fox/Sky etc.) and ISPs.

There are, however, tensions between network operators aspiring to dominate both utility and content operations. In the US these culminate in “Net Neutrality” arguments. Provided neither side actually wins, these appear to result in increased investment and better service. In the UK, however, the position of BT, straddling all markets (from access, through backhaul to content) with relatively weak action against anti-competitive behaviour, has had the opposite effect. Hence the need for more robust regulatory action to enable market forces to work.

 3. Effective infrastructure competition (not just the reselling of monopoly services) is essential to promoting investment in the UK full-fibre infrastructure (including backhaul).

The BEREC Report “Challenges and Drivers of NGA Rollout and Infrastructure Competition” noted “that infrastructure investment takes place when investment incentives are such that non incumbent players enter the market. A competitive response is then triggered and the incumbents also invest.”

This can be seen in the UK where investment in communications Infrastructure fell sharply, year on year (2002 – 2007) after Local Loop unbundling destroyed BT’s case for investing in order to compete with the Cable Companies in providing “full motion video to the home by 2002”.

BT’s capital investment and preventive maintenance budgets then remained almost static until 2015, while sales revenues doubled. Then, in 2015, when competitors began to invest, initially to serve business parks and commercial centres, BT began to review its own investment plans, albeit beginning with a take-over of EE to supposedly reduce duplication of effort. More recently BT’s spend on preventive maintenance has doubled, albeit it is still barely half that in the period to 2008. Hence the case for opening the maintenance market to competition to improve quality of service and response times using those UK maintenance operations who already serve overseas markets, UK utilities, defence and aerospace providers and the growing number of other private networks.

Until 2012 BT accounted for almost all new UK communications infrastructure investment. It probably now accounts for barely 25%. The figures are, however, uncertain. To the spend of Virgin, Vodafone, O2,3/Relish, CTIL, Arqiva, Wireless Infrastructure Group, City Fibre, Gamma, Gigaclear, Hyperoptic, Venus etc. needs to be added the investment to serve Business Parks and Data Centres being made by global utilities like Hibernia and Zayo and by major construction companies and property developers. We should also add the spend of Network Rail, of Universities (including to serve local Research Hubs and Science Parks) and Local Authorities on the infrastructures they themselves own.

Recent revelations as to the state of BT’s finances and the risk that Orange and Deutsche Telekom will cut their losses as soon as they are able to sell mean that proportion of communications infrastructure Openreach can fund is unlikely to rise – unless BT accepts the offer from Sky to enter into a ten year rental contract in return for BT Retail selling its content operations (de facto separation). Either way would make sense to many BT shareholders for it to also copy Telia and seek to use and/or operate, networks built and owned by others. Thus Telia now operates but still does not own Stokab, (of which it was always the largest “tenant”).

It is therefore even more necessary to encourage alternative investors.  Whether these work in co-operation with BT or in competition, or both (according to market and location) can be left to market forces provided there is effective and consistent regulatory action to give investors confidence that they will not be subject to predatory behaviour.

Responses to Questions:

Question 1: What local approaches have been taken to date or are planned – either in the UK or internationally – to stimulate the market delivery of full fibre networks, in both urban and rural areas, and what results have they achieved? Where appropriate please provide evidence and any other additional information.

There are many ways of providing local connectivity, dependent on the geography to be served, the availability of low price/cost access and wayleaves and the co-operation of property owners and local government (commonly both the largest customer and property owners as well as planning authority). But many of the shared-risk models common across the EU, let alone the rest of the world, are blocked in the UK by fear that those unwilling (unable) to participate (usually the incumbent supplier) will cite “state aid” (regardless of the many relevant decisions) and threaten legal action, even suing the EU if it gives agreement (and quietly dropping the cases when delay has destroyed enthusiasm).

The most common models for encouraging competition are variations on:

  1. Using the expected increase in property values to drive investment. Thus in Hong Kong the main fixed and mobile networks are owned by the parent companies of the main property businesses and operated to provide services that attract and retain tenants and improve property values. Many communities across the US and Scandinavia have adopted similar models, with the aim of the investment being to improve “real estate” values – albeit they tend to separate ownership (a variety of funding models to raise funds from local businesses and residents) from operation (contracted to regional, national or international network operators).
  1. Enabling/encouraging other utilities (e.g. power supply) to compete with the incumbent. This was the original model in South Korea and can be seen in the US in Chattanooga. The attractiveness of this model can be seen by the efforts that US incumbent operators recently took to prevent Chattanooga offering services outside its municipal power supply area.

Whatever the model for organising/funding local delivery, the availability of affordable backhaul is critical. Here the willingness/ability of BT to deliver appears limited. The current Openreach position on dark fibre and fibre on demand and Ofcom’s consultation on physical infrastructure (duct & pole) access imply that we will only see significant new investment if BT wants to actively market its spare capacity with a view to using the incremental revenues to also improve its own service and cover. The indications to date are that it does not. Rationing the service to five small ISPs with complex terms and conditions have caused its would-be partners, as well as its competitors, to conclude that BT is fighting a rearguard action to delay access and prevent its other revenue streams being cannibalised.

Hence the need to look more seriously at alternative backhaul providers.

The UK has a surprising number of other national trunking and distribution networks. There are those which currently serve specific audiences (e.g. Janet, HITS, MoD, NRTS, National Grid, National Rail, N3) and those which serve almost anyone who will pay (e.g. Arqiva, City Fibre, Sky, Virgin, Vodafone, Wireless Infrastructure Group, Zayo). Other networks serve specific geographic regions or markets (e.g. Colt for Financial Centres, the NEN for schools, Gamma for Leeds and Manchester, Hibernia from the US to London via South Wales and Reading, Venus serving the West End etc.).

Most all UK “public” networks (both fixed and mobile, local, national and regional) pass through Single Points of Failure” (SPoFs). These range from rural masts and city centre ducts to shared switching centres and service/support operations. Most, but not all, are run by BT (Wholesale as well as Openreach). The consequences include major outages with little or no standby, fixed or mobile, when fire, flood, lightning or cable-power-equipment theft-failure affect a “SPoF”. Hence the support from large businesses and data centres for investment in alternative routings, Until April 2017 such investment is rarely economic because of punitive valuations for business rates. The Business rates “holiday” announced by the Chancellor is most welcome but appears only to cover full-fibre – not shared masts and equipment. A permanent solution based on current actuals is needed.

The availability and quality of backhaul also determines the ability of independent operators to provide local access (whether fibre or wireless). Thus B4RN, often cited as an example of a rural community enterprise providing world class service, would not have been able to provide the latter had it not been able to obtain direct local access to a Zayo high speed trunking service, linking Manchester and Glasgow, at a fraction of the cost charged by BT for a much more limited local service.  The availability of backhaul in City Centres similarly determines which office or apartment blocks can be provided with gigabit connectivity.  It also determines the location of the 250 or so co-location and several hundred other data centres that are essential for the operation of low latency, cloud-based services and for the ability of users to make effective use of those services (including for back-up).

The provision of a Universal Service Obligation of at least 10 mbps (regardless of time of day or day of the week/month) will demand major improvements to backhaul in many parts of the country. That need will, however, be dwarfed by the need to expand capacity and improve reliability for a world of smart cities, transport, health care and all the other IoT applications which will depend on ubiquitous Wifi, 4, 4.5 and 5G availability.

We therefore need:

  • A national backhaul database
  • Ofcom to have access to forward plan to determine areas in need of intervention
  • Ofcom/DCMS to use the database to undertake gap analysis
  • A review of the full range of funding options: from public sector procurement to underpin investment through levies and cross subsidies to more granular intervention funding
  • A revisiting of the case for a retail USO after improved backhaul reduces the cost

Question 2 : What evidence is there to demonstrate the effectiveness and potential of the following approaches, specifically in the context of stimulating the rollout of local full fibre networks in urban and rural areas?

Demand side approaches

A. Public sector demand aggregation

The history of public sector demand aggregation is chequered. The main reasons for failure include:

– many organisations (consultancies as well as suppliers) are structured around silo-centric sales, systems, support and procurement and do not expect a net benefit from change

– career paths (both public and private sector) which reward those climbing professional/departmental promotion trees and penalise those focussed on cross-boundary co-operation.

One of my last activities before retiring as Secretary General of EURIM in 2010 was to try to organise a group to look at the shared network service procurement. We found good practice in Local Government (e.g. the SOCITM joint procurement exercises) and Education (e.g. JISC, Janet and the University Networks and Grids for Learning – now NEN) where up to 70% had been saved.  Central Government frameworks had commonly led to increased delay, cost and/or reduced throughput. We wanted to explore the tentative conclusion that procurement frameworks should compete for support from both customers and suppliers and report performance. That approach met with such resistance (from major suppliers and central government officials) that the planned study was dropped. We have since seen the failure of another generation of Central Government procurement frameworks.

The more recent success of players like City Fibre and the number of Local Authorities looking at ad hoc co-operation with their neighbours, indicates that the time may be ripe for another attempt. If so, it should be built around voluntary co-operation between those departments and agencies who actively want to co-operate (with serious support for those trying to make it work) and those suppliers offering support, discounts and service improvements to those who help cut their cost of sales and delivery.

Given the difficulty that Central Government will have in supporting such an approach, perhaps it should focus on providing tangible encouragement and rewards (e.g. funding for cross-boundary project management and procurement) to public bodies seeking to work together.

B. Voucher schemes for private sector demand aggregation.

 The success of the voucher scheme shows that this approach has serious potential but it needs to be sustained over time and linked to processes for aggregating the demand of those who do not qualify for vouchers. Future programmes should include help for the two thousand or so groups preparing Local Planning Agreements and 200 or so Business Improvement Districts to survey local demand and supply. These cover local SMEs and Home Based workers as well as consumers. The support should be dependent on the results being made fully available to those suppliers who provide information on the services they already offer to the area and on their forward plans.

Supply side approaches

C. Making public sector assets available

Most public sector organisations are under severe and increasing pressure to monetise their assets. This results in silo-centric cost-cutting except when leadership from the top of a Local Authority (for example) results in policy decisions to make assets freely (sometimes that really does mean “no charge”) available to those who make open access future-ready networks available to the council in ways that will save it more than any forgone revenue.

DCMS, DGLG, Transport and Treasury will need to co-operate in supporting local authorities, like Ashford (with its ambitious economic growth and housing plans) to ensure that such policies (including to join up building and highways regulation and silo-ed central government funding pots), are not overturned by planning inspectors used to following the wishes of incumbent operators who will not benefit.

It is also critical for Treasury to provide clear guidance as to how the public sector in general, including Central Government departments and agencies (such as Network Rail or the NHS and its Trusts) , should similarly balance the potential revenues from exploiting their assets against the gains from access to future ready communications at lower cost. The answers may vary by department and agency. But, without clarity of policy on budgeting, accounting and performance measurement, any rhetoric on aggregation will be wasted. Even so, the difficulty of organising co-operation is such that tangible carrots (including jump promotion paths for the officials who deliver) may well be needed.

D. Access to location data on infrastructure assets

Many, perhaps most, infrastructure providers, including local authorities, have their digital maps maintained for them by Ordnance Survey. But not even those with national responsibility for the Critical National Infrastructure can claim access without explicit customer agreement. A recent local authority exercise (using contingency planning powers) revealed the value of sharing: many networks were not where it was thought (e.g. the contractors had put cables or ducts on the other side of the road because …). But only those with appropriate security clearance could have access to the results.

A subsequent workshop on the actions necessary to provide a genuine open market in re-usable infrastructure components (from ducts and poles to dark fibre runs and open access switches), identified the value of a voluntary service with tiered security access, run by a suitable neutral third party – e.g. Ordnance Survey.

The aims would include helping:

  • Bandwidth hungry business to identify potential suppliers and/or decide where to locate
  • Property developers and Landlords to plan how to get connectivity to their sites
  • Network operators to sell spare capacity and plan co-operative investment to address lacunae and bottlenecks
  • Reduce the risk of network outage caused by “unplanned excavation”
  • CPNI and others to identify vulnerabilities and organise investment/support to address these
  • Central and local government better target the use of public funds.

A market driven approach, beginning with support and permission from those wishing to sell spare capacity (the high level, open access tier of maps) and plan inter-connection (security cleared engineering and support staff), is rather different to the mandatory/regulatory approach to opening up the Openreach database. The latter is likely to gather pace slowly. The former could accelerate rapidly if those who use the service begin to win serious new business –  particularly if used as “proof” by those handling public sector contracts requiring that critical services did not pass through the same single point of failure.

E. Directly funding fibre routes in uneconomic areas

The recommendations in the answers to A, B, C and D above are likely to lead to a reduction in the number and size of uneconomic areas but many will remain. Given the limited value of post codes in sparsely populated rural area (where properties may be many miles from the notional centre of the code) and densely populate urban areas (where a top floor flat may be similarly remote from a street cabinet), funding should be routed via competitive bids to support identified hereditaments and/or business/tourist locations (e.g. mountains, country parks or coastal paths, with the provision of backhaul to the “digital village pump” contracted separately. This is an area where co-operation with those preparing Local Planning Agreements in partnership with their Local Authorities is likely to be particularly helpful in tailoring supply to local need and affordable cost – levering community support where practical.

F. Potential pilots

Almost every approach has been piloted somewhere in the world. The need is to collate information about what has worked, where and why – not organise more pilots.

Question 3: What is the most effective and efficient delivery model Government can use to stimulate future delivery of full fibre networks across the UK in both urban and rural areas, building on and integrating approaches that have been taken to date?

There is no one model. The fixed/mobile mesh networks to support a “smart” world (4 and 5G, IoT etc.) will, like the Internet, be a set of networks of networks of networks ….

The focus should be on

1 Mandating the use of “future ready” technologies and open access standards for inter-operability,

That will require practical support for the production of authoritative practitioner guidance for those in Central and Local Government making planning and procurement guidance to enable them to avoid dead ends. This is almost certainly best done via the relevant professional bodies working together -but they will need funding and support to work across their own professional boundaries in ways which their members may find challenging.

2 Requiring those bidding for public funding to share all relevant information on current services and expected upgrade/extension costs except during a competitive tender.

 Greatly improved information is essential to make markets work by enabling informed customer choice as well as better informed planning and procurement.

 Question 4: What other changes, locally and/or nationally, are needed to reduce the cost of full fibre rollout, such as opening access to publicly and privately owned facilities, or changes to wayleaves, streetworks and other areas? What evidence is there to demonstrate the effectiveness of such changes?

  • Provide certainty for investors in new networks that they will not be subjected to predatory behaviour by incumbent operators subsidised by Government. This is particularly important given Government will wish to reduce its exposure to the BT pension fund deficit.

 

  • Require Government Departments and Agencies to contribute information on their networks and infrastructure facilities to any “voluntary” infrastructure mapping services and contribute towards the costs of such a service.
  • Treasury to provide clear guidance as to how those in the public sector should balance the potential revenues from exploiting assets (including access and wayleaves) against the gains from having access to future ready communications at lower cost. It is also vital to ensure that this is reflected in the funding allocations and guidance given to Local Government.
  • Provide tangible encouragement and rewards (e.g. funding cross-boundary project management and procurement) to public bodies to work together. And seek to ensure that individuals who focus on the collective benefits of cross-boundary co-operation rather than narrow departmental interests are not penalised.
  •  Provide the 2,000 Local Planning Forums and 200 or so Business Improvement Districts with support to survey local demand and supply: conditional on the results also being made available to those suppliers who provide them with information on the services they offer to the area and their forward plans.

 

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