Business rates stifle investment in broadband infrastructure

Legal uncertainty about how the Valuation Office rates optical fibre networks is depriving the UK of new investors in high speed fibre networks, says...

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.

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