Culture, Media and Sport Committee
Tuesday 15 March 2016
Gavin Patterson BT Chief Exec. and Kim Mears, Openreach
The issue of the true picture of who has a viable connection to superfast and who has not (irrespective of the misrepresentation by Openreach and local authorities by using the “Homes Passed” definition of getting superfast) was addressed by the Select Committee by a direct question to Kim Mears. She avoids answering, even though we know Openreach have always had this data to premise level. I’d speculate that Openreach won’t want to divulge it to Local Authorities whilst those Authorities are looking to pay Openreach to fill in the gaps in superfast coverage.
Q770 Chair: To follow up on one thing, Ms Mears, when is BT going to give detailed premise coverage data to BDUK and to local authorities?
Kim Mears: Where we are at the moment, we provide that information down to postcode level, seven digits, and that is shared with all of the local bodies. That allows them to create and to work with us in relation to the map, and also to provide information to their customers in respect of where we are going and when.
Q771 Chair: I know that, but you have not answered my question. That is the triumphant state of the status quo. You are the only people on the planet who know who can get this service and who cannot, and what I want to know is when are you going to give those digital maps to BDUK and to the local authorities? Because they are the people who need to know in order to satisfy their constituents and your customers, or your potential customers.
Kim Mears: Chair, that is not entirely true in respect of being the person who knows. When the intervention area is created by the local body they ask all providers in respect of who is serving within that area. What we will know is what our contractual arrangements are with the local body in respect of where we are going and when. If you look today—
Q772 Chair: So the first question is when are you going to give that information to BDUK and the local authorities, where you are going and when?
Kim Mears: If you look today, in most of the local bodies, we are coming towards the end of the phase 1 deployment. We have a view, working with the local bodies, where the phase 2 deployment will be. That is a view, but things happen in respect of it being a really complex technical deployment plan, so to be absolutely certain what that will mean it is really difficult to say today.
Q773 Chair: When are we going to see some digital detail maps? Just when? Just some?
Kim Mears: I do believe you have digital detail maps at the postcode level down to seven digits but not at the premise level.
Q774 Chair: No, we do not mean that. That is not detailed enough. We want it at the premise level. When are we going to see those?
Kim Mears: I truly believe that we probably need to work in a slightly different way and work out from the 100% backwards, rather than 95% outwards. They are the conversations we need to start having with the local bodies.
Q775 Chair: Next year? The year after? Give us some sense as to when these local authorities can know when you are going to be reaching the people they are supposed to serve.
Kim Mears: The reason why I am saying the 100% backwards—it is not an answer I can give you right here and now, I will take it away and come back with some more information—is we are still modelling with the local bodies, and £120 million of the give-back is being modelled to say where we are going and what we will cover. The work is still ongoing. We have not reached that definitive point that says we completely understand and that is where we stop.
Chair: I think we have registered the point with you both, hopefully.
This all sounds like avoiding the question, and meanwhile BDUK and local authorities are spending millions of pounds with Openreach without knowing what superfast voids they are hoping to fill, nor any accurate indication of what the result will be when completed. They have no way to guage if our money is being spent wisely or in the right places. I have access to this openreach data – I have seen data on all premises in the GU8 area (for example) and can tell the local authority (if they ask) that, typically, after their intervention with BDUK and their own money our village still has only 50% superfast access (despite all premises being “connected to an upgraded cabinet and so technically having access to the fibre network“)
Did the local authority know this? Did they realise how limited their intervention reach would be? Why are they still telling us that the coverage is 97% in our County? Lastly, if they truly do believe the PR that the county is at 97% coverage – why are so many communities paying huge amounts of private money to fill in the gaps?
The Homes Passed issue is addressed, but the answer seems at odds with the reality, here:
Q861 Chair: Just on that, Ms Mears, what do you say to the suggestion that this homes passed measure greatly overstates the impact of the deployment in rural areas because homes passed is not an accurate token for the number of homes properly actually connected to?
Kim Mears: Obviously, our homes passed number is fibre enabled and then you have the superfast number, which is 24 meg and above. The other point, though, is if you look at each of our individual contracts under BDUK, they have something that is called a speed and coverage template. That speed and coverage template is our contractual commitment not only in respect of homes passed but the speed that has to be gained in respect of those homes passed.
Q862 Chair: Right, but hold on a second. You could have a situation in which you count a home as passed but it cannot get any decent service from a particular cabinet and it is too far away in any case. Now, how could that possibly count as a home passed when the person has no, even in principle, possibility of getting a decent broadband signal?
Kim Mears: If you look at as far as the rural—so the BDUK contracts—we are really clear and the information will be available to everybody in respect of the speed associated with those premises and those cabs as part of our milestone to cash, so our reporting when we go through our whole claim process around what is available.
Gavin Patterson: We only count where we have delivered the speed that is in the template. If it is 24 megabits per second, that is counted within the homes passed for BDUK.
Q863 Chair: Okay, but that still leaves open the possibility that many of the homes that were allegedly in that postcode could not receive the service, doesn’t it? It is just homes passed, delivered to the cabinet. It may be that many of those homes can never see a service.
Kim Mears: You are right, as part of our commercial deployment where we may have enabled a cabinet there may be a number of lines from that cabinet that could not achieve superfast speeds. As part of the phase 2 deployment, so the superfast extension programme, what it did say was it would pick up potentially any long lines as part of that deployment that were below 15 meg.
Q864 Chair: Right. We still do not know that, though, because you will not let us have the digital maps as to where these premises are, so they do not have any options. All they know is they wait indefinitely for a moment where as part of a phase 2 deployment BT may be prepared to supply a service to them.
Kim Mears: Under the phase 2 superfast extension programme, we have certainly picked up through the data and working with the local bodies a number of slow lines as part of that programme.
Wednesday 9 December 2015 Hearing:
Q199 Chair: Of course the point of the gap-funding model was supposed to be, in part, that it was going to transfer risk in the case of rising costs away from the taxpayer and towards you as a supplier, wasn’t it?
Sean Williams: Yes.
Q200 Chair: Isn’t it true that the real risk has been to local government, because they have ended up paying for much, much more of the risk and the cost than was expected? Ms Mears, do you have a thought on that?
Kim Mears: I do not believe that that is true at all. In respect of the risk, any overrun is absolutely down to us in respect of any coverage. Obviously, any underspend in relation to any of the 44 contracts, it just means we go further, so working with the local bodies, we understand how much further we can go with any underspend capital available.
Q201 Chair: But you agree, don’t you, that local government was not expected to make anything like the same kinds of contributions at the original moment when this programme was contemplated than they have in fact made, is that right?
Sean Williams: According to our information, again including all of the contracts—Cornwall, Northern Ireland, BDUK phase 1 and BDUK phase 2—we are expecting local bodies to contribute £470 million. That compares with our £910 million and BDUK’s £625 million and some from devolved governments as well, which should be counted in, of £180 million. So it is local and devolved governments together accounting for about £650 million; the central government about £625 million and BT £910 million. I think that is in line—
Q202 Chair: Your view is this was always how it was contemplated to work?
Sean Williams: Yes.
Q203 Chair: Therefore you do not agree that local government has ended up bearing much more risk and cost than was originally contemplated?
Sean Williams: No, I think that is generally not the case. Of course what happens is we sign a contract at the outset for all local bodies. Their contribution therefore is specified very tightly in the contract and therefore they are not obliged to spend any more than that. In fact, if we do not spend as much because we have made savings, then we give it back to them.
Kim Mears: Yes, we go further.
Q204 Chair: I am struggling with this, because in an NAO report at the time, local government bodies were supposed to be spending—originally projected in 2011—£494 million, just below £500 million. Then two years later, or less than two years later, 17 months later, they are shown as spending £730 million, so it has gone up by £235 million. That is a completely disproportionate amount. In that period of time, departmental funding has remained exactly the same and supplier funding has fallen by £180 million, according to the NAO. That suggests that your numbers, the actual amount of funding that you have had to put in, has significantly fallen versus what was originally contemplated, by £180 million, if I have read that right. Sorry, about £190 million, and local authority costs have gone up by £240 million.
Sean Williams: We do not recognise those numbers and we are very happy to write to you.
Q205 Chair: I think you need to look at the NAO report. I think we are going to need to go into this and ask you for a proper reconciliation with the NAO, because—
Sean Williams: Yes, that is fine.
Chair: —it points to a completely different picture of what is going on here than the one you are painting for us.
Sean Williams: Yes. We did write extensively in response to the NAO report at the time and we are very happy to provide the Committee with an updated schedule on that.
Q206 Chair: It has been suggested by TalkTalk that your capital expenditure has declined over the last seven years. In 2008-09 it stood at about £950 million a year and adjusted for inflation it is 20% below that today. Is that true?
Sean Williams: No, that is not true. The £950 million is true, but Openreach’s capital expenditure last year was £1.08 billion and so it has increased.
Q207 Chair: But that is not adjusted for inflation, right?
Sean Williams: Yes, but we are obliged to deliver efficiencies within our operations. Ofcom requires at least 5% efficiency a year, so you cannot inflate the cost. We have delivered more for the same money because of the efficiency, so inflation is not the relevant factor there. We have delivered more for the same money and the amount of money has increased as well. This year it will be higher again.
Q208 Chair: Your view therefore is that on a like for like basis, BT’s capital expenditure has gone up over this period?
Sean Williams: In Openreach it has gone up over this period, over the seven years.
Chair: On a like for like basis?
Sean Williams: On a like for like basis, both in volume terms and in value terms, not by a marginal amount, but by a lot.
Q209 Chair: Has it gone up on the copper network?
Sean Williams: Yes, we have spent, on average, £410 million a year every year over the last seven years on the copper access network. The average spent on the fibre network is £300 million a year. There has been no year in that period in which investment in copper has been below the investment in fibre, so we have sustained—
Q210 Chair: The point is that your investment in copper has not fallen over the last seven years?
Sean Williams: That is correct. It has averaged £410 million and it is not on a downward trend, it is on an upward trend at the moment. But it does vary from year to year. It is not always going in the same direction, but it is on average higher. It is now higher than the average.
Q211 Chair: I think people are relaxed about that issue. The issue is what is the trend and what is the aggregate picture?
Sean Williams: Yes. If I may say, this is an allegation that is put to us in a number of fields, but just to be clear, the fibre network that we have deployed requires a copper line for every single fibre line. It would therefore be irrational for us not to invest in the copper line, because if the copper line does not work, then the fibre line does not work. So we have a strong incentive to invest in copper at the same time as investing in fibre. It is really important to understand that.
Q212 Chair: Are you saying that your incentive to invest in copper is the same as your incentive to invest in fibre?
Sean Williams: We have a strong incentive to invest in both. They do not offset each other, in fact, they amplify each other.
Chair: But you do not have more of an incentive to invest in one versus the other?
Sean Williams: No, both need to work for the service to work for customers. Kim, you are very well-positioned to comment on this.
Kim Mears: Absolutely. If you look in relation to our fibre rollout, it has been, in the main, the fibre to the cabinet. As Sean has described, that requires the copper line in respect of obviously the service to our customers. There is absolutely no incentive for us to stop our investment into our copper network, anything else but.
Q213 Chair: Okay, thank you for that. In the original projections for the programme, it was expected that there would be 20% take-up, I think I am right in saying, over the period. In fact, it has proven much higher.
Sean Williams: Yes.
Q214 Chair: You have therefore made higher levels of commercial revenue, which would then be subject to clawback, according to the recovery mechanism that has been put in place, is that right?
Sean Williams: Yes.
Q215 Chair: I think it would be helpful if you could set out for us, either now or in a separate submission, what would have been the case if a 30% take-up rate had been modelled for phase 2 of the programme. Presumably, what would have happened—I could be wrong—is that the financials would look different because the clawback would kick in at a different point and therefore the rate of return to the public would be different versus the rate of return to BT. Is that right?
Sean Williams: Just to say we are in a position at the moment where there is a clause in the framework that provides that if take-up is higher than forecast then we share the gain through this clawback mechanism, and so far we are rebating to public funding over £150 million. That is on the basis of our latest projection, which is, as you say, around 30%. If we had signed these contracts on the basis of a 30% assumption at the outset, the broad estimate is that the whole of that £150 million would not have been needed to be provided at the outset. So the public purse is getting back £150 million through clawback because it is a 30% projection now. If we had projected 30% at the beginning, it would have gone to £150 million. Now, there will be some margin of error around that, but that is, broadly speaking, the principle.
Q216 Chair: If the taxpayer is getting £150 million back under clawback, what is the parallel amount that BT has earned over that period? In other words, what is the percentage that determines—
Sean Williams: The way it works is that in the contracts there is a thing called the project unit margin, which specifies how much margin there is from these extra subscribers that we were not expecting, and then that is shared back between the local bodies and BDUK and ourselves. We only get, in a sense, what we have contributed. If we are contributing 25% or 30% of the total, then we would get 25% to 30% of that clawback margin.
Q217 Chair: So you get your money back?
Sean Williams: We all get the money back for the extra subscribers, yes.
Q218 Chair: I am just trying to work out what the return has been to you, if the public has had £150 million back.
Sean Williams: As I say, the full amount of the extra profitable revenue is shared back between the various parties.
Q226 Ian C. Lucas: Are they all individually dealt with and there is a separate aggregation of the figures for each contract?
Sean Williams: Yes.
Kim Mears: Correct, yes.
Q227 Ian C. Lucas: So it is not in any way done on a national basis?
Kim Mears: No, no, no.
Ian C. Lucas: It is done on a local basis?
Sean Williams: Yes.
Kim Mears: That is where the conversation is, at a local basis in respect of what is the gain share and then what do we do in respect of further coverage on a local basis.
Q228 Ian C. Lucas: Will take-up vary locally?
Kim Mears: Absolutely.
Q229 Ian C. Lucas: When you have talked about the 30% figure for take-up, how wide is the variation in take-up? What would be the lowest and what would be the highest level of take-up? Can you just give me an idea?
Sean Williams: They do vary by contract, yes, so 30% represents the average expected take-up in subsidised contracts. It is not an enormous variation, plus or minus 5%, but I think what we would have to do is come back to you with a bit more information.
Kim Mears: We can give you that detail.
Q230 Ian C. Lucas: I think that would be very helpful, because one of the massive issues—as you know even better than I do—in broadband delivery is regional variation, and I am very interested in the levels of take-up and how that affects things.
Kim Mears: Even within each of the individual contracts, we will see a variation in take-up within the geography. It will depend on the existing speeds available to the customers from those cabinets that will drive the level of take-up as well.
Q231 Nigel Huddleston: Can I just go back to this clawback mechanism? The principle is that if things go a bit better than expected, then the clawback kicks in?
Kim Mears: It is, yes.
Q232 Nigel Huddleston: Could you just explain how the clawback works? Because as I understand it, it is driven by this take-up, but there is no element of capital investment in the clawback. Is that the case?
Sean Williams: Essentially, the way the gap-funding model works is we estimate the costs of deploying the network and we estimate our commercial case, which is derived from the revenues we are expecting of this infrastructure, naturally, and the profits we get from that and then the difference between the costs and the profitability makes the gap. If the revenues are higher because take-up is higher, then clearly that reduces the amount of the gap funding from the public purse that is required. What we do in each individual contract is estimate each quarter exactly what we think the take-up will be and when we see that take-up is exceeding that estimate in the forecast, then we can project. If we are going to get a higher set of revenues, we can rebate back to the public purse the amount of money that the gap is reduced by.
Q233 Nigel Huddleston: But the capital investment side that has come in lower than anticipated, there is no element of that in the clawback then in terms of straight—
Sean Williams: No, clawback is very much a revenue side matter. There is a cost side matter, which is if we spend less to deploy what we have said, then the saving goes straight back to the local body, 100% of it.
Q234 Nigel Huddleston: You can see why that is somewhat controversial.
Sean Williams: The Government gets it both ways. If we spend less—
Nigel Huddleston: We love that, yes.
Sean Williams: Yes. If we spend less, you get it back; if we spend more, we have to take the cost. If we earn more, then we share it according to the clawback mechanism, yes.