Support the Digital Innovators

Why Government Should Get Behind the Independent Networks

 
by Malcolm Corbett, CEO INCA
 
When officials in Berkshire planned their extension to the local BDUK superfast broadband programme they took an unusual step. Instead of simply using the national supplier framework - i.e. BT - they decided instead to run an open procurement. They divided the county into lots and went out to the market for responses. BT elected not to bid, but several independent operators were happy to get involved. At the end of the process Gigaclear and Callflow Solutions were selected for projects covering rural West Berkshire and parts of Windsor and Maidenhead. 
 
Gigaclear will deliver 11,700 fibre to the premises (FTTP) connections offering ultrafast services of up to 1Gbps. As a result rural connectivity in West Berkshire will be transformed from sub-standard to world-class. Residents and businesses will be delighted and the local economy is set to see a significant boost. 
 
 
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The funding approach is even more astonishing. BDUK, West Berkshire District Council and Thames Valley Berkshire LEP will contribute £3.7m to the project. Gigaclear will add an extra £16.3m taking the total project funding to £20m. The state aid ‘intensity’ in this case will be around 15%, precisely the reverse of the situation where BT is the supplier demanding state aid that sometimes reaches 90% or more of the total costs. 
 
For Gigaclear West Berkshire is good territory and the scheme illustrates two important aspects of the smaller independents: they are flexible and they are willing to invest. 
 
Around the country in urban and rural areas new projects independent of BT are springing up, generally without recourse to public funding. The largest investment announced is Virgin Media’s £3bn Project Lightning that will extend its TV, phone and broadband services to another 4m homes and businesses. Smaller challengers are investing too with a series of announcements from CityFibre, Hyperoptic, Gigaclear, ITS, UK Broadband, Airband and others.
 
In some cases local communities are digging into their pockets as well as digging trenches. The B4RN project in Lancashire has raised over £1m in community shares and loans to build its gigabit network. If their current trajectory continues they could reach 10,000 rural premises. Cybermoor in Cumbria has followed suit with a community share issue to extend its fibre network into Northumberland. Fibre GarDen, also in Cumbria, set up a co-investment project with ITS Technology. Cotswolds Broadband has created a Community Interest Company to manage investment from BDUK, the district council and private investors for its mixed fibre and wireless broadband network covering 7500 premises. 
 
Other projects are developing collaborative approaches to new digital networks. Fluidata has proposed a Network Charter providing a degree of consistency for ISPs offering services over local schemes. In Brighton SMEs including ISPs have taken the lead in establishing a new Digital Exchange co-operative to improve the digital infrastructure available locally. The co-owned carrier-neutral hub and meet-me point has just gone live. It is a demonstration of collaboration between ISPs and other digital businesses, which has already allowed the creation of new products and services.
 
It’s all exciting stuff and fits perfectly into government’s desire to help create a more competitive landscape with providers other than BT accessing state funds for new networks. The big question is can the independents achieve the capacity needed to help get to 100% superfast coverage by the end of 2017 and can they make serious in-roads into the government's new ‘ultrafast’ ambitions?
 
Scaling Up
There is clearly a growing appetite from private investors and communities to get involved in supporting many of these initiatives with significant funding going into CityFibre, Hyperoptic, Gigaclear and others. Gigaclear’s funding alone amounts to nearly 10% of the total investment committed by BT to the rural broadband programme (BT’s contribution is approximately £350m according to the National Audit Office and Public Accounts Committee). With the right policy and regulatory environment it is clear that more funding can be made available. Crucially the way that government intervenes and the regulator acts, will affect the ability of the independents to achieve scale.
 
Two important steps will aid the growth of the competitive sector:
1) Introduce new public funding mechanisms other than grant funding based on BT's commercial ‘gap’.
2) Ensure access to affordable and suitably configured backhaul services in rural areas.
 
New Funding Mechanisms
All of central government’s funding for rural broadband has been deployed as grants or connection vouchers. Nearly all the grant funding has gone to BT in a programme that has come under heavy scrutiny from MPs and media. Any future public funding needs to encourage a more competitive response which means taking a hard look at the design of the programme. Grants can be very useful, but if they are given with no competition it becomes difficult to guarantee value for money for the taxpayer. We need to think harder about how public funding can be deployed in a pro-competitive way.
 
After a slow start the connection voucher scheme has begun to take off. There are many innovative schemes and providers that are aggregating vouchers to deliver low cost, ultrafast services into business parks. The scheme has attracted a wide range of suppliers and many thousands of businesses are benefitting. Some local projects are using connection vouchers as part of their overall funding profile to extend coverage of their networks. Building on this success will pay real dividends in terms of connectivity for small businesses. It’s an easy win.
 
Debt funding is another instrument that needs consideration. When Maria Miller was Secretary of State we consulted INCA members about different funding mechanisms and presented her with the results. In general the smaller providers said they prefer debt funding and guarantees to grants. Loans and guarantees (which act to reduce the cost of capital) offer a very different profile for a project than grant aid. The US uses loans extensively to support rural broadband deployment, mainly through the Department of Agriculture Rural Utility Service loan fund. This has been tremendously successful providing loans and guarantees to local projects with a high level of leverage and very low default rate. In the UK at least one local authority, West Oxfordshire, is supporting their local project - Cotswolds Broadband - with loan funding instead of a grant. 
 
Recently the European Commission published a report by Stefan Stanislawski of VenturaNext which looked at how the relatively small €180m Connecting Europe Facility can be deployed to best effect. His analysis shows that the CEF will have the biggest impact if it provides debt funding to early stage projects. In part this helps schemes overcome the problem of who steps in first to back a ‘risky’ venture, thus CEF funding helps unlock more private finance. 
 
Some operators with sufficient scale, notably Reggefiber in the Netherlands, have successfully raised hundreds of millions of euros in debt financing from the European Investment Bank. The assets they are building, particularly FTTP networks, lend themselves to utility-style financing. This is a point that has been underlined by CityFibre’s approach. The EIB has been criticised for replicating private sector activity, nevertheless focusing on long-term investment is the right approach. Virgin Media’s investment is backed by the Government’s £40bn infrastructure guarantee. INCA welcomes this and would like to see the scheme promoted to a wider range of operators.
 
The time is right to consider a broader range of options when it comes to providing the next round of public support for rural deployment and ultrafast services. There is a role for grants and connection vouchers. But there is also a role for loan funding and guarantees that can help lever in far more private capital.
 
Affordable Backhaul
For many rural projects suitable backhaul remains a costly problem. One company that installs FTTH connections as part of a broader utility installation service in new housing developments rejects 7 out of 10 projects because they can’t get affordable backhaul in the area. Despite the fact that the civil engineering costs are shared across the utility installation, lack of suitable backhaul renders many projects uneconomic. 
 
Fully separating OpenReach from the rest of BT into a pure infrastructure company would provide management incentives to widen access to the passive network. This solution is being proposed in response to BT’s acquisition of EE by major companies like Vodafone and Sky, broadly supported by the rest of industry. Short of full structural separation some INCA members have called for BT’s duct and fibre network to be opened up, particularly in areas where their network has been heavily subsidised by the state. Ofcom is consulting on access to ‘dark' fibre in their review of business connectivity and this needs to be pushed to a helpful conclusion.
 
Other assets could also be brought into play. There are extensive fibre networks running alongside the UK’s rail and motorway networks. Plans to commercialise the rail network fibre held out the prospect of improved backhaul capacity in many rural areas. Unfortunately these plans seem to have stalled. Another useful nationwide network is JANET serving schools and colleges. At least one community broadband scheme is working with JANET albeit in a research project. Getting access to JANET connectivity on good terms could significantly improve the economics of rural schemes.
 
Local authorities and other public bodies can play an important role too. Many councils and housing associations own duct and fibre for their own connectivity, CCTV and other networks. If these were opened up to third party providers it could transform the digital connectivity for citizens and businesses - and generate very useful revenue to fund hard-pressed public services. Some local authorities are going down this route, for example Hammersmith and Fulham council which has opened up its fibre network to a concession agreement involving ITS Technology and Hyperoptic. This is undoubtedly a win-win for everyone. The commercial providers get access to an existing duct and fibre network, so there is less cost and disruption. The local authority gains revenue and helps get high-speed digital connectivity to many more local people. It plays into the agenda for finding local solutions to local problems.
 
We need a concerted push from Government to get assets like these onto the table. It will be difficult to overcome the many vested interests, but the benefits for the UK as whole could be immense.
 
 
Where Next?
Government officials are pondering the next steps for rural broadband and ambitions for the UK to achieve world-class ‘ultrafast’ digital connectivity. It makes sense to support the vibrant, entrepreneurial, competitive providers with the sort of policy, regulatory and funding approaches that will help them scale to deliver great results for the UK and a really good deal for the taxpayer. We need high capacity, low-cost digital infrastructure. Alongside the big guys like Virgin Media, Vodafone, Sky and TalkTalk, the challengers from Gigaclear, CityFibre, ITS, Airband, Hyperoptic, B4RN and a host of others are proving that modern digital infrastructure does not start and end with a state-funded upgrade to BT’s old phone network.
 
INCA members and supporters will discuss these issues at a series of events including a London seminar Financing Independent Networks on 22nd July and a major conference, Transform Digital: Bristol on 15th and 16th September. Your participation is welcome.
 
 
Malcolm.Corbett@inca.coop
www.inca.coop
@malcolmcorbett @inca_nextgen
 
Many thanks to those who commented and contributed to this article including Daniel Heery, Stefan Stanislawski, Michael Armitage, Philip Virgo, Chris Pateman, Barry Ford, Jeremy Sheehan, Richard Feasey, Lorne Mitchell, Hugo Pickering, Shaun Fensom.