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Revision of the Community Guidelines for the application of State aid rules in
relation to rapid deployment of broadband networks
Response of British Telecommunications Plc (“BT”)
to the European Commission’s Questionnaire of 19 April 2011
BT welcomes the opportunity to comment on the European Commission‟s plans to
revise its Community Guidelines for the application of State aid rules in relation to
rapid deployment of broadband networks (the “Broadband Guidelines”). This
response does not address all of the Commission‟s questions in order but focuses
instead on the bullet points listed below.
The UK is one of the most competitive markets for communications in the world and
the UK Government aspires to see the UK become the most broadband enabled
European country by 2015. BT is doing a great deal to make sure this aspiration
becomes a reality. Around 99% of UK premises already enjoy access to copper
broadband and 2011 has seen the extension of ADSL2+ copper broadband with
speeds of up to 20 Mbps to over 65% of UK premises. In addition, BT is investing
£2.5bn in its super-fast fibre-based broadband network which it intends to extend to
two thirds of UK premises by the end of 2015.
The deployment of broadband infrastructure should, wherever possible, be market
driven but public funding is necessary to incentivise investment in areas where
deployment is not economic. In this connection, the Broadband Guidelines have
provided greater legal certainty and encouraged better designed aid measures by
Member States. However, some aspects of the Broadband Guidelines require
amendment and/or further clarification, for instance:
the network access conditions for recipients of public money for NGA
deployment (paragraph 79, 3rd indent of the Broadband Guidelines);
the economic rationale for the preference for multi-fibre point-to-point (“Pt-Pt”)
networks over Gigabit Passive Optical Network (“GPON”) technology;
how to ensure that public funding is not used to duplicate and devalue or preempt and discourage private sector investment;
public sector ownership and management of broadband infrastructure;
the calculation of the public sector funding contribution, in particular the
identification of eligible costs and the extent to which overheads and indirect
costs are eligible;
how small, local infrastructure projects can be financed in accordance with the
State aid rules; and
the allocation of risk between the public and private sectors and private sector
participation in the State aid approval process.
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NGA NETWORK ACCESS CONDITIONS
It is neither necessary nor efficient for all different types of network access to be
provided by the recipient of public funds for NGA deployment as a condition of State
aid approval.
As the Commission suggests in its consultation document1, some access remedies
are redundant under certain circumstances and there is no need to provide them to
ensure a sufficient level of competition.
One example of such an access remedy is the requirement to make available dark
fibre. In the UK context, the national regulatory authority (“NRA”), Ofcom, has found
(and the Commission has agreed) that it is inappropriate, disproportionate and
unnecessary to require winning recipients of public money for NGA roll-out to make
available dark fibre.
Ofcom undertook a detailed review of the appropriate regulatory regime to facilitate
the deployment of NGA and published its conclusions in its March 2009 document
“Delivering superfast broadband in the UK”:
“While there was significant consensus in the consultation responses on the role and
importance of active products, this was not the case for passive products. There was
no expressed interest in using passive access products in the near term. Despite
this, many respondents felt that it was important to maintain options for passive
based competition, although there were differing views on the form this might take.
We believe that, as with local loop unbundling, the economics of next generation
passive access are likely to change over time and as a result the willingness to
invest may increase. It is therefore important not to preclude these opportunities, but
at the same time we must avoid imposing additional costs which may undermine the
investments announced by network owners”.2
The question has most recently been considered as part of the 2010 Review of the
Wholesale Local Access market, in which Ofcom concluded as follows:
“We consider that physical fibre unbundling would not be a viable remedy to enable
the deployment of NGA networks during the period covered by this review, given the
sparse availability of suitable fibre in BT’s access network and the likely technical
feasibility of accessing fibre.”3
BT agrees with Ofcom‟s decision not to require access to dark fibre to be provided in
these circumstances. To the extent that a passive remedy might be considered
necessary in the regulatory context, as the European Commission pointed out
recently in relation to the Swedish WLA market review, duct access is preferable to
1
Question 5.2
http://stakeholders.ofcom.org.uk/binaries/consultations/nga_future_broadband/statement/statement.pdf
paragraph 6.2
3
http://stakeholders.ofcom.org.uk/binaries/consultations/wla/statement/WLA_statement.pdf paragraph 6.90
2
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dark fibre as it better enables operators to choose a suitable and sustainable point in
the “ladder of investment”. In the UK, the combination of virtual unbundled local
access (“VULA”) and Physical Infrastructure Access (“PIA”), together with the
functional separation of BT‟s local access network, forms a powerful combination to
address competition issues for NGA but still allows investment to be contestable and
sustainable.
The regulatory obligations proposed by Ofcom as part of this market review were
assessed by the European Commission to ensure compliance with the European
regulatory regime, and the European Commission endorsed Ofcom‟s decision in this
regard.
“The Commission notes that Ofcom does not impose fibre unbundling, given that it is
unlikely to be cost-effective in the UK due to BT’s network GPON topology, which
could result in a low level of aggregation of households served. On the basis of the
evidence provided, the Commission does not challenge the finding that today fibre
unbundling would not be a justified and proportionate remedy and agreed that VULA,
which offers characteristics that appear comparable to fibre unbundling allows
competitive entry on the WLA market. In addition, the Commission notes that
alternative operators can also rely on the SLU and the PIA remedies to climb the
ladder of investment and roll out their own fibre lines closer to their customers’
premises.”4
Access to dark fibre will therefore not always be an appropriate or efficient remedy.
The wholesale access required from State funded schemes should be designed to
maximise consumer choice and downstream competition in the particular
circumstances in question. As can be seen from the Ofcom and European
Commission comments above, this requires in each case a careful consideration of
the national regulatory context, the technological environment, the economics of the
remedy and the benefits for business and residential consumers to ensure that the
chosen remedy is targeted, justified and proportionate. Absent this kind of analysis,
the chosen remedy may deter private investment, discourage take-up of the
wholesale access remedy and ultimately of the resulting retail broadband offer.
In this connection, it is important that there should be proper and effective scrutiny of
the wholesale access offered by non-SMP operators bidding for or receiving State
aid, such that it is genuine, reasonable and non-discriminatory. In this context the
public sector body granting the aid should liaise with and consult the NRA about
local broadband developments and ensure that the access conditions proposed are
consistent with the analysis that the NRA would carry out when considering SMP
remedies to ensure downstream competition.
4
http://stakeholders.ofcom.org.uk/binaries/consultations/wla/responses/european-commission.pdf p8.
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Pt-Pt and GPON
Currently, there are two basic Fibre to the Premise (“FTTP”) architectures: point-topoint (“Pt-Pt”) and point-to-multipoint. The latter is often referred to as a passive
optical network (“PON”) or a Gigabit Passive Optical Network (“GPON”).
The Broadband Guidelines express a preference for multiple fibre networks on the
basis that they are technology neutral and conducive to long-term sustainable
competition. However, in its consultation, the Commission suggests that there may
be concerns about the economics of multiple fibre networks and invites comments
on the comparative merits of point-to-point and point-to-multipoint architectures for
effective unbundling and promotion of competition.
For its part, BT considers GPON to be more cost effective and efficient as well as
being able to support capacity growth.
In parallel, Ofcom has considered the implications of this choice of network
architecture on long-term competition in the UK, concluding that there was a lack of
clear demand for multi-fibre deployment and the imposition of an obligation to
unbundle GPON could discourage investment5. Furthermore, it found that effective
competition could be achieved by means of remedies other than unbundling.
Cost effectiveness
The deployment of a GPON network involves both lower capital investment and
ongoing operational expenditure than a Pt-Pt network.
As for capital investment, the lower fibre count and reduced duct build of a GPON
network result in a lower deployment cost than Pt-Pt. With Pt-Pt architecture, a
dedicated fibre connection is available to each end user from the exchange building.
By contrast, with GPON architecture, a single fibre from the exchange is shared by
several end users by means of a passive optical splitter which is deployed
somewhere between the exchange and the end users‟ premises. Pt-Pt therefore
uses more fibre and requires more equipment (in the local serving exchange) to
operate the fibre than GPON. Inevitably, the greater number of fibres required in a
Pt-Pt network means significantly higher demand for available space in the existing
infrastructure network (i.e. duct space) through which to route the fibres than GPON
would require. Such space is limited and to increase it would require extra civil
works, significantly increasing the cost per home passed/connected for operators.
On the operational side, with the greater number of fibres in a Pt-Pt network comes
an increased complexity of fibre management and likelihood of network failure. The
large quantity of fibre associated with Pt-Pt architecture means that it is more prone
to human handling errors as a large number of network failures occur due to faulty or
5
http://stakeholders.ofcom.org.uk/binaries/consultations/wla/statement/WLA_statement.pdf paragraph
6.146.
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incorrect fibre connection. 6 It also means that Pt-Pt requires more floor space,
accommodation and energy in the exchange as compared with GPON. Together
these factors result in much greater operational costs for a Pt-Pt network than for a
GPON network.
The higher cost of deployment of a Pt-Pt network translates into a much longer
payback period for the investment and, potentially, increased prices throughout the
distribution chain. This undermines some of the key policy objectives in this area,
namely to encourage a wide and rapid deployment of broadband networks and to
reduce the „digital divide‟. It discourages private investors and potentially deters
digital inclusion by reducing take up of the more expensive high speed broadband
offer.
Ability to support capacity growth
The optical bearer in GPON architecture has sufficient bandwidth capacity to meet
current and future end-user requirements. It allows a seamless upgrade to the next
generation of PON technology (10Gbit/s XG-PON), which increases the available
bandwidth many times over. Current 2.4G and future 10Gbit/s XG-PON systems will
be able to operate on the same fibre bearer, which will facilitate system upgrades of
targeted or general end user populations. The relatively cheap and simple upgrade
of the GPON network is an important consideration in the context of the Broadband
Guidelines, which appear to focus on cases of entirely new network deployment
almost to the exclusion of the (actually very common) instances of upgrades to
existing networks to improve broadband speeds.
For all these reasons, GPON is used widely throughout Europe.
Implications for long-term competition
As mentioned above, the prospects for competition on GPON and Pt-Pt networks
have also been considered in depth in the UK, in particular in the context of Ofcom‟s
2010 Wholesale Local Access Market Review.
In this review, Ofcom concluded that requiring BT to deploy multi-fibre, when it
deployed its FTTP network, would probably be an inefficient outcome, as surplus
fibre might well be supplied relative to actual future demand. A multi-fibre
requirement might also discourage investment in the FTTP network, given evidence
of very testing conditions for such deployments, including high costs and unproven
consumer demand for FTTP products.
Moreover, Ofcom was not convinced of the potential for full and effective unbundling
of Pt-Pt networks in practice. According to Ofcom, “the available evidence indicated
that the unbundling of multi-fibre is likely to become attractive to a CP only where it
6
Analysis Mason Report for Ofcom “GPON Market Review – Competitive Models in GPON: Initial Phase”
26 October 2009.
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has a sizeable market share under certain favourable conditions which include: high
coverage; high duct re-use; and also roll-out in densely populated areas. Given this,
and because other effective wholesale local access remedies would be available, we
considered that a multi-fibre obligation would not be a proportionate way to pursue
our objectives of securing effective competition and investment”. 7
Moreover, GPON facilitates switching more than Pt-Pt. GPON networks allow end
users to switch between CPs at a higher layer of the network than Pt-Pt 8 so
eliminating the need for intrusive physical activities in the network. This in turn
means lower costs and disruption associated with switching in a GPON network and
therefore a reduced risk of “lock-in” compared with Pt-Pt.
7
http://stakeholders.ofcom.org.uk/binaries/consultations/wla/statement/WLA_statement.pdf paragraph
6.69; Analysis Mason, Competitive models in GPON, December 2009.
8
That is GPON allows switching to take place at the layer 2 transmission level rather than the layer 0 physical
level required by Pt-Pt.
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DUPLICATION OF EXISTING AND PLANNED INFRASTRUCTURE
Despite the emphasis in the Broadband Guidelines on avoiding the duplication of
existing and planned infrastructure, BT‟s experience in the UK is that duplication with
public money of its own ADSL2+ and NGA deployment is relatively common. Public
sector bodies granting aid for broadband deployment frequently ignore
representations about the duplication they propose to fund despite the clarity of the
Broadband Guidelines on this question and central Government agencies are
unwilling to intervene. This is an area where the national regulator could play a role,
as an arbiter, when there is disagreement about whether or not proposed public
funding will duplicate existing or planned infrastructure.
Duplication can also arise where a public sector body has concluded a procurement
procedure but a significant period elapses before the contract is finalised and work
starts on deployment. In these circumstances, private sector investment may catch
up before the public sector contribution is spent and throughout this time businesses
and residents will have been deprived of broadband connectivity. To avoid this
eventuality, there should perhaps be a time limit by the end of which public funding
has to be spent. This would accelerate deployment and reduce the chances of
duplication.
It is not clear that defining a “white” area according to a minimum affordable
download speed criteria (as suggested in question 3.1) would necessarily assist in
resolving these problems. It is clear, however, that State funding should only be
approved where, amongst other things, it makes a substantial uplift in available
broadband speeds. For instance, if FTTC is already deployed in an area that should
not be a bar to public sector investment in FTTP.
Equally, setting minimum affordable download speeds appears arbitrary and
inflexible. Alternative solutions to fibre such as BT‟s ADSL2+ product or the use of
TV white space spectrum can be particularly useful in rural areas where the
topography makes wired solutions technically difficult and economically inefficient.
While these solutions may not reach the same speeds as fibre and struggle to
achieve the extremely ambitious speeds provided for in the EU2020 strategy, they
do significantly improve the broadband access and speeds currently experienced in
these areas. In this context, an overly prescriptive approach could be harmful and
there is a need for a careful case-by-case assessment of the existing infrastructure
and speeds available.
The European Commission‟s EU2020 strategy itself must be implemented carefully.
The strategy aims to provide all Europeans with access to internet speeds of above
30Mbps and to ensure that 50% or more of European households subscribe to
internet connections above 100Mbps. These targets are very ambitious and costly,
even in the UK where broadband speeds are already amongst the highest in Europe.
BT is concerned that it should not dissuade investment in speeds below 30 Mbps for
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those end-users where even a speed of 10 Mbps or less would be a significant
improvement. BT would welcome clarification of the Commission‟s view on this point
in the revised Guidelines.
On a separate note, the Broadband Guidelines are silent at present on the
duplication that inevitably occurs where mobile broadband infrastructure is financed
with public funds in a “white area”. The radio waves emitted by the mobile
infrastructure do not stop at the borders of the white area but continue into grey and
black areas where they can be used for broadband connectivity. The question is
whether the owner of the mobile infrastructure is entitled to derive revenues from
customers outside the white area given that it will be duplicating existing or planned
infrastructure with public funds. An examination of this issue in the Guidelines is
needed.
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PUBLIC SECTOR OWNERSHIP AND MANAGEMENT OF INFRASTRUCTURE
A common public sector model for broadband infrastructure deployment in the UK
involves the public sector going out to tender to find a third party for the physical
deployment of the new infrastructure, as well as the management and operation of it.
However, the authority, either itself or through a wholly-owned subsidiary, retains
ownership, takes responsibility for marketing infrastructure services and enters into
contracts with third party communication providers who want to use the new
infrastructure.
Experience, in the UK at least, has shown that there are at least four fundamental
flaws with this model which is ultimately an inefficient way to use public funds. The
model involves greater risk and expense for the public sector than the private sector
gap-funded model. Under the latter, the private sector partner takes part of the
financial risk, takes the responsibility for selling services and has the contractual
relationship with communications providers.
The first flaw is that the public sector finances the entire cost of the infrastructure
deployment and of its operation and management for the period of the contract with
the third party manager and operator. In the so-called gap funded model, the private
sector partner bears a significant part of this cost.
Secondly, the public sector takes the entire risk of deriving sufficient revenues from
the sale of services on the new infrastructure to cover its investment and operating
expenditure and to allow a reasonable return.
Thirdly, the public sector has to create a product and a brand which attracts
customers onto the new network. This aspect, which is a crucial part of making such
an investment viable, is something which the public sector has no experience of and
is not qualified to address.
Fourthly, the public sector is inexperienced in managing contracts
communications providers even if they can be attracted onto the new network.
with
Where the public sector has implemented this model in the UK, it has spent
significant amounts of public funds but has singularly failed to attract customers onto
its network and to cover its investment.
In the above scenario, the public sector grantor, or its wholly-owned subsidiary,
generally uses the new broadband infrastructure to supply the broadband needs of
private sector communications providers. Sometimes, however, the authority will
also use the new infrastructure to supply its own communications requirements and
those of other public sector bodies. Depending upon the circumstances, it will be an
infringement of the public procurement rules for communications services to be
supplied direct to other public sector bodies without a further competitive tender
taking place. For instance, assume that a number of local authorities have financed,
through a communications provider that they own jointly, the deployment of a new
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broadband platform. If the communications provider sells network services on that
platform to the private sector it cannot also sell those services to its public sector
owners or to other public sector bodies unless there is a proper procurement process
which it wins fairly.
It would be helpful if the revised Guidelines could analyse the implications of the
scenarios outlined above, namely where the public sector finances broadband
infrastructure and sells communications services on that infrastructure to the private
sector only or to the private sector and the public sector.
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THE CALCULATION OF THE PUBLIC SECTOR FUNDING CONTRIBUTION
In the UK, the funding model most often used for publicly financed broadband
projects is the private sector “gap funding” model. Here the private sector and the
public sector combine to meet the cost of deployment of the new infrastructure. The
private sector partner owns the new infrastructure and gives access to
communications providers on non-discriminatory terms.
The private sector partner has to calculate how much public funding it needs to cover
the total costs of the investment and to make a reasonable return on its own
investment. It is this “gap” amount that constitutes the bid price in the procurement
process
The “gap funding” calculation is usually based on investment and operational costs
less discounted projected future revenues over the project lifetime. Revenue
estimates typically rely on forecasts of the potential number of premises, the
expected-take-up and product pricing. The calculation also has to take account of
the private sector investor‟s intended rate of return, and the length of its investment
horizons.
There is also a tendency to focus on the supply side when assessing the required
amount of the public sector contribution. However, demand side measures to
encourage take up can also be effective in bridging the digital divide and so public
sector contributions to the cost of such measures should also be taken into account.
There are, therefore, many variables in the “gap funding” calculation in relation to
which guidance would be welcome:
the revenues which may be taken into account: in particular, the guidance
should clarify the appropriate treatment of revenues from existing investments
in the project area which will be lost when customers migrate to the new,
publicly financed next generation infrastructure;
a clear definition is required of the capital and operating expenditure which is
eligible for a contribution from public funds. For instance, the circumstances
in which overheads and indirect costs are eligible for a contribution require
clarification. Definitions do exist under the European Structural Funds rules
but only in outline. Member States are responsible for identifying eligible
costs under these rules in more detail but definitions and approaches vary
from region to region and the position is unclear where some or all of the
funding comes from national sources. If Member States are in error there is
always the danger that a European Commission audit will detect this and
require the recipient to pay for the mistake and repay any amounts not
contributed to the Commission view of eligible costs;
In some tender processes, the public sector grantor states that only capital
expenditure is eligible for a public sector contribution.
This ignores
commercial reality because the business cases of all bidders have to take into
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account not just capex but also opex. A clear statement to the effect that
opex is also eligible is needed;
Confirmation that the cost of demand side measures (e.g. the cost of
marketing schemes or subsidies to drive take-up) is eligible.
Limiting wholesale access to 7 years makes the business cases (which are
generally longer than 7 years) of bidders who are not subject to regulation much
more attractive because at the end of that period they are able to bring all
volumes back into their own vertically integrated business. This would tend to
distort the bidding process and in due course the competitive environment more
generally because there would be reduced regional competition between service
providers at the retail level.
The suggested minimum period of 7 years for guaranteed wholesale access is
therefore insufficient and BT believes that where State aid is granted, appropriate
third party access should be mandated until the end of the useful economic life of
the infrastructure.
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THE FINANCING OF SMALL, LOCAL INFRASTRUCTURE PROJECTS
There are many instances of small islands of broadband deprivation in rural and
urban areas which do not attract private sector investment but only require small
amounts of public funding to make a viable business case. In the UK such areas are
commonly referred to as “not spots”.
It is important for the Broadband Guidelines to recognise that the financing of not
spots, which involves smaller public sector contributions, should be subject to
proportionate obligations as a condition of State aid approval. For instance, whilst
there should in all cases be an obligation to make available non-discriminatory
wholesale access to the new infrastructure, there may not be a need for a clawback
obligation given the small amounts of funding involved.
Moreover, in these cases, individual State aid notifications and clearance are
disproportionate to their value, size and scale. The extension of the scope of the
General Block Exemption Regulation in these cases to cover “not spots” both inside
and outside so-called “assisted areas” and without the limits on aid intensity
contained in the UK Regional Aid Map would ease the progress of such projects
without giving rise to any material competition concerns or market distortion.
Finally, local authorities in the UK tend to rely too much on the de minimis regulation
and will award funding under the de minimis threshold to operators without, for
instance, a fair, transparent and technology neutral tender process or an obligation
to provide non-discriminatory wholesale access. The Commission‟s guidance on this
scenario would be welcome in its revised Guidelines.
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THE ALLOCATION OF RISK AND PRIVATE SECTOR PARTICIPATION IN THE
STATE AID APPROVAL PROCESS
BT has taken part in many gap funded public tenders for broadband deployment in
the UK and continues to do so. BT‟s experience in these bids has highlighted a
number of common features which make the award process and in-life project
management particularly difficult and costly for participants and discourage, rather
than encourage, the private sector from investing. Some examples of these features
are listed below.
First, there is a failure by many public sector bodies to appreciate that investments
are being made and risks incurred by both the private sector and the public sector
partners. Yet the risks are not shared. All public sector partners without exception
place all the contractual risk on the eventual recipient of the funding and seek to
impose unnecessarily onerous clauses. These include parent company guarantees
and indemnities and the ability to regulate the prices of wholesale and retail services
to be provided on the new infrastructure. In effect, they try to add an extra layer of
regulation without any reference to the national regulator. As well as being
potentially distortive of competition, this is unnecessary where, as in the UK, the
regulator does a good job.
Secondly, public sector bodies insist upon disproportionately burdensome audit and
document retention requirements which further increase the costs to the winning
bidder. There is an insistence on paper copies of invoices which is particularly
anachronistic in the current context. There is little recognition of the fact that many
components used in the infrastructure build will already have been purchased
pursuant to bulk buying arrangements and will not have been acquired specifically
for the individual project. At the same time, there is no universally recognised
definition of which capital and, in particular, operating costs are eligible for a public
sector contribution. There are audit rights for both the national authority and the
European Commission and there is no guarantee that a successful national audit
also means a successful Commission audit. There has to be a one stop shop to
reduce costs and to encourage participation by as many bidders as possible.
Thirdly, it is common practice for the public sector to incorporate into the funding
terms and conditions a long list of termination events which trigger the right for it to
terminate and require immediate repayment of the funding.
Fourthly, many public sector organisations try to pass their own obligations to comply
with the State aid rules on to the winning contractor while at the same time excluding
the latter from the State aid approval process with the European Commission. They
also attempt to pass on their own obligations under the European Structural Funds
regulations and the EU procurement rules.
There should be greater engagement and co-ordination in this process between the
eventual aid recipient, the national granting authority and the European Commission.
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The recipient is better placed than the national authority to explain the financial and
technical details of the proposed solution and, in particular, to specify and justify the
aid intensity required.
Better use of public funds can be made by ensuring that both demand and supply
side interventions run in parallel. To focus principally on supply side measures such
as capital expenditure may not be sufficient to achieve the public interest objective of
improved broadband connectivity for all. User demand for higher broadband speeds
arises from familiarity with and ability to use improved applications that require
higher speeds. Consequently, demand stimulation measures that teach users to
exploit such applications have a key role to play and should be given greater
prominence in the Broadband Guidelines.
Finally, although one of the stated policy objectives in the Broadband Guidelines is
the increase of consumer welfare generally by a wide and rapid deployment of
broadband networks, there is in practice a disproportionate focus on the benefits for
SMEs in the measurement of project outputs. ERDF funding is almost always
conditional on benefits for SMEs, such as delivering measurable assistance to SMEs
and being able to demonstrate their development and growth as a result, e.g. how
they exploit newly available high speed broadband; connecting with the „knowledge
base‟ elsewhere; through their introduction of innovative initiatives, products,
processes or services; the creation (or safeguarding) of jobs or new start-up
businesses. This can create problems for certain activities such as research and
development, or community based programmes. Measurement of outputs should be
re-oriented to look at general community and social benefit, not just economic
benefit.
The output required by the public sector for some projects is an increase in regional
GVA by a fixed percentage at the end of the project. That is not only impossible to
achieve but virtually impossible to measure. Outputs need to be tangible measures
that can be visible early on in the delivery cycle.