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Ministers cross wires on next-gen broadband

The government is making all the right noises about super-fast broadband, but its own officials seem to be taking a different view, says Malcolm Corbett

One arm of government is enthusing about the private sector's role in creating next-generation broadband. Unfortunately, another arm is trying to choke infant initiatives at birth, says Malcolm Corbett.

The coalition government continues to trumpet the virtues of private sector-led approaches to next-generation broadband and to promote local, community-led schemes. Although there is no big pot of central government money available, ministers and officials say they want to help the market develop, remove barriers to investment and encourage local innovation.

This is all well and good. But while Jeremy Hunt, Ed Vaizey and BIS officials are marching us towards a Big Society, super-fast broadband future for all, another set of officials working in the dusty-sounding Valuation Office Agency (VOA) seems intent on taxing those new initiatives, possibly to death.

Business rates on fibre have long been a bugbear in the industry. Vtesse Networks fought a long-running campaign in the courts against what it sees as unfairness in the system that benefits incumbents like BT while disadvantaging smaller players.

Barriers to investment
Francesco Caio highlighted the issue in his review of barriers to investment in next-generation access. It was noted in last year's Digital Britain report. Before the election, the Tories seemed intent on tackling the issue, but have since changed their minds. Pressure from the Treasury, perhaps?

On 11 August, the Valuation Office Agency (VOA) published its Revised Valuation Guidance for Telecommunications Networks. This guidance lays out the rating scheme that will apply for the next five years. The documents are long and complex, culminating in a series of tables giving the rateable values on fibre network routes, the number of lit fibres and a comparison with the previous scheme from 2005.

Perhaps it was no coincidence that the VOA's new guidance was published at the height of the silly season. Many commentators have focused on the proposal to set a rateable value of £20 per year per household connected to new fibre deployments. In the past they assessed cable networks on the basis of £7.50 per home passed.

The argument put forward for the new scheme is that it benefits new fibre deployments since rates are charged only for those premises actually connected rather than all those in the development. However, on brand new green-field sites where most customers would be expected to take a service over fibre, this change represents almost a tripling of the rates bill.

Taken together with rates increases for short fibre runs — on the basis that the market price for these has risen — the net effect will be to make an already marginal case for investment much worse, except perhaps for BT and Virgin Media.

Receipts and expenditures
Unlike the smaller players BT is not taxed by the kilometre of fibre for historic reasons. Instead, BT's rates are calculated on the basis of receipts and expenditures, arrangements whereby BT's accountants and the VOA argue about what the bill should be until a final settlement is reached.

Independent Networks Cooperative Association (Inca) wanted to delve deeper into the implications of the latest guidance and asked three broadband experts to put their heads together. The task went to Pauline Rigby — author of the FTTH [fibre-to-the-home] Council Business Guide and Inca's forthcoming UK supplement, Adrian Wooster — responsible for Inca's technical programme and well known broadband guru, and Louise Lancaster — responsible for Inca's policy and regulatory briefings.

They took as their model example a small market town of 1,000 customers and 25 businesses in the high street with a hub connecting them to the internet 25km away. The calculation is complicated, with various uncertainties, but they estimated the rates bill payable for this project could be between £15,000 and £18,000 per year. Assuming the network build cost to be £1.4m paid back over 20 years, the rates bill adds about 25 percent to the overall costs.

In Manchester, others undertaking similar calculations for business customers connected to the proposed Oxford Road fibre project indicate that the rates bill could be as high as...

... £33 per customer per month. If this proves correct the business rates alone will be higher than the price paid for a fibre connection in Amsterdam or Paris — cities against which the Manchester project is aiming to benchmark.

Bleak outlook
When compared with the way that copper connections are taxed, the situation for fibre looks even bleaker. Local-loop unbundlers were treated as a special case by the VOA in what was essentially a political decision. BT was designated as the occupier of all local loops, even those operated by other telecoms operators, and therefore the rates bill fell to BT.

The VOA proposes to continue this arrangement with sub-loop unbundling — the set-up where an alternative operator takes over the customer connections from a local street cabinet. BT will still pay the rates on the copper part of the line.

None of these developments is good news for those innovative private-sector players investing in fibre to the premises, nor for the communities they are trying to serve. It seems that the net effect of the VOA policy is to tax new entrants more than the incumbent, and new fibre connections more than old copper ones. A truly perverse result if the overall aim of broadband policy is to incentivise the market to invest.

Britain is already performing poorly in the international broadband speed comparisons with a recent study placing us below Romania, Latvia and the Czech Republic. These taxes on fibre will help keep us there.

Any answers?
When Francesco Caio undertook his review of the barriers to next generation access, Aidan Paul of Vtesse Networks proposed an alternative system that de-rated fibre and instead taxed BT on its exchange buildings, which are not part of the local rating lists. Paul argues that this measure would be fiscally neutral, a fairer system and would incentivise — rather than discourage — investment in fibre by a wide range of players.

More recently Adrian Wooster has argued that government should exempt fibre deployments altogether in areas that Ofcom deems 'market 1', where little or no investment is taking place. He also argues that this measure would be fiscally neutral — the Treasury wouldn't lose anything since no investment means no taxes — and would encourage investment, particularly in the 'final third' — in that it has been unable to get broadband speeds above 2Mbps because it is too far from BT's closest exchange and BT has chosen not to invest in upgrading its network there.

Indeed, exempting all final third areas from business rates for a set period could tip the balance and speed up investment. Even more radical is Wooster's suggestion that the rating system should be turned upside down — why not tax unused and unshared assets and discount openly shared and used assets, encouraging user take-up, reaching out to the digitally excluded and hard-to-reach areas?

Alternative approach
Another option is for communities to create social enterprises in the form of co-ops or community interest companies to invest in local fibre projects and seek partial or full exemption from business rates.

Around the world co-operatives have long been used as a mechanism to create services in areas of market failure, often with tax and other incentives to help overcome some of the barriers.

A classic example is the rural phone co-ops developed in the US in the middle of the last century to bring telephone services to their communities. They did this very successfully and it's a model we could usefully copy in the UK in communities that don't want to get left behind.

Of course, the real answer is for the government to seize this problem and finally deal with it. Messrs Hunt and Vaizey are right — we need to encourage more investment and innovation in super-fast, next-generation broadband.

It would be very helpful if they could persuade Mr Osborne of the importance of this argument. Then perhaps we can all march in the same direction.

Malcolm Corbett is chief executive of the new Independent Networks Co-operative Association, which represents organisations building and operating independent next-generation broadband networks in the UK.

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