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6. Option Review

This section looks at the possible options available should the Executive wish to address the reach issue. At a high level, there are the following main options to consider:

• Do Nothing
• Private Sector Solution
• Public Sector Intervention.

6.1 Do Nothing

The Executive has not committed to provide broadband to every household in Scotland. There could, therefore, be an argument that enough has been done, and with high overall levels of availability across Scotland, the job is finished. As was shown in Section 2.1, the expansion of ADSL services to all exchanges in Scotland has increased the availability figures substantially over the last two years, in particular, with the target set, and achieved, of availability to 100% of communities.

Scotland and the UK have extended their lead on extensiveness, which brings them to the often-quoted 99.6% level. Our further investigations with BT suggest this figure would have to be revised down for Scotland and other UK regions but would still be approximately 99% and in some cases greater - meaning it remains the top rated country amongst the key broadband enabled countries compared. With no further intervention from the Executive, those relatively low numbers out of reach could look to a satellite solution - with possible grant assistance for businesses though the Enterprise network.

However, the Executive has publicly stated that criteria and potential solutions on 'reach' will be developed including the publicly communicated timescales for implementation in 2006-07. In addition, out of reach subscribers have been encouraged to contact the Executive to log their issues, which all adds to the view that something is going to be done. As the availability figures get closer to 100%, and even the most remote areas are now obtaining service, expectations will increase.

There is also pressure from a number of MSPs representing those constituents affected, which adds to the view that the demand is there for some solution to be put in place.

In reality, the assessment of market failure (by the European Commission - the ultimate deciding body in Europe) is judgment, based on current supply (extensiveness, number of competitors, pricing) and demand, both current and expected. There is clearly a demand (as evidenced through the database) and a lack of supply in this case. There have been many arguments in the past around the justification of investing in broadband provision, particularly to the more remote areas, where broadband access can compensate for poor access to a range of services including education, health, commerce and entertainment.

It has been easier to justify projects that aim to benefit end-user businesses rather than residences, since the expected economic benefit is more tangible, although still very difficult to quantify. However, broadband projects in France, for example, have been classed as a service of general economic interest ( SGEI), and these will serve both businesses and residences alike. In doing so the authorities leading the project, and the EC, are both saying that they believe telecoms - in its broadest sense - to be economically and socially important.

We believe the risks and benefits of this option can be summarised as follows:

6.2 Private Sector Solution

The broadband reach issue exists because the commercial operators have not provided a solution due to the commercial limitations involved and because of lack of knowledge about where not-spots exist. The business case is not there to invest in the required technology to meet the requirements of a small number of subscribers who will only be prepared to pay standard levels of broadband rentals. Affordability is as important as the availability of service. There are some larger communities who may be able to attract a private solution from a small local contractor, but there will remain questions around sustainability due to the very low margins involved.

A totally private sector led solution is not, therefore, a realistic option if the Executive wishes to address the broadband reach issue across all the potential subscribers identified.

6.3 Public Sector Intervention - Implementation Model Approach

Based on the discussion in the previous two sub-sections, the remainder of this section assumes some level of intervention is followed.

There are a number of different models in which the public sector might intervene to provide a solution.

Our overall approach to preparing a commercial model is to define the fundamental components of a Scottish Executive ¹² led Implementation Model for delivering broadband to the out of reach locations. The Implementation Model is designed to provide sufficient flexibility, such that all possible scenarios and eventualities can be managed during the implementation of solutions. The model includes a 'do nothing' scenario.

The Implementation Model operates to a number of principles designed to ensure viability, sustainability and offer 'value-for-money', as well as minimise risk particularly from a State Aid perspective, such as ensuring minimal market distortion.

At a high-level these principles should be:

• Least intervention necessary for minimum duration, proportionate to the scale of the issue, given competing demands for public funds
• Technology neutrality
• Services based on published standards or industry de-facto standards
• Funding paid only after delivery of service
• Minimum tariff subsidy
• Solutions sought in an open and transparent manner and assessed using pre-defined evaluation and value-for-money criteria
• Sustainable solutions, given market trends such as price competitiveness, increasing take-up and network changes.

The suggested Implementation Model could be delivered using a phased approach, with areas without service categorised so that proactive involvement and funding intervention by the Scottish Executive progressively increases as the solution becomes more difficult to justify commercially. However, a subsidy threshold is set that controls the amount of funding intervention. When the subsidy threshold is reached, then reactive 'fallback' categories kick-in. The categories are defined as follows:

The concept of the phased implementation is illustrated in Figure 6.1, which shows the implementation categories and the increasing subsidy per user, as the number of premises decreases per Cluster Area.

Figure 6.1: Implementation Phases and Subsidy Per User

The detail of each category is described below. It should be noted that although the implementation is phased, the implementation of each category could occur at any time because some locations will not justify any proactive funding intervention. However, in principle the categories are in implementation priority order, so that the overall implementation can be broadly phased, i.e. the least interventionist approach to delivery of Category 1 has priority over the funding intervention of Category 2, and so on.

6.3.1 Category 1: Facilitation Only

For Cluster Areas categorised as Category 1, no funding intervention is offered. However, during this phase the Scottish Executive may need to facilitate the implementation of solutions to these areas without service using a number of mechanisms:

• Stimulating demand
• Gathering evidence of demand
• Providing evidence of demand to suppliers
• Encouraging suppliers to resolve access problems
• Helping to coordinate communities, so they can purchase their own services/network.

In this category the solutions are effectively commercially viable and delivered by the private sector.

Cluster Areas falling into this category include those locations where BT recognises access issues, and should be willing to implement solutions. It may also include areas where the community identifies a viable supplier and solution that can be funded privately without public sector intervention.

If a Cluster Area cannot be provided with a commercially viable solution after the above activities have been exhausted, then the Cluster Area falls into Category 2, which is described in the next section.

6.3.2 Category 2: Community Funding Intervention

For Cluster Areas categorised as Category 2, funding intervention is offered to suppliers for developing a solution to each Cluster Area. The activities that the Scottish Executive should undertake during this phase include:

• Assessment of Cluster Areas to determine those most likely to obtain sustainable solutions and offer economic benefits - this assessment would include understanding the demand profile in terms of business activity within a Cluster Area and density of premises. Note: this process has effectively started through the Mason analysis of clusters provided in document 9 WQA003O.
• Defining service requirements (possibly at a Cluster Area level, if the community is comfortable with lower levels of service).
• Seeking supplier bids for each Cluster Area (as single lots, but also as multiple lots because economies of scale would be achievable from a logistics and roll-out timing perspective).
• Evaluating supplier bids and awarding Grant Funding Contracts to the most economically advantageous solution that meets the minimum criteria of providing the service over a pre-determined time-period.

If after receiving supplier bids, the solutions proposed for a Cluster Area do not offer value for money and are not affordable, then the Cluster Area falls into Category 3. Note that the funding threshold needs to be clearly defined prior to assessing supplier bids for Cluster Areas.

The clusters should be offered to suppliers as a single batch initially, so that suppliers can leverage economies of scale (lower costs) and the Executive can achieve a lower average cost of solution intervention (more clusters meet the value for money criteria if an average cost, rather than an individual cluster cost, is considered). If suppliers do not have the opportunity to develop solutions with all clusters in scope, then it is unlikely that the most remote and smallest clusters would be able to receive a broadband service. The worst-case cluster costs are unlikely to offer value for money on their own.

During this phase of effort, the Scottish Executive would also need to continue with demand-side activities listed in Category 1 above.

Scenarios that can be addressed by this category include situations where there are known problems with the existing BT infrastructure, and the commercial case for BT is unviable. However, it may be feasible to request a bid from BT and, if acceptable, implement the solution as an extension, or change request, within the existing SSI contract.

6.3.3 Category 3: Individual Grant Funds

For locations that are not viable for Category 2 solutions, an individual, one-off grant is available to a resident or business upon application, i.e. 'on demand'. Each application is assessed before approval, and the grant is only paid upon receipt of the supplier's invoice. Applicants are responsible for obtaining supplier quotations and purchasing a broadband service.

The activities that the Scottish Executive should undertake during this phase include:

• Design of a grant application process, including service definition, funding threshold, application form and assessment criteria
• Advertising of grant fund availability to encourage applications and supplier offerings
• Providing application advice
• Providing structured advice about technology options
• Providing a neutral list of suppliers (satellite and others).

It may be possible to manage the process such that multiple applications received from the same area could be grouped together to operate the Category 2 process.

A key difference between Category 2 and Category 3 solutions is that funding for Category 2 solutions is paid to suppliers, whereas Category 3 funds are paid to individual residents or businesses.

6.3.4 Category 4: Do Nothing

The Category 4 (do nothing) is only 'deployed' if a grant fund applicant requests a subsidy that exceeds the maximum funding threshold set by the Scottish Executive, or, indeed, if the total budget available for intervention was exhausted.

In addition, potential subscribers who do not request a grant will fall into the 'do nothing' category. However, for these situations, the Executive will have made an offer of a grant, and it will be the subscriber that has 'done nothing'.

6.3.5 Benefits of the Implementation Model

The benefits of taking the Implementation Model approach include:

• It is defensible
• All possible scenarios can be addressed
• A staged approach, with clearly identified categories offers fall-back options
• The likely outcome is a reduced number of 'not spots'
• During the implementation period, advances in technology may reduce service issues and number of 'not spots', e.g.BT doing trials of DSLAM in cabinets
• Positive public relations - the Executive is seen to be doing something proactively, rather than taking the 'do nothing' option from the start
• It is up to suppliers to make it happen, using funds on offer from the Executive
• The supplier market determines which scenarios are not commercially viable, not the Executive
• The 'do nothing' option remains an option.

6.3.6 Potential Risks and Issues with the Implementation Model

There are a number of potential issues with the Implementation Model, although by identifying them at an early stage it should be possible to manage them during the implementation process. Issues might include:

• The next 'digital divide' may be a real issue within the period of implementation
• The implementation timescales in relation to formal procurement requirements may not be acceptable to the Executive
• No clusters fall into Category 1
• No suppliers are interested in bidding to provide solutions even with funding on offer
• Solutions may be considered unsustainable even though value for money criteria may be met, e.g. smaller supplier sustainability risk rather than solution sustainability, or unproven technical solution risk
• Customer experience of service with smaller supplier solutions is more likely to be poor in terms of service performance, sales process, technical support, and customer service issues. This is often compared to BT, which is considered 'real broadband'
• Grant funds are insufficient for customers to sustain paying the cost of expensive service (assuming service is satellite and more expensive than 'standard' ADSL)
• High volumes of grant funds drain funding such that only a limited number of 'not spots' are served
• Administration costs to operate an Implementation Model scheme may be too high if separate State Aid approval was required and/or the market approach has to be via an OJEU procurement

6.4 Implementation Model Costs

[Details on possible costs have been removed for confidentiality e.g. in case a tender is pursued]

However, ballpark figures for attempting to deliver 100% coverage (for the high-end estimate of 25k premises out of reach) using non-wireline solutions were:

Caution must be applied due to the many assumptions involved in deriving these high-level figures. None of the costing analysis assumes that BT takes action to address some of the clusters that develop, for example, and we believe this should always be the first option.

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