UK retains tax disadvantages for fibre
There remain serious financial and regulatory issues which should concern all those hoping to see the UK’s fibre network reach its full and proper potential, and see the country truly among the frontrunners in Europe for infrastructure.
First, some background. About five million kms of fibre optic cable has been deployed across the UK yet there is little commercial FttH installed and operational outside BT’s efforts in parts of London. A number of companies have extensive backhaul fibre networks (including BT, Energis, Cable & Wireless, Colt Telecom, Virgin Media, Fibernet and Surf Telecom), but as yet FttH – truly the end-game, rather than FttC – remains a very restricted service. Nevertheless, as 2010 draws on the previous rationale for limiting FttH seems to be dissipating.
For most operators, the business rationale hitherto has been that fibre was comparatively expensive to deploy, and that given the services and applications available much of the capacity would lie idle. Thus FttH provided little promise of a return on potentially huge investments.
To the first point, all in this business, whether policy makers or consumers, now accept that future demand for bandwidth will require FttH, and that squeezing last century’s copper networks with upgraded technologies will never suffice.
To the second point, the falling cost of fibre deployment and the examples of successful municipal-funded (and to a degree customer-built) networks in Sweden and the Netherlands have shown that extending FttH can be cheaper for operators than installing DSL equipment in exchanges. In the UK, Energis and Surf Telecom are noteworthy because of their use of existing utility infrastructure to deploy their fibre networks as a cost-saving measure; both companies piggy-back on the electricity infrastructure. Energis runs its networks along the national grid’s electricity transmission infrastructure and the regional electricity company’s main distribution lines, as well as the London Underground network. Surf Telecom is a subsidiary of the Western Power Distribution (WPD) utility and runs most of its fibre optic cable along WPD’s existing power cables, either as a separate cable or wrapped around the earth wire. This utility model of network deployment has operating costs only a quarter that of running underground cables, meaning it can pass the savings on to its customers and offer cost-effective broadband connections. FibreCity has taken a different tack, utilising the sewer network in Bournemouth, Birmingham, Dundee and a number of other towns (the company plans to connect more than one million homes over the next four years).
However, this good work is being undertaken despite a skewed tax policy relating to fibre builds. The government’s role in promoting fibre thus far has been unsatisfactory: although its intention to provide universal broadband is commendable, and is in line with similar developments elsewhere in Europe (it is already in place in Switzerland, Spain and Finland), the anticipated 2Mb/s download rate is neither ambitious nor sufficient, and rests on the continuing dependence on copper networks.
The government, lacking a satisfactory model to help fund a fibre NGN, has retained the unequal tax regime on fibre lines which favours the two main players – BT and Virgin Media – despite pre-election promises to review the tax rating system. This has been an issue for a number of months, but it has become newsworthy again because of the recent government backtrack on its promised review.
In sum, the Valuations Office (VOA) considers that since fibre NGNs are in the early stages of being rolled out, there is insufficient rental or cost of construction data available on which to amend its tax valuations, and so it is applying to FttH the same approach which it does to CATV networks (on the basis that they are already FttC). The rateable value (tax) per home passed by cable networks is currently £7.50, but the VOA assumes that given the investment and longevity of fibre network payback, the tax for connected fibred homes should be £20 (this was also based on the number of homes connected rather than homes passed to account for the lower number of fibre subscribers as fibre networks get built up).
In addition, under the current model BT, Virgin Media and Cable & Wireless are each treated differently by the VOA. Virgin Media is rated based on the number of homes passed, while BT pays tax based on the rent generated by a cable (as determined by the VOA) as also on its entire physical non-domestic infrastructure. All other players pay per fibre pair – with networks up to 50kms they pay for cables used at between £2,000 (outside London, or £3,000 for business rates) and £3,000 (within London) for the first km. There is then a phased scale, increasing the rent per km as the length of the network falls below 2,000kms – in other words, for tax purposes smaller networks pay proportionately more in tax. In addition, BT does not pay higher rates with the greater number of fibres used, whereas alternative operators pay more proportional to each km lit up. For alternative operators, the higher cost to access each home becomes evident since each is connected with a separate cable (almost all of which are shorter than a km). Although the tax falls rapidly the more cables an operator has (an example for the scaled cost structure has been blogged here) the overall tax bill to deliver fibre to a community can be burdensome, and would dissuade a proportion of those people so served from signing up.
This advantage to BT compared to smaller operators with numerous short run cables was what the Conservative party had promised to review, and which it has now – as part of the Coalition government – reneged on (largely, one suspects, because the Treasury thereby can continue to bring in hundreds of millions of pounds annually).
Within Europe, the UK is perhaps alone in taxing fibre lines given that almost all other regulatory regimes charge for rights of way only 9if they charge at all). Both systems introduce additional costs for smaller operators, and in the UK context it is clearly a disincentive which favours BT.
It should be necessary for the government to review this fibre regime if it to encourage an expanded fibre footprint in the UK, and so realise the ‘best super-fast broadband’ infrastructure in Europe by 2015, as it has promised the electorate.
For more information on the UK’s broadband market, see:
United Kingdom – Broadband – Fixed Network Overview, Statistics & Forecasts;
United Kingdom – Broadband – Wireless Overview.
Tagged in: Broadband Fixed, Broadband Wireless, United Kingdom
