In March this year, DLA Piper published an article on Project Gigabit – the UK Government’s recently released plan to support nationwide coverage of gigabit-capable broadband throughout the UK. In our article we noted that the approach to the subsidy would be a procurement-led model, whereby prospective fibre operators bid on and win contracts for the supply of fibreoptic broadband services within a specific area or market.
On 1 June, the Department for Digital, Culture, Media & Sport (“DCMS”) released an in-depth paper – Delivering a gigabit-capable UK: Gigabit Infrastructure Subsidy. The paper sets out how the government plans to manage the Project Gigabit Infrastructure Subsidy Scheme and how the procurement will work.
In this article we set out:
- the Government’s approach to procurement – i.e. how contracts will be awarded for the building and management of fibre networks in areas that that would not be commercially economic for exclusively private sector financial investment;
- the different funding models that will be adopted – i.e. how subsidies for contracts will be funded;
- subsidy eligibility; and
- some concluding thoughts for investors.
Approach to Procurement
The Government intends to use the first year of Project Gigabit as a “learning year” whereby the performance of different procurement and subsidy models (as outlined below) will be evaluated in order to make changes to methodology in subsequent years. After the first year, a continuous ongoing improvement cycle will be built into all approaches to procurement moving forward.
The Government proposes the use of three primary procurement models (eligibility for which is outlines later in this article):
- A Dynamic Purchasing System (“DPS”) designed to award contracts for smaller interventions in areas of up to 10,000 premises. This model will be flexible, allowing fibre operators wishing to invest in smaller market areas to join and leave a list of pre-qualified suppliers at any time they wish. Call-offs will then be made against suppliers on the DPS list. This will be designed in a way that permits involvement from small-scale investors and suppliers through the use of lower barriers to entry to the procurement process. It is anticipated that this procurement model most suitable for those seeking to become involved in multiple, similar, procurements over multiple years and is designed to provide a standardised and simplified route to market for contracting authorities and suppliers.
- A Restricted Procurement Procedure whereby contracts for larger interventions in areas up to 150,000 premises are involved. This will offer fibre operators the opportunity to participate in the procurement of large-scale contracts upon selection by the Department for Digital, Culture, Media, and Sport (“DCMS”). In order to be selected, prospective fibre operators must complete an initial ‘Selection Questionnaire’ which covers a number of technical details to determine compatibility with the scale of the project. Suppliers who meet the criteria at this stage will then be invited to bid for individual contracts under this procurement method.
- A Single Supplier Framework Agreement model, which is designed to act as a ‘catch all’ for any areas of the country where there is no competition, where procurement has otherwise failed through previous routes, or where commitment to substantially larger scale requirement secures step-change investments in capacity and higher speed of delivery. These are intended to be single supplier agreements and any operator involved in this model of procurement will be responsible for building the network to any premises allocated under the respective agreements.
Role of BDUK in procurement
Building Digital UK (“BDUK”), now an arm of the DMCS, is set to take an active role leading on all models of procurement as the national competence centre and is expected to develop and tender the majority of contracts. Local authorities will still have opportunity to procure contracts themselves but due to the varying levels of expertise in the procurement and management of such matters in comparison to the BDUK, this is now expected to be only on the exceptional basis. This is a contrast to previous developments to the fibre network where it was the local authorities in the relevant markets procuring the majority of contracts. This change is in response to the lessons learned from the previously designed fibre programmes.
The Government intends to make five models of funding available to fibre operators:
- Investment Gap Funding: The relevant contracting authority procures a private sector partner who will be responsible for financing, designing, building, owning, and operating the broadband infrastructure. Upon completion of deployment, a capital subsidy will then be paid to the private sector operator and on expiry of the contract they retain ownership of the network. The subsidy in this case is the minimum amount necessary for the partner to deliver the project while making an ‘acceptable rate of return’. Investors seeking to invest in a fibre operator’s network rollout to which this funding is available must be aware that clawback provisions will likely be in place to recover any over-funding of the development.
- Concession to build-operate-transfer: The contracting authority provides a concession contract to a fibre operator to build, operate, and generate revenues from the created network. The private sector partner derives economic benefit from, but also bears the risk associated with, the infrastructure for the duration of the contract. On termination of the contract, the network will revert to the public authority and they may then decide if they wish to re-tender the contract, operate the network themselves, or sell the network. It is unclear what term is proposed for such concession contracts, and Prospective investors should be aware of this as it mean a limited timeframe to make a return on investment.
- Public sector owned supplier: An arms-length company, owned by the relevant contracting authorities, will invest in and provide the broadband infrastructure services to customers through service contracts. On deployment, ownership and management would fall to the public entities as a wholesale supplier. They would therefore be responsible for and manage all commercial revenues and risks.
- Public-Private Partnership: The contracting authority will form a joint venture (“JV”) or special purpose vehicle (“SPV”) with private sector fibre operators. The SPV or JV would then invest in and provide broadband infrastructure services to customers through service contracts. In this model both parties own equity in the entity and therefore split the risk and rewards of ownership subject to the distribution of shareholdings.
- Co-operative model: This model acts as a variant of the public sector owned model. The purpose of the Co-op would be to provide central resources to undertake aspects such as marketing, billing, and management of the network assets on behalf of the members of the Co-op. Members would retain ownership of their assets throughout the time of investment, but the Co-op would have specific rights to exploit them in order to carry out its functions as a broadband provider.
Eligibility and Evaluation of proposals
Eligibility for Dynamic Purchasing System Procurement
The criteria for entry to the DPS procurement method subsidies are yet to be fully finalised, but are expected to include items including:
- evidence of gigabit-capable technology solutions;
- demonstration of suitable financial standing; and
- acceptance of the terms and conditions and code of conduct applicable to the procurement method and funding model of the project.
It is anticipated that the DPS will create a list of pre-qualified investors who will then be able to bid for call off contracts as and when they appear. Entry requirements under this method are expected to be of lower burden, in order to encourage suppliers of a smaller nature, as noted above. Once approved, access to the DPS will be open throughout its life and regular engagement strategies are expected to ensure that suppliers understand their commitments when bidding to enter into the DPS.
It should be noted that these are not the only criteria and a fuller list of criteria is expected to be released in due course.
Evaluation of fibre operator proposals
The manner in which wider non-DSP fibre operator’s proposals will be judged (i.e. call-offs against the DPS list, or post-selection invitation to tender stage response) remains under development and subject to consultation with industry participants. The DCMS notes, however that the expectation that bidders will be assessed on aspects such as:
- the bidder’s network design and technical solutions;
- completed contract schedules and included terms;
- the bidder’s project plan showing delivery against milestones within the specified timescale;
- the pricing model for every eligible premise in the requirements; and
- the ability to meet wholesale access requirements.
The Paper flags that certain fundamental commitments must be reflected in bids, including:
- Technology neutrality – it must be ensured that the procurement does not favour any particular technology or network architecture. Bids will therefore be focused on objectively what technology will provide the maximum coverage at the minimum cost.
- Use of existing infrastructure – all bidders are strongly encouraged to make use of already existing infrastructure in the area. This includes the use of their own infrastructure, the use of other supplier infrastructure, and the use of other utilities infrastructure, such as relevant electricity infrastructure already in place.
- Wholesale access – all bids are expected to commit to offering passive and active access to the network on fair and non-discriminatory conditions to all third party operators who request it for any reasonable purpose. These obligations would fall away after 7 years for active infrastructure, but will apply indefinitely for all passive infrastructure.
- Wholesale access pricing – all bids are expected to offer wholesale access pricing on wholesale access products at a fair and reasonable level. In instances where these products are not regulated in the UK, the pricing of open access products will be proposed by bidders as part of the bid process. In doing so, bidders must align themselves with any benchmarking rules set out by UK authorities, such as Ofcom.
All procurements are expected to be managed through e-tendering platforms that suppliers and bidders will be able to access.
Development of Contract Stages of DPS and Restricted Procurement proposals
Should a supplier successfully propose and win a DPS or restricted procurement opportunity, as described above, they will begin work on network and infrastructure delivery in three stages. Each of these stages will allow parties to evaluate progress and overall success and potential of the ongoing project. They will also allow BDUK to determine whether funds from their arranged funding model have been over-prescribed and whether clawback measures should be engaged.
- Stage 1 focuses on the design, survey, and cost modelling of the project. At this point, parties can agree which premises are eligible and what the maximum costs for each premises are likely to be based on any issues or complications that arise on the ground. At this stage the number of premises, cost, and time of delivery will all be agreed and concluded with the supplier. Upon completion of this stage, a break clause will be present which may be used if the outcome of this stage becomes materially different to the original bid or in the case of a policy or funding change.
- Stage 2 focuses primarily on the build stage. As noted above, prospective investors should be aware of clawback measures put in place designed to recover any over-estimated funds provided for the purposes of building the infrastructure.
- Stage 3 goes on to focus on the monitoring of the infrastructure. At this point, the parties will monitor uptake of use and wholesale access obligations for the network over a period of between 7 and 15 years. Investors should also be aware of any clawback provisions at this point for the remainder of the term present to account for any underestimation of take up and revenue produced by the network.
Notable aspects for investors
There has been a strong, and growing, wave of investment in FTTP projects in Europe during 2020 and continuing in 2021, especially (though not only) in the UK. There are a variety of investment models for such projects, and there is therefore a present and growing interest in Project Gigabit among investors. The paper should provide investors with certainty as to how the Gigabit Infrastructure Subsidy Scheme will work practically.
There are a number of broader issues which an investor would need to consider, when participating in a project subsidised by Project Gigabit:
- As is set out in our article, one of the matters for an investor to consider is market risk i.e. once a network has been built and connectivity has been rolled out, is there a customer base for return on investment. Project Gigabit is intended to bring fibre to areas where traditional investment is uneconomical either due to high costs, or low customer numbers, or a combination of both. Project Gigabit therefore covers projects that would not otherwise be profitable without subsidy.
- One of the potential benefits of Project Gigabit is that being awarded contract for a particular area may reduce the likelihood of another fibre operator building out a network to the same area. However, this benefit is somewhat diluted as winners of the process must commit to offering both passive and active infrastructure access to other operators.
- An investor can invest in a project before or after a subsidy has been granted. There are obviously risks associated with the timing of the grant of the subsidy given it is a competitive process, rather than a generally available subsidy.
- As noted above clawback provisions will be put in place to ensure that any over -estimation of necessary construction costs, or under-estimate of future revenue generation will be accounted for. Thus the “upside” that might normally apply in these situations must be shared.
DLA Piper continues to monitor updates and developments to Project Gigabit. For further information or if you have any questions please contact the authors or your usual DLA Piper contact.