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Standard User WWWombat
(knowledge is power) Fri 29-May-15 12:22:10
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Response to @ValueForMoney, State Aid

[link to this post]
This post is a response for @ValueForMoney in this news article:
Then ask how is there any room for BT's capital contribution given the scale of state aid reported in BT's accounts, relative to what's been delivered and relative to what BT did commercially?
How can this be state aid complaint when there is not even a reference to BT making a capital contribution in the notes of the accounts?

There's just too much to be able to fit into 600 characters...

Here are the ways I look at BT's expenditure, and the kind of questions I ask to see whether the data presented is sensible. Or whether further dirt needs digging.

Sniff test 1: Is BTOR's net capital spend returning to pre-NGA levels?

Sniff test 2: Are BTOR spending a lot more than they receive from state aid?

Sniff test 3: What rate of BTOR expenditure should we expect?

Sniff test 4: What rate of state aid payments should we expect?

Sniff test 5: What relative proportion of state aid do we expect?

Test 1: We need to see BTOR expenditure down near £700-800m for this, but the quarterly figures don't show this. They show total spend is increasing (and increasing a lot in the last year, when the state aid is coming in quickest).

(The history of BTOR capital expenditure figures is listed below)

Test 2: In the Q4 accounts, and for the whole of 2014/15, BTOR's capital spend went up. The state aid only accounts for 25% of total capital expenditure.

In the other 75% is the "room" for BT's own contribution. That's enough room to pass the sniff test. No note is needed in the accounts to make it "state aid compliant"

So - there's room, but does this mean BT made any of their own contributions to the NGA rollout?

Test 3: I'd be expecting BT to be capable of wiring in the same number of cabs now (peak BDUK rollout) compared with 2013 (peak commercial rollout). However, the line density will be lower, so I'd expect fewer homes passed.

Meanwhile, I'd expect the length of fibre spine to be getting much longer - so there'd be higher costs for civil engineering (likely contractor?).

In 2013, Liv reported an NGA spend rate of £300-400m pa, out of BTOR total £1144m. About 30% of their total spend, when passing 80,000 premises per week.

In 2015, BTOR's total spend (net of aid) remains the same; it is a reasonable assumption that the NGA spend rate remains similar: £300-400m pa.

This kind of rate of expenditure is probably within the limits that city financiers will accept - keeping within the cashflow generated by the business.

In the middle of the 2014/15 financial year, they reported passing 60,000 premises per week, with 40,000 of these within BDUK - a rate that suggests they have been keeping up with the rate of cabinets deployed, but they're gradually getting less dense.

At the same time as keeping their own spending going, they've pulled in (and spent) aid of £378m. They either employed a lot of new people for that, or contracted a lot of work out.

Those rough figures suggest BT is continuing to spend their own money on the NGA rollout as before, but state aid is paying for a large slab of additional expenditure.

Isn't that what we would expect?

I might go as far as to say it exceeds my expectations. The combination of continuing their own spending (within the cashflow of the business) plus one-off additional expenditure, fully financed by state aid, leads to a total that is higher than I'd have predicted.

Test 4: For BDUK phase 1 alone, we expect BT to receive £1.2bn of combined state aid over the course of 4+ years - but spread unevenly, with notable ramp-up/down. Right now would probably be the expected peak rate (as seems to be confirmed in the Welsh report this week)

If totally even, the aid would spread out as £300m pa, £75m pq.

Receiving £378m in the peak year seems reasonable.

Test 5: In all of the press releases for phase 1 BDUK contracts, BT's own contribution amounted to slightly less than the total subsidies. IIRC, I calculated around £1bn for BT vs £1.2bn from public subsidy, but I can't find my figures right now.

So let's just say that I'd expect BT to spend their own money at, very very roughly, the same rate as the state aid they receive; probably slightly less.

And the Q4 figures from BT suggest, very very roughly, state aid totals around the same amount as BT's own expenditure.

When looking at BT's financial reports, the figures offered pass my "do they make sense?" tests.

Capital spend, £m:
Total Q4= 248   FY=  951

Total Q4= 278   FY=  907

Total Q4= 294   FY=1,087

Total Q4= 279   FY=1,075

Cap   Q4= 293   FY=1,144
Aid   Q4=   0   FY=    0
Total Q4= 293   FY=1,144

Cap   Q4= 252   FY=1,049
Aid   Q4=  59   FY=  126
Total Q4= 311   FY=1,175

Cap.  Q4= 278   FY=1,082
Aid   Q4= 117   FY=  378
Total Q4= 395   FY=1,460
Standard User VFM
(newbie) Fri 29-May-15 17:47:45
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Re: Response to @ValueForMoney, State Aid

[re: WWWombat] [link to this post]
This guidance to analysts showing BT capital reducing to 'tens' - as soon as the state aid kicks in.

I have a BT slide showing

Run rate capex £300-£400m (2013) .... moving to tens (m).

The run rate peaked at 400 cabs as per the unmetered power application doc (serach for UMSUG pdf) and that also confirms commercial ends at 50,000 cabs.

You just run out of cabs - Total 87,3xx + 5k eol and that's 100% not 90% - 90% is an extra 28,000 ish.

I cannot quote the NAO but I did check and they said they saw everything BT could produce, so the £24k including the overheads, PMO is solid, I also have a second source on that but cannot quote but the numbers were agreed by folk working in group finance.

You can do other checks - Callflow systems in Kent use the same ECI boxes and use PIA. They with no efficiences rarely go above £30k with ECC's and good budgets for power, includes rentals of space at handover point.

You can also enter the product codes for lines cards, network cards and casings into a number of equipment sites and you can gets quotes for one offs deliverd for $12kUS. I know I can use £5k for BT and still leave planty of room for the actual. I know I embaress nobody using a futher £5k budget to install, power, plynth, tie cables. The rest is the 1-2km of fibre and then the overheads.

So 1100 a month delivered is £27.5m or £82.5m a quarter, leaving room for the work in progress.

I have three analysts posing questions on the capitalised labour numbers, but each are now of the opinion the state pays all or nearly all for NGA, and it has been a prinary contributor to creating free cash flow.

I think for peace of mind, just reconstruct a LS2 switch, 1-2 kilomentre overlay fibre, cabinet and install and see you could even get close to £50k.

In the current BDUK scheme I can count 29 counties whose total average costs are below £25k. So this will rise, but it there is no BT contribution.

Your £1bn is £751m in the press releases, but this reduces to £530iskm if you use the intervention level and the NAO say this is likely to be £350m max. Oxera say BT matched capex is c£26Xm less than expected without referring to what was expected. But Oxera and Audit Wales point to reconciliation process when referring to BT contribution. It's hot air in my opinion.

Wales BT capex is £35 per premise so 5.4m premises x £35= £189m. So it is low. I would be so happy if BT contributed £50 a premise and netted it off LA costs. That's £250m. FCC insist operators pay first $70 for FTTC installs before rural subsidy kicks in.

Your underlying assumption of £2.5bn/50,000 cabs or £130 per premises is I think significantly flawed or just overstated for reasons I provided earlier. 18 months of less labour and switch away from FTTP meant 'comfortably under' as per Mr Livingstone.

I am awaiting a seond opinion on OR capital expenditure for 2014-15. The variation is down to capitalisation polcies and I have not checked the interaction with depreciation.

The resource is the same Morrison, Carillion/Telent resource as before.

So the £2.5bn has to be restated. It is £1bn for the 50,000 cabs and handover points, and the rest I assume are the wholsale platforms, CDPs and bunch of Adastral development costs.
The £1bn match is at best £250m capital, the rest is operational costs if that, and other costs to be found.
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