Project Gigabit is the UK Government's programme to enable hard to reach communities to access superfast broadband. Nearly £5bn of funding is being provided for an infrastructure subsidy programme, comprising a series of phased contract opportunities. Project Gigabit provides a great opportunity for independent fibre network operators (or altnets), many of whom have been successful in raising significant funds from a range of investors. In this update we look at some of the key financial and structuring issues for operators bidding for Project Gigabit opportunities.
Background
Project Gigabit was launched in March 2021 and is aimed at delivering superfast broadband to the final 20% (F20) of the population. The project is run by Building Digital UK (BDUK) on behalf of the Department for science, Innovation and Technology.
The main part of Project Gigabit is the procurement of contracts to develop giga-bit capable broadband infrastructure in a number of identified areas around the country. These take the form of smaller contracts that are called off through a mini competition under a dynamic purchasing system (Type A contracts) and contracts for larger geographic areas that are each subject to a separate procurement exercise (Type B contracts).
The contract terms and conditions are complex and onerous and need careful review given the extensive obligations that they impose on operators. This is particularly the case for smaller operators that have scaled fast and may not extensive internal controls and procedures in place to manage project change and contract compliance.
In addition to the Type A and Type B contracts, Project Gigabit will also provide continued funding for vouchers to connect customers in hard to reach areas, but reliance on vouchers will decrease as more areas are enabled through Type A and Type B contracts.
Bidding for Type A and Type B Contracts
As we've noted, Type A contracts are called off under a dynamic purchasing system, a sort of electronic framework system which suppliers can join at any time. Type B contracts are subject to individual procurement exercises using the "restricted procedure" under the Public Contracts Regulations 2015 – so, for each Type B contract opportunity, there are two stages: an initial "selection" stage and a further "award" stage.
For the selection stage bidders must satisfy two groups of criteria:
- first they must not be subject to any disqualification under procurement rules (known as "exclusion grounds"), for example because they have committed certain criminal offences, or failed to comply with tax commitments;
- secondly they must satisfy the technical, economic and professional "selection criteria" set by BDUK. In order to do that bidders must in particular be able to demonstrate relevant experience and expertise in delivering superfast broadband infrastructure, and to demonstrate that they have the financial strength to commit to a contract on this scale.
The criteria used by BDUK are deliberately demanding in order to minimise the risk of project failure, but this means that they can be challenging for all but the largest providers.
Many potential bidders with the right experience will not necessarily have the balance sheet or turnover to satisfy the selection criteria – in such situations procurement rules require BDUK to allow bidders to rely on other entities to help them meet these criteria.
For economic criteria that can mean relying on a parent company or investor, but the entity bringing the financial strength to the table will often be required to share liability for delivery, perhaps through a guarantee. These are often known as "consortium bids" but there is no requirement at this stage for a consortium to take any particular legal form.
Any member of the consortium (and indeed any subcontractor) must themselves complete a selection questionnaire in order to self-certify that they do not trigger any of the grounds for exclusion.
For those bidders and bidding consortia who satisfy these selection criteria there is then the second phase of the restricted procedure, where the criteria must concern only the bidder's proposals for delivery of the particular contract. This can include the structure for how the bidder proposes to ensure delivery, for example how it proposes to engage subcontractors, or ensure that financial commitments are met.
It is essential that advice is taken early on to identify potential issues and ensure that each entity that may form part of a consortium bid understands what that involves. Early engagement also helps ensure sufficient time for investors to go through any internal approval processes.
Operational and accounting segregation
A successful bid under a Type A or Type B procurement does not grant the operator exclusivity for retail services to the properties passed. To ensure compliance with subsidy control rules, the infrastructure built using Project Gigabit funding must be made available to any retail operator wishing to offer services to the premises served.
To ensure transparency, under BDUK's Project Gigabit contracts, operators must ringfence the Project Gigabit funded infrastructure from their retail operations by ensuring "full accounting separation is in place". In practice, this will usually be done through the incorporation of separate group companies for the different functions. As well as facilitating the required accounting separation, these different entities can also help to manage more general commercial risk across the business.
This may require restructuring of operations to separate network ownership from retail operations, which may in turn have an impact on arrangements with investors. Alternatively, if an operator does not ordinarily make its network available to third party providers of broadband services, it may wish to ringfence only its Project Gigabit funded infrastructure.
Operators planning to bid for Project Gigabit opportunities should consider how they will structure their business to comply with these requirements. This may require a restructuring of the business, including the ownership of assets, which will need careful consideration and often involve obtaining third party consents. Care should be taken to ensure there are no unintended consequences, such as breaching the terms of existing contracts or financing arrangements, or incurring additional tax costs.
Provision of wholesale services
In addition, operators need to ensure that they provide Project Gigabit funded wholesale services on a fully transparent and non-discriminatory basis.
This means the operator cannot provide a captive retail operation with access on more favourable terms than those that it offers to the rest of the market. This applies not just to the price of those services, but also the terms and conditions that apply.
Each operator must therefore publish its wholesale agreement and tariff six months prior to its Project Gigabit funded services becoming available. To ensure compliance with the non-discriminatory principle, that agreement and the prices offered must be the same as those in place with the operator's own retail operations.
Operators who decide to segregate wholesale and retail operations may still be able to provide their retail division with preferential access and terms for non-Project Gigabit funded infrastructure. While this is possible, this is likely need multiple wholesale agreements.
More information
Brodies has extensive experience advising operators on bidding for Project Gigabit opportunities and public infrastructure funding for telecoms, including advising on structuring of operations and wholesale contract terms. If you would like to discuss how we can assist, please get in touch.
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