Audit Proposition to demonstrate Value For Money/ Best Value in NGA Procurements Background Local Authorities and devolved administrations funded through BDUK’s Rural Broadband Fund, are contracting for NGA coverage of their areas in line with their Local Broadband Plans. Most of these have or will procure using a further competition under the BDUK Framework. The majority (if not all) these procurements will only receive a bid from BT. The Authorities have an obligation to ensure Best Value as well as Value For Money, especially from private sector bidders for public sector grants. Whilst there are pricing structures and precedents that BDUK can offer to assist in this, there is significant concern over the cost-­‐effectiveness and VFM these represent, especially as they are based on little external referencing beyond the pricing offered by BT for previous bids. Moreover, it is clear that while the BDUK Framework has been very helpful in clearing state aid, the specifics of a Framework where BT is obliged to sell inputs to the other Framework member, should it lose a bid, suggests that the dynamics of any pricing via the BDUK Framework should be tested externally wherever possible. Authorities need a number of additional measures to secure VFM, mitigating the risk of subsequent challenge and instead ensure Best Value through the resulting contract. INCA and its partners have identified the following package of measures to help secure Best Value for your money in these times of austerity. Proposition We propose offering a packaged audit and reference pricing service to any Authority running a procurement and entering into a contract for NGA. This service will be hosted and provided through INCA in order to demonstrate its independence from any one supplier and ensure that it contains up-­‐to-­‐date cost and price data. We will assess value for money in a European context and will submit benchmark data on a regular basis to the EU Commission for testing and peer review. Suggested Approach There are 5 principle activities in the VFM Audit Service: 1. Establishment and Validation of Benchmark Prices. NGA benchmark prices will be determined using national and international data for each technology approach. In particular, this will provide a benchmark in both rural and urban contexts for: a. Fibre to the Premise (FTTP) GPON and P2P b. Mix of Fibre to the Cabinet (FTTC) GPON, P2P INCA NGA Best Value Audit Proposition v2.1
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Prism Business Consulting Limited, a limited company registered in England and Wales.
Registered number- 05859021. Registered Office- 105 Charmouth Road, St. Albans, Herts AL1 4SG
c.
d.
e.
f.
Fixed Wireless Access (FWA) Interplay of 4G FWA versus FTTC where no duct exists Interplay and use of 4G MobileBroaband/FWA and FTTC Analysis by Phase –e.g 1 Handover Point serving 5-­‐10exchanges through to 40-­‐100 cabinets. The benchmark will be derived by first compiling a ‘bottom-­‐up’ cost model and aggregating this to determine a cost per premise passed and per premise connected. This will take into account component pricing from suppliers and realistic resource costs based on the technology architecture employed. It will use data from actual implementations by a range of suppliers in the UK and from implementations around the world. This will derive the average benchmark cost and range of standard deviation for each technology that could be expected for an NGA roll-­‐out. These figures will then be tested with 2 to 3 suppliers of each technology in the UK to determine and validate an average benchmark price together with the range of standard deviation it is reasonable to expect. 2. Independent Review of Proposal Prices. The benchmark prices can be used to inform a review of proposal prices received from bidders / contractors in either a further competition run under the BDUK Framework or an independent procurement for NGA. This review will be a fixed price package consisting of: a. Confirmation that appropriate pricing data has been received b. Confirmation of the background information that has been received to support these prices c. Comparison of the prices received to the benchmark and standard deviation for the technology proposed. d. Consideration of local demographic and geographic factors to determine appropriate variation from the benchmark within the defined deviations. e. A ‘sense check’ on the value for money of the technology proposed, against the benchmarks and standard deviation data for other technologies. f. An independent recommendation on the Value For Money represented by the price and technology proposed in each NGA bid received. 3. Validation and Clarification of Proposal Prices. Should the review recommend that the prices received do not represent VFM, then a more detailed validation and clarification exercise can be undertaken with the bidder / contractor to further understand and refine the proposals as necessary. This may include using additional information requested from the bidder on the breakdown of the price offered, or where this is not available, the use of external data directly derived from survey and analysis work in the region. The output would be either: a. An increased coverage offer from the bidder based on adjusted price assumptions b. A revised price from the bidder c. A recommendation to seek alternatives that offer greater Value For Money 4. Validation of Local ‘Reference Price’ and Monitoring Arrangements. Once an acceptable balance of cost/ price and coverage has been determined that represents Best Value through the procurement, the detail of this will be compiled into a Reference Benchmark document. The document and spreadsheets will: a. contain the Reference price based on the national benchmark as adjusted to accommodate local conditions and amended/ agreed with the supplier through validation and clarification (if required) b. describe the reasonable range of tolerance that could be accepted as variation to the Reference Price, to take into account actual local conditions, reasonable excess construction charges etc. INCA NGA Best Value Audit Proposition v2.1
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Prism Business Consulting Limited, a limited company registered in England and Wales.
Registered number- 05859021. Registered Office- 105 Charmouth Road, St. Albans, Herts AL1 4SG
c. define a mechanism for monitoring the planned and actual charges incurred during each stage of implementation d. be structured in such a way to allow its inclusion in the final contract signed with the successful bidder e. enable Authorities to use the tool to identify international best practice for costs and subsidies f. assist Authorities to work together in demanding new levels of granular cost disclosure from their chosen NGA provider. This document will enable the ongoing compliance of the supplier with the pricing structures and Best Value offered under the contract. 5.
Audit Review of ‘Exceptional’ Prices. The project and contract management teams within the Authority can validate prices for each proposed stage of the implementation against the Reference Price Document. They can conduct a further validation against each invoice received from the supplier. Where the actual price proposed varies beyond the tolerances defined, the team may commission an ‘Exception Review’ of the specific stage or invoice. This review will follow similar lines to the validation and clarification activity and seek to: Revise the prices proposed b. Identify alternative means of achieving the stage requirement c. Recommend removal of the stage from the scope of the contract if no satisfactory revision or alternative can be agreed, with the corresponding reduction in coverage and price. The relevant affected area would remain ‘white’ and be categorised as within the ‘hardest to reach 10%’ as defined by the EU Commission and BDUK. Alternatives can then be sought for this area using other suppliers, techniques or technologies that would offer Best Value for the specific circumstances. a.
Duration and Resource Effort The anticipated resource effort and timescales activity would be: 1. Establishment and Validation of National Benchmark Prices: 24 days over 4 weeks maximum a. Bottom-­‐up cost modelling for each of the 3 technology groups-­‐ 2 days each = 6 days b. Price testing with suppliers-­‐ 2 days each for 3 suppliers for each technology = 18 days c. Completed as part of the first ‘pilot’ reviews conducted for participating Authorities. 2. Independent Review of Proposal Prices: 5 days a. Confirm that appropriate pricing data has been received-­‐ 0.5 days b. Confirm the background information that has been received to support these prices-­‐ 0.5 days c. Compare the prices received to the benchmark and standard deviations-­‐ 1.5 days d. Consider local demographic and geographic factors to determine appropriate variation-­‐ 1.5 days e. ‘Sense check’ the value for money of the technology proposed-­‐ 0.5 days f. Make independent Value For Money recommendation-­‐ 0.5 days 3. Validation and Clarification of Proposal Prices: variable depending on the extent of clarification required. Indications are given below of the typical resource effort that might be required: a. Compiling the list of clarification questions and data requirements-­‐ 1 day b. Reviewing response information and data-­‐ 5 days c. Research using other external sources where no breakdown data is provided-­‐ 15 days d. Clarification meetings with bidder(s)-­‐ 3 days INCA NGA Best Value Audit Proposition v2.1
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Prism Business Consulting Limited, a limited company registered in England and Wales.
Registered number- 05859021. Registered Office- 105 Charmouth Road, St. Albans, Herts AL1 4SG
e. Update independent Value For Money recommendation including alternative approaches if necessary-­‐ 1 day 4. Validation of Local ‘Reference Price’ and Monitoring Arrangements: 3 days a. (Re)validate the Reference price-­‐ 0.5 days b. Determine tolerance range-­‐ 0.5 days c. Define appropriate monitoring mechanism based on local requirements-­‐ 1 day d. Compile contract schedule-­‐ 1 day 5. Audit Review of ‘Exceptional’ Prices: variable depending on the extent of audit review required. Following a similar approach as for 3 above, indicative resource effort (per exception) could be: a. Compiling the list of audit data required-­‐ 0.25 days b. Reviewing response information and data-­‐ 1 day c. Research using other external sources where no breakdown data is provided-­‐ 5 days d. Clarification meetings with bidder(s)-­‐ 2 days e. Produce Audit Report including alternative approaches or de-­‐scoping recommendation if necessary-­‐ 0.75 days Resources Proposed: The amount of resource effort will be minimised by deploying experts in the field of NGA broadband, including: • David Cullen-­‐ 26 years of telecoms, media and technology management and public sector consulting experience including 8 years as a director of Andersen’s government services practice and 6 years as Chief Executive of NYnet Ltd where he led the pilot procurement for North Yorkshire. Director of INCA, negotiating with NGA suppliers and BDUK. • Mark Melluish-­‐ 32 years in telecommunications. In early 2000 joined new start-­‐up company focusing on broadband using ADSL via street cabinets. Has assisted local government, (former) RDAs and industry in analysing and streamlining telecommunications budgets and identifying Superfast Broadband solutions for the ‘final third’. Co-­‐founded Rutland Telecom, the UK’s first independent provider of FTTC. Since early 2012 has been consultant to UK Fibre Infrastructure Company (NDA in place) advising on strategy and commercialisation of Local Authority infrastructure. • Mike Kiely-­‐ A 22-­‐year career in telecommunications. Most recently (May 2010 to September 2012) was Technical and Regulatory lead for Broadband Delivery UK. Principal author of BDUK technical requirements for the rural NGA programme and responsibility for estimating NGA project costs. • Malcolm Corbett-­‐ An Internet and broadband professional for 25 years, founder and CEO of INCA. Malcolm has extensive knowledge of the public policy aspects of broadband deployment as well as an understanding of technologies and capabilities of private sector players. • Callum Knowles-­‐ 17 years experience of fixed and wireless coverage development for Counties, Cities, Districts and Boroughs, including BDUK project lead for East Sussex County Council, Lead for Brighton and Hove City Wireless project, Lead Consultant for Pan London Wireless Concession. Currently running NGA soft market testing and procurements using various business models. Is a Member of the Institute of Economic Developers (MIED) and is working on a supplementary planning Guide on Fibre installation in new Developments. INCA NGA Best Value Audit Proposition v2.1
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Prism Business Consulting Limited, a limited company registered in England and Wales.
Registered number- 05859021. Registered Office- 105 Charmouth Road, St. Albans, Herts AL1 4SG
Proposed Fee Structure The normal daily rates for these personnel is between £750 and £1,000 recognising the knowledge, expertise and negotiating strength they bring. However, these rates can be significantly reduced by packaging the service to replicate the templates used and minimise the ‘learning curve’ for each audit and. The fixed fee costs of the service would be £5,000 comprising £3,100 for the Review (2) and £1,900 for the Reference and Monitoring mechanisms (4) excluding VAT and (minimal) necessary expenses. Any further days required for validation, clarification or exception audits would be charged at £700. In addition, the costs of producing and regularly updating the benchmark data need to be built in. The cost of this is £15,000. We propose that this be shared between three ‘pilot’ Authorities initially using the service at £5,000 each. In return for this investment, the pilot authorities will receive: a. A bottom-­‐up analysis of their specific data, which will be anonymously incorporated into the benchmark b. Collaborative IP rights on the benchmark data. A £3,000 surcharge will be levied on all other Authorities using the service, making the ongoing price of the audit package £8,000. As a result of (b), this surcharge will be passed back to the pilots until the development cost is fully recovered. The surcharge will then be applied to regular updating of the data and compilation of all reference pricing to produce a national database. Indicative Cost Benefit Case The cost benefit rationale for this level of spend is based on: • an assumed reduction in the overall costs of the NGA rollout • a reduction in aid intensity to ensure the scheme remains well within the levels stated in the state aid umbrella measure (thus maintaining compliance) • an increase in coverage for the same level of aid The true cost benefit of conducting the audit review will only be apparent after the event. However, we can determine the potential value of the exercise if we make some assumptions. Say for example: • The area under scope of an average NGA procurement will include c. 2,000 cabinets • BT has already enabled 65% of cabinets using their own capital. This leaves 35% or c.700 to be enabled using the funds provided through the intervention. • No more than 10% of all premises are considered out of scope through being ‘too hard to reach’, of which 5% are on long lines from enabled cabinets and 5% are connected to economically unviable cabinets. This puts 100 cabinets out of scope, leaving 600 cabinets to be enabled using the funds. • The national average benchmark cost of cabinet deployment in an FTTC solution is found to be £30,000 including a reasonable charge for labour etc. • The review of local conditions increases the benchmark tolerance to £35,000 on average (an uplift of 17%). Based on these assumptions, the ‘target‘ of achieving 90% coverage by enabling 600 cabinets should cost £21m. Using the average aid intensity quoted in the state aid measure (71%) the public funding to be allocated under the project would be £14.9m. INCA NGA Best Value Audit Proposition v2.1
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Prism Business Consulting Limited, a limited company registered in England and Wales.
Registered number- 05859021. Registered Office- 105 Charmouth Road, St. Albans, Herts AL1 4SG
If the average cost per cabinet were to rise by only 0.5% more than the local reference assumption, the public funds required for 90% would increase to £16.4m. Conversely, £14.9m of gap funding would only enable 545 cabinets, reducing coverage to 87.25%. ‘Worst case’ audit review costs would be in the region of £22,000: • Package charges of £8,000 (including the benchmark surcharge) • 20 days of extensive clarification work = £14,000 Using the scenario above, even worst-­‐case audit review costs represent only 0.15% of the funds allocated-­‐ and hence would be justified by an increase in coverage of the same amount. David Cullen Managing Director, Prism Business Consulting for and on behalf of INCA July 2013 INCA NGA Best Value Audit Proposition v2.1
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Prism Business Consulting Limited, a limited company registered in England and Wales.
Registered number- 05859021. Registered Office- 105 Charmouth Road, St. Albans, Herts AL1 4SG