You are on page 1of 142

Benefits of Broadband

and the Broadband Wales


Programme to the Welsh
Economy
Benefits Analysis Study

Atkins Management Consultants


Raleigh House
Langstone Business Village
Langstone Park
Newport
NP18 2LG
South Wales
Tel: (01633) 415500
Fax: (01633) 411211
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

CONTENTS HEADING

EXECUTIVE SUMMARY .............................................................................................................. 1


PART A....................................................................................................................................... 10
1 METHODOLOGY.............................................................................................................. 10
1.1 INTRODUCTION .................................................................................................... 10
1.2 OVERVIEW OF METHODOLOGY FOR MEASURING NET BENEFITS................ 10
2 AVAILABILITY AND TAKE UP OF BROADBAND IN WALES ....................................... 16
2.1 INTRODUCTION .................................................................................................... 16
2.2 BROADBAND AVAILABILITY................................................................................. 17
2.3 TAKE UP ................................................................................................................ 21
2.4 PENETRATION RATES ......................................................................................... 26
3 FORECASTS OF AVAILABILITY AND UPTAKE OF BROADBAND IN WALES ........... 28
3.1 INTRODUCTION .................................................................................................... 28
3.2 AVAILABILITY ........................................................................................................ 28
3.3 TAKE UP ................................................................................................................ 32
3.4 PENETRATION RATES ......................................................................................... 36
4 NET BENEFITS OF BROADBAND .................................................................................. 38
4.1 INTRODUCTION .................................................................................................... 38
4.2 PRIVATE SECTOR BENEFITS .............................................................................. 38
4.3 PUBLIC BENEFITS ................................................................................................ 40
4.4 COSTS ................................................................................................................... 41
4.5 NET BENEFITS ...................................................................................................... 42
4.6 CONCLUSION........................................................................................................ 44
PART B....................................................................................................................................... 45
5 OVERVIEW OF METHODOLOGY.................................................................................... 45
5.1 INTRODUCTION .................................................................................................... 45
5.2 SUMMARY OF NET BENEFIT METHODOLOGY .................................................. 45
5.3 ESTIMATION OF THE COUNTERFACTUAL......................................................... 46
6 AVAILABILITY AND TAKE UP OF BROADBAND IN WALES ....................................... 48
6.1 INTRODUCTION .................................................................................................... 48
6.2 ESTABLISHING THE COUNTERFACTUAL........................................................... 48
7 NET BENEFITS OF THE BBW PROGRAMME................................................................ 53
7.1 INTRODUCTION .................................................................................................... 53
7.2 PRIVATE SECTOR BENEFITS .............................................................................. 53
7.3 PUBLIC BENEFITS ................................................................................................ 54
7.4 NET BENEFITS ...................................................................................................... 55
7.5 NET BENEFIT OF PROGRAMME.......................................................................... 57
APPENDIX 1 SUMMARY OF THE BBW PROGRAMME.......................................................... 60
A1.1 BACKGROUND TO THE PROGRAMME ........................................................... 60
A1.2 BROADBAND ENVIRONMENT BEFORE THE PROGRAMME WAS
LAUNCHED ........................................................................................................ 61
A1.3 ACTIONS TAKEN FORWARD FOLLOWING BROADBAND WALES
PROGRAMME LAUNCH .................................................................................... 61
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A1.4 BROADBAND WALES PROGRAMME 2005- 07................................................ 64


A1.5 THE FUTURE ..................................................................................................... 70
APPENDIX 2 CASE STUDIES .................................................................................................. 72
A2.1 INTRODUCTION, APPROACH AND KEY FINDINGS ....................................... 72
A2.2 CASE STUDY A: ECONOMIC DEVELOPMENT.............................................. 77
A2.3 CASE STUDY B: TRANSPORT ....................................................................... 80
A2.4 CASE STUDY C. ENVIRONMENT AND PLANNING ....................................... 84
A2.5 CASE STUDY D. COUNTRYSIDE ................................................................... 87
A2.6 CASE STUDY E: TRAINING ............................................................................ 90
A2.7 CASE STUDY F: EDUCATION......................................................................... 92
A2.8 CASE STUDY G: COMMUNITIES..................................................................... 95
A2.9 CASE STUDY H. HOUSING ............................................................................ 97
A2.10 CASE STUDY I. LOCAL GOVERNMENT ...................................................... 100
A2.11 CASE STUDY J. PUBLIC SERVICES ............................................................ 104
A2.12 CASE STUDY K: CULTURE........................................................................... 107
A2.13 CASE STUDY L: HEALTH AND SOCIAL CARE ............................................ 110
APPENDIX 3 BROADBAND COSTS .................................................................................... 113
A3.1 INTRODUCTION .............................................................................................. 113
A3.2 HISTORICAL COSTS....................................................................................... 113
A3.3 FORECAST COSTS......................................................................................... 119
A3.4 SUMMARY OF COSTS .................................................................................... 125
APPENDIX 4 IMPACTS OF BROADBAND ON ECONOMIC PERFORMANCE ................... 126
A4.1 INTRODUCTION .............................................................................................. 126
A4.2 REVIEW OF LITERATURE .............................................................................. 126
A4.3 IMPACT OF BROADBAND ON WELSH ECONOMIC PERFORMANCE ......... 135
APPENDIX 5 BREAKDOWN OF NET BENEFIT ESTIMATES .............................................. 137
APPENDIX 6 TABLE OF ACRONYMS .................................................................................. 139
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

EXECUTIVE SUMMARY

1. The Broadband Wales Programme commissioned Atkins to quantify the benefits arising
from the adoption of broadband in Wales and the benefits attributable to the Broadband
Wales Programme (BBW Programme). In this report, we describe our analysis and
findings.

2. Our report and this Executive Summary are structured into two main parts. In the first part,
we look at the benefits of broadband to the Welsh economy, building on our forecasts of
availability and take-up. In the second part, we look at the benefits attributable to the
Broadband Wales Programme. HM Treasury guidance on appraisal and evaluation in
central government, as set out in The Green Book, has informed our analysis.

Overview of Net Benefits of Broadband to the Welsh Economy

3. We estimate the net benefit of broadband on the Welsh economy over the period 2000 to
2015 to be £1,387 million. This number should be treated with some caution as it is
necessarily based on a number of assumptions and forecasts. Nonetheless, we believe it
provides a reasonable order of magnitude indication of the likely benefits. Moreover, given
the underlying level of uncertainty and in order to avoid over-stating the benefits, we have
chosen to emphasise the benefit estimate derived from using low case assumptions. In
particular, £1,387 million is our estimate of the lower bound of benefits.

4. Figure 1 shows the profile of our estimated net benefits over time. Net benefits are initially
low, reflecting the initially low level of broadband take-up. Indeed, in 2002, we estimate
net benefits to be negative, as costs are greater than benefits. However, net benefits
rapidly increase from 2003 onwards, as the take up of broadband became (and we
forecast to become) increasingly widespread in Wales.

BBW English Final Version v2.doc 1


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 1
Lower bound estimate of the net benefit of broadband in Wales, £m discounted,
2000-2015

180

160

140

120
Net Benefits (£m, discounted)

100

80

60

40

20

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-20

Source: Atkins’ estimates.

5. The private sector receives the majority of the benefits, as shown in Table 1. We estimate
private sector benefits of broadband in Wales at £1,135m over the fifteen year period,
which is over three times the public benefits of £314m over the same period.

Table 1
Composition of the Lower Bound Estimate of Net Benefits, discounted, 2000-2015

Value (£m)

Private sector benefits 1,135

Public benefits 314

Total costs 62

Net benefit 1,387

Source: Atkins’ estimates,

Sensitivity of Net Benefits

6. Our estimates of the benefits of broadband are, of course, sensitive to the underlying
assumptions and forecasts on which they are based. Therefore, in addition to our lower
bound estimate described above, we produced a number of other estimates based on

BBW English Final Version v2.doc 2


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

individually plausible, but more optimistic assumptions. As a result, we estimated an


extreme upper bound to net benefits over 2000 to 2015 of £28,375 million.

7. This upper bound estimate incorporates a number of different assumptions compared to


the lower bound estimate. In particular, we assume for the higher bound estimate a higher
level of forecast take-up and consumers who are less responsive to price changes (that is,
a steeper shape to the demand curve).

Availability and Take Up of Broadband in Wales

8. Current availability in Wales of broadband services with speeds up to 2Mbps downstream


(i.e. “first generation”) is comparable to that in other UK countries and regions, at around
99% of sites. This is a result of the high level of availability of Asymmetric Digital
Subscriber Line (ADSL).

9. Up until 2004, broadband penetration rates (defined as the number of broadband


connections per 100 inhabitants) in Wales lagged behind that in each of the G7 countries.
However, during 2004 and the first half of 2005, the penetration rate in Wales increased
relatively quickly, outstripping the rates in both Italy and Germany, as well as the OECD
average. By the second quarter of 2005, the penetration in Wales had almost caught up to
that in France. See Figure 2.

Figure 2
Comparison of Broadband Penetration Rates, 2001 - 2005

25

20
Broadband penetration rate

15

10

0
4

2
-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q
01

02

02

02

02

03

03

03

03

04

04

04

04

05

05
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

Canada Japan United States United Kingdom France OECD Germany Italy Wales

Source: OECD and Atkins’ estimates.

10. We estimate that the penetration rate in Wales (and the UK) continued to grow quickly
over the remainder of 2005. To account for uncertainty in the future level of adoption of

BBW English Final Version v2.doc 3


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

broadband, our central, high and low cases contain different assumptions regarding the
take up of broadband, as shown in Figure 3.

Figure 3
Historical and forecast broadband connections in Wales, 2000-2015

1,200,000
Actual Forecast

1,000,000

800,000
Number of connections

600,000

400,000

200,000

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Central Hgh Low

Source: Atkins’ estimates.

Availability and Adoption of Faster Broadband Services in Wales

11. Although current availability of first generation broadband in Wales is comparable to other
UK countries and regions, Wales is lagging behind most other UK countries and regions in
the availability of faster broadband services (e.g. providing speeds of 4-8Mbps to users).
In turn, the UK also currently lags behind many other industrialised countries in the
availability of these faster broadband services.

12. Wales faces an additional challenge in the deployment of faster broadband services. To
date, the relatively high level of availability in Wales is a result of the deployment of ADSL.
However, the speed of ADSL (and associated future technologies) diminishes with the
length of line connecting a user to their local exchange. In Wales, it is likely the case
(given the lower population density) that the average line length is longer and so the Welsh
population can expect, on average, slower services via ADSL than in the UK as a whole.

13. Our central, high and low case estimates for the number of broadband connections in
Wales include different assumptions regarding the levels of availability of different future
broadband technologies.

BBW English Final Version v2.doc 4


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Our Methodology for Calculating Net Benefits of Broadband

14. The methodology underlying our calculation of the net benefit of broadband in Wales is
based on the following equation:

Net benefit = private sector benefits + public benefits – costs

15. Private sector benefits are those that accrue directly to households and businesses from
their use of broadband services. We measure private sector benefits by estimating the
consumer surplus from broadband services in Wales. Consumer surplus is the difference
between the amount each consumer would be willing to pay for their broadband service
and the amount they actually pay. To estimate consumer surplus, we construct demand
curves for broadband based on own price elasticity of demand data and assumptions
regarding the form of demand curve. We do not measure producer surplus (i.e. the
benefit that accrues to suppliers of broadband services) as ownership of these companies
is largely outside of Wales.

16. We define public benefits as those that accrue either to the public sector or to third parties
indirectly. We provide a partial quantification of public benefits through case studies
across twelve policy areas. Some of these resulted in the identification and quantification
of public benefits, and we include these in our measure of total benefits.

17. We deduct public sector costs from benefits to obtain an estimate of net benefits. There is
no need to deduct private sector infrastructure costs to obtain a measure of net benefits of
Broadband in Wales, because the consumer surplus approach provides a measure of
benefits which is already net of such costs.

18. Our methodology provides a practicable means of quantifying the net benefit of broadband
in Wales. However, it does have weaknesses, notably: (1) there is uncertainty over key
components of our approach to estimating consumer surplus, resulting in a wide range of
values for the estimated benefit of broadband; (2) by adopting a case study approach to
estimating public benefits, we do not measure all public benefits; (3) the benefits identified
may not be wholly attributable to broadband as at least some of the benefit could be
secured via dial-up connections rather than by broadband – although we believe this will
be decreasingly the case; and (4) because of data gaps, we have frequently had to rely on
the exercise of our judgement in producing estimates and forecasts.

Overview of Net Benefits of the Broadband Wales Programme

19. We estimate the net benefit of the Broadband Wales Programme over the period 2000 to
2015 to be £357 million. This number is necessarily based on assumptions and forecasts
and accordingly should be treated with caution. However, given the uncertainty underlying
the assumptions, we present our lower bound estimate, of £357 million, to minimise the
risk of over-stating benefits.

20. The annual profile of our estimate of the net benefits of the Programme is shown in Figure
4. In the early years, we estimate the net benefit of the Programme to be negative, as a
result of the costs of the Programme and the relatively low level of take up of broadband in
Wales. As take up started (and we forecast to continue) to increase, we estimate a sharp
rise in the net benefits of the Programme.

BBW English Final Version v2.doc 5


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 4
Net Benefits of Broadband Wales Programme, discounted, 2000-2015

50

40

30
Net benefit (£m discounted)

20

10

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-10

-20

Source: Atkins’ estimate

21. We calculate the net benefit of the Programme as the difference between: (1) the net
benefit of broadband including the Programme; and (2) the net benefit of broadband
excluding the Programme (which is our baseline). The key components of this calculation
are shown in Table 2.

Table 2
Present Value (PV) of Net Benefits, 2000 - 2015

Value
(£m)
Baseline 1,378

Actual and forecast 1,734

Net Benefit of Programme 357


Source: Atkins’ estimates. Note: Values subject to rounding errors.

Sensitivity of Net Benefits

22. Our estimates of net benefits are, of course, sensitive to the assumptions we have made.
Therefore, in addition to the lower bound estimate described above, we produced several
other estimates based on more optimistic assumptions regarding the take-up of broadband
and the price responsiveness of demand. We estimated an extreme upper bound to net
benefits of the Programme over the period 2000 to 2015 of £11,682m.

BBW English Final Version v2.doc 6


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

23. The assumptions underlying the upper bound estimate differ from those of the lower bound
in several respects. In particular, for the upper bound, we assume a different form of
demand curve (with a lower elasticity of demand) and a lower baseline (based on different
levels of broadband availability and take up).

Baseline Take Up of Broadband

24. We estimated that, if the Programme had not been established, there would have been 7.5
broadband connections per 100 inhabitants in Wales as at June 2005, compared to our
estimate of actual penetration of 12.7 connections per 100 inhabitants. This (central case)
estimate of counterfactual take up is presented in Figure 5.

25. Our baseline estimates are based on forecasts made prior to the establishment of the
Programme and exclude the influence of the Programme on take up and availability. To
isolate the effect of the Programme, we adjust these forecasts to control for the effect of
other changes in the market.

Figure 5
Counterfactual take up, 2000-2015

1.2
Millions

Actual Forecast

1.0

0.8
Broadband Connections

0.6

0.4

0.2

0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Actual (central) Counterfactual (central)

Source: Atkins’ estimate

BBW English Final Version v2.doc 7


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Our Methodology for Calculating the Net Benefits of the Programme

26. Under our methodology, the net benefits of broadband are calculated as:

• Net benefit = private sector benefits + public benefits (– costs)1

27. We then calculate the net benefit of the Programme as the difference between: (1) a
baseline of net benefits in which we assume the Programme was not established; and (2)
the net benefits of broadband in Wales given the existence of the Programme.

28. This approach has the merit of being practicable. However, the approach does suffer from
weaknesses. In particular, the benefits we identify may not be wholly attributable to
broadband, as at least part of the benefits could be secured via dial-up (although we
believe this will be decreasingly the case). Moreover, we have been required to exercise
our (subjective) judgment in producing our estimates. This is particularly the case for the
counterfactual where we have estimated levels of availability and take up of broadband in
order to estimate net benefits for a state of the world we created. Moreover, to
accommodate the extent of uncertainty over key parameters in our method for estimating
benefits, we adopt a range of assumptions which result in a wide range of estimated net
benefits.

Case Studies of Broadband Benefits and Literature Review on Economic


Performance

29. As part of this study, we undertook “case studies” in key Welsh Assembly policy areas. By
case studies, we mean short reviews of particular mechanisms or causal chains by which
broadband can impact policy goals in Wales, and of the quantitative benefit which
broadband has delivered or has the potential to deliver. The case studies are designed to
illustrate how broadband can impact policy goals and to prompt discussion with each
policy area and other stakeholders regarding the value of broadband and the BBW
Programme. The case study estimates have been included, where relevant, in our overall
estimate of the net benefit.

30. As part of this study, we also reviewed the literature dealing with the impact of Information
Communication Technologies (ICT) and broadband on economic performance. Key
findings from this review are that investment in ICT can empirically be shown to improve
macroeconomic indicators and that various attempts have been made to measure these
effects. The magnitude of the effects is shown not to be universal; for example,
productivity improvements in the US attributed to ICT investment have been higher than
the productivity improvements attributed to ICT investment in Europe. It is also apparent
that an economy’s structure affects the outcome of ICT investment.

31. There is much less literature available regarding the specific impacts of broadband
(compared to the ICT literature). However, some relevant studies (and findings) have still
been made and it is possible to quantify some of the benefits of broadband. However, it
can be contended that the benefits only become tangible once broadband adoption has

1
Note: we only deduct costs when we measure net benefit inclusive of the Programme. Under
the baseline, the Programme is assumed not to have been established and, therefore, there
are no costs to deduct.

BBW English Final Version v2.doc 8


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

passed a certain level. More generally, widespread availability of broadband is a sine non
qua of a modern economy as is widely being recognised in many developing countries.

32. The material for these parts of the study can be found in the Appendices of this Report

Report Structure

33. The remainder of the report is structured as follows:

34. Part A deals with our estimate of the net benefit of broadband to the Welsh economy.

• In Section 1, we describe the methodology adopted to estimate the net benefit of


broadband to the Welsh economy.
• In Section 2, we present a summary of historical information on the availability and
take up of broadband services in Wales.
• In Section 3, we present our forecasts of availability and take up of broadband to 2015.
• In Section 4, we draw together the assessment of the net benefits of broadband to the
Welsh economy.
35. Part B deals with our estimate of the net benefit of the Broadband Wales Programme.

• In Section 5 we provide an overview of the methodology we adopted to estimate the


net benefits of the Programme.
• In Section 6, we describe our estimates and forecasts of availability and take up of
broadband in Wales had the Programme not existed, which we use in our estimate of
baseline net benefits.
• In Section 7, we bring the components of the calculation together to estimate the
Programme’s net benefits.

36. Appendices provide an overview of the Broadband Wales Programme; the “case studies”
illustrating the benefits in particular policy areas; the estimated and forecast costs of
broadband infrastructure; our review of the economic literature about the impact of
broadband on economic performance; and a breakdown of the constituents of our lower
bound estimates of the net benefits of broadband and the Broadband Wales Programme to
the Welsh economy.

BBW English Final Version v2.doc 9


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

PART A

1 METHODOLOGY

1.1 INTRODUCTION

1.1.1 In this Section, we describe the methodology we have adopted to estimate the net
benefits of broadband to the Welsh economy from 2000-2015. In devising our
methodology, we have sought to design an approach which is practicable,
transparent, repeatable by our client, and justified by economic theory and practice.

1.1.2 We describe the key elements in our approach below, identifying its strengths and
weaknesses.

1.2 OVERVIEW OF METHODOLOGY FOR MEASURING NET BENEFITS

1.2.1 We calculate net benefits as follows:

• Net benefits = Total benefits – Costs

1.2.2 The total benefits of broadband include both private sector and public benefits.
Accordingly, we calculate total benefits as the sum of private sector and public
benefits, that is:

• Total benefits = private sector benefits + public benefits

1.2.3 Private sector benefits are those that accrue directly to households and businesses
from their use of broadband services. For households, the direct benefits might
include the ability to access internet retail outlets that have products for sale at
prices lower than in high-street outlets or the time savings for individuals able to
work from home because of broadband access (hence avoiding a commute). For
businesses, these direct benefits might include the benefits arising from faster
communications and the exchange of data with other suppliers. It is these types of
direct benefits to the private sector that the broadband user will have considered
when making their decision as to whether to acquire broadband.

1.2.4 Public benefits are those benefits from broadband services that either accrue to the
public sector, or to third parties indirectly (i.e. in the latter case, the broadband user
will not typically have considered this benefit when making their purchasing
decision). An example a public sector benefit might include efficiencies in
procurement enabled by broadband. An example of indirect public benefit includes
a reduction in pollution as home workers (enabled by broadband) avoid their
commute to work.

1.2.5 Below we summarise our method for estimating each of the listed constituents of the
net benefit calculation and provide an assessment of the strengths and weaknesses
of the approach.

BBW English Final Version v2.doc 10


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Private Sector (Direct) Benefits

1.2.6 In cost benefit analysis, the gross benefit to a consumer (which can be either a
household or business) of a good or service is equal to the amount that they are
willing to pay for that good or service. The net benefit to the consumer of a good or
service, also known as the consumer’s surplus, is equal to the difference between
the price that the consumer is willing to pay for that good or service and the price
they actually pay. These concepts are illustrated in the demand curve for an
individual consumer, depicted in Figure 1.1.

1.2.7 The two diagrams in Figure 1.1 illustrate the price a consumer is willing to pay for
incremental units of a good. That is, at a price of r1, the consumer is just indifferent
between consuming one unit of the good and consuming none. The price r1 can be
thought of as the value the consumer derives from consuming that good (i.e. the
gross benefit). As the price declines, the more units of the good the consumer will
purchase, i.e. at r2 the consumer will purchase a second unit of the good and derive
a gross benefit from the incremental unit equal to r2. In the left hand diagram of
Figure 1.1, the gross benefit to the consumer of consuming three units is shown by
the area shaded in dark blue. The right hand diagram of Figure 1.1 shows the net
benefit of consuming three units with a uniform market price (of between r3 and r4).
The net benefit is simply the gross benefit of the three units minus the cost to the
consumer of purchasing the good.

Figure 1.1
Illustration of a Consumer’s Gross and Net Benefit
Price

Price

r1 Gross benefit Net benefit


r1

r2 r2

r3 r3
Price
r4 r4
r5 r5
r6 r6

1 2 3 4 5 6 1 2 3 4 5 6
Quantity Quantity

BBW English Final Version v2.doc 11


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

1.2.8 Figure 1.1 illustrated the concept of gross and net benefit to one consumer of a
good or service. The demand curves for all such consumers can, in theory, be
aggregated to produce a demand curve for all consumers of that good or service
(the market demand curve). The area under the market demand curve provides a
measure of the gross benefit to all consumers from the consumption of the good or
service. One way to measure the benefit to the consumers of a good or service is,
therefore, to estimate the market demand curve.

1.2.9 We measure the private sector benefit of broadband by estimating consumer


surplus (or the net benefit). This requires us to estimate the market demand curve
for broadband in Wales. There are several ways to estimate demand curves,
including econometric estimation and the conduct of willingness to pay surveys. In
practice, as we now describe, we adopt a simple approach, influenced by our
criteria of repeatability and practicability.

1.2.10 To estimate the demand curve for broadband in Wales, we use existing estimates
of the own price elasticity of demand2 (from the US) combined with assumptions
regarding the shape of the demand curve. In particular, own price elasticity of
demand provides information as to the slope of the demand curve at a given point
(or across a small arc), when price and quantity are known. However, to estimate
consumer surplus, we need the shape of the demand curve across its length.

1.2.11 For the purposes of estimating the consumer surplus of broadband in the US,
Crandall and Jackson (2001) assumed a linear demand curve.3 However, a linear
demand curve can be argued to overstate benefits - “the assumption of linearity may
overstate consumer surplus at the high end. That is, because the assumption of a
constant slope implies the elasticity decreases [in absolute terms] as the demand
curve shifts outwards, the large consumer surplus estimated could be viewed as a
mathematical artefact.”4 To address this potential overstatement, Crandall, Hahn
and Tardiff (2003) adopted an alternative, and more conservative, method based on
a demand curve with a constant elasticity and a “choke” price (i.e. a price above
which demand is zero).

1.2.12 We adopt the following two alternative assumptions regarding the shape of the
demand curve for broadband: (1) linear demand; 5 and (2) constant elasticity

2
Price elasticity of demand indicates the “responsiveness” of demand to a change in price and is
calculated as the percentage change in quantity divided by the percentage change in price.
3
Crandall and Jackson (2001) The $500 Billion Opportunity: The Potential Economic Benefit of
Widespread Diffusion of Broadband Internet Access, Criterion Economics.
4
Crandall, Hahn and Tardiff (2003) “The Benefits of Broadband and the Effect of Regulation” in
Broadband: Should We Regulate High Speed Internet Access, Crandall and Alleman (eds), Dec 2002.
5
Given a linear demand curve q(p) = a – bp (where q is quantity, p is price and a and b are parameters),
consumer surplus = q1 * (a/b - p1) * 0.5. The parameters can be calculated as follows: b = -η * (q1/p1)
(where η = own price elasticity of demand) and a = q + bp.

BBW English Final Version v2.doc 12


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

demand. 6 We adopt a choke price that is three times the prevailing price of
broadband services for our consumer surplus estimates based on a constant
elasticity of demand. This assumption is consistent with Crandall, Hahn and Tardiff.
This multiple means that, if the prevailing price of broadband services to households
is £20/month, no households would buy the service if the price increased to above
£60/month. We believe this is a conservative assumption.

1.2.13 Under the consumer surplus approach, we assume that the demand curves shift
outwards over time. In the case of linear demand, we assume the slope of the
demand curve remains the same, while, in the case of the constant elasticity of
demand curve, we assume the slope changes, but the own price elasticity of
demand remains unchanged. The amount by which the demand curves shift
outwards depends on the take-up and price of broadband services. In other words,
we fit our demand curves to known (or forecast) price and quantity combinations at
given points in time. Our estimates of historical and forecast take-up are presented
in Sections 2 and 3 respectively. We forecast prices as a margin over costs.
Appendix 3 presents our derivation of the costs of broadband services (including the
deployment and take up of new services, such as Fixed Wireless Access and higher
speed Digital Subscriber Line services).

1.2.14 It should be noted that we do not include direct benefits that accrue to providers
of broadband services (i.e. producer surplus) in our estimates of private sector
benefits of broadband in Wales, as their ownership resides largely outside of Wales.

1.2.15 The above approach to estimating private sector benefits provides headline
figures for direct benefits to domestic and business broadband users, but does not
illustrate the types of benefits that can be realised and the mechanisms by which
they are realised. Therefore, in addition to the above, we provide a number of “case
studies” to illustrate the type of private sector benefits that can be realised. These
case studies are illustrative and, in the case of private sector benefits, are not added
to our measure of total benefits.

Public Benefits

1.2.16 As stated above, we use the term public benefits to include benefits accruing to
two constituents:

• directly (or indirectly) to the public sector; and


• indirectly to third parties.7

1.2.17 There are numerous public sector benefits arising from the use of broadband.
Our approach to assessing these benefits is based on case studies of specific policy

6
Constant elasticity of demand curves have the following general functional form: q(p) = Apη, where A is a
parameter. Consumer surplus is given by the integral of this function evaluated between the prevailing
price (n) and choke price (m), i.e. consumer surplus = A/(η+1) * (m(η+1)-n(η+1)). For a given price and
quantity on the curve, A = q1p1-η.
7
Indirect benefits do not necessarily accrue wholly to the buyer of broadband services and are not,
therefore, typically taken into account in their purchase decisions. In economic parlance, there is an
externality.

BBW English Final Version v2.doc 13


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

areas. Some of these resulted in the identification of public benefits, with the
remainder accruing to the private sector. Where we have been able to identify and
quantify a public sector benefit, we include this in our measure of total benefits.

Costs

1.2.18 Outlined above is the approach we adopted to estimate the constituents of total
benefits (i.e. private sector and public benefits). In order to calculate net benefits we
need to consider what costs should be deducted from total benefits.

1.2.19 The consumer surplus approach to measuring private sector benefits provides a
direct measure of benefits that is net of the costs to consumers of purchasing the
service. There is no need to deduct private sector infrastructure costs to obtain a
measure of net benefits, because the consumer surplus approach provides a
measure of benefits which is already net of such costs.

1.2.20 In looking at the public benefits of broadband, we have focused on those


provided through the BBW Programme. Therefore we deduct the costs of the BBW
Programme to come to an estimate of the net benefits. In several cases, there are
likely to be some further implementation costs required to realise the public benefits,
but the timing and size of these costs is highly uncertain. To allow for the impact of
these further costs in our Present Value (PV) calculation and to get to a net benefit
estimate, we take a conservative assumption to profiling the extent to which the total
potential level of benefits is achieved over time; and take into account the fact that
we have identified only some of the whole suite of potential public sector benefits.

Strengths and Weaknesses of the Methodology

1.2.21 Below we summarise the key strengths and weaknesses of our approach to
estimating the net benefits of broadband to the Welsh economy.

Strengths

• The approach to measuring net benefits, outlined above, is practicable. In particular,


there is sufficient data available to enable us to produce estimates of both realised (i.e.
historical) net benefits and potential (i.e. future) net benefits. For estimating future net
benefits, it is necessary to make assumptions. However, given the data availability,
we also need to make certain assumptions in estimating realised benefits and costs.
We make all our assumptions and their bases transparent.
• The consumer surplus approach is the preferred theoretical measure of benefits.
• The relative simplicity of the approach means that it is repeatable, enabling our client
to repeat the method and update the results in future, without significant additional
outlay of resources.
• The case studies provide illustrations both of some of the mechanisms by which
private sector and public benefits can be realised; and the indicative order of
magnitude of the analysed benefits.

BBW English Final Version v2.doc 14


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Weaknesses

• In relation to our estimation of consumer surplus: (1) in the absence of Welsh specific
data, we use estimates from the US of own price elasticities to inform the construction
of demand curves. The demand for broadband in the US may well have different
drivers and properties than demand for broadband in Wales. In the absence of
certainty, we use a range of estimates for the elasticity of demand; (2) we do not know
and, therefore, assume the shape of the demand for broadband in Wales. Whilst the
assumptions we adopted are commonly cited, it is unlikely that (and would be
coincidental if) our estimated demand curves coincided with actual demand curves.
Again, we use alternative assumptions regarding the form of demand curve, and
these result in a range of estimates within which the true value is likely to reside.
• In relation to our estimation of public benefits through the use of case studies: (1) we
do not measure all public benefits. It should be noted that the resulting estimates are,
therefore, conservative; and (2) there are data and evidence gaps standing in the way
of robust estimation. Given these gaps, we have adopted a pragmatic, indicative
approach to our estimations, using our judgement where necessary.
• The benefits estimated may not be wholly attributable to broadband. In particular, it
could be argued that some of the benefits broadband users realise could also be
realised if they used dial-up connections. However, we believe it is increasingly the
case that services enabled by an internet connection will only be accessible via
broadband services and, therefore, that the amount of broadband benefits that could
also be realised via a dial-up connection will diminish.
• The complementary nature of broadband, other ICT equipment and user applications
make it difficult to separately identify benefits due to broadband and those due to ICT,
either independent of broadband, or of ICT in complement with broadband.

1.2.22 In summary, we have developed a practicable approach that results in estimates


of the likely magnitude of the benefits of broadband in Wales. However, given the
uncertainties inherent in the data and our approach, the estimates should be treated
with caution.

BBW English Final Version v2.doc 15


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

2 AVAILABILITY AND TAKE UP OF BROADBAND IN WALES

2.1 INTRODUCTION

2.1.1 In this Section, we present a summary of historical information on the availability


and uptake of broadband services in Wales. As well as providing relevant context to
our study, we use historical broadband availability and take up data to estimate
realised benefits of broadband in Wales.

2.1.2 Our analysis concerns the following categories of broadband:

• Digital Subscriber Line (DSL) broadband. There are several types of DSL broadband,
with a common feature that they are delivered over BT’s local loop (connecting BT’s
local exchange to sites), following the installation of a Digital Subscriber Local Access
Multiplexer (DSLAM) at the local exchange.
Currently, the most prevalent form of DSL in Wales is Asymmetric DSL (ADSL), which
provides downstream speeds (i.e. to the user) that are greater than the upstream
speeds (i.e. from the user).
Until recently, 2Mbps was the maximum downstream speed in Wales available through
ADSL. However, during 2005/06, some faster services became available (e.g. DSL
Max, which offers up to 8 Mbps, and through Local Loop Unbundling, see below for
more details).
• Local Loop Unbundling (LLU). Local Loop Unbundling occurs when a party other than
BT installs a DSLAM within a local exchange and offers DSL services to customers.
For the purposes of our historical estimates, we disaggregated LLU from DSL, as LLUs
offered higher connection speeds prior to the roll-out of DSL Max. For example, the
service offerings of active LLUs in Wales include speeds of up to 8Mbps; and
• Cable Modem. Broadband services can be delivered via cable networks, originally
installed for delivery of TV services. Cable broadband offerings in Wales, via ntl,
provide downstream speeds of up to 3Mbps (although constrained to 2Mbps when
acquired with phone and services), however these speeds are being upgraded to 10
Mbps.

2.1.3 We do not review historical data on availability or take up of either satellite or


wireless broadband in detail. This is because the levels of either availability and/or
take-up are low and robust data is not readily available. For example, in the case of
satellite, although 99% of households and businesses in Wales have been able to
access satellite broadband services since 2002, the Broadband Wales Observatory
(BBWO) estimate take up to be less than 1% of the broadband market. In the case
of wireless, BBWO estimate availability to be less than 1% of all households and
businesses.8

8
Broadband Benchmark: Quarterly Report (Q1) 2005 – Issue 2.1, BBWO.

BBW English Final Version v2.doc 16


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

2.2 BROADBAND AVAILABILITY

2.2.1 In this sub-section, we review the evolution of the availability of broadband in Wales
to date. As well as being of interest in their own right, these data inform our
estimate of total costs used to produce our assessment of the net benefits of
broadband. We consider availability by each of the categories of broadband listed
above.

ADSL Broadband

2.2.2 BT has 439 exchanges in Wales, of which 404 had been enabled for ADSL as at the
end of January 2006. That is 92% of exchanges were enabled and, as a result,
some 99% of all sites within Wales could access ADSL.9

2.2.3 As at end January 2006, 35 exchanges in Wales, deemed economically “unviable”


by BT, were yet to be enabled.10 The majority of unviable exchanges are located in
Powys, Gwynedd and Pembrokeshire. The Broadband Wales Programme’s
Regional Innovative Broadband Support (RIBS) is intended to provide availability of
first generation broadband for those areas of Wales currently unable to access
broadband.

2.2.4 BT has recently rolled out nationwide across the UK to ADSL enabled exchanges, a
new service, which extends ADSL to its technical limits (up to 8Mbps, dependent on
a site’s proximity to its exchange). Prior to the nationwide roll-out, BT had trialled
this service at some sites in Cardiff and the Vale of Glamorgan.

Symmetric DSL Broadband

2.2.5 During 2005, BT enabled nineteen exchanges in Wales to provide sites with
Symmetric DSL broadband (SDSL), as part of wider roll-out of SDSL across the
UK. 11 As the name suggests, SDSL provides equivalence of upstream and
downstream speeds.

2.2.6 BBWO estimate some 21% of sites in Wales currently have access to SDSL
broadband services as a result of the enablement of the nineteen exchanges. This
compares with some 42% across the UK. 12 However, in September 2005, BT
Wholesale announced it was to halt the roll-out of SDSL, due to a significant lack of
demand (having failed to stimulate demand for SDSL following price reductions in
the previous month).

9
Pg 13, UK Broadband Status Report: A Report for the Department of Trade and Industry, January 2006,
Ovum.
10
Pg 14, ibid. “35 exchanges in Wales have been deemed unviable by BT due to the fact that each
exchange services the needs of less than 300 homes and businesses.”
11
BT delivers on commitment to broaden availability of symmetrical broadband services, BT press release,
31 Jan 2005.
12
ibid.

BBW English Final Version v2.doc 17


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Local Loop Unbundlers

2.2.7 Bulldog and Updata are two Local Loop Unbundlers active in Wales. During 2005,
Bulldog upgraded nine exchanges in areas around Cardiff and Wrexham and is
offering services up to 8Mbps in these areas. Updata operates in Pembrokeshire.

2.2.8 Bulldog’s nine enabled exchanges give it access to nearly 12% of all sites in
Wales.13 It enabled two exchanges in Cardiff on February 2005, one in Wrexham in
April 2005 and the remainder in Cardiff in June 2005.

Cable-modem

2.2.9 ntl owns and operates a cable network that is available at some 350,000 sites in
South Wales. 14 Taken across the whole of Wales, ntl’s cable network makes
broadband via cable modem available to around 25% of all sites in Wales. ntl’s
website reports that the company started offering 128kbps and 512kbps internet
connections in 2001.

Satellite and Wireless Broadband

2.2.10 Whilst stated previously that there is limited availability and take-up of wireless
and satellite broadband across Wales, a non-exhaustive list of active providers in
Wales includes: MLL Telecom; Wbnet; England Communications; Surf Telecom;
Gaia Technologies; Avonline; Excelerate Technical; Glamorgan Telecom Ltd; AVC
Broadband Ltd; and Pinnacle Telecom.

Regional and International comparisons

2.2.11 In this sub-section we compare the availability of broadband services in Wales


both to the UK as a whole and to other countries.

2.2.12 In Figure 2.1, we provide a breakdown of broadband household coverage by UK


region and technology type as at the fourth quarter of 2005. The data in this Figure
show Wales to now have a similar level of availability of DSL compared to Scotland
and regions within England. However, Wales has the lowest level of availability of
cable across all the regions shown. According to the data shown in Figure 2.1,
Wales had no Fixed Wireless Access (FWA) technologies, as at the fourth quarter of
2005. However, we note that there are at least two wireless providers in Wales
(Wbnet and England Communications).

13
Pg 9, Benchmark, Quarterly Update, July – September 2005, Issue 2.0, BBWO. Pg 15 of Broadband
Benchmark: Quarterly Update (Q2), Issue 1.1, BBWO, 2005, details the exchanges enabled by Bulldog
and the date of enablement.
14
Pg 20, Broadband Benchmark, Quarterly Report (Q1) 2005 – Issue 2.1.

BBW English Final Version v2.doc 18


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 2.1
Proportion of households covered by technology and region, Q4 2005

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
Wales Scotland East East of London North East North West Northern South East South West West Yorks &
Midlands England Ireland Midlands Humbs

DSL Cable FWA

Source: UK Broadband Status Summary, March 2006, Ovum.

2.2.13 Wales (with 11%) also lags behind England (37%) and Scotland (29%), but not
Northern Ireland, in the availability of services from LLU operators, as shown in
Table 2.1.

Table 2.1
UK LLU Coverage, Sept 2005

Country Number of LLU Operators Domestic LLU Availability

England 5 37%
Northern Ireland 0 0%
Scotland 2 29%
Wales 1 11%
Source: Pg 11, Benchmark, Quarterly Update, July – September 2005, Issue 2.0, BBWO.

2.2.14 It is also notable that Wales had just one retail LLU operator as at September
2005 compared to five in England. The lack of competing providers of broadband
may place Wales at a disadvantage, compounding the lower level of availability of
cable networks in Wales relative to England.

2.2.15 Availability of SDSL in Wales is some 21% which lags behind the average for the
UK as a whole (of 42%).

BBW English Final Version v2.doc 19


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

2.2.16 Wales also has a relatively low level of availability of higher bandwidth services
(downstream), as shown in Table 2.2, compared to other countries and regions in
the UK.

Table 2.2
Coverage of households by minimum downstream speed, UK Regions, Q1 2006

0.5 1 2 4 8 16 24

East Midlands 99% 96% 93% 86% 56% 4% 1%

East of England 100% 96% 93% 86% 54% 4% 1%

London 100% 96% 93% 88% 71% 24% 7%

North East 100% 96% 93% 86% 55% 4% 1%

North West 100% 96% 93% 87% 60% 6% 2%

Northern Ireland 100% 96% 93% 84% 42% 0% 0%

Scotland 100% 96% 93% 85% 46% 3% 1%

South East 99% 96% 93% 84% 47% 6% 2%

South West 99% 96% 93% 83% 38% 3% 1%

Wales 98% 95% 92% 81% 33% 0% 0%

West Midlands 100% 96% 93% 87% 61% 6% 2%

York. & Humb. 100% 96% 93% 86% 52% 5% 2%

National 100% 96% 93% 86% 53% 7% 2%


Source: Exhibit 3.4, Sophisticated Broadband Services, Analysys, May 2006.
Note: “100%” entries are less than 100% due to rounding.

2.2.17 In relation to upstream speeds from households, Wales ranked lowest of all the
UK regions across 0.5Mbps, 1Mbps and 2Mbps speeds.

2.2.18 As shown in the above, although Wales now compares to the UK as a whole in
terms of availability of DSL, the comparison is less favourable with regard to the
availability of broadband via LLUs, cable networks and also of higher bandwidth
services.

2.2.19 Wales, and the UK as a whole, compare reasonably well to other countries in
terms of availability of lower speed broadband services to households (ie up to
2Mbps downstream). This has been achieved, primarily, through BT’s deployment
of ADSL. However, the UK’s (and Wales’s) relative position in the availability of
higher speed broadband services, i.e. at 4Mbps and 8Mbps, is weaker.

2.2.20 At the end of the first quarter of 2006, 86% of the UK population had availability
of 4Mbps (downstream) broadband services and 53% had availability of 8Mbps
services. Wales’s availability of 4Mbps services was 81% and of 8Mbps services
was just 33%. At the end of the third quarter of 2005, across all G7 countries and
also South Korea, Australia, Ireland and Sweden, the UK’s level availability of

BBW English Final Version v2.doc 20


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

4Mbps and 8Mbps services to households were the lowest (with the exception of the
availability in Germany of 8Mbps). However, following the launch of BT’s new ADSL
service, as at the first quarter of 2006, the UK’s availability of 4Mbps downstream
speeds to households now only lags behind South Korea and Japan, while
Germany, Italy and Ireland now lag behind the UK in the availability of 8Mbps
downstream speeds to households.

2.2.21 The roll-out of various new services will enable the UK, and to a lesser extent
Wales, to narrow the gap in the availability of higher bandwidth services over the
next few months. Nonetheless, Wales (and the UK as a whole) will still lag behind
the leading broadband countries, such as South Korea, Japan and Sweden. As
noted by Analysys, these countries have benefited from several factors absent in
the UK, including financial support from government for network investment,
favourable demographics, and cultures of high-technology adoption.15

2.3 TAKE UP

2.3.1 The purpose of this sub-section is to review the data on take up of broadband
services in Wales. These data are used in our calculation of private sector benefits
arising from broadband to date. We start by reviewing data for the UK as a whole,
before presenting available data, and producing some estimates, for Wales.

UK data

2.3.2 Figure 2.2 provides an estimate of the level of UK broadband connections from
2000 to November 2005. We estimate that the rapid pace of take-up in broadband
has resulted in some 9.4 million broadband connections in the UK by November
2005. The diagram shows that, over the period 2000 – 2005, there has also been a
general, though not universal, increase in the rate of take-up, i.e. for most periods,
the level of take up is increasing by an increasing amount.

2.3.3 Figure 2.2 also shows some data points for the level of cable modem broadband
connections and DSL broadband connections. These data show that, initially, the
majority of broadband connections in the UK were via cable modem. However, from
December 2003 onwards, the numbers of DSL connections exceed cable modem
connections, with the growth rate in DSL connections substantially greater than the
growth rate in cable modem connections. This is confirmed by the data presented
in Table 2.3.

15
Pg 21, ibid.

BBW English Final Version v2.doc 21


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 2.2
UK Broadband connections 2000-Nov 2005

10
Millions

8
Number of broadband connections

0
0
01

02

03

04

05
01

02

03

04

05
1

01

D 1

Fe 1

02

D 2

Fe 2

03

D 3

Fe 3

04

D 4

Fe 4

05

5
0

r-0

-0

-0

r-0

-0

-0

r-0

-0

r-0

-0

-0

-0
-0

r-0
b-

b-

b-

b-

b-
20

n-

g-

n-

g-

n-

g-

n-

g-

n-

g-
ct

ct

ct

ct

ct
ec

ec

ec

ec
Ap

Ap

Ap

Ap

Ap
Fe

Ju

Ju

Ju

Ju

Ju
Au

Au

Au

Au

Au
O

O
Total Broadband Cable modem Total DSL (exc. LLU)

Source: Ofcom Communications Reports, various; BBWO Broadband Benchmark Report Q1 2005; National
Statistics Internet Connectivity data, BT press releases; Atkins’ estimates.

2.3.4 Table 2.3 presents a breakdown of broadband take up for the UK for selected
months from December 2003. In December 2003, some 1.8 million broadband
connections were DSL, compared to 1.4 million via cable modem. By June 2005,
there were more than twice as many DSL compared to cable modem connections
(5.7 million compared to 2.2 million).

Table 2.3
UK Broadband take-up

Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05

BT retail 829,000 967,000 1,102,000 1,283,000 1,491,000 1,752,000 1,940,000

BT wholesale 924,000 1,248,000 1,585,000 2,011,000 2,616,000 3,180,000 3,658,000

Other DSL: LLU


& Kingston 18,000 21,000 29,000 38,000 53,000 71,000 105,000

xDSL subtotal 1,771,000 2,236,000 2,716,000 3,332,000 4,160,000 5,003,000 5,703,000

Cable 1,366,000 1,495,000 1,625,000 1,781,000 1,950,000 2,119,000 2,247,000

Satellite and
FWA 9,000 9,000 9,000 9,000 9,000 9,000 9,000

Total 3,146,000 3,740,000 4,350,000 5,122,000 6,119,000 7,131,000 7,959,000


Source: Ofcom Communication Market reports and updates, various

BBW English Final Version v2.doc 22


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Wales data

2.3.5 Below, we present the data we have sourced for Wales, by category of broadband,
and then we present our estimates of broadband take up required to produce our
estimate of private sector benefits.

ADSL

2.3.6 Table 2.4 presents data on ADSL take up for the UK and Wales, from a variety of
sources. As it is from a variety of sources, care must be taken in drawing
comparison. Nonetheless, the data in Table 2.4 show that whilst take up in Wales
lagged behind the UK as a whole, Wales soon started to catch up. Indeed as at
December 2004, the ratio of take up in Wales to the UK was greater than the ratio of
the populations of the countries.16 During 2005, however, the ratio started to decline
(though not consistently in the data shown).

Table 2.4
ADSL Take-up in Wales, BBWO & BT

UK Wales Wales:UK ratio


Nov-02 500,000 4,000 0.80%

Jan-04 2,000,000 50,000 2.50%

Sep-04 3,000,000 140,000 4.67%

Dec-04 4,000,000 208,000(*) 5.20%

Mar-05 5,000,000 245,000 4.90%

Jun-05 5,600,000 250,000(*) 4.46%

Sep-05 6,200,000 302,000 4.87%


(*) denotes BT value for ADSL take up in Wales.
Source: BT press releases (of 4/4/05, 11/7/05 and 10/11/05); BBWO Benchmark Reports

2.3.7 Table 2.5 provides a breakdown of ADSL take up by Local Authority in Wales.

16
In 2002, the population of the UK was 59.2 million, of which Wales comprised 2.9 million, i.e. a ratio of
approximately 5%.

BBW English Final Version v2.doc 23


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 2.5
ADSL Connections in Wales by Local Authority

Availability by Connections Take up


site(*) (as % of availability)
Blaenau Gwent 100% 5,000 14.50%

Bridgend 100% 11,000 20.90%

Caerphilly 100% 15,000 18.80%

Cardiff 100% 18,000 14.70%

Carmarthenshire 76% 9,000 15.80%

Ceredigion 67% 5,000 17.20%

Conwy 96% 9,000 18.30%

Denbighshire 89% 9,000 19.00%

Flintshire 96% 13,000 21.40%

Gwynedd 63% 6,000 14.00%

Isle of Anglesey 62% 4,000 14.50%

Merthyr Tydfil 100% 4,000 15.00%

Monmouthshire 93% 9,000 23.10%

Neath Port Talbot 94% 8,000 12.60%

Newport 100% 9,000 13.50%

Pembrokeshire 83% 9,000 16.80%

Powys 64% 8,000 14.50%

Rhondda, Cynon, Taff 100% 17,000 16.50%

Swansea 96% 12,000 14.70%

The Vale of Glamorgan 100% 11,000 16.90%

Torfaen 100% 7,000 16.50%

Wrexham 93% 10,000 17.90%

WALES 91% 208,000 16.30%


Source: BT press releases (of 4/4/05). (*) These figures are rounded, i.e. even where availability is shown as
100%, there may be black spots where some sites cannot receive ADSL services.

Cable modem

2.3.8 The data we have for cable modem broadband connections within South Wales are
estimates produced by the BBWO, specifically:17

17
BBWO Broadband Benchmark Reports.

BBW English Final Version v2.doc 24


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

• 100,000 connections in the first quarter of 2005; and


• 115,000 connections in the third quarter of 2005 (based on the rate of growth in cable
modem connection in the UK over the same period – see Table 2.3).

2.3.9 In addition to the above, a survey by ORC International conducted for the Welsh Assembly
Government, found that 63% of Welsh residents had access to the Internet at home in the
fourth quarter of 2005. Moreover, 39% of residents claimed to have Broadband access at
home (although 40% of these did not know their speed of connection and 11% stated their
connection speed was slower than 512Kbps).18

Historical broadband take-up estimates for Wales

2.3.10 Below we present our estimates of historical take up of broadband in Wales that
we use in our estimate of private sector benefits.

2.3.11 We estimate total connection numbers for broadband on a monthly basis, by


calculating monthly compound growth rates between known data points for each of
the main current broadband categories (as detailed above).19,20 Where there is no
Welsh specific data from which to calculate these growth rates, we apply growth
rates from the UK broadband market as a proxy. In addition, we assume that the
number of ADSL connections as at December 2005, was such that 55% of
households with an internet connection used broadband. In the case of LLU
connections, for which we have no data relating to Wales, we estimate a number of
connections in Wales based on the ratio of LLU connections to BT’s DSL
connections in the UK.

2.3.12 We separately estimate the number of non-domestic sites with broadband


connections, by applying survey evidence on the proportion of businesses using
broadband to the number of non-domestic sites in Wales. Specifically, we assume
that by December 2005 the number of businesses in Wales with a broadband
connection was the same as in the UK as a whole as at May 2005 (which according
to Ofcom was 50% of businesses).

2.3.13 Figure 2.3 plots the resulting estimates of take-up of broadband in Wales, by non-
domestic and domestic (and small, home office) users.

18
Broadband Wales Resident Survey: Wave three (Quarter 4 2005), January 2006, ORC International.
19
We estimate data on a monthly basis as the rapid take-up of broadband technologies means that taking
a longer interval (e.g. quarterly, or annual) will result in a less accurate estimate of direct benefits.
20
The exceptions are that we assume that the 208,000 DSL connections in Wales detailed in Table 2.4
relate to March 2005 (the month preceding BT’s press release which contained this figure), rather than
December 2004, and we do not include the September 2005 figure for Wales DSL connections.

BBW English Final Version v2.doc 25


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 2.3
Estimate of Broadband Take Up in Wales

600,000

500,000
Number of broadband connections

400,000

300,000

200,000

100,000

-
Au 00

Au 01

Au 02

Au 03

Au 04

Au 05
O 0

Fe 00

Ap 1
Ju 1

O 1

Fe 01

Ap 2
Ju 2

O 2

Fe 02

Ap 3
Ju 3

O 3

Fe 03

Ap 4
Ju 4

O 4

Fe 04

Ap 5
Ju 5

O 5

5
D 0

D 1

D 2

D 3

D 04

D 05
0

0
r-0

0
r-0

0
r-0

0
r-0

0
r-0

-0
-0

-0

-0

-0
n-
g-

n-
g-

n-
g-

n-
g-

n-
g-

n-
g-
b-

b-

b-

b-

b-
-

-
ec

ec

ec

ec

ec

ec
ct

ct

ct

ct

ct

ct
Ju

Non-domestic Domestic

Source: Atkins’ estimates

2.4 PENETRATION RATES

2.4.1 In Figure 2.4 we chart penetration rates in each of the G7 countries, the OECD and
also in Wales from 2001 to the second quarter of 2005. Up until 2004, broadband
penetration rates in Wales lagged behind that in each of the G7 countries. However,
during 2004 and the first half of 2005, the penetration rate in Wales increased
relatively quickly, outstripping the rates in both Italy and Germany, as well as the
OECD average. By the second quarter of 2005, the penetration in Wales had
almost caught up to that in France. We estimate that the penetration rate in Wales
continued to grow quickly over the remainder of 2005.

2.4.2 In Figure 2.5 below, we show for a range of countries (including Wales) the
composition of the penetration rate by broadband technology as at June 2005.

BBW English Final Version v2.doc 26


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 2.4
Comparison of Broadband Penetration Rates, 2001 - 2005

25

20
Broadband penetration rate

15

10

0
2
4

2
-Q
-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q

-Q
01

02

02

02

02

03

03

03

03

04

04

04

04

05

05
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
Canada Japan United States United Kingdom France OECD Germany Italy Wales

Source: OECD and Atkins’ estimates.

Figure 2.5
Comparison of Broadband Penetration Rates by Technology, Q2 2005

30

25
Broadband penetration rate

20

15

10

0
Sw ay

Po aly
C nd

R blic
Be nd

en

Ki tes

H nd

Ire y
m

l
he rea

itz n d

Fi a

m a

G alia

Ze in

nd

Sl h R and

Tu c
D nds

N m

U ted an

ce

ey

G o
Au urg

e
Ic k

es

ga

li
an
ar

ad

xe tri

ec
ic
a

ga
iu

do

ub
w

rk
la

an
a

a
ed

al
Sw ela

ni Jap

la
It

ex
te Sta

ew Sp
rtu
Lu us
m
N Ko

bo

u
r
rla

m
lg

re
al
nl

ol
an

or
er

st

un
ng

ov e p

ep
Fr
en

M
er
A

ze P
et

ak
d

c
N
U
ni

DSL Cable Other

Source: OECD and Atkins’ estimates.

BBW English Final Version v2.doc 27


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

3 FORECASTS OF AVAILABILITY AND UPTAKE OF


BROADBAND IN WALES

3.1 INTRODUCTION

3.1.1 In this Section, we forecast the availability, take up and penetration rates of
broadband in Wales to 2015. We use these forecasts in our estimation of the future
benefits of broadband in Wales.

3.1.2 Given the inevitable uncertainty in producing forecasts, we adopt a range of


possible outcomes, by considering three scenarios for broadband availability and
take up: (1) a high case; (2) a central case; and (3) a low case. Nonetheless,
forecasting is a necessarily uncertain exercise and the resulting forecasts of
availability and take up, as well as the estimates of benefits they inform, should be
treated with caution.

3.2 AVAILABILITY

3.2.1 In this sub-section, we consider the likely evolution of the availability of broadband in
Wales to 2015. We focus our attention on the development of existing and currently
emergent technologies. In particular, the development of:

• higher speed xDSL services, e.g. ADSL2+ and Very high speed DSL (VDSL);
• higher speed broadband via existing cable networks;
• Fibre To The Building (FTTB); and
• Fixed Wireless Access technology (of which WiMax is an emerging example).

xDSL

3.2.2 As described above, ADSL services are already widely available in Wales and as a
result of the Broadband Wales Programme’s RIBS project, first generation
broadband will be available at all exchanges in Wales. DSL is likely to remain the
most cost effective means of providing broadband to a majority of the Welsh
population over the horizon of our forecast.

3.2.3 As noted above, BT implemented the UK nationwide roll-out of its up to 8Mbps


service in April 2006. It should be noted, however, that not all users will receive an
8Mbps service, and users in Wales are likely to receive slower average speeds as
we now explain. The speed of connection that a user achieves under ADSL
depends on the length of the local loop connecting their site to an exchange. In the
case of ADSL, the maximum downstream speed is around 8Mbps. This speed is
available for line lengths of just over 2km. Once the 2km point is reached, the
maximum speed of ADSL starts to reduce, to around 5Mbps at 3.5km and around
2.5Mbps at around 4km.

BBW English Final Version v2.doc 28


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

3.2.4 The maximum speed that users of ADSL can access, therefore, depends on the
length of line connecting them to the local exchange. It has been suggested that
some 80% of lines in the UK are less than 3km long.

3.2.5 We do not possess sufficient data to estimate with accuracy the number of sites that
would be served at what speed by ADSL in Wales. However, Wales’ population
density is much lower than for the UK as a whole21 and, across Wales, the average
line length connecting a site to an exchange is likely to be greater than the UK
average. As a result, we would expect that average ADSL (and ADSL2+) speeds to
be lower in Wales than the UK.

3.2.6 The next stage in the deployment of xDSL technologies in Wales is likely to be the
implementation of ADSL2+ at local exchanges. ADSL2+ is capable of delivering
downstream speeds of 25Mbps over relatively short distances (i.e. up to around
1km). On line lengths of 3km and above, ADSL2+ delivers the same speeds as
ADSL.

3.2.7 Some LLUs are already offering 24Mbps services in and around London whilst
several LLUs have announced plans to enable exchanges for ADSL2+. Typically,
these plans do not include detailed lists of exchanges to be enabled, but an
intention to, say, unbundle the top 500 or 1000 exchanges.

3.2.8 In the absence of detailed plans for the enablement of exchanges, we adopt three
scenarios for the enablement of exchanges for ADSL2+ in Wales:

• Central case: we assume that the rate at which ADSL2+ becomes available in Wales,
is the same as occurred with ADSL; although the speed of connection is dependent on
the line length from the local exchange to the site, i.e. sites more than 3km away from
an exchange will not benefit from ADSL2+ if BT’s up to 8Mbps service is available to
them;
• High case: we assume that the rate at which ADSL2+ becomes available in Wales is
determined solely by the prioritisation of exchanges by the number of (domestic) sites
they serve. (As noted, such a prioritisation of exchanges for ADSL enablement would
have resulted in greater availability in Wales earlier); and
• Low case: We take as our low case, the difference between central and optimistic
cases deducted from the central case, i.e. the low case provides symmetry with the
high case.

3.2.9 In all these cases, we assume the roll-out of ADSL2+ in Wales starts in 2007. We
also assume that ADSL2+ is only available at 50% of sites. That is, whilst we
assume that all ADSL enabled exchanges are also, eventually, enabled for ADSL2+,
on average, across all exchanges, only 50% of sites will receive a speed higher than
with ADSL and that fewer people will receive higher bandwidth services in Wales
compared to the UK as a whole. We believe this is a plausible assumption.

21
There are 244 people per km2 in the UK as a whole compared to 141 people per km2 in Wales.

BBW English Final Version v2.doc 29


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Cable Modem

3.2.10 As noted above, ntl’s cable network in South Wales covers some 23% of all sites
in Wales. In 2000, ntl was offering broadband speeds of 128kbps and 512kbps over
its network. In more recent years, ntl has made available broadband at 3Mbps
(although this reduced to 2Mbps when acquired as part of a “triple play” package, i.e.
television, broadband and telephony). In the last few months, ntl has started to offer
a 10Mbps service, which it previously announced would be rolled out across its
networks by end-2006.22 Most recently, news emerged that ntl is to conduct trials
of a 100Mbps services from March 2006.23

3.2.11 With regard to future availability, we assume ntl makes:

• 10Mbps broadband services available in Wales over the course of 2006; and
• >10Mbps broadband services available in Wales from 2007.

3.2.12 Although, we envisage the speed of broadband services via cable networks to
increase, we do not envisage a large expansion in the size of ntl’s network in the
time period of this study. This is in large part a consequence of the relatively large
cost of installing new cables (especially to existing sites, where the cost of
reinstatement are significant). However, as we note below, fibre networks are likely
to be one of the key infrastructures, over the longer term, for the delivery of
bandwidths greater than that available via xDSL technologies delivered over BT’s
copper local loop.

Fixed Wireless Access (FWA)

3.2.13 Whilst DSL services may provide the most cost effective means of providing
broadband to the majority of the Welsh population, a greater proportion of Welsh
consumers will be unable to access xDSL services at higher bandwidths than UK
consumers, because of a greater proportion of sites in Wales being further away
from their local exchange than in the UK as a whole.

3.2.14 As demand for higher bandwidth services increases, prospective consumers not
served by xDSL services at higher speeds will look for alternative technologies to
meet their bandwidth needs. FWA is one of the technologies that could provide a
cost effective means of delivering higher bandwidth services to sites distant from
local exchanges.

3.2.15 Above, we assumed that some 50% of sites in Wales would be too remote from
their exchanges to receive a quicker broadband service under ADSL2+. The sites
not served provide a potential market for FWA technologies. However, there is
uncertainty as to both the extent of demand for higher bandwidth service up to 2015
and the scope of coverage of other higher bandwidth service in Wales. There is,
therefore, also uncertainty as to the future level of availability and economic viability
of FWA.

22
ntl unveils strategy for next generation broadband, ntl press release, 8/8/05.
23
ntl to trial 100Mbps broadband services, www.broadbandzilla.co.uk, 11/2/06, sourced on 14/2/06.

BBW English Final Version v2.doc 30


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

3.2.16 Given this uncertainty, we consider three cases for the availability of FWA
technologies in Wales:

• High case: FWA technologies become available to 10% of sites in Wales;


• Central case: FWA technologies become available to 7.5% of sites in Wales; and
• Low case: FWA technologies become available to 5% of sites in Wales.

3.2.17 For each of the above, we assume that availability of FWA is phased in over a 3
year period starting from 2009.

Fibre to the Cabinet/Building (FTTC/B)

3.2.18 Fibre optic cables are likely to provide an increasingly significant role in the
delivery of broadband (complemented by FWA) as demand for higher bandwidths
increases.

3.2.19 Fibre can be used to deliver broadband in a variety of ways. For example, Fibre
to the Cabinet (FTTC) takes a fibre from the local exchange to a cabinet, which
houses remote terminal equipment. This enables technologies such as ADSL2+
and VDSL to deliver higher bandwidth services by reducing the length of the local
loop used to connect sites, as fibre has by-passed part of the copper local loop.
The costs of maintaining FTTC are greatly influenced by the quality of the cabinets
in which the equipment is contained.

3.2.20 Fibre to the Building (FTTB) provides a fibre connection from the local exchange
to the user’s building. For residential users, this is likely to remain an expensive
option of servicing higher bandwidths, given the need, for example, to establish way
leaves and rights of way and reinstatement. Costs of FTTB will be lower for new
building developments, or where the services can be provided in conjunction with,
say, a utility company.

3.2.21 We consider three cases for the availability of Fibre in Wales:

• High case: Fibre is provided to 10% of sites in Wales;


• Central case: Fibre is provided to 7.5% of sites in Wales; and
• Low case: Fibre is provided to 5% of sites in Wales.

3.2.22 For each of the above, we assume that availability of FWA is phased in over a 5
year period starting from 2010.

Overview of Forecast Availability

3.2.23 Figure 3.1 provides an overview of broadband availability in Wales from 2006 to
2015 for each of the broadband technologies described above.

BBW English Final Version v2.doc 31


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 3.1
Forecast of broadband availability at sites in Wales, 2006-2015 (central case)

1.40
Millions

1.20
Number of sites with broadband access

1.00

0.80

0.60

0.40

0.20

0.00
Se 6

Se 7

Se 8

Se 9

Se 0

Se 1

Se 2

Se 3

Se 4

Se 5
06

Ja 6

M 7

Ja 7

M 8

Ja 8

M 9

Ja 9

M 0

Ja 0

M 1

Ja 1

M 2

Ja 2

M 3

Ja 3

M 4

Ja 4

M 5

15
-0

-0

-0

-0

-1

-1

-1

-1

-1

-1
0

1
0

1
n-

p-

n-

p-

n-

p-

n-

p-

n-

p-

n-

p-

n-

p-

n-

p-

n-

p-

n-

p-
ay

ay

ay

ay

ay

ay

ay

ay

ay

ay
Ja

ADSL ADSL2+ Cable FWA Fibre

Source: Atkins’ estimates.

3.3 TAKE UP

3.3.1 Below we describe our forecast of broadband take up in Wales for the period 2006
to 2015. In short, our approach involved two main stages. First, we forecast an
aggregate level of demand, considering domestic and non-domestic demand
separately. The method we adopted for these forecasts was to: (1) forecast the
potential market size; and then (2) apply an adoption curve to the potential market
size. Second, we allocated the resulting aggregate forecast of broadband demand
by applying various adoption curves to each of the individual technologies discussed
above. As with our forecasts of availability, we forecast high, central and low cases
in order to illustrate a range of possible outcomes.

Aggregate Broadband demand

3.3.2 As noted above, we separately forecast domestic and non-domestic demand.

Domestic Broadband Take-Up

3.3.3 Our forecast of household take-up of broadband depends on:

• the size of the potential market, which is the number of on-line households in Wales;
and
• a broadband technology adoption curve.

BBW English Final Version v2.doc 32


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

3.3.4 The potential market is the number of households with an internet connection. We
forecast the number of on-line households in two stages:

• First, we forecast the number of households in Wales with a PC. According to


research conducted by ORC for the Welsh Assembly Government, 71% of Welsh
households had a home PC in the fourth quarter of 2005. We take this as the starting
point of our forecast. We expect that the number of households in Wales without a
PC will continue to reduce over time. Therefore we apply an annual reduction to the
number of households without PCs. For our central case forecast we assume a 5%
per annum reduction, for our high case we assume a 7.5% per annum reduction and
for our low case, a 2.5% per annum reduction.
• Second, we forecast the number of PC households with an internet connection. As at
the fourth quarter of 2005, according to ORC, some 63% of households in Wales had
an internet connection. This provides the starting point for our forecast. We expect
the number of households with a PC but no internet connection to reduce over time.
For the purposes of these forecasts, we assume in our central case that the number
of households without an internet connection reduces by 50% per annum, in our high
case by 75% per annum, and in our low case by 25% per annum.

3.3.5 Having estimated the size of the potential market (i.e. the number of on-line
households), we then estimate the share attributable to broadband, which we do by
applying an “adoption curve” to our estimate of the potential market size. That is,
we use an adoption curve which describes the market share as a percentage of the
total market.

3.3.6 We use as our adoption curve a Gompertz curve, which takes the following
− be kt 24
functional form: y = Le . This equation generates an “S-shaped” adoption
curve (often applied to the adoption of new technologies), with the precise shape of
the curve dependent on the parameters adopted. For our central case, we adopt
values for parameters b and k from existing studies, specifically, b = 4.52 and k = -
0.25.25 For our high case and low cases we assume that k equals -0.35 and -0.15,
respectively.

24
y is the market share at time t, L is the limit to which the equation tends (in this case L=100% market
share), t is the time period and b and k are parameters.
25
Criterion Economics, The Effects of Ubiquitous Broadband Adoption On Investment, Jobs and the US
economy, September 2003 and Technology Futures Inc, Residential Broadband Forecasts, 2002.

BBW English Final Version v2.doc 33


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 3.2
Central case forecast of PC and on-line Households, 2006-2015

1,200,000

1,000,000

800,000
Number of Households

600,000

400,000

200,000

-
Se 6

Se 7

Se 8

Se 9

Se 0

Se 1

Se 2

Se 3

Se 4

Se 5
06

07

08

M 9

M 0

11

12

M 3

M 4

15
Ja 6

Ja 7

Ja 8

Ja 9

Ja 0

Ja 1

Ja 2

Ja 3

Ja 4

15
-0

-0

-0

-0

-1

-1

-1

-1

-1

-1
0

1
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
p-

p-

p-

p-

p-

p-

p-

p-

p-

p-
ay

ay

ay

ay

ay

ay

ay

ay

ay

ay
Ja

M
PC Households On-line households

Source: Atkins’ estimates

3.3.7 We apply the adoption curve to the number of on-line households to derive our
forecast of the number of households with broadband in Wales, shown further below
in Figure 3.3.

Non-domestic broadband take-up

3.3.8 Similar to our method for forecasting domestic demand, our forecast of non-
domestic broadband connections depends on:

• the size of the potential market; and


• a rate of adoption of broadband at non-domestic sites.

3.3.9 We take as our estimate of the size of the potential market the total number of non-
domestic sites, adjusted downwards (by 20%) in recognition of the inclusion of the
public sector in non-domestic (and as we measure public benefits separately). We
assume that this remains constant over the period of the forecast.

3.3.10 We calculate the adoption curve for demand at non-domestic sites as the
compound monthly growth rate that results in a share of non-domestic sites equal to
an assumed market share in December 2015, starting from a share of 50% in
December 2005. For our central case we assume that 90% of non-domestic sites
are served by broadband by December 2015, for our high case, we assume 100%
of sites are served and for our low case, 80%.

BBW English Final Version v2.doc 34


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Overview of Forecast Take-up

3.3.11 The combined historical and forecast (for each of the three cases) number of
broadband connections is shown in Figure 3.3.

Figure 3.3
Forecast broadband connections, 2006-2015

1,200,000
Actual Forecast

1,000,000

800,000
Number of connections

600,000

400,000

200,000

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Central Hgh Low

Source: Atkins’ estimates

Forecast take-up by technology

3.3.12 Having forecast the aggregate level of broadband demand, we then divided this
across each of the technologies considered above. This division is used in
generating our cost forecasts for each technology and in our estimates of private
sector benefits.

3.3.13 We produced our forecasts for each technology as follows:

• for FWA and fibre technologies we assumed that 60% of the sites to which the
technology is available adopt it. 60% take up of availability is a high compared to
current figures for xDSL and cable modem. However, both FWA and fibre are
expensive technologies (relative to xDSL and exploitation of cable networks for
broadband). We adopt this high take up figure as we believe, given the costs of these
technologies, investors will want to secure high levels of take up before making the
decision to invest. If they can’t secure high take-up, they are less likely to invest
without financial support;
• for cable modems, we assumed that demand for cable modems grows at a fixed
proportion of the demand for broadband as a whole. We then divided the derived

BBW English Final Version v2.doc 35


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

demand for cable modem services between existing speeds (ie to 10Mbps) and faster
speeds (with the latter requiring additional investment to be realised). To forecast the
adoption of the faster (greater than 10Mbps) bandwidth service, we apply a Gompertz
curve, with the residual demand met by the slower (current) speeds; and
• the remainder of demand is satisfied by xDSL services. We divide this remaining
demand between ADSL and ADSL2+ services. Again, we adopt a Gompertz curve to
model the adoption of the new technology (ADSL2+), with ADSL meeting the residual
demand.

3.3.14 For the central case, the results of the forecasts for each of the above
technologies (as well as for broadband in aggregate) are shown in Figure 3.4.

Figure 3.4
Forecast broadband demand by technology, central case

1.20
Millions

1.00

0.80
Number of connections

0.60

0.40

0.20

0.00
Se 6

Se 7

Se 8

Se 9

Se 0

Se 1

Se 2

Se 3

Se 4

Se 5
6

M 7

M 8

M 9

M 0

M 1

M 2

M 3

M 4

M 5
Ja 6

Ja 7

Ja 8

Ja 9

Ja 0

Ja 1

Ja 2

Ja 3

Ja 4

15
-0

-0

-0

-0

-1

-1

-1

-1

-1

-1
0

1
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
p-

p-

p-

p-

p-

p-

p-

p-

p-

p-
ay

ay

ay

ay

ay

ay

ay

ay

ay

ay
Ja

ADSL ADSL2+ Cable <10Mbps Cable >10Mbps FWA Fibre Total

Source: Atkins’ estimates

3.4 PENETRATION RATES

3.4.1 Table 3.1 shows the penetration rates of broadband (i.e. connections per 100
inhabitants) in Wales implicit from our forecasts (assuming a constant population).
This shows a relatively sharp increase in penetration rates in the early years as
broadband continues to replace dial-up as the dominant form of internet connectivity.
However, the pace of growth slows as broadband comes to dominate the market,
with growth in penetration rates then being driven by the gradual increase in the size
of the market.

BBW English Final Version v2.doc 36


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 3.1
Forecast Broadband Penetration (connections per 100 inhabitants) in Wales

Date Broadband Penetration


Jun-05 12.7%

Jun-06 18.0%

Jun-07 21.0%

Jun-08 23.7%

Jun-09 26.1%

Jun-10 28.2%

Jun-11 30.1%

Jun-12 31.7%

Jun-13 33.1%

Jun-14 34.3%

Jun-15 35.4%
Source: Atkins’ estimates

BBW English Final Version v2.doc 37


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

4 NET BENEFITS OF BROADBAND

4.1 INTRODUCTION

4.1.1 In this Section, we describe the net benefits of broadband to the Welsh economy. As
described earlier, we calculate net benefits as follows:

• Net benefit = private sector benefits + public benefits – costs

4.1.2 Below, we provide details regarding each of the components used in this calculation,
before presenting our resulting estimates of the net benefit of broadband to the Welsh
economy.

4.2 PRIVATE SECTOR BENEFITS

4.2.1 In this sub-section, we describe our calculation of the private sector (direct) benefits of
broadband in Wales. As described in Section 1, we base our measure of private sector
benefits on an estimate of consumer surplus. Our approach to calculating consumer
surplus requires information regarding the prices and quantities of broadband connections
as well as the elasticity of demand for broadband services. Below, we first explain the
elasticity information used in our calculations, before describing the prices we use.
Quantity information is as presented in Sections 2 and 3. Finally, we set out estimates of
private sector benefits using the consumer surplus approaches.

Own Price Elasticity of Demand

4.2.2 In the absence of own price elasticities of demand for broadband services in Wales, we
use data from the US. In particular, we adopt a range of estimates of elasticity from US
studies relating to the year 2000. The range is from -1.79 to -0.59 and we take as our
central estimate -1.19, which is the mean average of the extremes of our range.26

4.2.3 In the case of our assumed linear demand curve (where the elasticity of demand will vary
over time), we apply the range of US elasticities from 2000 to Wales in the year in which
the penetration rate in Wales matched that of the US in 2000. For other years, the slope of
the demand curve is kept constant and so the elasticity of demand is determined by the
effective point on the demand curve. This provides a (crude) control for the different state
of development in the two markets.

Historical prices

4.2.4 We use separate prices for domestic and business broadband, and also disaggregate by
technology where appropriate (eg ADSL and cable modem). We include both the monthly
charge and any one-off connection or activation charge (assuming self-installation).

26
The range is taken from across five studies. Summary results regarding the price elasticity of
broadband from these five studies, and others, are listed in Appendix B of The Residential and
Commercial Benefits of Rural Broadband: Evidence from Central Appalachia, M.L. Burton and M.J. Hicks,
July 2005.

BBW English Final Version v2.doc 38


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

4.2.5 The prices we use for ADSL are the then prevailing prices for BT’s service and for cable
modem are ntl’s then prevailing prices. Prior to 2005, we assume all users pay for a
service with a 512Kbps downstream connection speed. Thereafter, we assume all users
pay for higher speed services. Moreover, for the purposes of our modelling, we assume all
users pay the latest available prices (i.e. they switch from existing to new tariffs
immediately). Figure 4.1 shows the resulting average monthly revenue, inclusive of one-
off connection charges, for domestic customers. There is an upward shift in average
revenue between July 2002 and March 2003 which is, perhaps, surprising. However, this
reflects the price data we have, which shows increases in both BT’s and NTL’s connection
charges around this period.

Figure 4.1
Average Monthly Revenue per Domestic Connection

100
Average revenue (£) per connection per month (inc. connection charges)

90

80

70

60

50

40

30

20

10

0
Au 00

O 0
D 00

Ap 1
Ju 1
Au 1
01

D 1

Ap 2
Ju 2
Au 02

O 2
D 2

Ap 3
Ju 3
Au 03

O 3
D 3

Ap 4
Ju 4
Au 4
04

D 4

Ap 5
Ju 5
Au 05

O 5
D 5
Fe 0

Fe 1

Fe 2

Fe 3

Fe 4

5
0

0
0

-0

0
r-0

-0

-0

0
r-0

0
-0

-0

0
r-0

0
-0

-0

r-0

-0

-0

r-0

0
-0

-0
n-

g-

b-

n-

g-

b-

n-

g-

b-

n-

g-

b-

n-

g-

b-

n-

g-
ct

ct
ec

ct
ec

ct

ct
ec

ec

ct
ec

ec
Ju

Source: Historical BT and NTL prices.

4.2.6 For non-domestic charges, we apply a price that is a multiple of our average price to
domestic consumers. The multiple is based on the difference in average revenues per
user for residential versus business users for the UK.27

Future Prices

4.2.7 We base our forecasts of future prices on our estimates of future costs. In particular, we
assume that prices for each technology change by the same percentage as the change in
average unit costs. For ADSL2+ and Cable Modem delivering downstream speeds of over
10Mbps we assume a 15% mark-up over cost. For the more expensive technologies (fibre
and FWA) we assume a lower margin, on the grounds that suppliers will want to keep

27
For the UK, PWC (2004) report average revenue per residential user to be €33 compared to €77 per
business, i.e. a ratio of 2.33rec.

BBW English Final Version v2.doc 39


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

prices to users low in order to encourage take-up and defray the substantial fixed costs
over a larger user base.

Estimate of Private Sector Benefits

4.2.8 The resulting estimates of private sector benefits over the 2000-2015 period are presented
in Table 4.1, for all our alternative methods (i.e. linear demand and constant elasticity of
demand) and assumptions (three cases for demand and three cases for the elasticity of
demand).

Table 4.1
Estimates of Private Sector Benefits, not discounted

High case Central case Low case


(£m) (£m) (£m)
Linear demand

Low elasticity 34,766 28,900 21,761

Mid elasticity 17,237 14,329 10,789

High elasticity 11,459 9,526 7,173

Constant elasticity of demand

Low elasticity 3,490 3,087 2,612

Mid elasticity 2,493 2,206 1,866

High elasticity 1,847 1,634 1,382


Source: Atkins’ estimates

4.2.9 The estimates in the above table provide an extremely wide range for private sector
benefits, from almost £35 billion to just under £1.4 billion over the fifteen year period of our
study, on an undiscounted basis. We discuss below (in sub-section 4.5) the reasons for
this range.

4.3 PUBLIC BENEFITS

4.3.1 Appendix 3 provides quantified benefits from broadband for a range of case studies across
policy areas. As described in our methodology, some of the studies resulted in the
identification and quantification of public benefits. Where this is the case, we add these to
our measure of total benefits.

4.3.2 The quantified benefits arising from the case studies are a combination of realised benefits
and potential benefits. In adding these benefits to our measure of direct benefits, to obtain
an estimate of total benefits, we consider three scenarios for the realisation of public
benefits:

• High case: all benefits realised by 2015;


• Central case: 80% of potential benefits are realised by 2015; and
• Low case: 60% of potential benefits are realised by 2015.

BBW English Final Version v2.doc 40


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

4.3.3 We assume that the public benefits accrue in proportion to the uptake of broadband
relative to the level of forecast take up at the end of 2015. The resulting profiles of public
benefits are shown in Table 4.2.

Table 4.2
Estimates of Public Benefits, not discounted

Year High case Central case Low case


(£m) (£m) (£m)
Historical

2000 0.0

2001 0.2

2002 0.5

2003 2.5

2004 11.6

2005 26.3

Forecast

2006 43.9 33.7 24.5

2007 53.1 39.2 27.0

2008 61.0 44.2 29.4

2009 67.7 48.7 31.7

2010 73.2 52.6 33.8

2011 77.7 56.0 35.7

2012 81.5 59.0 37.6

2013 84.7 61.6 39.3

2014 87.5 63.9 40.8

2015 89.9 66.0 42.3


Source: Atkins’ estimates

4.4 COSTS

4.4.1 In order to arrive at an estimate of the net benefits of broadband, we deduct costs. In
particular, we deduct the costs of the Broadband Wales Programme. The profile of costs
we have used for the Programme are shown in Table 4.3.

BBW English Final Version v2.doc 41


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 4.3
Broadband Wales Programme Costs, not discounted

Year Amount (£m)

2002/3 17.14
2003/4 8.14
2004/5 9.96
2005/6 6.58
2006/7 18.53
Source: The Welsh Assembly Government

4.5 NET BENEFITS

4.5.1 We estimate the Present Value of the net benefits of Broadband in Wales over the period
2000 to 2015 to be between £1,387m and £28,375m, as shown in Table 4.4.28

Table 4.4
PV of Net Benefits

High case Central case Low case


(£m) (£m) (£m)
Linear demand
Low elasticity 28,375 23,552 17,800

Mid elasticity 14,355 11,881 8,952

High elasticity 9,734 8,034 6,036

Constant elasticity of demand


Low elasticity 3,395 2,917 2,397

Mid elasticity 2,588 2,200 1,784

High elasticity 2,064 1,734 1,387


Source: Atkins’ estimates

4.5.2 As is apparent from Table 4.4, there is a wide range in our estimates of benefits, from £1.4
billion to £28.4 billion. This wide range is largely a result of the assumptions we adopted in
order to estimate private sector benefits using the consumer surplus approach (and
regarding the shape of the demand curve in particular). The broad range of these

28
We applied a discount rate of 3.5% to future and historical net benefits, i.e. our base year was 2005,
hence we discounted future net benefits and inflated historical benefits to account for the time value of
money.

BBW English Final Version v2.doc 42


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

assumptions reflects the uncertainty as to the true form of the demand curves for
broadband in Wales over the fifteen years of the study.

4.5.3 The lower estimates of benefits shown in Table 4.4, are derived under the assumption of a
constant elasticity of demand curve. We adopted this form of demand curve precisely to
provide a more conservative estimate of benefits (compared to the assumption of a linear
demand curve). However, the assumption of a constant elasticity of demand for
broadband services over time is, arguably, conservative. In practice, we would expect the
elasticity of demand for broadband to change – becoming more inelastic over time (i.e.
decreasing in absolute terms) as broadband becomes more of a necessity (and its value
therefore rises). The consumer surplus estimate under a constant elasticity of demand
could, therefore, be viewed as providing a lower bound to benefits.

4.5.4 Under the assumption of a linear demand curve, elasticity does rise over time (given our
other estimates regarding price and quantity). However, as discussed in Section 1, the
resulting high estimates of benefits can be argued to be a mathematical artefact. The
consumer surplus estimate under a linear demand curve could, therefore, be viewed as
providing an upper bound to benefits. It is for these reasons we believe it plausible that
the true value of benefits lie within the range of benefits from the consumer surplus
approach, shown in Table 4.4.

4.5.5 Under all of the above estimates of net benefits, private sector benefits are greater than
public sector benefits. Table 4.5 lists for our central case demand forecast, the ratio of
public benefits to private sector benefits.

Table 4.5
Percentage Ratio of Public to Private Sector Benefits, central case

Central case
Linear demand
Low elasticity 2.0%

Mid elasticity 4.1%

High elasticity 6.1%

Constant elasticity of demand


Low elasticity 18.6%

Mid elasticity 26.0%

High elasticity 35.1%


Source: Atkins’ estimates

4.5.6 Figure 4.2 shows the per annum net benefit under assumptions of linear demand and
constant elasticity of demand, with our mid-point elasticity assumption. This Figure shows
several interesting features of our estimates of net benefits, as we discuss below.

BBW English Final Version v2.doc 43


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 4.2
Estimated Net Benefits, discounted

1,800

1,600

1,400

1,200
Net Benefits (£m, discounted)

1,000

800

600

400

200

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-200

Linear demand, mid-point elasticity Constant elasticity of demand, mid-point elasticity

Source: Atkins’ estimates

4.5.7 First, the above Figure makes clear the profile of benefits over time. In particular, up to
and including 2004, levels of benefits are low (and in some cases negative, as costs are
greater than benefits). However, the increase in net benefits is rapid after 2004 as the
take-up of broadband became (and we forecast to become) increasingly widespread in
Wales.

4.5.8 Second, the Figure shows the large differences between our estimates of net benefits
depending on the assumptions adopted. Most notably, the estimate of net benefits based
on a linear demand, results in a substantially higher estimate of net benefits, particularly
from 2005 onwards.

4.6 CONCLUSION

4.6.1 We have calculated, and presented above, the net benefits of broadband in Wales over
the period 2000 to 2015 using a number of different methods and assumptions. Our
resulting estimates of the Present Value of benefits range from £1,387 million to £28,375
million.

4.6.2 There is considerable uncertainty regarding the parameters required to calculate consumer
surplus. Accordingly, our estimates of benefits based on consumer surplus also cover a
considerable range. The lower end of this range (£1,387 million) is based on our low case
forecast of broadband demand and our high case own price elasticity of demand. We
believe this represents a conservative estimate of the lower bound of benefits. Conversely,
the higher end of this range is based on our high case demand forecast of demand and
our low case elasticity. We believe this represents a very optimistic estimate of the upper
bound of benefits.

BBW English Final Version v2.doc 44


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

PART B

5 OVERVIEW OF METHODOLOGY

5.1 INTRODUCTION

5.1.1 In this part of the report, we examine the net benefit of the Broadband Wales Programme.

5.1.2 Our methodology entails us estimating the net benefit of the Broadband Wales Programme
as the difference between our estimates of net benefits in the following scenarios:

1. Broadband Wales Programme: the net benefits of broadband to the Welsh


economy given the existence of the Broadband Wales Programme (i.e. outturn and
forecast net benefits of broadband); and
2. Baseline: the net benefits of broadband to the Welsh economy had the Broadband
Wales Programme not been created.

5.1.3 The second of these scenarios is a counterfactual, specifically what would have happened
absent the Programme. The counterfactual provides a baseline against which we
compare outturn (and forecast) benefits, with the difference between the two attributable to
the Programme.

5.1.4 Below we summarise our methodologies for estimating net benefits and for establishing
the counterfactual.

5.2 SUMMARY OF NET BENEFIT METHODOLOGY

5.2.1 Earlier in this report, we describe in detail the method used to estimate the net benefits of
broadband in Wales, inclusive of the impact of the Programme. The results of the
application of this method provide the quantification of our scenario 1 above.

5.2.2 In this sub-section we briefly summarise the method. We calculate net benefits as follows:

• Net benefits = private sector benefits + public benefits (– costs) 29

5.2.3 Private sector benefits are the benefits that accrue directly to households and businesses
that purchase broadband services. We measure these private sector benefits by
estimating the consumer surplus from broadband services (i.e. the difference between the
amount each consumer would be willing to pay for their broadband service and the amount
they actually pay).

5.2.4 We define the public benefits of broadband to be those that accrue (either directly or
indirectly) to the public sector or indirectly to third parties. We estimate various public
benefits through a series of case studies conducted across twelve policy areas.

29
Note: we only deduct costs when we measure the net benefit inclusive of the Programme, i.e. under the
baseline, the Programme is assumed not to have been created and there are no costs to deduct.

BBW English Final Version v2.doc 45


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

5.2.5 We do not include in our calculation of net benefits of broadband in Wales, either the costs
incurred by or the benefits that accrue to private sector providers of broadband
infrastructure. This is because ownership of these providers resides outside of Wales.
When we measure net benefits inclusive of the Programme, we do deduct Programme
costs.

5.3 ESTIMATION OF THE COUNTERFACTUAL

5.3.1 Our approach to estimating private sector benefits is dependent on outturn and forecast
availability and take-up of broadband.

5.3.2 In order to estimate the net benefits of the Broadband Wales Programme, we estimate a
counterfactual level of broadband availability and take-up, i.e. what level of availability and
take-up of broadband services in Wales would have been achieved if the Programme had
not been conceived. We then use this counterfactual of availability and take-up to derive
the net benefit of broadband had the Programme not existed, using the approach to
calculating net benefits described above. This provides our baseline of net benefits. Our
measure of the net benefits of broadband attributable to the Programme is the difference
between the baseline and our estimate of net benefits of broadband inclusive of the
Programme.

5.3.3 We based our estimates of counterfactual availability and take up on pre-BBW forecasts.
We use pre-BBW forecasts that exclude any potential influence of BBW on take up and
availability as they are forecasts of what was expected to happen absent the Programme.
One of the reasons that outturn availability and take up will have varied from such pre-
BBW forecasts is the impact of the Programme (which is what we are seeking to identify).
Of course, another, and possibly more significant, reason as to why outturn values differed
from forecast values is simply that the market changed in an unforeseen way. Because of
this, we do not believe it appropriate to simply take pre-BBW forecasts as being the
counterfactual (as a significant part of the difference between these forecasts and outturn
values is likely due to changes in the market other than the Programme).

5.3.4 In order to isolate the effect of the Programme on availability and take up, we adjust the
pre-BBW forecasts for Wales to account for these other market changes. We measure the
impact of these other market changes by comparison to the UK as a whole. In particular,
we assume that the amount by which outturn values of broadband availability and take up
in the UK differ from forecast provides a measure for these other market changes in Wales.
Accordingly, we adjust the pre-BBW forecasts for Wales by the proportion by which pre-
BBW forecasts for the UK differed from the outturn values for the UK. We believe this is
an appropriate method to more accurately isolate the effects of the Programme on take-up
and availability.

Strengths and Weaknesses

5.3.5 The strengths and weaknesses of our method of estimating net benefits apply equally to
our estimate of net benefits under the counterfactual.

5.3.6 However, the uncertainty that is involved in creating the counterfactual is a further
weakness, i.e. we are estimating the net benefits of a state of the world that we have
created. Our estimates of this state of the world, although informed by available evidence,

BBW English Final Version v2.doc 46


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

are necessarily uncertain. Whilst we adopt three scenarios for counterfactual availability
and take up (high, central and low), there remains uncertainty and the resulting forecasts,
and the estimates of benefits which they inform, should be treated with caution.

BBW English Final Version v2.doc 47


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

6 AVAILABILITY AND TAKE UP OF BROADBAND IN WALES

6.1 INTRODUCTION

6.1.1 As described in the previous Section, we use a counterfactual estimate of broadband


availability and take up in assessing the impact of the Programme. Our counterfactual is
of the availability and take up of broadband in Wales assuming that the Programme did
(and does) not exist.

6.1.2 The basis for this estimate are the forecasts of availability and take up made prior to the
existence of the Programme, i.e. absent the Programme, what was availability and take up
expected to be.

6.2 ESTABLISHING THE COUNTERFACTUAL

6.2.1 In this sub-section we describe how we establish our counterfactual for broadband
availability and take up and present the resulting counterfactual.

Historical counterfactual

Availability

6.2.2 Prior to the establishment of the Programme in July 2002, we assume the counterfactual
availability of ADSL was equal to actual availability. However, after 2002, we assume that
the counterfactual availability differs from actual availability. We estimate the
counterfactual availability from 2003 onwards using a pre-BBW forecast of the availability
of ADSL in Wales and the UK for mid-2005 made assuming no significant government
intervention.

6.2.3 As explained in our methodology (see section 5.3), we adjust the forecast of broadband
availability in Wales upwards in the same proportion by which the forecast for the UK,
made at the same time, was in error. For example, using illustrative figures, if the forecast
of broadband availability in the UK had been 67% compared to an outturn availability of
99%, then the forecast of availability in the UK would have been in error by 48%.30 As the
forecast for the UK was predicated on no significant government intervention, the 48%
indicates the magnitude of the impact on availability of those factors other than
government intervention (e.g. the BBW Programme) that were unforeseen when the pre-
BBW forecasts were made. Accordingly, we would adjust upwards the pre-BBW forecast
of availability in Wales by 48%. In doing so, we more accurately isolate the impact of the
Programme on availability from other market changes (unforeseen at the time the forecast
was made) impacting availability. We then attribute the difference between this adjusted
pre-BBW forecast of availability in Wales and actual availability in Wales to the impact of
the BBW Programme.

30
(99/67)-1 = 47.8%

BBW English Final Version v2.doc 48


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

6.2.4 We assume that the counterfactual level of cable modem availability is equal to the actual,
as the cable network in South Wales was in situ prior to the Programme and has not been
expanded since.

Take up

6.2.5 Our counterfactual take-up is based on pre-BBW forecasts of take-up as at mid-2005. As


with our estimate of counterfactual availability, we attribute part of the difference between
the forecast and outturn take up to factors other than the Programme. We do this by
adjusting upwards the take up forecast for Wales by the same proportion by which the
forecast for the UK was in error (i.e. the difference between outturn and forecast). We
estimate counterfactual take up of ADSL in Wales to be some 185,000 in December 2005,
compared to our estimate of actual take up of 346,000.

6.2.6 We do not have pre-BBW forecasts of cable modem take-up. However, on the basis that
the network was in place prior to the Programme, we assume under the counterfactual a
monthly growth rate in cable modem take up that was ten percent less than the actual
monthly growth rate.

6.2.7 The resulting counterfactual take up is shown in Figure 6:1.

Figure 6:1
Counterfactual take up, 2000-2005

300,000

250,000

200,000
Number of connections

150,000

100,000

50,000

-
Au 00

O 0

Au 01

O 1

Au 02

O 2

Au 03

O 3

Au 04

O 4

Au 05

O 5
Fe 00

Ap 1
Ju 1

Fe 01

Ap 2
Ju 2

Fe 02

Ap 3
Ju 3

Fe 03

Ap 4
Ju 4

Fe 04

Ap 5
Ju 5

5
D 0

D 1

D 02

D 03

D 04

D 5
0

0
r-0

0
r-0

0
r-0

0
r-0

0
r-0

-0
-0

-0

-0
n-

n-

n-

n-

n-

n-
g-

-
b-

g-

-
b-

g-

-
b-

g-

-
b-

g-

-
b-

g-
-

-
ec

ec

ec

ec

ec

ec
ct

ct

ct

ct

ct

ct
Ju

xDSL Cable modem

Source: Atkins’ estimates

6.2.8 To derive our counterfactual estimates of domestic connections and non-domestic


connections, we assume that the ratio between actual total and domestic connections
applies to the counterfactual, with the residual attributable to non-domestic connections.

BBW English Final Version v2.doc 49


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Future counterfactual

6.2.9 Above we described how we estimated counterfactual availability and take up to the end of
2005. Below we comment on our forecasts of counterfactual availability and take up from
2006 onwards.

6.2.10 The method used in forecasting counterfactual availability and take up is essentially the
same as that described earlier in this report to forecast availability and take up under
actual conditions. Below we note only relevant differences between the assumptions and
methods.

6.2.11 There are key differences between the counterfactual and our other forecasts of
availability for 2006 to 2015:

• under the counterfactual, ADSL roll out is assumed to have reached the level actually
achieved in 2005 by the end of 2006, i.e. counterfactual availability of ADSL is
assumed to increase from 83% in December 2005 to almost 100% by December
2006; and
• under the counterfactual, the deployment of BT Max, ADSL2+ and high speed cable
modem services are all assumed to occur one year later.

6.2.12 The counterfactual take up of broadband has exactly the same drivers as our forecasts
described earlier. The only differences, other than those driven by availability, are the
starting points for the forecasts.

6.2.13 Figure 6:2 shows the resulting estimate of counterfactual take up, from 2000 to 2015,
compared to our estimate of actual take up and central case forecast.

6.2.14 Figure 6:3 provides a breakdown by technology of our (central case) counterfactual take
up forecast.

BBW English Final Version v2.doc 50


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 6:2
Counterfactual take up, 2000-2015

1.2
Millions

Actual Forecast

1.0

0.8
Broadband Connections

0.6

0.4

0.2

0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Actual (central) Counterfactual (central)

Source: Atkins’ estimates

Figure 6:3
Counterfactual take up by technology, 2000-2015

1.20
Millions

1.00

0.80
Number of connections

0.60

0.40

0.20

0.00
Se 6

Se 7

Se 8

Se 9

Se 0

Se 1

Se 2

Se 3

Se 4

Se 5
M 6

Ja 6

M 7

Ja 7

M 8

Ja 8

M 9

Ja 9

M 0

Ja 0

M 1

Ja 1

M 2

Ja 2

M 3

Ja 3

M 4

Ja 4

M 5

15
-0

-0

-0

-0

-1

-1

-1

-1

-1

-1
0

1
0
0

1
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
p-

p-

p-

p-

p-

p-

p-

p-

p-

p-
ay

ay

ay

ay

ay

ay

ay

ay

ay

ay
Ja

ADSL ADSL2+ Cable <10Mbps Cable >10Mbps FWA Fibre Total

Source: Atkins’ estimates

BBW English Final Version v2.doc 51


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

6.2.15 For comparison purposes, Table 6.1 shows the forecast penetration rates (i.e. number of
broadband connections per 100 inhabitants) of the counterfactual compared to our main
forecast (under the central case).

Table 6.1
Forecast Broadband Penetration in Wales, central cases

Date Broadband Penetration: Broadband Penetration:


Central case Counterfactual
Jun-05 12.7% 7.5%
Jun-06 18.0% 11.0%
Jun-07 21.0% 14.2%
Jun-08 23.7% 17.5%
Jun-09 26.1% 20.6%
Jun-10 28.2% 23.4%
Jun-11 30.1% 26.0%
Jun-12 31.7% 28.3%
Jun-13 33.1% 30.3%
Jun-14 34.3% 32.1%
Jun-15 35.4% 33.7%
Source: Atkins’ estimates

BBW English Final Version v2.doc 52


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

7 NET BENEFITS OF THE BBW PROGRAMME

7.1 INTRODUCTION

7.1.1 In this Section, we describe the net benefits of the Broadband Wales Programme. As
explained earlier, we calculate the net benefit as:

• Net benefit of Programme = net benefit of broadband (including Programme) minus


net benefit of broadband (excluding Programme)

7.1.2 Our estimates of the net benefit of broadband (including Programme) are described in Part
A of this Report. Below we explain how we derive our baseline net benefit, i.e. the net
benefit of broadband excluding the Programme, before presenting the results of our
estimates of the net benefit of the Programme.

7.1.3 We calculate net benefits of broadband as follows:

• Net benefit = private sector benefits + public benefits (– costs) 31

7.2 PRIVATE SECTOR BENEFITS

7.2.1 We measure private sector benefits by estimating consumer surplus. As noted above,
there is uncertainty over some of the key parameters in our approach to estimating
consumer surplus and, as a result, we adopt several alternative assumptions. In particular,
we assume two different forms of demand curve (linear demand and constant elasticity of
demand) as well as three assumptions regarding the elasticity of demand (high, mid and
low). These alternative approaches and assumptions result in six alternative baselines.

7.2.2 Our approach to estimating private sector benefits is dependent on levels of broadband
take up and price. Counterfactual take up was described in the previous Section. We
assume that, under the counterfactual, historical prices were the same as actual prices
and that future prices change by the same percentage as the change in average unit costs.

7.2.3 It could be argued that to assume the same historical prices for services in the
counterfactual is inappropriate as the lower levels of take-up in the counterfactual will
result in higher average unit costs and, as a result, higher prices. However, this is not
necessarily the case. In industries with fixed costs, provided variable costs are covered,
there is an incentive to keep prices low to expand the market to defray fixed costs among
more consumers. So, whilst unit costs are higher under the counterfactual, so is the
incentive for suppliers to keep prices low to stimulate demand. In effect, we assume that
these two effects offset each other.

7.2.4 Our resulting estimates of baseline private sector benefits are detailed in Table 7.1.

31
Note: we do not deduct Programme costs when we measure the baseline (as the Programme is
assumed not to have been established).

BBW English Final Version v2.doc 53


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 7.1
Baseline private sector benefits, 2000-2015, discounted

Central baseline
(£m)
Linear demand
Low elasticity 12,495

Mid elasticity 6,195

High elasticity 4,118

Constant elasticity of demand


Low elasticity 2,084

Mid elasticity 1,489

High elasticity 1,103


Source: Atkins’ estimates

7.3 PUBLIC BENEFITS

7.3.1 Appendix 2 of this Report describes a range of case studies across policy areas. Where
these case studies resulted in the identification and quantification of public benefits, we
add these to our measure of total benefits. However, we do not add the total amount of
public benefits attributed to broadband to our estimate of baseline net benefits as some of
these benefits were the result of the Programme, which we assume not to have been
established under the baseline. Rather, we add to our measure of baseline net benefits,
the difference between total amount of public benefits attributed to broadband and the total
amount of public benefits attributed to the Programme. For example, in the case of
Housing, we identified economic benefits attributable to broadband of £3.5m p.a., of which
we attributed £1.1m p.a. to the Programme. Accordingly, we only add £2.4m p.a to our
measure of baseline net benefits (i.e. £3.5 - £1.1m).

7.3.2 The case studies identified a number of realised and potential benefits. We assume (for
both our counterfactual and base case) that 80% of potential benefits are realised by 2015,
and that they accrue in proportion to the uptake of broadband relative to the level of
forecast take-up as at the end of 2015.

7.3.3 Our resulting estimate of baseline public benefits is detailed in Table 7.2.

BBW English Final Version v2.doc 54


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 7.2
Estimates of Public Benefits, 2000-2015, discounted

Year Central baseline


(£m)
Historical counterfactual

2000 0.04

2001 0.18

2002 0.44

2003 1.20

2004 4.58

2005 9.48

Forecast counterfactual

2006 11.68

2007 14.55

2008 17.19

2009 19.48

2010 21.38

2011 22.88

2012 24.01

2013 24.83

2014 25.38

2015 25.71
Source: Atkins’ estimates.

7.4 NET BENEFITS

7.4.1 We estimate the Present Value of the baseline (or counterfactual) net benefits of
broadband in Wales over the period 2000 to 2015 to be in the range £1,278 million to
£13,965 million, as shown in Table 7.3.32

32
We applied a discount rate of 3.5% to future and historical net benefits, i.e. our base year was 2005,
hence we discounted future net benefits and inflated historical benefits to account for the time value of
money.

BBW English Final Version v2.doc 55


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 7.3
Baseline Net Benefits, 2000-2015, discounted

High Central Low


baseline baseline baseline
(£m) (£m) (£m)
Linear demand
Low elasticity 13,965 12,718 11,870

Mid elasticity 7,041 6,418 5,993

High elasticity 4,760 4,341 4,055

Constant elasticity of demand


Low elasticity 2,396 2,307 2,225

Mid elasticity 1,779 1,712 1,651

High elasticity 1,378 1,326 1,278


Source: Atkins’ estimates

7.4.2 The above baselines cover a number of assumptions which we have discussed in Part A
of this Report. In short, we believe it plausible that the true value of benefits lies within the
extremes of the range presented.

7.4.3 It should also be noted that our estimate of the counterfactual is reliant on the accuracy of
our estimates for take-up. To test the sensitivity of our results to these estimates, we ran
two alternative scenarios – a high case and a low case. For historical take up, the
difference between these cases and our central counterfactual case is that we assume a
difference in the forecast of take-up as at mid 2005 of +/- 20%). The resulting estimates of
the PV of net benefits for each of these alternative counterfactuals are shown in the table
above.

7.4.4 Under all of the above estimates of net benefits, private sector benefits are greater than
public sector benefits, although the ratios are higher than in our estimates of the net
benefits of broadband presented in Section 4.5. Table 7.6 lists for our baseline central
case demand forecast, the ratio of public benefits to private sector benefits.

BBW English Final Version v2.doc 56


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 7.4
Percentage Ratio of Public to Private Sector Benefits, central case

Central case
Linear demand
Low elasticity 3.7%

Mid elasticity 7.5%

High elasticity 11.3%

Constant elasticity of demand


Low elasticity 22.4%

Mid elasticity 31.4%

High elasticity 42.3%


Source: Atkins’ estimates

7.5 NET BENEFIT OF PROGRAMME

7.5.1 As discussed above, we calculate the net benefit of the Programme as the difference
between the net benefit of broadband including the Programme and the net benefit of
broadband excluding the Programme (i.e. the baselines described above).

7.5.2 We estimate the lower bound of the PV net benefits of the Broadband Wales Programme
to be £357m, over the period 2000 to 2015, see Table 7.5.

Table 7.5
PV of Net Benefits, 2000 - 2015

PV of Net
Benefits (£m)
Baseline (constant elasticity of demand, high
elasticity, high baseline) 1,378

Actual and forecast (constant elasticity of


demand, high elasticity, central case) 1,734

Net Benefit of Programme 357


Source: Atkins’ estimates. Note: Values are subject to rounding errors.

7.5.3 Figure 7.1 illustrates the annual profiles of net benefits of both the above scenarios, i.e. the
baseline and the actual and forecast scenarios. The difference between these two
scenarios in any given year provides our measure of the net benefit of the Programme in
that year. The sum of these differences for each year from 2000 to 2015 equates to the
£357 million net benefit of the Programme, shown in Table 7.5.

BBW English Final Version v2.doc 57


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 7:1
Comparison of net benefits, discounted, 2000-2015

250

200

150
Net Benefits (£m, discounted)

100

50

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-50

Baseline Actual and forecast

Source: Atkins’ estimates

7.5.4 For the first few years, our estimate of the counterfactual net benefits is greater than our
estimate of actual net benefits. This reflects the exclusion of the costs of the Programme
under the counterfactual (and whilst take up, and hence benefits, are also lower under the
baseline, the cost effect dominates). However, from 2004, the net benefits of broadband
(inclusive of the Programme) are greater, by a significant amount, than the baseline net
benefits.

7.5.5 Our estimate of net benefits is sensitive to the assumptions we have made, both in the
baseline and in our estimate of net benefits inclusive of the Programme.

7.5.6 The net benefit presented in Table 7.5 relates to our estimated lower bound of benefits of
the Programme. In we present the net benefit of the Programme under all the scenarios
detailed above, compared to our estimates of actual and central case forecast of net
benefits inclusive of the Programme.

7.5.7 This shows a range of net benefits for the Programme of between £357 million and
£11,682 million.

BBW English Final Version v2.doc 58


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 7.6
PV of Net Benefits, discounted

High Central Low


baseline baseline baseline
(£m) (£m) (£m)
Linear demand
Low elasticity 9,588 10,835 11,682
Mid elasticity 4,840 5,463 5,889
High elasticity 3,275 3,693 3,979
Constant elasticity of demand
Low elasticity 521 611 692
Mid elasticity 421 489 549
High elasticity 357 409 456
Source: Atkins’ estimates.

BBW English Final Version v2.doc 59


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

APPENDIX 1 SUMMARY OF THE BBW PROGRAMME

In this Appendix, we provide an overview of the Broadband Wales Programme, including


its origins in the objectives of the Welsh Assembly Government, the targets and goals
expected of it, how it has designed projects to meet those targets, progress against targets
and how priorities have evolved over time. The emphasis is on showing the design of
projects to meet successfully a changing map of targets. Spend data by project is not
included.

A1.1 BACKGROUND TO THE PROGRAMME

A1.1.1 Cymru Arlein – Online for a Better Wales launched by the Welsh Assembly Government
in 2001 outlined the Assembly Government’s vision for an ICT enabled society. This
Strategy had the following key pillars:

• Enhancing Communities – through e-citizens, e-inclusion and e-communities


• Building Successful Businesses – through effective implementation of e-business
processes
• Improving Public Services – through e-enabling public services and adopting an e-
Government approach
• Developing ICT Skills – through e-education and e-training.

A1.1.2 Access to, and effective use of, a first class infrastructure were considered prerequisites
to the achievement of these key aims.

A1.1.3 The need for a first class infrastructure in Wales was reiterated in the Welsh Assembly
Government’s overarching strategic vision “Wales – A Better Country” and in its
economic development strategy “A Winning Wales”.

A1.1.4 Consequently, the origins of the Broadband Wales (BBW) Programme


(www.wales.gov.uk/broadband) go back to 2001 when Analysys Consulting were
commissioned to undertake an assessment of the case for improved broadband
provision in Wales. Their Report “Ubiquitous Broadband Infrastructure in Wales”
underlined the key contribution pervasive broadband access could make to the
development of the Welsh economy. A detailed implementation plan was drawn up by
Analysys Consulting Ltd which made a number of recommendations for actions to
stimulate both supply and demand in Wales and which would result in improved
availability and take up of broadband across Wales.

A1.1.5 Recommended work focused on actions to improve availability for the public sector, the
business sector and the general public. The actions were largely accepted by the Welsh
Assembly Government Cabinet in May 2002 and the Broadband Wales Programme was
officially launched by Andrew Davies, Minister for Economic Development and Transport
in July 2002.

BBW English Final Version v2.doc 60


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A1.2 BROADBAND ENVIRONMENT BEFORE THE PROGRAMME WAS LAUNCHED

A1.2.1 At the outset of the Programme the demand for broadband in Wales (and indeed the UK)
was embryonic although it was clear that demand would be likely to increase significantly
in a relatively short period of time. BT Wholesale were the only wholesale broadband
supplier in Wales. There were a number of competitors to BT Retail but it was difficult for
other broadband retailers to find a commercially viable market in Wales because of lack
of demand for broadband and the costs associated with wholesale products.

A1.2.2 BT wholesale and retail broadband charges were set by OFTEL33 and based on a UK
wide tariff structure. OFTEL categorised BT as having Significant Market Power (SMP) in
Wales (and indeed the UK) in fixed broadband services. The existence of players with
SMP usually means that prices are higher than in more competitive markets. BT’s
leased line product (kilastream and megastream) meant that broadband (at any capacity)
was available to anyone in Wales but that it was expensive compared to other types of
broadband technology, e.g. ADSL.

A1.2.3 There were (and still are) 439 BT telephone exchanges in Wales of which approximately,
in July 2002, 30 (or 7%) were ADSL enabled, which equated to 35% of the Welsh
population having access to broadband via this technology.34 Market statistics for ADSL
take up were limited but known to be exceedingly low.

A1.2.4 Provision of broadband via satellite in Wales was virtually non-existent and cable TV
infrastructure existed only in Cardiff, Newport and Swansea (the NTL network was in
proximity to around 250,000 homes). There was no wireless broadband infrastructure
apart from licensed provision.

A1.2.5 The UK legal, regulatory and state aid regime was largely untested from a Government
broadband intervention perspective. There was limited availability of radio spectrum with
an ability to provide cost effective broadband deployment. Local Loop Unbundling, whilst
available, had failed to make an impact in Wales or indeed virtually anywhere else in the
UK.

A1.3 ACTIONS TAKEN FORWARD FOLLOWING BROADBAND WALES PROGRAMME


LAUNCH

A1.3.1 The eight original Programme aims were stated as:

Target 1 - The availability of affordable terrestrial broadband services in Wales will be


increased by approximately 30% with 310,000 extra homes and 67,000 extra business
lines potentially being able to access broadband.

Target 2 - Broadband will be widely available throughout Wales at near DSL prices.

33
OFCOM replaced OFTEL from January 2004
34
Figures based on information supplied by BT.

BBW English Final Version v2.doc 61


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Target 3 - 50 to 100 local or regional initiatives will be developed, harnessing the


creativity of communities and businesses to deliver broadband solutions optimally aligned
with their particular circumstances.

Target 4 - fibre and/or other broadband connectivity will be available at most business
parks.

Target 5 - Approximately 1200 additional public sector sites will be broadband enabled.

Target 6 - Cost orientated high-speed connectivity will be made available between Wales
and an international Internet hub.

Target 7 - Increased awareness of broadband and its benefits, which will stimulate
creativity and entrepreneurship across Wales.

Target 8 - Increased international awareness of the Broadband Wales Programme,


which will enhance Wales’ reputation as a place for businesses to locate and grow.

A1.3.2 In 2004, progress against these targets was assessed and a strategic review was
undertaken to consider the appropriateness of these targets given the fast moving
technological and regulatory telecommunications environment. The review identified that
four of these targets had been met, and of the remaining targets three were on target to
be delivered with the remaining one requiring further research. Particular successes
related to the following targets:

Target 1 – Availability and Affordability


Since the launch of the Programme, broadband coverage grew significantly from 36% in
July 2002, through 53% ADSL coverage in July 2003 and 75% ADSL coverage in July
2004. In October 2004, coverage of 512kbps ADSL broadband was 89%. Coverage
currently (June 06) stands at around 99%.35

Target 2 – Market Price


This target was achieved and was facilitated by the introduction of the Satellite Subsidy
Scheme / Broadband Support scheme.

A1.3.3 In September 2002 a Broadband Satellite Subsidy scheme was launched to help Small
and Medium Sized Enterprises (SMEs) to take advantage of broadband. The grant had a
ceiling of £1,500 and was successfully taken up by 250 businesses across Wales.

A1.3.4 In the latter half of 2003 a review of the Scheme was undertaken which resulted in a
revised Scheme being launched in March 2004. The schemed was expanded to include
the voluntary sector. The maximum level of support was increased to £3,000 or 50% of
eligible 1st year costs. This scheme has helped support over 1,310 SMEs and voluntary
sector organisations access a broadband service (1,060 under the new scheme and 250
under the original scheme).

35
BT estimate

BBW English Final Version v2.doc 62


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Target 5 - Public Sector Access

A1.3.5 In 2002 the Welsh Assembly Government procured and paid for a managed high speed
core fibre ring (622Mbps) around Wales with 100Mbps linking all 22 Local Authorities
together. This network is commonly known as the Lifelong Learning Network.
Additionally the Welsh Assembly Government has helped fund the cost of connecting
schools, libraries and learning centres to the core network and funded two posts in each
Authority to help demonstrate the benefits of broadband and increase usage. Finally, in
order for people living in each Local Authority area to reap the full benefit of what
broadband can do for them, the Welsh Assembly Government also invested just under
£10m in placing electronic learning equipment in schools to facilitate and speed up
electronic learning. This programme of work has led to large increases in the absolute
number and percentage of public sector sites (especially secondary and primary schools,
ICT learning centres, and libraries) connected to broadband.

A1.3.6 Additionally a similar network linking all NHS Trusts, hospitals and GP surgeries was
created. Whilst it is noted that this health network (DAWN2) was outside the scope of the
Broadband Wales Programme, there are synergies and lessons learned by the Welsh
Assembly Government across both projects.

A1.3.7 The Programme’s value has been supported by the eleven Higher Education Institutions
and eleven Further Education Colleges in South Wales being connected to broadband
through the South Wales Metropolitan Area Network (MAN). Similarly, two Higher
Education Institutions and nine Further Education Colleges in North Wales are connected
to broadband through the North Wales MAN. Indeed the Lifelong Learning Network
offers resilience to the North Wales and South Wales Metropolitan Area Networks.

Target 7 – Increased awareness of broadband and its benefits

A1.3.8 Direct evidence of a correlation between increased awareness/ take-up of broadband


and increased levels of entrepreneurship is very difficult to prove. However, it was
believed that there had been an improvement in the levels of entrepreneurship in Wales
since July 2002, which may have been stimulated by the availability of affordable
broadband services.

Try Before You Buy

A1.3.9 This demonstration scheme involved installing broadband demonstration facilities at


Business Support Centres across Wales to demonstrate broadband technologies to
businesses in Wales. To date over 10,000 business and voluntary organisations have
trialled broadband technologies to establish what technology is appropriate to them and
what benefits could potentially be realised as a result of its take up.

A1.3.10 Over a hundred press articles have appeared relating to the Programme and /or the
potential benefits of broadband in local and national press. The Programme has also
carried out a large scale, Wales wide, bus advertising campaign. A comprehensive set
of marketing materials have been produced branded brochures, stationery, business
cards and exhibitions banners. Two videos have been produced including “Broadband
For Life” which provides details of how broadband could help in four distinctly different
scenarios.

BBW English Final Version v2.doc 63


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A1.3.11 A Key Influencer Group was established as part of the Broadband Wales Programme.
The Group was launched in May 2004 and is made up of public, private and voluntary
sector representatives from across Wales with relevant interests and expertise. The
Group has facilitated the placing of numerous sector specific articles in industry
publications and have also undertaken research on broadband uptake and applications
within their own specific areas.

A1.3.12 A Broadband Wales Taskforce was appointed in 2004 for a two year period. The
Taskforce consisted of a team of people based across Wales representing the
Programme whose role it was to demonstrate to people, businesses and groups what
broadband might mean for them. The Taskforce initiated contacts and projects with a
broad audience within Wales. .Taskforce members established relationships with key
organisations such as the Welsh Development Agency (WDA), Opportunity Wales, and
Business Eye in order to ensure a cohesive and connected set of messages as to the
benefits and availability of broadband. Additionally they were closely involved with
Regional Economic Fora and Local Authorities to establish principles, practices and
relationships.. They were directly involved in generating broadband case studies for
business, residential and education sectors. They also built constructive relationships
with key influencers at sub regional level.

A1.3.13 When the Broadband Programme was launched it was recognised there was a need
for independent evaluation of the Programme targets and other complementary work.
To fulfil this requirement a contract was awarded in April 2004 to the E-Commerce
Innovation Centre (ECIC) at Cardiff University (www.broadbandwalesobservatory.org.uk
and www.arsyllfabandeangcymru.org.uk) to establish a Broadband Wales Observatory
(BBWO). The role of the Observatory is to gather information on broadband
developments in Wales, the UK and Worldwide and articulate what this means for
Wales and what lessons might be learned or policy options recommended with the
overall aim of improving broadband coverage and take up in Wales.

A1.4 BROADBAND WALES PROGRAMME 2005- 07

A1.4.1 In January 2005, following the strategic review in November 2004, the Broadband Wales
Strategy 2005-07 was published which contained the vision for Wales to have an
“advanced and competitive broadband services infrastructure which supports and
enables a Welsh knowledge economy to thrive and prosper”. In March 2005 a
Broadband Brokerage was established to capture demand for broadband services
(www.bbwo.org.uk). This facility supports many of the targets described below.

A1.4.2 The specific targets described in the Strategy were as follows:

By the end of 2005


• Ensure that take up of first generation broadband in Wales is at least equal to the UK
average.
• Ensure that everyone in Wales has access to information, which allows them to make
a decision on what broadband could mean for them.
• Award a contract to allow homes, businesses or voluntary sector sites in Wales to
have access to first generation broadband infrastructure.
• Issue at least a thousand Business Support Scheme Grants to SMEs and the

BBW English Final Version v2.doc 64


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Voluntary Sector in Wales.


• Create a fund to support the provision of broadband to public sector sites in Wales.
• Develop an agreed Welsh policy for the aggregation of public sector demand for
broadband infrastructure, in line with Making Better Connections.
• Demonstrate to the telecommunications industry the level of demand for second
generation broadband infrastructure that exists in Wales.

During 2006
• Fund two Advisors in each Local Authority in Wales to help implement local
broadband strategies (until March 2006).
• Fund a resilient broadband network linking all 22 Local Authorities in Wales,
supporting mission critical and value added applications (until 2006).
• Announce and implement the agreed policy in respect of the aggregation of public
sector demand for broadband infrastructure.

By March 2007
• Ensure that take up of first broadband in Wales is at least equal to the UK average.
• Aim to support at least 50 local projects throughout Wales.
• Ensure the availability of second generation broadband infrastructure to at least 50%
of the Welsh business population.
• Aim to secure the provision of fibre speed broadband connectivity at pre-identified
business parks/locations at affordable prices.
• Aim to ensure that Wales has extensive geographic access to competitive wholesale
infrastructure.
• Implement an agreed strategy in relation to the provision of a direct connection from
Wales to the global core internet.
• Increase international awareness of the Broadband Wales Programme benefits to
help enhance Wales’s reputation as a place for businesses to locate and grow.

What progress has been made?

2005 Targets

A1.4.3 “Ensure that take up of first generation broadband in Wales is at least equal to the UK
average”

A1.4.4 Achieved. The Welsh Assembly Government undertook a survey of Welsh residents in
order to track the take-up of broadband. The latest survey (December 2005) indicated
that take up of first generation broadband in Wales is at 32% (up from 17% in 2004).
This figure is based upon the Welsh Assembly Government definition of broadband
(connection speeds of 512 Kbps or more). For UK comparison purposes it has used the
statistics published by Ofcom (www.ofcom.org.uk) who define broadband as an ‘always on’
connection at speeds of 128 Kbps or more. In this survey broadband take-up in Wales,
using the Ofcom definition (128kbps), stands at 39% which exceeds the UK average
figure of 30.6% as published by Ofcom in May 2005.

A1.4.5 “Ensure that everyone in Wales has access to information, which allows them to make a

BBW English Final Version v2.doc 65


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

decision on what broadband could mean for them”

A1.4.6 This is both achieved and ongoing. The Welsh Assembly Government uses a range of
media to promote awareness of both the Broadband Wales Programme and the benefits
that broadband delivers. The Broadband Wales Programme website provides
information and links to further information on the benefits of broadband and is available
to everyone in Wales. The website has been marketed pan-Wales. Statistics show there
were nearly 17,000 ‘hits’ (circa 11,000 unique ‘hits’) on the site for the period January
2005 to December 2005.

A1.4.7 Marketing activities have been delivered across Wales to increase the awareness of the
benefits of broadband. Activity included broadband enabled Smartcars at local and
national events, billboards, bus and radio advertising and benefits of broadband videos
for businesses and citizens. Targeted marketing activity through direct mailing and
leaflet drops has been delivered to 16,000 SMEs and 650,000 homes. Welsh Assembly
Government research (conducted in December 2005) indicated that awareness of
broadband is at 96% and awareness of the Programme is at 15%.

A1.4.8 “Award a contract to allow homes, businesses or voluntary sector sites in Wales to
have access to first generation broadband infrastructure”

A1.4.9 This was achieved in March 2006. The Regional Innovative Broadband Support (RIBS)
project, which is part funded through Objective 1 European Structural Funds, was
designed specifically to allow all homes, business or voluntary sector sites to access
first generation (512kbps to 2mbps asymmetrical service) broadband infrastructure.
The successful contractor, BT Group, will provide access to first generation broadband
and work is already underway to upgrade the unviable telephone exchanges in Wales
with DSL technology. When completed all Wales’ 439 telephone exchanges will be
DSL enabled. This should be complete before the end of 2006. Additionally, BT
Group are required, under the terms of the contract, to ensure the provision of first
generation broadband to those living in broadband “blackspots” i.e. areas where an
exchange is enabled but where a broadband service is not available due to distance
and/or technology limitations.

A1.4.10 “Issue at least a thousand Business Support Scheme Grants to SMEs and the
Voluntary Sector in Wales”

A1.4.11 Achieved. As a result of the significant increase in basic broadband availability across
Wales, the continued competitive downward pressure of pricing by the market and
achievement of the previous target it was decided that the scheme would close to new
applicants on 28th February 2006. A review of the impact of this scheme is underway.

A1.4.12 “Create a fund to support the provision of broadband to public sector sites in Wales”

A1.4.13 This target was not addressed due to the interdependency with the 2006 target to
develop and implement an agreed policy for the aggregation of public sector demand
for broadband infrastructure.

A1.4.14 “Develop an agreed Welsh policy for the aggregation of public sector demand for
broadband infrastructure, in line with Making Better Connections”

BBW English Final Version v2.doc 66


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A1.4.15 The Public Sector Broadband Aggregation (PSBA) project was commissioned to
explore the potential for the provision of best value high bandwidth (broadband)
connectivity through the aggregation of demand across the public sector in Wales to
meet the current and projected needs of users. Aggregation could also help to facilitate
the efficient and effective usage of shared assets, information, services and applications,
as appropriate. While a number of significant public sector networks exist in Wales, to
date there has been little cross-sector aggregation. The matter was considered by the
Welsh Assembly Government Cabinet in January 2006 and an agreement was reached
to create a ‘pooled’ budget from across the Ministerial portfolios from January 2007 to
fund an aggregated public sector network.

A1.4.16 “Demonstrate to the telecommunications industry the level of demand for second
generation broadband infrastructure that exists in Wales”

A1.4.17 This target has progressed aggressively due to interdependencies with Strategic Target
3 and the fast moving market pricing and speed enhancements being offered by
operators. The Programme team has recently begun to:

(i) assess the current and future provision of and demand for second generation
broadband across Wales;

(ii) make recommendations about the need for public sector intervention in the
second generation broadband market; and

(iii) outline the return on investment for Wales of any interventions proposed.

A1.4.18 This will allow the Welsh Assembly Government to consider what, if any intervention it
should put forward in this area.

2006 Targets

A1.4.19 “Fund two Advisors in each Local Authority in Wales to help implement local broadband
strategies (until March 2006)”

A1.4.20 Since 2002 the Broadband Wales Programmes has provided funding for two Local
Authority Advisors to champion the development of broadband and ICT services. The
Advisors have helped provide savings to the Local Authorities (LAs) by identifying and
supporting the effective use of ICT within the Authorities, schools, libraries and ICT
Learning centres. Through their work these advisers have helped develop and exploit
the use of broadband. Specifically, they have provided ICT support, such as networking
and business process re-engineering to schools, libraries and ICT learning centres
across Wales.

A1.4.21 “Fund a resilient broadband network linking all 22 Local Authorities in Wales,
supporting mission critical and value added applications (until July 2006)”

A1.4.22 In 2002 the Programme procured and financed a managed high speed core fibre ring
(622 Mbps) around Wales. As described previously, this network is known as the
Lifelong Learning Network (LLN). The network quickly became a multifunctional
platform facilitating improved interconnectivity between all Local Authorities allowing

BBW English Final Version v2.doc 67


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

them to benefit from economies of scale in their ICT systems and to make service
delivery improvements (e.g. disaster recovery and e mail filtering). It also assisted
Local Authorities meet their e-Government commitments.

A1.4.23 “Announce and implement the agreed policy in respect of the aggregation of public
sector demand for broadband infrastructure”

A1.4.24 This target follows on from the target set in 2005 which was to develop an agreed
Welsh policy for the aggregation of public sector demand for broadband infrastructure.

A1.4.25 The Minister for Enterprise Innovation and Networks introduced a paper at Cabinet in
January 2006, and underlined the project as a significant component of the Broadband
Strategy and a key enabling tool in the delivery of Making the Connections – the Welsh
Assembly Government’s Strategy for improving Public Service delivery in Wales.

A1.4.26 The paper outlined the current lack of interconnectivity between public sector IT
networks in Wales; the inability of networks to share information; advantages to be
gained from the procurement economies of scale and other strategic, operational and
financial benefits. The paper therefore proposed a network linking the Public Sector
and the creation of a pooled budget drawing on funds from relevant Ministerial
portfolios.

A1.4.27 It was agreed that in respect of the emergency services, consideration would need to
be given to the inclusion of the police IT systems following the outcome of the review of
the number of police forces in Wales. It was also acknowledged that whilst the
proposals would facilitate better networking across the Health and Social Care
organisations, particular attention should be given to confidentiality issues.

A1.4.28 Ministers agreed the creation of a pooled budget and that officials should proceed to
make arrangements for the budget to be in place in 2007.

2007 Targets

A1.4.29 “Ensure that take up of first generation broadband in Wales is at least equal to the UK
average”

A1.4.30 As described earlier the Broadband Wales Programme has an ongoing research and
monitoring role which tracks broadband provision and take up. This target is on track.
Further data will be gathered in 2007.

A1.4.31 “Aim to support at least 50 local projects throughout Wales”

A1.4.32 To date, over 30 broadband initiatives have been supported in Wales through
Ministerial involvement, launch events and project support sign posting. Additionally,
there are funding schemes put in place by the Welsh Assembly Government which
help support the implementation of ICT projects. This includes the recently launched
“Communities @One” project which aims to enable communities and individuals to use
ICT in ways that are relevant to them to enhance their quality of life, overcome
difficulties and support them to fulfil their social, economic and cultural potential.

BBW English Final Version v2.doc 68


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A1.4.33 “Ensure the availability of second generation broadband infrastructure to at least 50%
of the Welsh business population”

A1.4.34 Telecommunications operators are already rolling out 8Mpbs and beyond across Wales
although it is likely that there will be areas where this will not be commercially viable.
Research is being carried out to establish whether there is a need for intervention in
the second generation broadband market in Wales. Should there be a proven need for
intervention on economic grounds a project will be developed.

A1.4.35 “Aim to secure the provision of fibre speed broadband connectivity at pre- identified
business parks/ locations at affordable prices”

A1.4.36 “Aim to ensure that Wales has extensive geographic access to competitive wholesale
infrastructure”

A1.4.37 These two targets are addressed together. The FibreSpeed Wales project is an
integral part of the Programme and aims to ensure that businesses located on the
strategic business parks in North Wales have access to leading edge broadband
technology. The project will help deliver a minimum of 10Mbps symmetrical service
and have the capacity to offer advanced Gigabit capability at prices similar to those
available in the most competitive parts of the UK (London and the South East of
England).

A1.4.38 Equipping Wales’ strategic business parks to the highest technological standards with
advanced broadband infrastructure, means they will be amongst the best in Europe in
terms of bandwidth capability and affordability which will help businesses in Wales
compete even more effectively in the global economy.

A1.4.39 The project is potentially a pan Wales project, but approval received from the European
Commission is for phase 1 only (North Wales) which covers 14 business parks of
strategic importance to the Welsh Assembly Government’s Property Strategy for
Employment in Wales.

A1.4.40 “Implement an agreed strategy in relation to the provision of a direct connection from
Wales to the global core internet”

A1.4.41 Research was undertaken in 2003 to ascertain whether Wales was being
disadvantaged due to the lack of a connection to the global internet. The results
showed that there was insufficient demand for such a connection to warrant public
sector intervention. A research refresh is currently underway.

A1.4.42 “Increase international awareness of the Broadband Wales Programme benefits to help
enhance Wales’ reputation as a place for business to locate and grow”

A1.4.43 The profile of the Programme is already raised in Europe and beyond. Its existence is
promoted through a variety of means including Programme representation at internal
events and through the Welsh Assembly Government’s Trade and Invest Wales
activities. One of the Programme team is on secondment to the European Commission
which helps ensure the Commission remains appraised of the Programme’s
developments. Furthermore, the speaking engagements of the Minister for Enterprise

BBW English Final Version v2.doc 69


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Innovation and Networks actively contribute to the achievement of this programme


objective – with opportunities at home and abroad used as the basis for raising
awareness of the goals and objectives of the Broadband Wales Programme. Similarly,
the Director of the Broadband Wales Programme has attended and spoken at
broadband and ICT specific events across the world.

A1.5 THE FUTURE

A1.5.1 There is growing evidence of the importance of ICT investment and associated
infrastructures in achieving competitiveness and growth. ICT is a principle means of
getting more efficient and higher quality products and services in both the public and
private sectors. Moreover, technological development plays a key part in achieving
higher growth rates and research and development (R & D) is a key driver for innovation
and of increased competitiveness.

A1.5.2 Governments throughout the world are recognising the significance of the accelerating
development and mass deployment of technology in economies and societies. As a
result the Welsh Assembly Government has responded by launching an external
consultation (planned July 2006) “Towards e-Wales: A consultation on exploiting the
power of ICT in Wales” on exploiting the power of information and communication
technology (ICT) in Wales. The consultation is about how Wales can exploit ICT to
achieve its goals for economic success, public service reform and social inclusion. It is
aimed at those who are in a position to make decisions which affect the lives and
livelihoods of individuals, businesses and communities in Wales.

A1.5.3 It is recognised that expertise and experience in exploiting ICT already exists across
Wales. However, the Welsh Assembly Government will seek to focus action around
building and embedding:

• greater knowledge and understanding of where and how ICT can bring
significant benefits. This includes proposals to scope an e-Wales Observatory to
gather and distribute information on patterns and trends in ICT development, and
strengthen the evidence base of the impact of ICT; raise public understanding of ICT;
ensure that advice and information about ICT security is appropriately widespread;
raise the international profile of significant ICT innovation and success in Wales; and
learn more about how innovation and success in other countries can benefit Wales.
• capacity to exploit it to a far higher degree than has been possible to date.
Through joined up working across the Assembly Government, and with external
stakeholders, the aim will be consistency in the skills and resources necessary to
exploit ICT appropriately in policy design and delivery. It will also include informing,
and being informed by, policy developments beyond Wales (e.g. at UK Government
and EU levels and beyond). In addition, it will include developing the capacity within
the Welsh Assembly Government to lead on major cross-cutting ICT developments,
with support and engagement from different areas of policy. A further important
dimension will be ensuring the empowerment and capacity of citizens to exploit ICT to
access and influence public services, and benefit their lives and careers.
• a culture of innovation with ICT which can further stimulate public service
reform and economic success. This includes exploring ways of creating a greater
critical mass of innovative ICT behaviour. The strategy seeks feedback on options for

BBW English Final Version v2.doc 70


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

achieving this which might include, for example, strengthening networking between
project groups in different areas; identifying improved mechanisms for translating
innovative pilots into mainstream delivery; and ways of encouraging private sector
interest and investment in exploiting ICT innovation.
• an electronic infrastructure which is fit for purpose and underpins economic
competitiveness and twenty first century public service. This includes ensuring
affordable and ubiquitous access to an advanced and open communication
infrastructure which is critical for competitiveness and inclusion. The existence and
exploitation of an advanced infrastructure will create opportunities such as the ability
to transform delivery of public services, boost ICT skills and increase levels of
innovation, enterprise and productivity and make an attractive inward investment
location. Whilst it is content, services and applications that will bring value to the
Welsh economy these can be realised only if there is an appropriate infrastructure to
support them.

A1.5.4 Three specific phases are proposed and described for achieving effective exploitation of
ICT in Wales:

Phase one: focuses on setting foundations, identifying strengths opportunities and


priorities.
Phase two: focuses on building capacity, confidence and knowledge transfer.
Phase three: reflects normalisation of multi-agency delivery and ICT development, with
clearly defined impacts on economic performance and public service improvement and
efficiency. In this phase Wales will be recognised internationally for ICT innovation and
exploitation.

A1.5.5 It is not expected that these phases will be achieved uniformly, as in some areas of policy
capacity and performance we are already achieving significant outcomes and
establishing a reputation for excellence. However, they are intended to denote a stage at
which they become the prevailing characteristic of ICT policy in Wales.

A1.5.6 Wales is already rich in action, creativity and innovation with ICT and has an exciting
foundation on which to build a robust and sustainable transformation of our public
services and economy.

A1.5.7 On the basis of the consultation on this strategy the Welsh Assembly Government will
prepare an e-Wales Action Plan for publication in autumn 2006, focusing on priorities for
action to exploit ICT in our public services and economic development strategy. In the
meantime the Assembly Government will continue to progress actions which have
already been agreed and resourced, and which will contribute as an integral part of the e-
Wales action plan.

BBW English Final Version v2.doc 71


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

APPENDIX 2 CASE STUDIES

A2.1 INTRODUCTION, APPROACH AND KEY FINDINGS

Objectives and scope

A2.1.1 This Appendix sets out the “case studies” undertaken as part of the overall study. By
case studies, we mean short reviews of particular mechanisms or casual chains by which
broadband can impact policy goals in Wales. The focus is on assessing the quantitative
impact. We use available data where possible, or plausible assumptions where it is not.

A2.1.2 The following policy areas are covered:

a) Economic development
b) Transport
c) Environment and planning
d) Countryside
e) Training
f) Education
g) Communities
h) Housing
i) Local government
j) Public services
k) Culture
l) Health and social care

A2.1.3 The objectives of the case studies are:

• to support and stimulate discussion with each policy area and other stakeholders
regarding the value of broadband and the BBW Programme, by illustrating key causal
links between policy and desired outcomes and potential quantitative impacts;
• to support our calculation of the benefit of broadband to the Welsh economy, by
providing indicative estimates of public benefits; and
• to support our calculation of the benefit of the Broadband Wales Programme, by
providing quantified illustrations of some of the underlying mechanisms by which the
BBW Programme generates benefits.

Approach

A2.1.4 In each case study, we adopt the following approach:

• identify key causal mechanisms, linking broadband and e-enablement to the private
benefits of individuals or the policy goals of government;
• estimate, on an indicative basis, the actual or potential improvement in the benefit
variable arising from e-enablement;
• estimate a share of the e-enablement benefit which can be attributed to broadband;
and

BBW English Final Version v2.doc 72


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

• estimate a share of the broadband benefit which can be attributed to the BBW
Programme.

Data and calculation issues

A2.1.5 In the first step of the quantitative assessment, we try to estimate the actual or potential
benefit from e-enablement. Note the following data and calculation points:

• No primary research is involved in these case studies. All findings are based on desk-
top analysis of existing research and data.
• There are very significant data gaps standing in the way of robust estimation. For
many of the variables that one would ideally like to quantify, there is no or little reliable
or relevant data. For many of the areas, there are complex causal fields at work
(many variables with a potentially complex interaction between them and with the
expected timing of impact spread over many years). A very rich data environment
indeed would be necessary to isolate the historic impact of broadband.
• There is a paucity of quantitative secondary studies which identify the impact of
broadband on particular policy areas.
• The scope of the case studies is wide, and so each case study has been undertaken
on a reasonably resource-efficient basis.

A2.1.6 Given these data and evidence gaps, we have adopted a pragmatic, indicative approach,
using our judgement where necessary. Using a mixture of available data points and
plausible assumptions, we find ways to carry out indicative estimations. In each policy
area, it is possible to identify means by which broadband can help to achieve benefits /
desired outcomes and to quantify the change in benefits / desired outcomes on an
indicative basis.

A2.1.7 In the second and third steps, we attribute a share of the e-enablement benefit to
broadband; and then we further attribute a share of the broadband benefit to the BBW
Programme. Attribution of appropriate shares of the total e-enablement benefit to
broadband technology and to the BBW Programme is particularly difficult. There is very
little quantitative evidence available and a large measure of judgement is necessary. The
specific challenges are as follows:

• Multiple inputs are responsible for the outcome. Delivery of solutions will involve a
mixture of ICT hardware, software, broadband connectivity, vision, process redesign,
new skills and capabilities, and change management. Each one is necessary for the
solution to work and achieve the full benefit. Attribution of the whole of the benefit to
broadband would clearly be inappropriate, but deciding the appropriate share is
difficult.
• The BBW Programme is stimulating availability and take-up of broadband but is
clearly not only the force acting in this direction. Attribution of the whole of the
broadband benefit to the BBW Programme would be inappropriate, but deciding the
appropriate share is difficult.

A2.1.8 To overcome these difficulties, a pragmatic approach has been adopted. To indicate the
share of the total e-enablement benefits attributable to Broadband, we ascribe a share
ranging from 100% to 30%, based on the following criteria.

BBW English Final Version v2.doc 73


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

• The extent to which the empirical evidence is based on research into the economic
benefits of broadband itself; or whether the empirical evidence relates to ICT more
broadly.

• The extent to which Broadband is the key enabler and/or a necessary condition for the
benefit to be achieved; or whether broadband is an enabler which enhances the quality
and level of the achieved benefit, but is not absolutely necessary for a material level of
benefit delivery.

• The extent to which the benefit is delivered over the medium term. As time goes by,
broadband will increasingly displace narrowband, and it will become increasingly the
case that broadband will be necessary to access the relevant applications and derive
the associated benefits. In particular, we apply this to the case studies where the
calculated benefits are those that will be achieved over the medium term.

A2.1.9 We note that the lower bound for the broadband attribution factor is 30%, which may
seem high. However, a reasonably high lower bound is appropriate, because the case
studies have been selected to cover precisely those policy areas and causal chains
where broadband is reckoned to have a significant impact or potential impact. We have
not looked at all potential impacts, and in particular have not addressed policy areas
where broadband’s impact is reckoned to be more marginal.

A2.1.10 To indicate the share of the broadband benefits attributable to BBW, we similarly adopt
a pragmatic approach. We ascribe a share ranging from 50 to 20%. This range of
scaling factors is derived from our work comparing actual take-up of broadband with
the estimated counterfactual take-up that would have occurred in the absence of the
BBW Programme. This analysis indicates that following the BBW Programme, actual
take-up is some 40% higher than it would otherwise have been in the short run. This
gap converges over time, so that it is under 20% by 2010. Our scaling factors are
therefore typically in the range of 40-20%. However we allow a higher upper limit to
deal with cases where the BBW Programme has directly targeted the relevant
customer segment. More specifically, the choice of ascribed share within the 50-20%
range is based on the following criteria.

• The extent to which BBW spend was directly responsible for broadband roll-out in the
relevant sector of the economy, and/or has implemented projects directly targeting the
relevant customer group.

• The time-profile of benefits realisation (whether the benefit is realised in the near term
or over the medium run). A higher share is applied when the benefit delivery profile is
more near term, reflecting the finding that BBW’s impact on take-up is weighted
towards the nearer term.

A2.1.11 In those three cases where the uncertainty as to an appropriate BBW attribution factor
is greater than in other case studies, we apply a range of scaling factors. These three
instances produce high, central and lower estimates.

A2.1.12 The table below summarises the attribution factors that we have applied in each case
study. It also summarises the key drivers underlying our judgement.

BBW English Final Version v2.doc 74


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Evidence is BB is the key Identfied Attribution Did BBW Identfied Above Attribution
about BB? enabler and benefits to be factor target this benefits average level factor
/or necessary achieved over applied to sector? achieved of applied to
condition? the medium broadband over the near uncertainty? BBW (%)
term? (%) term?

Economic development y 100 y 40-20


Transport n n 30 y 40
Environment n n 30 y 40
Countryside n y 40 y n 30
Training n y 40 y n 30
Education n n 30 y y 50
Communities y 50 y 40-20
Housing y y 50 y 40-20
Local Government y 50 y y 50
Public Services y 50 y y 50
Culture n y 40 y n 30
Health and social care y 50 n n 20

A2.1.13 Note that the case studies provide only a snapshot of currently realised and foreseen
benefits. The estimates are from today’s perspective and do not build in various
possible sources of growth in benefit levels. For instance, as shown in the above table,
we ascribe 30% of the value of telecommuters’ saved time to broadband, in part
because this calculation relates to currently realised benefits, and at the current time,
broadband is only one contributory factor among several. However, over the medium
term, broadband will be increasingly a necessary condition, and one could expect both
the volume of telecommuting and the broadband attribution factor to rise.

A2.1.14 We also again note that there is an important element of judgement in these
calculations. The quantitative estimates are intended to provide useful insights and
illustrations of the potential order of magnitude of impact in Wales. On the basis of
these findings, the option of more detailed empirical research (including micro-level
primary and survey research) into particular areas can be considered.

Summary of key findings

A2.1.15 A summary of the quantitative estimates derived from the case studies is shown in the
table below. These figures summarise our central case estimates.

BBW English Final Version v2.doc 75


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Summary of Quantitative Case Study Estimates, central case (£m, per annum)

Policy area Estimated Attributed to Attributed Realised or Private or


impact of Broadband to BBW potential public
ICT (£m) (£m) (£m) benefit benefit
Economic development 24 24 7.1 Realised Private
Transport 17 5.1 2.0 Realised Private
Environment 0.4 0.1 0.05 Realised Public
Countryside 10 4.0 1.2 Potential Private
Training 10 4.0 1.2 Potential Public
Education 13.5 4.1 2.0 Realised Private
Communities 1 0.5 0.2 Potential Public
Housing 7 3.5 1.1 Potential Public
Local Government 24 12.0 6.0 Potential Public
Public Services 100 50.0 25.0 Potential Public
Culture 2 0.8 0.2 Potential Public
Health and social care 40 20.0 4.0 Potential Public
Total 249 128 50

A2.1.16 Higher and lower case assumptions were applied to the BBW attribution in three of the
case studies (namely Economic Development, Communities and Housing). These
produce a variance of plus or minus £3m around our £50m p.a. central case estimate
for the aggregate BBW benefit relating to the case study areas. The table above uses
central case estimates.

A2.1.17 Key points to note about the summary findings are:

• The benefits covered by the case studies examined only a selection of the totality of
benefits arising from the accelerated take-up of broadband as a result of the BBW
Programme.
• On an indicative basis, these case studies identify actual and potential benefits from
the deployment of broadband-enabled applications of around £250 million p.a. Of
this total, £128 million p.a. is estimated to be attributable to broadband, and £50
million p.a. is the share of the aggregate benefit attributed to BBW.
• If the benefit accrues to the individual (as in telecommuting), it is shown in the table as
a private benefit. If the benefit accrues to third parties or to the state (in terms of cost
savings or help in meeting policy targets), it is shown as a public benefit. If we look
just at the public benefits, the estimated annual benefit attributed to broadband sums
to £91million p.a. of which BBW is attributed £38 million p.a.
• Most of the identified case study benefits fall into the “potential” category, rather than
“realised”. This reflects how many of the predicted benefits from broadband are yet to
be fully realised. The balance between already-realised and yet-to-be-realised shares
varies by case study area. The probability of the potential being realised in time is
seen as very high but the timing is uncertain.

BBW English Final Version v2.doc 76


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.2 CASE STUDY A: ECONOMIC DEVELOPMENT

Introduction

A2.2.1 This case study looks at the potential impact of broadband on jobs in Wales.

A2.2.2 The Welsh economy has been undergoing an extended period of change, diversifying
from an economy dominated by heavy industries into a broader mix of manufacturing and
services. This restructuring requires a high rate of job creation to offset the job losses.
Ongoing job losses can be expected in a number of key sectors in long term decline,
including manufacturing, agriculture, hunting, forestry and fishing.

A2.2.3 “A Winning Wales”, the Welsh Assembly’s 2001 economic development strategy,
presented a target of raising total employment by 135,000 by 2010. The target was later
increased to 175,000. Against this background, the potential of broadband to assist and
stimulate job creation in Wales is clearly of great interest.

Causal Links

A2.2.4 There are a variety of potential links from broadband investment through to job creation.

• Investment in broadband can lead to job growth in those sectors manufacturing the
relevant equipment, and this will lead to further multiplier effects in the rest of the
economy.36 This probably does not apply to a strong degree in Wales.
• Investment in broadband can improve productivity across the economy. The
mechanisms can be via more rapid diffusion of knowledge and innovation; and the
adoption of new, more efficient business processes. The productivity improvement will
safeguard jobs in a competitive environment. If it leads to an increase in sales and
output above the increase in productivity, it will lead to new jobs.
• Investment in broadband can stimulate the growth of new sectors, or a rebalancing of
the economy across the existing sectors. If the new sectors are high-productivity and
labour-intensive, there will be growth in new, high paid jobs. In particular, it is hoped
that broadband investment will stimulate the growth of high-value, knowledge-based
businesses and jobs.

Appraisal of recent trends

A2.2.5 In this context, we look at some available economic indicators to see if there is evidence
of growth in knowledge-based employment, activity and innovation in Wales, under the
stimulus of the wider availability of broadband.

Employment flows

• Since 2001, net annual growth in employment in Wales has been running at around
20,000 people per year.37

36
See for example Criterion Economics “the Effects of Ubiquitous Broadband Adoption on Investment,
Jobs and the US Economy” September 2003.
37
“Wales: A Vibrant Economy”, November 2005

BBW English Final Version v2.doc 77


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

• Over this period, there have been large increases in employment in public
administration, education and health; financial intermediation and business services;
distribution, hotels and restaurants; and a big decline in manufacturing.

Business Enterprise R&D expenditure (BERD)

• Over the medium term, BERD in Wales has been increasing. Between 1993 and 2004,
BERD in Wales increased by 56% in real terms (or by an average of 4% per year).38
But Wales starts from a low base level of BERD compared to the UK average.39
• Recent trends have been volatile. BERD in Wales rose in 2003, but dropped by 15%
in 2004.

Product and Process Innovation

• Welsh businesses marginally outperform the UK average for product and process
innovation.
• For example, 44% of businesses with employees reported introducing new products
and services in 2004/05, compared to the UK average of 35%.40

UK Competitiveness Index / Proportion of Knowledge-based businesses

• A composite measure of competitiveness across UK Regions shows Wales lagging in


11th position out of 12 in 2004. This is the same relative position as Wales occupied
in 1997. 41 The competitiveness measure takes into account R&D expenditure,
business start-ups, educational attainment, GVA, employment and proportion of
knowledge-based businesses. Welsh competitiveness is shown to have improved
materially from 1997, but a similar trend is seen in many other regions, and so Wales’
relative UK ranking is unchanged.
• The report shows the proportion of knowledge-based businesses in Wales at 14.1% in
2003, markedly up from 11.9% in 1997. But this puts Wales in last place in the UK.
As with the composite index, many other regions have seen similar growth, meaning
that relative rankings have not changed much over the period.

A2.2.6 Overall, the evidence is patchy but it is clear that employment growth has been strong,
that restructuring of the economy is under way, and that there has been growth in
knowledge-based sectors - even if there has not been a pervasive shift in this direction.
The promotion of knowledge based industries may need an extended period of time to
work. Research indicates that knowledge based firms are attracted by infrastructure,
strength of the science base, skilled labour and industry specialisation (agglomeration
economies). These will take time to build and deepen in Wales.

38
Statistics for Wales, Research and Development Expenditure. 2004
39
“Innovation in the Regions and Devolved Administrations: A Review of the Literature”, Frenz and
Oughton, June 2005
40
Small Business Service “Annual Survey of Small Businesses: Wales 2004/05”, 2005
41
“Competitiveness Index: The Changing State of the Nation 1997-2005” Robert Huggins Associates
2005

BBW English Final Version v2.doc 78


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Quantitative Assessment

A2.2.7 It seems reasonable to ascribe a part of the growth in net employment in Wales in recent
years to broadband. Given that it is still early days in the shift to knowledge based
employment, a relatively modest attribution seems plausible.

A2.2.8 A recent US study found that broadband added over 1% to the employment growth rate
in a typical community.42 This impact was found by comparing differential employment
growth rates across individual towns (some of whom invested in broadband infrastructure
and some of whom did not), and correcting for other structural factors. It is arguable that
the same (1%) level of impact cannot be expected for country-level data, because there
will be no comparable sharp contrast between countries having broadband and those
without it. Nonetheless the study is very useful in setting a likely upper limit for
broadband’s impact on employment. To get a reasonably conservative estimate of the
broadband effect in Wales, we assume that broadband has added 0.1% to the net
employment growth rate that would have otherwise occurred since 2001. This
assumption implies that roughly 5% of the net job creation, or 1,000 jobs per annum, are
attributable to broadband.

A2.2.9 We value each of these jobs at the current average wage for jobs in Wales. In 2005, full-
time average gross weekly earnings in Wales stood at £454.4, equivalent to £23.6k over
a year.43 Therefore the annual benefit from 1,000 additional jobs is £23.6 million.

Attribution of benefits

A2.2.10 How much of this benefit should be attributed to broadband? Since the empirical
evidence relates precisely to the impact of broadband, we assume that 100% of the
estimated employment benefit is attributable to broadband. The additional jobs are
those stimulated by broadband itself. This implies an estimated benefit from
broadband investment of £24m pa.

A2.2.11 How much of this broadband benefit should be attributed to the BBW Programme?
Business users have been one of the key focus areas for the BBW Programme. BBW
projects aimed at the business community include the “Try before you buy” scheme,
the Broadband Support scheme, and FibreSpeed. However, we have not estimated
specifically what business take-up would have been without BBW, and therefore we
use a range of 40-20% for the attribution to BBW. This equates to the full width of our
counterfactual estimate. Under a 30% central case assumption, the implied benefit
attributable to BBW is £7m pa, with a higher case estimate of £9.4m pa and a lower
case estimate of £4.7m pa.

42
Lehr, Osorio, Gillett “Measuring Broadband’s Economic Impact”, MiT, 2005
43
Statistics for Wales, “Annual Survey of Hours and Earnings, 2005” SB 3/2006

BBW English Final Version v2.doc 79


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.3 CASE STUDY B: TRANSPORT

Introduction

A2.3.1 This case study looks at the impact of broadband in promoting teleworking, reducing
commuting and thereby leading to saved time.

A2.3.2 Broadband will contribute to transport objectives in other ways as well. The benefit to
teleworkers includes reduced vehicle operating costs. Reduced commuting will also
reduce congestion and thereby save time for other road users. Broadband will improve
business logistics and inventory and vehicle control, and thereby reduce freight traffic.
This case study looks at only one aspect of the causal chain from broadband to transport
objectives.

Travel substitution and time benefits

A2.3.3 The key causal link between broadband and saved time is that of travel substitution. For
some workers, broadband access to their office systems substitutes for physical
presence at the workplace and enables these people to work from home for at least
some of the time. This will result in a private benefit of saved time.

A2.3.4 There are some potential offsets to these time savings. Those telecommuting may make
some additional trips (eg to the shops or for social purposes) that they would not
otherwise have made. However, this does not diminish the value of saved time from
teleworking; it simply reflects a choice as to how the saved time is spent. Similarly, it may
be that an individual uses the saved time to relocate to a more distant location from work;
but this still represents a benefit to the individual and a choice as to how that benefit is
utilised.

Definition and extent of teleworking

A2.3.5 Data on the extent of teleworking is limited. This is in part due to the different types of
homeworking, only some of which can be classified as teleworking and are impacted by
broadband. Data often bundles together the following categories of homeworkers:

• those who work predominantly or for more than 3 days per week from home, using
ICT to communicate with their base office;
• those who frequently work from home (at least 1 day per week), using ICT to
communicate with their base office;
• those who work occasionally from home, using ICT to communicate with their base
office;
• mobile teleworkers or those who are predominantly “on the road”, using ICT to
communicate with a home office or data centre;
• self-employed home workers, regularly using ICT (including SoHo);
• traditional home workers, who do not use ICT.

A2.3.6 A related data complication is limited information on the number of occasions that
teleworkers work from home and the number of times that they commute to their office.

BBW English Final Version v2.doc 80


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.3.7 In the face of data limitations, we adopt a pragmatic approach, using the most relevant
findings available from a variety of studies.

Estimate of the value of saved time

A2.3.8 The value of saved time from increased teleworking can be calculated via the following
steps:

Value of saved time per annum = Total number of teleworkers in Wales *


Average number of days per year teleworking *
Average time spent commuting per day *
Average value of time

Total number of teleworkers in Wales

A2.3.9 Welsh Assembly data shows that 9.7% of the working population, or 115,000 people,
“usually or mainly work from home”.44 This data was derived from the 2001 census of
population and so by now will probably have grown. However, it includes all forms of
home worker, including those who work at home in all situations (such as those who run
a child care service from their home). So it goes wider than teleworkers.

A2.3.10 Another key data source is a survey undertaken for the EU by SIBIS in 2002/03. This
showed that at that time 2.5% of the UK employed population teleworks from home at
least one day/week, and a further 9% in the UK telework on an occasional or
supplementary basis.

A2.3.11 Taking into account these and other data points, a reasonable assumption is that
around 5% of the current Welsh population in employment (1.328 million) telework from
home on a regular basis and would otherwise commute to an office elsewhere. This
estimate is assumed to exclude SoHo workers, traditional homeworkers who would not
otherwise commute, mobile teleworkers, and those who telework only very occasionally.
In the higher estimates of the extent of teleworking, these categories typically account
for a large share of the total. It focuses on those teleworkers whose behaviour directly
impacts travel substitution. It equates to around 66,400 people.

Average number of days per person per year teleworking

A2.3.12 Studies suggest an average of 1.5 teleworking days per person per week. 45 We
assume this figure is appropriate for the 5% of the Welsh population deemed to
telecommute. It equates to 6 teleworking days per month or around 70 teleworking
days per year (taking into account a minor adjustment for holidays).

44
Welsh Transport Statistics 2004, Personal Travel, 6.16 travel to work and working from home
45
See “The Impact of Information and Communications Technologies on Travel and Freight” HOP
Associates 2002

BBW English Final Version v2.doc 81


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Average time spent commuting per day

A2.3.13 Data shows an average time taken to travel to work in Wales of around 20 minutes.46
Assuming that this figure applies to the average teleworker in Wales, the average time
that would otherwise be spent commuting is 40 minutes per day.

Average value of time

A2.3.14 The Department for Transport issues guidance as to the appropriate values to use for
saved commuting time in transport studies.47 The values are based on research into
willingness to pay, as derived for instance when commuters have a choice between a
cheaper, slower journey and a more expensive one. Willingness to pay will vary
considerably depending on such factors as the income of the individual traveller, the
value and urgency of the journey, and the comfort and attractiveness of the journey
itself. Taking the Department’s recommended figure for the perceived value of
commuting time, and uplifting to bring it to 2006 values, gives a value of £5.47 per
person per hour.

A2.3.15 These figures produce the following indicative findings:

• Teleworking saves around 3.1 million hours for Welsh teleworkers over the course of
a year.
• Teleworking has a total aggregate perceived value to these people of £17m.
• The average individual Welsh teleworker saves 47 hours of travel time over a year,
with an average value to the individual of £255.

Attribution of benefits

A2.3.16 How much of this benefit should be attributed to broadband? Our estimate of the
current magnitude of teleworkers has excluded those for whom ICT is not a
contributory factor. Although broadband improves the quality of teleworking, at the
current time it is not a wholly necessary condition. Whilst It will become increasingly
cumbersome to access corporate data via narrowband, it is an option for teleworkers at
the moment. On this basis, we attribute 30% of the value of saved time to broadband,
or £5m pa. We would expect this figure to rise over time, as teleworking grows and as
the appropriate broadband attribution factor rises.

A2.3.17 How much of this broadband benefit should be attributed to the BBW Programme?
Given that the benefit estimate relates to the current level of broadband take-up, we
attribute 40% of the broadband benefit of saved time to BBW. The 40% factor is the
extent to which the BBW Programme is deemed to have increased the take-up of
broadband in the near term. A variety of BBW projects will have contributed to
achieving this increased take-up, including RIBS, marketing and demand stimulation,
and the wider impact on the community of promoting broadband availability at libraries,

46
Welsh Transport Statistics 2004, Personal Travel, Table 6.9
47
Department for Transport, Transport Analysis Guidance, Value of Time and Operating Costs,
December 2004

BBW English Final Version v2.doc 82


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

schools, learning centres, and the workplace. The estimated share of the benefit
attributable to BBW equates to £2m pa.

BBW English Final Version v2.doc 83


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.4 CASE STUDY C. ENVIRONMENT AND PLANNING

Introduction

A2.4.1 This case study looks at the potential impact of broadband on the environment. It
examines the impact of teleworking on reduced travel and thereby on reduced emissions
and pollution; and the quantitative benefit attributable to this effect. This is a type of
indirect benefit in that it accrues to the community at large, rather than privately to the
individual teleworker or purchaser of broadband services.

A2.4.2 The total impact of broadband on emissions is wider than that shown in this case study,
in that there are various other causal links and offsets. For instance,

• broadband contributes to increased home-shopping, which will tend to reduce


shopping-related travel and emissions (offset by the additional delivery traffic); and
• homeworking will increase home power and heating consumption (offset by savings
on these costs that would otherwise be incurred in offices).

A2.4.3 This case study looks at only one aspect of the causal chain from broadband to
environmental objectives.

Value of reduced emissions

A2.4.4 The value of reduced CO2 emissions can be calculated via the following steps:

Value of reduced CO2 emissions Total number of teleworkers in Wales *


per annum = Number of days per year teleworking *
Percent for whom teleworking avoids a car journey *
Average commuting miles per day *
Average CO2 emissions per mile *
Market value of reduced CO2 emissions

• Total number of teleworkers in Wales: This is estimated to be 66,400. See the


Transport case study for its derivation.
• Number of days per person per year teleworking: This is estimated to be 70. See the
Transport case study for its derivation.
• Percent for whom teleworking avoids a car journey: Welsh personal travel data show
that 82% of people normally use a car or van to travel to work. The bulk of the
remainder walks or goes by bus. It is probably the case that teleworkers typically fall
into the car category but there will be some who would otherwise walk, use a bus, or
share a car - i.e. for whom teleworking does not result in a reduction in vehicle
mileage. Given that 82% of the overall Welsh population drive to work, we assume
that the same figure applies to the telecommuting population.
• Average commuting miles per day: Welsh transport data shows the average length of
“commuting and business” trips in Wales as 10.9 miles.48 A commute to and from

48
Welsh Transport Statistics 2004; Personal travel, table 6.2. Data drawn from the National Travel
Survey.

BBW English Final Version v2.doc 84


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

work represents two trips. Assuming that commuting trips are roughly of the same
length as the average “commuting and business trip”, this indicates an average
commuting distance of 22 miles per day. Some studies show that teleworkers have,
on average, longer commute trips than commuters in general. But in the absence of
other evidence, we assume that the 22 miles per day figure also applies to
teleworkers in Wales.
• Average CO2 emissions per mile: Standard average conversion factors for car
mileage in the UK shows that 10,000 miles travelled generates around 3 tonnes of
CO2.
• Market value of reduced CO2 emissions: In January 2006, the traded price of CO2
(in the European market for emissions allowances) was around €24 / tonne of CO2.
Using an average €/£ exchange rate of 1.5, this equates to £16/tonne.

A2.4.5 These figures produce the following indicative findings:

• Teleworking in Wales avoids some 84 million vehicle miles that would otherwise be
undertaken in the course of a year.
• It avoids around 25,000 tonnes of CO2 emissions, with a potential market value of a
little over £400,000 per annum.
• The average Welsh telecommuter who would otherwise drive avoids around £7 worth
of CO2 emissions per year.

A2.4.6 Currently, the Welsh transport sector produces around 6.3 million tonnes of CO2
emissions p.a. 49 The estimated emissions saved by telecommuting represent some
0.4% of this total.

A2.4.7 There are a variety of potential biases in this calculation. The following two are most
important, but to some extent will offset each other.

• Telecommuters will tend, on average, to have a longer journey to work than the
average person, because the length of journey to work is a key influencing factor in
some people’s decision to become a teleworker. This will tend to increase the figure
for average commuting miles per day.
• There may be offsets to the reduction in miles travelled via the extent to which
telecommuting generates new traffic flows. There is some evidence that this effect is
weak, but it will not be zero.50 This will tend to reduce the net saving in miles per day.

Attribution of benefits

A2.4.8 How much of this benefit should be attributed to broadband? It is appropriate to use the
same benefit attribution shares in this case study as applied in the Transport case study,
because they both depend on the factors driving growth in teleworking. Therefore we
attribute 30% of the environmental benefit to broadband, or £0.1m pa.

49
Key Environment Statistics for Wales 2006; latest data relates to 2003
50
In a BT case study, 7 out of 43 teleworking respondents reported increased leisure journeys as a
consequence of home working, and the increased mileage was low in relation to the commuting savings.

BBW English Final Version v2.doc 85


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.4.9 How much of this broadband benefit should be attributed to the BBW Programme? Again,
the same factor as applied in the Transport case study is appropriate, and therefore we
attribute 40% of the broadband benefit to BBW, or £50,000 pa.

BBW English Final Version v2.doc 86


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.5 CASE STUDY D. COUNTRYSIDE

Introduction

A2.5.1 This case study looks at the potential impact of broadband on the agricultural sector.

A2.5.2 Agriculture is a relatively important sector for the Welsh economy, especially in terms of
employment. Agriculture accounts for around 57,500 full-time and part-time positions in
Wales.51 Average farm size is small compared to the rest of the UK and dominated by
family run farm enterprises. Because of the nature of the land, livestock production
predominates over arable farming.

Value of ICT and broadband

A2.5.3 ICT / broadband can add value to the agricultural sector via a wide variety of e-
commerce type benefits:

• Ready access to business advice, improving farm management and outcomes.


• Ready access to training, improving skills and productivity.
• Quicker completion of regulatory and compliance requirements, including stock
control and cattle tracing.
• Ready access to grants.
• Use to purchase goods and services, saving time and achieving unit cost reductions.
• Use to rent equipment or join in other forms of co-operation, achieving benefits of
integration, reducing the need for asset ownership and saving on capital employed.
• Better information about market prices, leading to an improvement in achieved sales
prices.
• Potential to deepen quality and the Welsh farming brand and move from commodity to
more premium pricing.
• Access to weather information.
• Potential to help with developing new business opportunities, such as B&B and visitor
activities, via low cost/ high reach marketing.

A2.5.4 Another way of looking at the potential benefits is to note how ICT/ broadband can impact
the goals of the Rural Development Plan for Wales.52 ICT/broadband has a major role to
play in contributing to two key goals:

• improved competitiveness of farms, via upskilling, provision of advisory services,


better integration across farmers, and improved branding;
• improved quality of life and diversification of the rural economy, via assistance to
growing rural tourism and other micro business ventures, and the support provided to
village life.

51
Statistics for Wales “Farming Facts and Figures, Wales”, 2005
52
Draft “Rural Development Plan for Wales, 2007-2013. The Strategic Approach” Welsh Assembly
Government 2005

BBW English Final Version v2.doc 87


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.5.5 The potential contribution of ICT/broadband to the rural economy is reflected in a number
of initiatives, including Opportunity Wales (promoting the realisation of e-commerce
benefits to farms in parts of Wales) and the Farming Connect service in Wales (giving
farmers access to advisers either electronically or via contacting local facilitators).

A2.5.6 An important constraint on exploiting the broadband potential has been limitations in the
availability of broadband services in more remote rural areas, but this is becoming less
and less relevant as broadband availability becomes close to universal across Wales.

Quantitative Assessment

A2.5.7 To illustrate the potential financial impact of ICT/broadband, we apply a series of


plausible assumptions about the potential impact to the economics of the average
livestock farm business in Wales53. Given the commodity nature of livestock, we assume
that better farming practices, e-based buying and selling, and branding efforts can
increase realised output and diminish input costs by 0.5 percentage points; but that it
can raise non-farming income from on-the-farm activities by 5%; and that these benefits
can be captured by around 50% of farms. These assumptions are applied in the
following table.

Potential impact of ICT/ broadband on livestock farm incomes in Wales, (£m, per
annum)

Base Data on annual Farm Incomes (£'000)


Farm output 93.4
Input costs 77.3
Net farm income 16.1
Non-farming income (on the farm) 4.1

Assumed Potential from broadband


Increase in value of farm output (%) 0.5
Reduction in input costs (%) 0.5
Increase in non-farming income (%) 5

Net annual financial benefit (£'000)


Assumed increase in value of farm output 0.5
Assumed reduction in input costs 0.4
Assumed increase in non-farm income 0.2
Sum of benefits 1.1

Aggregation across Wales


Total number of active livestock/ mixed holdings in Wales 18,290
Percent achieving the benefit (%) 50
Aggregate financial benefit (£'000) 9,680

53
See Statistics for Wales “Estimates of Farm Incomes in Wales” SDR16/2005 and “Farming Facts and
Figures, Wales” 2005

BBW English Final Version v2.doc 88


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.5.8 These assumptions suggest an indicative figure of around £10m per annum for the
potential financial benefit to Welsh livestock farmers from exploiting the potential of
ICT/broadband.

Attribution of benefits

A2.5.9 How much of this potential benefit should be attributed to broadband? Broadband is a
powerful enabler of getting the relevant information and advisory services to farmers, but
it is not the only communication channel. On the other hand, the identified benefits are
those expected over the medium term, by when broadband will have become
increasingly necessary. We therefore attribute 40% of the potential benefit to broadband,
or £4m p.a.

A2.5.10 How much of this broadband benefit should be attributed to the BBW Programme?
BBW has focused on getting more widespread availability and take-up of broadband in
rural communities. The key project has been RIBS, which has supported the
enablement of unviable exchanges and broadband blackspot areas. Without this
intervention, broadband availability would be much lower in rural areas. On the other
hand, the profile for benefits realization in the farming sector is over the medium term.
We therefore attribute 30% of the potential broadband benefit to BBW, or £1.2m p.a.

BBW English Final Version v2.doc 89


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.6 CASE STUDY E: TRAINING

Introduction
A2.6.1 This case study looks at the potential impact of broadband on adult training, focusing on
its potential to generate cost savings.
Value of broadband in training
A2.6.2 Broadband is a key enabler for e-learning. The provision of adult training is one of the
key policy levers in Welsh Assembly’s plans for economic growth, as well as personal
development in Wales.
A2.6.3 It is not realistic to presume that all training can be provided via the internet. Different
methods of learning suit different people and delivery is likely to be more effective when
customised to the needs of the individual. However, there remains vast potential to
develop e-learning further in meeting the needs of adult learners in Wales. There are a
variety of reasons why e-learning can be seen as a suitable channel for a broad range of
training provision.
• Content of training. The 2005 “Future Skills Wales” Survey shows where employers
perceive the greatest skill gaps. Key skill deficiencies were seen in areas such as
problem solving, customer handling skills, communication skills and team working
skills.54 These are generic skills which are capable of being taught on a distance-
learning or e-learning basis.
• Receptivity to e-learning: Respondents to the Survey also show a reasonable level
of interest in, and awareness of, e-learning training. The Future Skills Survey 2003
found that 33% of respondents identified with the internet and CD ROM packages as
potential methods for learning something new. However, this interest was
concentrated among those respondents with relatively high existing skill levels.
• Raising quality standards. E-learning may help to address the problem of too much
poor quality training provision. An element of centralised monitoring and control over
content would make it easier to raise and enforce standards of e-learning compared
to traditional channels.
• Widening participation. E-learning provides opportunities to widen participation in
adult training. Flexibility in timing and location of delivery and cost-efficiency
overcome some of the key barriers to training take-up.
Quantitative Assessment

A2.6.4 Upto 1st April 2006, Education and Learning Wales (ELWa) was the body charged with
encouraging and securing the provision of post-16 education and training in Wales,
except higher education. (From 1st April, ELWa was merged with the Assembly).
Expenditure on Programme costs in 2005-06 was planned at £523 million, with this figure
set to grow in the following years.55 This expenditure supports around 350,000 learners
in Wales. Most of the funds go towards supporting further education institutions, school
sixth forms and work based learning.

54
Future Skills Wales, Sector Skills Survey December 2005
55
ELWa Business Plan “Making Learning Work for Wales” 2005-08

BBW English Final Version v2.doc 90


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.6.5 In 2003, ELWa developed a strategy for e-learning. Within this framework, a wide range
of developmental initiatives are being pursued.56 Nonetheless, only a small part of total
programme spend currently relates to e-learning.
A2.6.6 What is the potential for greater use of ICT, broadband and e-learning to achieve
efficiencies in delivering this programme of training?
• A reasonably ambitious target for the roll-out of e-learning could lead to around 10%
of current adult learning being provided through this channel in the medium term.
This figure is not higher because of the continued need for face-to-face tuition to
predominate for most client groups; and because of the emergent finding from
research that e-learning is most effective when incorporated and blended with other
delivery methods.
• The potential cost saving of e-learning depends on a number of factors, including the
development costs for creating the content, the number of people to whom the
content is delivered, and the extent of on-going tutor support. Recent research
suggests that earlier expectations of very major cost reductions have not been fulfilled,
in part because trainers and tutors are now seen as essential to support the e-
learning components. 57 However, wider adoption of e-learning would provide
opportunities for economies of scale which are currently not available. There are
courses where extensive face-to-face tutor time is not a prerequisite. And there is
considerable scope to achieve savings in the on-line administration services (e.g.
enrolment, billing, information and advice). 58 We therefore assume that e-learning
can yield a 20% gain in efficiency when it replaces traditional tuition methods.
A2.6.7 Application of these assumptions to ELWa’s programme expenditure suggests the
potential for ICT and e-learning to save around £10m pa in the provision of post-16
learning and training in Wales. (This estimate is based on annual programme spend,
multiplied by the percentage that could be delivered via e-learning methods, multiplied by
the percentage efficiency saving for this type of learning. That is 523 * 0.1 * 0.2.)
Attribution of benefits
A2.6.8 How much of this potential benefit should be attributed to broadband? Whilst Broadband
is a powerful enabler of e-learning, CD-ROMs provide an alternative electronic format for
content. However, the identified benefits are those expected over the medium term, by
when broadband will have become increasingly necessary. We therefore attribute 40% of
the potential benefit to broadband, or £4m pa.

A2.6.9 How much of this broadband benefit should be attributed to the BBW Programme? BBW
projects have specifically targeted the education sector. Relevant BBW projects include
the Lifelong Learning Network, Local Access Circuits, and Public Sector Broadband
Aggregation. However, given the medium term profile for benefits realization, we attribute
30% of the broadband benefit to BBW, or £1.2m pa.

56
See speech by Jane Davidson, Minister for Education and Lifelong Learning, National Assembly for
Wales, to Dysg e-learning conference June 2004 for an overview of e-learning initiatives.
57
Becta “Research into the use of ICT and e-learning for the work-based learning in the skills sector”
November 2004
58
Greville Rumble “E-education – whose benefits, whose costs?” (2001)

BBW English Final Version v2.doc 91


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.7 CASE STUDY F: EDUCATION

Introduction

A2.7.1 This case study looks at the potential impact of broadband on education. It focuses on
the impact on GCSE results and the potential financial benefits.

Causal links

A2.7.2 There are various routes by which ICT and broadband can improve educational results:

• Use of broadband by pupils to search for information on the internet.


• Improved access for pupils to research studies and other educational texts.
• Improved ability to map and manipulate scientific and mathematical data.
• Use of interactive educational software (available either over the internet or in another
form) to add variety to lessons and to increase pupil engagement and motivation.
• Improved access for teachers to teaching aids.
• Streamline the running of schools, and thereby free up administrative time for
teaching activity.

A2.7.3 The above provides good reasons why ICT/ broadband could have a positive impact on
educational attainment. Actual impact will of course depend critically on the skill in actual
deployment in schools, gaining experience and insights into how to extract the most
benefit and what teaching methods are displaced by its introduction. The beneficial
effects may not be instantaneous but instead spread over time.

A2.7.4 A variety of studies have tried to measure the impact of ICT and broadband in education.

• An influential BECTA/DfES study (the “ImpaCT2 study”) involving 60 schools in


England found a positive relationship between ICT use and GCSE achievement.59
The impact is spread unevenly across subjects.
• Other research challenges the robustness of some of the positive empirical findings
because of imperfect control for omitted variables which are correlated with ICT
investment; but a recent reappraisal of the evidence still shows evidence of a
beneficial impact for ICT investment.60
• There are a range of studies looking at the labour market returns to qualifications. It
is possible to apply these returns to the improved educational results attributed to ICT
to derive a lifetime financial benefit. This approach was adopted by PwC in its study
of Broadband connectivity in Europe.61
Quantitative assessment of impact in Wales

A2.7.5 For this illustrative estimation, we adopt the following approach:

59
BECTA/DfES “ImpaCT2: the impact of ICT on pupil learning and attainment”, March 2003
60
“New Technology in Schools: is there a pay-off?” Machin, McNally and Silva, January 2006, Centre
for the Economics of Education, LSE.
61
PwC “Technical assistance in bridging the digital divide: a cost benefit analysis for broadband
connectivity in Europe” October 2004

BBW English Final Version v2.doc 92


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

• We assume that the ImpaCT2 findings regarding the impact of ICT investment on
GCSE results are valid and applicable to Wales.
• We apply the predicted improvements in performance by subject to the distribution of
GCSE results achieved in Wales in 2004-05. We calculate how this would impact the
Key Performance Indicator of pupils achieving “5 or more GCSEs grade A*-C or
vocational equivalent”.
• We measure the financial benefit by looking at the impact on lifetime earnings, as
derived from the gap between earnings for this level of educational attainment and the
preceding level (NVQ level 2).

A2.7.6 Key stages of the calculation work as follows:

The impact of ICT on GCSE results.

A2.7.7 ImpaCT2 found a statistically significant positive association between ICT and GCSE
results in the following subjects.62

• GCSE science: 0.56 of a grade;


• GCSE design and technology - 0.41 of a grade;
• GCSE modern foreign languages - 0.82 of a grade.

A2.7.8 The positive impact is apparent at each of the three pupil ability levels (high, average, low)
that the study investigated.

Application to the distribution of GCSE results in Wales

A2.7.9 Applying these improvements in performance to the 2004/05 distribution of GCSE results
in Wales63 leads to an increase in 3% in the number of individual GCSE results falling in
the A*-C range. The aggregate of individual entries achieving this result rises from
60.7% to 63.8%.

A2.7.10 In 2004-05, there were 38,495 pupils in Wales in the final year of compulsory education
of whom 52.2% “achieved five or more GCSE’s grade A*-C or vocational equivalent”.
We assume that the 3% increase in individual scores raises the total number “achieving
five or more GCSE’s grade A*-C” by 1.5%64, which equates to an extra 577 entering
this grouping.

Impact on lifetime earnings

A2.7.11 Educational attainment is linked to lifetime earnings via the expectation of higher
earnings and less unemployment. DfES data from spring 2005 shows an increase in

62
The study also found indications of a positive association in other subjects, but the effects were not
statistically significant and therefore the potential benefits have been excluded from this estimation.
63
Statistics for Wales “GCSE/GNVQ and GCE A,AS and AVCE results in Wales, 2004/05”, November
2005, Tables 1 and 3
64
The impact on this metric will be less than the impact on the total number of passes in the range of
A*-C because some of the individuals affected will already be included in the 52.5% group; and some of
the individuals affected will nonetheless still not have 5 or more grades at this level.

BBW English Final Version v2.doc 93


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

average gross weekly pay of £34 between those with a highest qualification of NVQ
“level 2” (which is equivalent to 5 good GCSEs) and those “below level 2”. Using
reasonable assumptions, including the expected unemployment rate, this equates to
lifetime NPV incremental earnings of around £23,300 per person; or £13.5 million when
aggregated across 577 people.

A2.7.12 This approach thus yields an indicative estimate of £13.5 million per year for the
financial benefit of greater ICT use in schools in Wales.

A2.7.13 Note that:

• This estimate refers only to the current level of benefit, measured at a single point of
assessment (namely GCSE results). A fuller estimate needs to take into account the
impact on other levels of educational attainment.
• The impact is likely to grow as teachers become more experienced at using ICT in the
classroom and as educational software improves.
• The estimate looks only at benefits. Total costs for ICT provision at schools will
include: hardware, software licenses, applications, server costs, connectivity, teacher
training (direct cost and opportunity cost) and technical support.

Attribution of benefits

A2.7.14 How much of this benefit should be attributed to broadband? The empirical research
relates to the use of ICT in the classroom, and not specifically to broadband.
Broadband is not wholly necessary to achieving ICT benefits in the classroom. And the
identified benefits are those that are currently being realised. For these reasons, we
attribute 30% of the benefit to broadband, or £4m pa. However, we would expect this
figure to grow over time.

A2.7.15 How much of this broadband benefit should be attributed to the BBW Programme?
BBW projects have specifically targeted broadband in schools. Relevant BBW projects
include Electronic Whiteboards, the Lifelong Learning Network, Local Access Circuits,
Public Sector Broadband Aggregation, and the funding of ICT Advisors. Secondly, the
identified improvement in educational performance relates to the current time. We
therefore attribute 50% of the broadband benefit to BBW, or £2m pa.

BBW English Final Version v2.doc 94


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.8 CASE STUDY G: COMMUNITIES

Introduction

A2.8.1 This case study looks at the impact of broadband on the Social Justice and Regeneration
policy area. We look at broadband’s role in supporting the Communities First policy
initiative.

Impact of ICT and broadband

A2.8.2 A recent study by the ODPM’s Social Exclusion Unit analysed the ways in which ICT can
support solutions to social exclusion65. Three main mechanisms were identified:

• Development of tailored local plans via the sharing of strategic information.


• Joining up services around the needs of the person.
• Inclusion of individuals within new personal, employment, and social networks.

A2.8.3 The Communities First initiative in Wales is an example of the first type of mechanism
above. ICT and broadband have facilitated the creation of tailored neighbourhood
renewal strategies built upon the expressed, bottom-up suggestions of local communities
themselves. The ODPM report regards the design of new bottom-up services, driven by
excluded people themselves as one of the major opportunities to combat social exclusion.

A2.8.4 The importance of access to good data, at the right level of neighbourhood detail, for the
design of effective renewal plans has been highlighted in recent research 66 . Among
other things, good local data enables better targeting of spend and a reduced need to
commission research and consultancy.

A2.8.5 A more theoretical perspective is provided by the economics of information. Imperfect


information lies at the heart of sub-optimal use of resources. Policy design based purely
on centrally held information runs the risk of very large allocative inefficiency, exemplified
by central planning decisions in command economies. More positively, ICT and
broadband, by reducing search costs and by allowing policy designers to make use of
dispersed information, can yield improvements in the allocation of society’s resources.

Communities First programme

A2.8.6 Communities First is a Welsh Assembly programme aimed at cutting poverty and helping
to improve the lives of people who live in the poorest areas. It is distinctive in that local
people themselves decide what is needed and are helped to make it happen.

A2.8.7 The 100 most deprived local areas, as identified by the "Welsh Index of Multiple
Deprivation", are eligible to draw down Communities First funding. The scope of projects
eligible for support is very wide. Local communities, working in partnerships including

65
ODPM “Inclusion through Innovation.: Tackling social exclusion through new technologies” November
2005
66
ODPM Research Report 18 “Data Sharing for Neighbourhood Renewal: Lessons from the North
West” November 2005

BBW English Final Version v2.doc 95


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

local authorities and voluntary organisations, develop local action plans and submit
proposals to a National Assembly Panel for assessment.

A2.8.8 Communities First aims to:

• get local people involved in improving their areas and their own prospects;
• bring in funding and support from a range of sources to make things happen;
• make sure improvements last;
• encourage flexibility, risk-taking and new ways of dealing with problems;
• involve everyone working together to identify and do something about their
community's problems.

A2.8.9 Communities First depends strongly on networking, partnership, and co-ordination across
a wide range of delivery agents. From an ICT perspective it relies very strongly on the
Communities@One project which is aimed at improving ICT take up and use.

Quantitative Assessment

A2.8.10 Latest information for the Communities First programme indicates that there are 137
Communities First Partnerships in existence, and funding of £131.1 million has been
allocated to support the implementation of the programme.67 Assuming that the spend
runs over the planned 10 year horizon, this equates to £13m per annum.

A2.8.11 We assume that the use of dispersed information and the involvement of local bodies
has enabled the better targeting of spend. We further assume that this informational
efficiency has the potential to increase the welfare value of spend by 10%. This would
produce an indicative benefit of around £1.3m per annum.

A2.8.12 In practice, it is likely that the bottom-up approach will involve some organisational
inefficiencies, which will in part offset the informational efficiency. Greater resources will
be needed to co-ordinate the actions of a wide range of interest groups involved in
deciding local action plans. For this reason, we reduce the potential benefit by a factor
of 30%. This results in an estimated benefit of around £1m pa.

Attribution of benefits

A2.8.13 How much of this potential benefit should be attributed to broadband? Broadband is
the key enabler of sharing information among dispersed groups. We therefore attribute
50% of the potential benefit to broadband, or £0.5m pa.

A2.8.14 How much of this broadband benefit should be attributed to the BBW Programme?
Given, the very wide range of groups and people involved in Communities First projects,
it is appropriate to use the 40-20% range for the attribution to BBW, (with 30% as the
central case). This range equates to the full width of our counterfactual estimate for the
impact of the BBW programme on broadband take-up. This yields an estimated benefit
from BBW of between £0.2m and £0.1m pa.

67
National Assembly for Wales, Social Justice and Regeneration Committee, Communities First Update,
8th December 2005

BBW English Final Version v2.doc 96


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.9 CASE STUDY H. HOUSING

Introduction

A2.9.1 This case study looks at the impact of broadband on meeting homelessness objectives
within the housing policy area.

A2.9.2 Welsh Housing Statistics show that 9,856 households were accepted as “eligible,
unintentionally homeless and in priority need” during 2004-05 and therefore requiring
accommodation. The number of households in this category has been growing since
1999. By the end of 1Q 2005, some 3,300 statutorily homeless households were in
temporary accommodation. 32% of this total were in hostels, refuges and bed and
breakfast.

A2.9.3 In November 2005, the Welsh Assembly Government published a National


Homelessness Strategy, 2006-08. The strategy emphasises prevention, partnership and
joint-working.

How broadband contributes

A2.9.4 At first sight, broadband has only a tenuous link with homelessness and finding
appropriate policy solutions. But Broadband can contribute to solutions to
homelessness in a variety of ways.

• Co-ordination of agencies. Providing assistance to the homeless involves co-


ordinating the actions of a range of central government, local authority, voluntary and
private bodies. Many different delivery partners are involved in providing help.
Ensuring that they work together effectively and cover all aspects of the required
solution is far from straight-forward. Potential gaps in service provision include lack of
referrals between organisations; poor links between housing, training, and
employment; and few links between training organisations.
A related aspect of homelessness is that it often results from a mix of problems and
resolution needs co-ordination across a range of areas - e.g. housing benefit, debt
advice, family mediation, substance misuse, and health.
Broadband makes these various forms of required co-ordination more effective and
cost-efficient than they would otherwise be. Broadband should result in more
effective partnership working and joined-up service delivery than would otherwise be
possible.
• Access to assistance services. Broadband is a valuable tool in ensuring
widespread awareness of, and access to, potential sources of assistance. For
instance, housing related search databases can help to relocate people under
potential threat of homelessness, and secure a viable solution, before the household
becomes statutorily homeless. This fits well with the Welsh policy emphasis on local
authorities enabling people, as early as possible, to find their own solutions to their
housing problems, very often in the private rented sector.68

68
See Welsh Assembly Government National Homelessness Strategy Action Plan 2006-2008,
paragraph 1.1.3

BBW English Final Version v2.doc 97


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

• Provision of Training. The provision of training is an important service for homeless


people. Education and training are important to those in temporary accommodation,
because it represents a viable route into employment and out of the lengthy queue for
permanent accommodation. It also can provide a renewed sense of self-worth and
self-confidence. A further advantage of ICT-based training is the flexibility in its
scheduling. Broadband provides an effective means of providing training on many
topics.
• Job-hunting. Jobs are one of the key routes away from homelessness - both for
those who have become homeless, and those who are at risk of becoming so.
Employment enables people to make their own housing arrangements. Facilitating
job-hunting is an important part of both preventative and curative homelessness
strategies. Many homeless people have good experience of employment and good
prospects for employability, if the right help and opportunities are available. “Business
Action on Homelessness” is part of the Business in the Community organisation and
brings together employers aiming to help homeless people back into work.
Broadband and internet-based job portals are important tools in job-hunting.

Quantitative assessment

A2.9.5 Homelessness is expensive for the state; and therefore any material contribution to its
reduction will have important financial benefits. The costs of homelessness are not
transparent, in part because it depends on the circumstances of the individual and the
details of their accommodation. Some published figures are:

• the cost of a bed space in a hostel or a shelter of £26,000 pa, and an additional
annual cost of welfare benefits and public sector services of £8,000.69
• weekly hostel costs of £313 per person, equivalent to an annual cost of around
£16,000.70

A2.9.6 These estimates are biased towards London; and various forms of temporary
accommodation are cheaper than hostels. For the purpose of this example, we assume
that annual costs in Wales for a homeless person is approximately £15,000. This is a
mix of benefits, accommodation costs, and support costs.

A2.9.7 Given the causal mechanisms outlined above, it is reasonable to assume that Broadband
has helped to reduce homelessness; and if fully exploited in Wales, its contribution could
be material.

A2.9.8 A plausible assumption for broadband’s potential is that it could reduce the homeless
total by 5% over the course of a year. This assumes that its potential to achieve effective
co-ordination, partnership working, training and job-hunting assistance is exploited
through the requisite process changes. If the 5% reduction applies in full to the
annualised cost of a homeless person, this equates to an annual saving of around £7
million.

69
See the launch of Crisis Changing Lives, www.crisis.org.uk
70
See “No room to move”, www.homeless.org.uk

BBW English Final Version v2.doc 98


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Attribution of benefits

A2.9.9 How much of this potential benefit should be attributed to broadband? Broadband is the
key enabler for improved partnership working. The benefit is due to be realised over the
medium term, by when broadband will become increasingly pervasive for sharing
information. We therefore attribute 50% of the potential benefit to broadband, which
equates to £3.5m pa.

A2.9.10 How much of this broadband benefit should be attributed to the BBW Programme?
Given that delivery agents for help to the homeless cover a very wide range of people
and organisations, it is appropriate to assume a 40-20% range for the attribution to
BBW, (with 30% as the central case). This range equates to the full width of our
counterfactual estimate for the impact of the BBW programme on broadband take-up.
This assumption yields an estimated benefit from BBW of between £1.4m and £0.6m
pa.,

BBW English Final Version v2.doc 99


07/09/2006
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

CASE STUDY I. LOCAL GOVERNMENT

Introduction

A2.10.1 This case study looks at the potential impact of broadband on the cost of providing local
government public services. In particular, it looks at the potential for shared service
facilities, enabled by broadband, to reduce local government administrative and support
costs.

A2.10.2 Broadband will contribute to local government objectives in other ways as well, for
instance by informing and engaging the public; and helping to change behaviour in line
with public policy objectives. This case study looks at only one aspect of the causal
chain from broadband to local government policy objectives.

Action to date

A2.10.3 Local government has been a priority area for the BBW Programme. The Welsh
Assembly Government procured and paid for a managed high speed core fibre ring
with links to all 22 local authorities in 2002. It has provided grant funding to individual
local authorities to help fund the costs of connecting schools, libraries and learning
centres.

A2.10.4 Initial action by local authorities has focused on meeting e-government commitments,
developing inter-active web-sites and improving electronic access to services – in other
words improving front-line access. Official guidance encouraged local authorities also
to look into the use of ICT to redesign back office functions and to share facilities
across different services and organisations.71 But a report by the Partnership Council
Secretariat in 2004 found that relatively little change had been made to back-office
processes, by that time.

A2.10.5 There is evidence that this is now changing and that the use of ICT to enable
collaboration and shared service provision across local government has become a
major priority.

• The Welsh Assembly’s policy for public sector reform “Making the Connections”
(October 2004) explicitly focuses on collaboration and sharing of back office functions
as the means by which local authorities in Wales can overcome the cost
disadvantages related to their relative small scale.
• “Value Wales” has been sent up to promote extensive collaboration in procurement.
• In July 2005, the First Minister for Wales launched the Beecham review to look into
the most significant opportunities for collaboration in local services delivery.

A2.10.6 Collaboration is now a very strong focus of attention and actions to achieve the
consequential cost-efficiencies can be expected over the coming years.

71
“Implementing Electronic Government (IEG) Statement Guidance” National Assembly for Wales,
October 2001

BBW English Final Version v2.doc 10


07/09/2006
0
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

How shared services can reduce costs

A2.10.7 Back office processes are typically fragmented across the local government sector.
Each service area may be responsible for an important range of processes (such as
procurement), and so there is duplication within a single local authority. Secondly each
local authority provides a full suite of centralised back office processes (such as finance,
HR, payroll), and so there is duplication across authorities. If a single entity can
provide the same process to a range of service areas and to a range of local authorities
(and other public sector bodies), significant cost savings can be achieved.

A2.10.8 Broadband is a critical element in the shared service approach. The range of services
brought within a shared services approach can include HR, finance, procurement,
payroll, Facilities Management, and the processing of transactions. Shared services
typically depend on the rapid transfer of large volumes of data from/to different service
area and the shared service centre; and different local authorities and the shared
service centre. The required collaboration and cost saving are effectively inconceivable
without broadband.

A2.10.9 Broadband is however only one part of the enabling technology and change. A shared
service approach will typically involve:

• Decisions about scope and participation


• Re-engineering of processes to enable best practice to be adopted
• Consequential redesign of roles, responsibilities and organisational structure
• Standardisation of processes across the participating entities
• Governance structures to enable change over time
• Investment in new ICT systems and software
• Change management to support the programme

A2.10.10 The opportunity presented by shared services is particularly strong in Wales because
of the relatively small scale of individual local authorities, compared to the UK average.
There is a chance to develop new concepts for shared services by pooling across
national and local government, the NHS and education. This will be challenging given
the need for process standardisation that underlies a shared service centre; but it
represents an exciting area for innovation.

BBW English Final Version v2.doc 10


07/09/2006
1
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Estimate of potential impact

Gross revenue expenditure by Welsh local government authorities


on "central and departmental support services", 2003-04

Service area £
thousand
Education 77,806
Personal social services 117,658
Police 147,165
Fire 22,532
Courts 613
Roads and transport 38,478
Housing 17,672
Council tax benefit 15,085
Libraries, culture, heritage 35,598
Environmental services 36,167
Planning and economic development 28,639
Central administration 66,050

Total 603,463
Source: Statistics for Wales, Welsh Local Government Statistics, 2005,
Appendix A

A2.10.11 Welsh local government data indicates that aggregate expenditure across the different
authorities on “central and departmental support services” is around £600m p.a. (see
table above). This figure covers the management, support costs and central support
recharges associated with each service area. 72 The £600m p.a. figure therefore
includes all the costs that could be subject to a shared service centre approach; but it
also includes the service-specific management costs which are not part of the shared
centre concept. 73 For indicative purposes, it is reasonable to assume that
approximately 20% of this total is attributable to HR, finance, procurement, payroll,
Facilities Management, and the processing of transactions.74 The exact figure will of
course vary between authorities and across services; and will depend on the exactly
which processes are deemed to fall within the scope of the shared facility. 20% is
assumed to be a reasonable figure in part because procurement and transactional
processing account for a significant proportion of local government staff time in key
service areas. This gives annual expenditure on shareable support services of
approximately £120m p.a. across local government in Wales.

72
“Notes for guidance for completing from RO3 (PSS), Council fund revenue account 2004-05” National
Assembly for Wales
73
Data clearly identifying the different types of support cost is typically not available, in part because of
CIPFA guidance that the true cost of services should include the allocation of overheads. Overhead costs
are typically allocated into the published cost of each service area.

74
The figure for Police services represents an outlier, and may not follow this argument. For other
service areas, the figure for central and departmental support services is in the region 10-20 % of total
spend.

BBW English Final Version v2.doc 10


07/09/2006
2
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.10.12 There have been a wealth of implementations of shared service facilities, and reported
operating cost savings typically fall into a range of 10% to 30% of the relevant cost
base. The cost savings arise from reduced headcount, reduced costs of IT
maintenance, and reduced real estate needs. Examples of case studies showing this
range of savings include:

• IDeA case study covering 5 councils in Australia, October 2005;


• AMR Research, June 2005 - case studies from Accenture;
• Welsh Assembly’s assessment of merger of WDA and ELWa, November 2004.

A2.10.13 This suggests a potential prize of around £12m - £36m per annum from the full roll out
of a shared service approach to back-office functions across the local government
sector in Wales (i.e. 10- 30% of £120m p.a.) This figure excludes any savings arising
out of improved procurement processes leading to reduced cost for purchased goods
and services. Achievement of the cost reduction would necessitate major process
change, investment in new systems, and change management. A mid-point estimate is
£24m p.a.

A2.10.14 This potential saving is still to be realised, although action is being planned. Using a
simple DCF model, we calculate the expected NPV benefit at £114m. This assumes
£24m for the annual cost saving, achieved in stages over 2008-10; once-off
implementation costs of £60m, incurred over 2007-09; a forecast period to 2020; and
a real discount rate of 7%.

Attribution of benefits

A2.10.15 How much of this potential benefit should be attributed to broadband? Broadband is a
necessary condition for shared service facilities. The recent rapid adoption of shared
service centres has been as a direct consequence of broadband’s functionality.
Therefore, we attribute 50% of the estimated annual potential benefit to broadband,
which equates to an estimated broadband benefit of £12m p.a.

A2.10.16 How much of this broadband benefit should be attributed to the BBW Programme? The
BBW Programme has directly facilitated investment in broadband by local authorities.
Relevant BBW projects include the Lifelong Learning Network, Local Access Circuits,
and Public Sector Broadband Aggregation. Also taking into account that action is
happening over a reasonably near term time horizon, we attribute 50% of the
broadband benefit to BBW, or £6m p.a.

BBW English Final Version v2.doc 10


07/09/2006
3
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.11 CASE STUDY J. PUBLIC SERVICES

Introduction

A2.11.1 This case study looks at the potential impact of broadband on the cost of providing
public services. In particular, it looks at e-procurement. E-procurement offers the
potential for significant savings and featured heavily in the Gershon proposals to
improve public sector cost-efficiency across the UK.

Target saving potential

A2.11.2 E-procurement enables savings via the following mechanisms:

• Automation and stream-lining of the procurement process


• Better management information, leading to improved focus and control
• Rationalisation of the supplier base
• Negotiation of better prices from a controlled list of suppliers

A2.11.3 There have been a number of pilot studies and early examples of e-procurement in the
public sector. An OGC study75 provides some examples of the realised and planned
percentage cost savings from e-procurement initiatives.

• Scottish Executive: annual procurement spend of £2bn, with the aim of a 2-4%
saving from the implementation of e-procurement.
• “IDeA marketplace”, for local authorities’ procurement: expectation of 8% reduction in
the price of purchased goods and services.
• Average measured savings of 3.6% of the total spend passing through the e-
procurement system.

A2.11.4 The 2001 Welsh Assembly study76 that led to the current set of e-procurement activities
looked at various possible benchmarks for projected savings:

• If the Welsh Public sector could consistently achieve prices in the lower quartile of
their own price spreads, savings of 7.5% would result.
• A 3% target for savings for the Welsh public sector was deemed to be challenging but
achievable.

A2.11.5 E-procurement implementation projects are challenging. They involve technical ICT
investment, integration into back-office and MI systems, process re-engineering,
training, and change management. To realise the potential, it is necessary to get the
organisation using the new procurement system, avoiding both maverick buying and
reversion to manual processes. There are also important economies of scale, such
that it makes sense for public sector agencies to share e-procurement systems.

75
OGC “e Procurement: Cutting through the hype” Autumn 2002
76
Welsh Assembly Government “Better Value Wales: Review of Procurement in the Welsh Public
Sector” February 2001

BBW English Final Version v2.doc 10


07/09/2006
4
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Action to date

A2.11.6 Action to capture the savings in Wales has begun. The Welsh Assembly Government
has published a cost-efficiency savings target of up to £300 million p.a. by 2008 and at
least £600 million p.a. by 2010 77 for the range of actions under “better use of
resources”. Procurement is a central part of the action plan. A target of £120m pa has
been set for procurement value for money savings by 2008. Given annual procurement
spend in Wales of approximately £4 billion, the £120 million target represents 3% of
spend.

A2.11.7 Value Wales, part of the National Assembly’s Finance team, is the vehicle for achieving
the savings in procurement, support functions, and management of capital investment.
Value Wales (Procurement) is the unit given responsibility for driving forward e-
procurement across the whole of the public sector.

A2.11.8 The National Procurement Website for Wales was established in November 2003. It
aims to bring together the public sector and its suppliers; and to provide an online
tendering facility.78 Its functionality has been expanded over time. By June 2005, more
than £500 million of Welsh public sector contracts had been made available to
suppliers through the National Procurement Website.79

Quantitative Assessment

A2.11.9 It seems appropriate to take the £120 million p.a. target level of savings from e-
procurement as a reasonable measure of the potential benefit to the Welsh public
sector from e-procurement. A higher level of savings may be ultimately attainable, but
this level of achievement is still stretching.

A2.11.10 The £120 million figure includes savings in purchased goods and services across local
government, health, higher education, further education, National Assembly Wales, and
Assembly sponsored Public Bodies. To avoid double-counting, we need to reduce
from this total any procurement savings included in other case studies; accordingly, we
reduce the total by £15m to reflect the savings embodied in the Health case study; and
by £5m to reflect savings embodied in the Training case study. (The Local
Government case study includes savings related to procurement administration costs,
but none related to the cost of procured goods and services.) After these deductions,
the net potential savings for e-procurement of public services amounts to £100m p.a.

Attribution of benefits

A2.11.11 How much of this potential benefit should be attributed to broadband? Broadband is a
necessary condition for, and key enabler of, e-procurement. E-procurement’s recent
take-off has been as a direct consequence of broadband’s functionality and
broadband’s ability to integrate a network of suppliers at low cost. E-procurement
requires a high degree of business adoption of broadband, to enable extensive on-line

77
Welsh Assembly Government “Delivering the Connections: From Vision to Action” June 2005
78
Welsh Assembly Government “Making the Connections: ICT and e Government in Wales: Cymru Ar-
lein” October 2004
79
Welsh Assembly Government, Cytgord, VW(P) quarterly newsletter, Issue 10, Summer 2005

BBW English Final Version v2.doc 10


07/09/2006
5
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

collaboration and integration with suppliers. We therefore attribute 50% of the


estimated annual potential benefit to broadband, which equates to £50m p.a.

A2.11.12 How much of this broadband benefit should be attributed to the BBW Programme? The
BBW Programme has directly facilitated investment in broadband functionality across
the public sector. Relevant BBW projects include Public Sector Broadband Aggregation,
as well as projects aimed at increasing broadband take-up among businesses and
potential suppliers to the public sector (who need to be able to bid via e-channels to
enable e-procurement to realise its potential). Given this, and taking into account that
action is happening over a reasonably near term time horizon, we attribute 50% of the
broadband benefit to BBW, or £25m p.a.

BBW English Final Version v2.doc 10


07/09/2006
6
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.12 CASE STUDY K: CULTURE

Introduction

A2.12.1 This case study looks at the potential impact of broadband on the provision of Welsh
Language training, focusing on its potential to extend coverage.

A2.12.2 The strategic goals of the Welsh Assembly include strengthening Wales’ cultural
identity and helping to create a bilingual country. It is a long term goal, extending over
several decades. The 2001 census showed that around 21% of the population can
speak Welsh and that 28% of the Welsh population have at least some Welsh
language ability. 80 Longer term census data (1921-2001) shows a stabilisation /
modest increase in Welsh speaking numbers after years of decline. Nonetheless, the
goal of a bilingual country is very challenging. Evidence suggests that the everyday use
of Welsh is declining and maintaining children’s use of Welsh beyond the age of 16 is
not easy.81 In this context, it is important that the potential of all available policy levers
is recognised and exploited.

Value of broadband in promoting Welsh Language

A2.12.3 ICT and broadband can facilitate growth in Welsh Language ability and use in a variety
of ways.

• Reach. The key advantage of broadband-enabled internet interventions is their


potential to reach an audience of tens of thousands; whereas any policy initiative
based solely on the work of individuals will necessarily have a much more limited
audience. Internet/broadband can often complement other initiatives based on more
individual action. An example is the launch by the Welsh Language Board of the Twf
website, to support the project to encourage language transmission within the family.
• Targeting. As well as being able to reach large numbers, broadband-enabled internet
material can be targeted at the interests of specific groups and communities. The
Welsh language strategy identifies a number of communities / interest areas for
priority attention, including Welsh-speaking communities, young farmers, business
users, sport and pop music, and pre-7 year olds.
• Training. The internet provides an excellent means to store and provide widespread
access to Welsh Language training materials. The National Grid for Learning (NGfL)
Cymru site is an example of this use. An advantage of distance learning is that the
pace of learning can be tailored to the specific needs of the individual. Welsh
language learning is integrated into the e-learning agenda and action programmes of
ELWa.
• Marketing. A key aspect of the marketing campaign promoting the use of Welsh is to
focus on people under 35 as the prime target market. To reach this target audience,
extensive use of new media is recommended. Because of their appeal to this age

80
Statistics for Wales, Statistical Bulletin 22/2003
81
See National Assembly for Wales: Culture, Welsh Language and Sport Committee, 7 December
2005 proceedings

BBW English Final Version v2.doc 10


07/09/2006
7
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

group, there is potential for Welsh language sites, portals and chatrooms to widen and
deepen the appeal of the Welsh language.82
• Translation. Internet/ broadband can provide ready access to automated translation
services, which substantially reduce the cost of translation and facilitate the use of
Welsh.

A2.12.4 This list shows how broadband / internet deserves to be an integral part of the strategy
for promoting the Welsh Language.

Quantitative Assessment

A2.12.5 Iaith Pawb, the National Action Plan for a Bilingual Wales, includes a target to increase
the percentage of people in Wales able to speak Welsh by 5 percentage points in 2011
compared to the 2001 census figure.83 This would mean raising the percentage from
21% to 26%, and achieving around 730,000 people able to speak the Welsh language,
assuming a stable population.

A2.12.6 A 2002 EU report looked at the cost-effectiveness of different policy interventions


designed to support minority languages in Europe.84 The outcome of policies can be
seen as improvements in three domains: the ability to use a language; opportunities to
use it; and the desire to do so. Cost-effectiveness of policies is difficult to assess not
only because measuring outputs is difficult, but also because policies will have different
types of impact across these three domains. Nonetheless the study was able to
produce some high-level comparisons:

Cost per user of policy intervention

Policy intervention Key output Cost per user


Summer camp for schoolchildren Desire €600
ICT-assisted language learning Ability €20
Pre-school assisted places Ability €400

A2.12.7 These results illustrate clearly the relative cost advantages of ICT based interventions
over more individual type interventions. They also suggest that ICT based solutions will
need to play an important role if the 5% increase in Welsh speaking ability is to be
achieved.

A2.12.8 In terms of the potential benefit that could be provided by broadband-enabled


interventions, we apply the above per user cost figure for ICT assisted learning
(€20/per user) to the 2011 target for Welsh speakers (730,000). This produces a
potential spend of £9.8 million in the period to 2011, or around £2m p.a. The
underlying rationale is that to achieve the desired target for the total number of Welsh
speakers, some form of ICT based intervention is likely to be applicable to all speakers;

82
Welsh Language Board “Changing behaviour, usage and perceptions: marketing the Welsh
Language” 2003
83
Welsh Assembly Government “Iaith Pawb, a National Action Plan for a Bilingual Wales” 2003
84
“Support for Minority Languages in Europe” European Bureau for Lesser Used Languages, 2002

BBW English Final Version v2.doc 10


07/09/2006
8
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

and that this expenditure will be well justified given its comparative cost-effectiveness.
The estimate is of course only indicative.

Attribution of benefits

A2.12.9 How much of this potential benefit should be attributed to broadband? It is appropriate
to use the same benefit attribution shares in this Welsh language training case study as
applied in the generic Training case study. Therefore we attribute 40% of the Welsh
language training benefit to broadband, or £0.8m pa. The question arises as to
whether this £0.8m benefit forms part of the £4m benefit already identified under the
Training case study or is additional to it. We assume that the benefit in the Training
case study relates to potential savings on existing expenditure, whereas the benefit
identified in this case study relates to the benefit potential achievable on new spend,
and therefore is additional.

A2.12.10 How much of this broadband benefit should be attributed to the BBW Programme? It is
appropriate to use the same share as applied to the Training case study, or 30%.
Whilst BBW has targeted the education sector (via the Lifelong Learning Network,
Local Access Circuits, and Public Sector Broadband Aggregation projects), the time
profile extends into the medium term. A 30% attribution factor leads to an estimated
BBW benefit of £0.2m pa.

BBW English Final Version v2.doc 10


07/09/2006
9
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.13 CASE STUDY L: HEALTH AND SOCIAL CARE

Introduction

A2.13.1 This case study looks at the potential impact of broadband on the provision of health
care in Wales.

A2.13.2 E-health covers a wide variety of potential applications of ICT and broadband to the
provision of health care services. These range from relatively discrete informational
and process improvements of an evolutionary nature; through to major redesign of how
services are delivered and supported, with major cost-efficiency and effectiveness
implications. The impact of broadband on health care is potentially enormous. It helps
to underpin the new vision of patient centred care, with improved care for the individual
at home or close to home, combined with scarce clinical skills concentrated in larger
scale hospitals.85

Value of broadband in health care

A2.13.3 Potential applications are shown below.

• Improved access by individuals to medical information, stimulating improved individual


responsibility for their own health.
• Improved access by medical professionals to patient information, leading to improved
medical care, reduced amount of repeat tests and appointments, and efficiency
savings.
• Availability of more complete and integrated patient information.
• Improved consultations and collaboration between medical professionals leading to
better medical decisions and outcomes; and better utilisation of leading medical
experts.
• Improved access to technical knowledge for medical professionals, saving their time
and leading to better medical decisions.
• Distance learning for medical professionals, leading to improved and more up-to-date
medical knowledge.
• Use of remote diagnostic techniques.
• Use of remote monitoring technology for individual patients at home, leading to earlier
diagnosis, improved health outcomes and less need for hospital visits.
• Use of remote consultations between medical professionals and patients, saving
patient time and travel costs; and better utilisation of scare medical resource.
• Shared service facilities for hospitals, enabling a saving of back-office costs.
• Pooled e-procurement of goods and services.
• Better information for health care administration managers, leading to more efficient
resource allocation and investment decisions.
• Stream-lining and automation of information flow along the supply chain, including the
electronic transfer of prescription data.

85
See NHS Wales “Improving Health in Wales” (2001) and NHS Wales “Designed for Life: Creating
world class health and social care for Wales in the 21st Century” (May 2005)

BBW English Final Version v2.doc 11


07/09/2006
0
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A2.13.4 There are some key barriers to achieving these benefits:

• The scale of required investment is large, and health care budgets will remain
stretched.
• Major change in working practices, support processes, individuals’ skills and
organisational structures need to accompany the ICT investment. ICT is only one
component within the required change programme.
• Many ICT projects in the health service (as well as elsewhere) in the past have not
delivered their expected benefits, in part because of a shortage of IT skills.
• Concerns about data privacy and patient confidentiality need to be met.
• There is already a very full change agenda facing NHS Wales.

A2.13.5 Delivery of a range of e-health initiatives is under way via the NHS Wales’ Informing
Healthcare (IHC) programme. ICT healthcare projects in Wales and England include
electronic patient health records; e-booking system for appointments; electronic
transfer of prescription information; new telemedicine services and pilots; NHS Direct
Online; and the National electronic Library for Health.

Quantitative Assessment

A2.13.6 Various studies have looked at quantifying the net benefits of e-health applications. A
couple of good examples analysing particular applications are:

• A PwC / EU study looked at the impact of doctor-patient consultations happening on-


line without the need for physical contact with the patient, and evaluated the resultant
time and cost savings for both patient and doctor.86 The calculation assumed that
37% of consultations are suitable for carrying out on-line; and that a face-to-face
consultation takes a little under 1 hour, including travel time. On these and other
assumptions, the potential savings were estimated to build gradually over time to
reach €1.24 billion p.a. across the EU25 by 2013.
• An Australian study analysed the potential impact of an accelerated rollout of
broadband connecting major hospitals and specialist medical centres. 87 Patients
would be able to get specialist treatment from local hospitals, and avoid the need to
travel to a regional medical centre. It looked at the roll-out of applications in the areas
of psychiatry, radiology and ultrasound, and in the leading scenario found a potential
NPV benefit of $195 million (AUD). A key driver of the result is the large distances of
the Australian Continent, leading to large potential savings in travel times for patients
but also a relatively high cost to achieve connectivity.

A2.13.7 More generally, however, there is not widespread understanding of the overall potential
of e-health applications and achievements to date. An IPPR study in 2004 examined
available evidence relating to NHS’ spend on some of its ICT flagship projects and
concluded that there was a surprisingly small amount of convincing research evidence

86
PwC “Technical assistance in bridging the digital divide: a cost benefit analysis for broadband
connectivity in Europe” October 2004
87
Access Economics “The Economic Impact of an Accelerated Rollout of Broadband in hospitals” for the
Australian Government’s NOIE, December 2003

BBW English Final Version v2.doc 11


07/09/2006
1
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

about ICT’s impacts and benefits.88 The need to strengthen the evidence base for
health investment decisions is recognised and led to the creation of the Wales Centre
for Health in 2005 with a mission to gather evidence to help inform decision-making.

A2.13.8 In this context, we judge that the most useful approach is to give some indication of the
big picture. Public expenditure on health services is large so that even if the application
of broadband improves efficiency only by a small percentage amount, the absolute
savings are material. We give some examples below.

• E-procurement. NHS Wales purchases of prescribed drugs and appliances amounts


to around £500 million per year.89 Group purchasing of standardised products and
services can offer considerable savings, often exceeding 10%. 90 Applying a
generalised e-procurement saving factor of 3%91 implies a potential saving of £15m
p.a.
• Use of Remote technologies. NHS Wales hospital and community health services
expenditure on out-patients amounted to £400 million (or £122 per single attendance).
A plausible assumption is that use of remote diagnostic and monitoring applications
could cut the need for attendances by 5%, reducing costs by £20m p.a.
• E-Training. NHS Wales spend on education and training amounts to around £194
million pa. In the earlier case study on training, we assumed that 10% of adult
training could be delivered via e-training routes having a 20% efficiency – which
delivers an overall efficiency gain of 2%. The same assumptions would imply an
efficiency gain of £4m pa.

A2.13.9 These three examples show an aggregate potential of savings of around £40m p.a.

Attribution of benefits

A2.13.10 How much of this potential benefit should be attributed to broadband? Broadband is a
key enabler of e-procurement, on-line communications and e-training. Given the
weighting of benefits towards e-procurement and the use of remote technologies,
where broadband is a necessary condition for benefits realisation, we attribute 50% of
the estimated potential benefit to broadband, or £20m p.a.

A2.13.11 How much of this broadband benefit should be attributed to the BBW Programme? The
BBW Programme was not involved in the (DAWN2) roll-out of broadband to hospitals in
Wales. However, it has been responsible for the accelerated take-up of broadband
amongst businesses and individuals with whom the hospitals need to interact and
integrate to achieve the potential stream of benefits. Our counterfactual estimate
indicates that the BBW Programme has increased broadband take-up by 20-40%. In
the light of this, and the medium term profile for benefits realisation, we attribute 20% of
the broadband benefit to BBW, or £4m p.a.

88
Institute for Public Policy Research “Public Value and e-Health” Jamie Bend, 2004
89
Health Statistics Wales, 2005, Chapter 15, Finance.
90
“IST Impact Study, Health Domain” Information Society Technologies, November 2004
91
A 3% target for procurement savings was used in the Audit Commission’s “Health Procurement and
Supply: Review of findings in Wales” 2002

BBW English Final Version v2.doc 11


07/09/2006
2
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

APPENDIX 3 BROADBAND COSTS

A3.1 INTRODUCTION

A3.1.1 In this Appendix we explain how we arrive at estimates of both the historical and future
costs of broadband provision in Wales. The historical costs relate to the period 1999
through 2005, and the future costs 2006 through 2015. We use forecast costs as our
basis for forecast prices.

A3.1.2 The historical costs are based entirely upon the three primary methods of broadband
delivery in Wales, namely xDSL, Local Loop Unbundling (LLU) and cable modem.

A3.1.3 The forecast costs are based upon the delivery of broadband services via existing and
emerging technologies, namely xDSL, high-speed xDSL, cable modem, high-speed
cable modem, fibre-to-the-home (FTTH) and Fixed Wireless Access (FWA).

A3.1.4 The total costs discussed herein are based upon Atkins’ estimates and forecasts of
broadband uptake and availability, as detailed in Sections 2 and 3.

A3.2 HISTORICAL COSTS

A3.2.1 In this section, we consider the cost of broadband provision in Wales over the years 1999
to 2005. In particular, the methodologies used when estimating the costs associated
with the provision of broadband services via xDSL, LLU and cable modem are outlined.

xDSL

A3.2.2 Before attempting to estimate the cost of xDSL provision by BT in Wales, telephone
exchange data regarding exchange size and date of DSL-enablement was examined.92

A3.2.3 xDSL uptake per exchange per annum was estimated using the following information:

(i) Atkins’ estimates of xDSL uptake per annum;

(ii) the total number of premises served by each exchange;

(iii) the availability of xDSL (taken to be the total number of premises served by
DSL-enabled exchanges).

A3.2.4 Uptake per exchange per annum was estimated to be:

• (total xDSL uptake at year end / total xDSL availability at year end) x total premises
served by exchange.

A3.2.5 Exchanges were then classed according to the estimated number of active xDSL
subscribers per exchange: large (5,000 – 7,000 subscribers), medium (3,000 – 5,000
subscribers), small (1,000 – 3,000 subscribers) and micro (less than 1,000 subscribers).

92
Exchange data is available from ‘The Broadband Resource’ website www.samknows.com/broadband/

BBW English Final Version v2.doc 11


07/09/2006
3
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Figure 3.1 below summarises our estimate of the number exchanges enabled per
annum, classed according to likely xDSL uptake.

Figure 3.1
Estimate of Exchanges Enabled Per Annum

180

160

140

120

100

80

60

40

20
Micro
0 Small
1999 Medium
2000 2001
2002 Large
2003 2004
2005

Large Medium Small Micro

Source: Various

A3.2.6 The cost of upgrading each class of exchange (large, medium, small and micro) was then
derived using publicly-available 2005 cost data and allowing for the maximum number
of subscribers in each class (i.e. 7,000, 5,000, 3,000 and 1,000 for large, medium,
small and micro respectively). The 2005 cost data used were based upon (i) published
equipment prices discounted at 20% for bulk purchase, (ii) BT openreach prices for
exchange enablement discounted at 40% and (iii) Atkins’ assumptions with regards to
project management, installation and commissioning and operations and maintenance.

A3.2.7 In addition to the above, we included a supply cost of £24 per user per annum. This
covers the cost of billing systems, marketing etc.

A3.2.8 The estimated costs associated with upgrading each class of exchange, as of 2005, are
provided in Table 3.1 below. From these figures, weighted average costs of exchange
enablement have been derived, which take account of the quantity of each class of
exchange.

BBW English Final Version v2.doc 11


07/09/2006
4
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 3.1
Estimated xDSL Exchange Enablement Unit Costs (2005)

Large Medium Small Micro Weighted


Average

Fixed Capex (per exchange) £109,164 £82,577 £57,039 £40,474 £45,582

Variable Capex (per user) £88 £88 £88 £88 £88

Fixed Opex (per exchange) £123,817 £89,223 £54,808 £21,918 £33,360

Variable Opex (per user) £32 £32 £32 £32 £32


Source: Atkins’ estimates

A3.2.9 To arrive at estimates of unit costs for the years 2000 to 2004, the weighted average
costs for 2005 have been adjusted in each previous year in line with changes in
National Statistics’ Producer Price Index for radio, television and communication
equipment. The weighted average costs for years 2000 through 2004 and the
Producer Price Index are as listed in Table 3.2 below.

Table 3.2
Estimated xDSL Exchange Enablement Unit Costs (2000 - 2005)

2000 2001 2002 2003 2004 2005


Producer Price Index 100.0 97.3 88.0 84.3 82.1 80.1

Fixed Capex (per exchange) £58,657 £57,073 £51,618 £49,448 £48,158 £46,984

Variable Capex (per user) £110 £107 £97 £93 £90 £88

Fixed Opex (per exchange) £41,648 £40,524 £36,650 £35,109 £34,193 £33,360

Variable Opex (per user) £47 £46 £44 £43 £43 £42
Source: Atkins’ estimates

A3.2.10 The above unit costs have been used to estimate the annual cost of xDSL service
provision and thereafter an overall historical cost for the years 2000 through 2005. The
annual costs, their components and the total historical cost are as listed in Table 3.3
below.

BBW English Final Version v2.doc 11


07/09/2006
5
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 3.3
Estimated xDSL Exchange Enablement Costs (2000 - 2005)

2000 2001 2002 2003 2004 2005


Total Fixed Capex £879,858 £741,955 £258,092 £3,758,050 £8,668,363 £6,107,975
Total Variable Capex £36,588 £94,978 £347,462 £3,440,248 £11,686,275 15,505,183
Depreciation £183,289 £350,676 £471,787 £1,911,446 £5,982,374 £10,121,716
Total Fixed Opex £624,722 £1,134,663 £1,209,463 £3,826,925 £9,881,818 £13,977,915
Total Variable Opex £15,546 £56,270 £211,615 £1,808,568 £7,306,786 £14,653,931
Cost Per Annum £823,558 £1,541,609 £1,892,864 £7,546,939 £23,170,978 £38,753,562
6-Year Total Cost £73,729,509
Source: Atkins’ estimates

A3.2.11 Each of the lines in Table 3.3 were derived as follows:

• total fixed capex per annum is the product of the exchanges enabled per annum and
the fixed capex per exchange;
• total variable capex per annum is the product of the new subscribers per annum and
the variable capex per user;
• straight line depreciation (of fixed and variable capex) is calculated assuming a five
year asset life;
• total fixed opex per annum is the product of the cumulative number of enabled
exchanges and the fixed opex charge per exchange;
• total variable opex per annum is the product of the cumulative number of subscribers
and the variable opex charge per subscriber; and
• the cost per annum of xDSL provision is the sum of the depreciation charge, total
fixed opex and total variable opex in each year.

A3.2.12 The total historical cost of xDSL provision in Wales is then taken to be the sum of the
derived per annum costs. This is estimated to be £74m over the years 2000 to end of
2005.

Local Loop Unbundling (LLU)

A3.2.13 In estimating the historical cost of broadband provision via LLU in Wales, the costs
listed in Table 3.4 below were used.

BBW English Final Version v2.doc 11


07/09/2006
6
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 3.4
Estimated LLU Exchange Enablement Unit Costs (2005)

Unit Cost Source


Fixed Capex (per exchange) £50,000 Extracted from C&W presentation entitled ‘Local
Loop Unbundling’ (Sep 2004)

Variable Capex (per user) £100 Extracted from C&W presentation entitled ‘Local
Loop Unbundling’ (Sep 2004)

Fixed Opex (per exchange) £10,000 Extracted from C&W presentation entitled ‘Local
Loop Unbundling’ (Sep 2004)

Variable Opex (per user) £175 Extracted from C&W presentation entitled ‘Local
Loop Unbundling’ (Sep 2004)

A3.2.14 Given that LLU unbundling activity in Wales has been restricted to the enablement of 9
exchanges (all during 2005), arriving at an estimate of historical cost from the above
unit costs was straightforward when compared with xDSL case discussed previously.
The total historical cost estimate is as provided in Table 3.5 below.

Table 3.5
Estimated LLU Exchange Enablement Costs (2005)

2005 Explanation
Total Fixed Capex £450,000 Exchanges enabled x fixed capex per exchange

Total Variable Capex £968,377 New subscribers x variable capex per subscriber

Depreciation Straight-line depreciation based upon 5-year


£283,675 asset life
Total Fixed Opex Cumulative exchanges enabled x fixed opex per
£90,000 exchange
Total Variable Opex Cumulative subscribers x variable opex per
£1,927,071 subscriber (including £24 per user supply cost)
Cost Per Annum Sum of depreciation, fixed opex and variable
£2,300,747 opex
Source: Atkins’ estimates

Cable Broadband

A3.2.15 ntl’s cable network in Wales was ”built to deliver Broadband services and is
predominantly a fibre-optic based network which allows for considerable amounts of
data to travel at very high speeds”.93 As such, when estimating the historical cost of
broadband provision via cable, it has been assumed that there are no fixed cost
components (i.e. no additional investment has been made in core network

93
‘Broadband Communications’, Memorandum submitted by NTL to the UK Parliament, Feb 2002. We
infer from this statement that ntl’s network in Wales was digitally enabled as installed, rather than being an
analogue cable network.

BBW English Final Version v2.doc 11


07/09/2006
7
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

infrastructure to accommodate broadband). This assumption is supported by the fact


that prospective subscribers to NTL’s cable broadband service can only obtain a
service if they reside within reach of the existing cable network (i.e. the network is not
extended to encompass new geographic locations).

A3.2.16 The unit costs (as of 2004) used to derive an estimate of historical cost are as listed in
Table 3.6 below. These unit costs are based upon a typical service of 0.5 Mbit/s per
subscriber contended at 20:1.94

Table 3.6
Estimated Cable Broadband Unit Costs (2004)

Unit Cost Source


Fixed Capex (per exchange) n/a

Variable Capex (per subscriber) £266 ntl investor presentation entitled ‘ntl: Home’ (Sep
2004)

Fixed Opex (per exchange) n/a

Variable Opex (per subscriber) £142 Assumption based upon annual operating and
maintenance costs equivalent to 30% of variable
capex and a backhaul allowance and a £24 per
annum per user supply cost.

A3.2.17 In common with the approach adopted with xDSL, the above unit costs have been
index-linked to the National Statistics’ Producer Price Index for radio, television and
communication equipment, to give unit costs for the years 2000 through 2005. The unit
costs for each year under consideration are as listed in Table 3.7 below.

Table 3.7
Estimated Cable Broadband Unit Costs (2000 - 2005)

2000 2001 2002 2003 2004 2005


Producer Price Index 100.0 97.3 88.0 84.3 82.1 80.1

Variable Capex (per subscriber) £324 £315 £285 £273 £266 £260

Variable Opex (per subscriber) £171 £167 £153 £148 £145 £142
Source: Atkins’ estimates

A3.2.18 Table 3.8 below lists the estimates of cost per annum and the associated cost
component.

94
NTL employs a contention ratio of between 15:1 and 20:1 on its cable residential services.

BBW English Final Version v2.doc 11


07/09/2006
8
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 3.8
Estimated Cable Broadband Costs (2000 - 2005)

2000 2001 2002 2003 2004 2005

Total Variable Capex £231,356 £549,278 £1,708,938 £5,631,649 £18,867,546 £7,607,304

Depreciation £46,271 £156,127 £497,915 £1,624,244 £5,397,753 £6,872,943

Total Variable Opex £122,154 £410,461 £1,296,428 £4,301,593 £14,474,132 £18,336,579

Cost Per Annum £168,425 £566,588 £1,794,342 £5,925,837 £19,871,886 £25,209,521

6-Year Total Cost £53,536,599


Source: Atkins’ estimates

A3.2.19 We derived each of the lines in the above table as follows:

• variable capex is calculated to be the product of the number of new subscribers per
annum and the variable capex per subscriber;
• depreciation is calculated on a straight line basis assuming a five year asset life;
• total variable opex is calculated to be the product of the cumulative number of
subscribers and the variable opex per subscriber; and
• The cost per annum is the sum of the depreciation charge and the total variable opex
in each year.

A3.2.20 The total historical cost of broadband provision via cable of £54m is then the sum of the
annual costs for the years 2000 to 2005.

A3.3 FORECAST COSTS

A3.3.1 In this sub-section, we consider the possible future costs of broadband provision in
Wales over the years 2006 to 2015. The cost forecasts are based upon existing and
emerging technologies, and rely heavily upon Atkins’ forecasts of availability and
uptake.

A3.3.2 The technologies considered are: xDSL, high-speed xDSL, cable broadband, high-speed
cable broadband, Fibre-to-the-Building (FTTB) and Fixed Wireless Access (FWA).

A3.3.3 In view of the uncertainties inherent in making forecasts concerning equipment type,
equipment and service costs, service availability and uptake, the results should be
treated with caution.

Outline Methodology

A3.3.4 In forecasting the future cost of broadband provision, a similar methodology has been
adopted for each of the technologies under consideration. In each case, base costs
per subscriber (or groups of subscribers) have been estimated based upon 2005 cost
data where available or on Atkins’ informed estimates of 2005 costs otherwise.

A3.3.5 To model changes in base costs, we have made use of figures published in a report by
PWC, Ovum and Frontier entitled ‘Technical Assistance in bridging the “digital divide”:

BBW English Final Version v2.doc 11


07/09/2006
9
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A Cost Benefit Analysis for Broadband Connectivity in Europe’ (2004). This report
contains forecasts of the average annual cost per user of broadband provision in
Europe over the years 2004 to 2014. We have evaluated average costs per user for
Group 1 countries (which includes the UK) and the percentage change in year-on-year
costs was extracted and used as a basis for modelling the change in our base 2005
costs estimates. These year-on-year changes in base cost are listed in Table 3.9
below.

Table 3.9
Forecast of Year-on-Year Change in Base Cost

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Base -3.64% -2.52% -1.72% -0.88% -0.88% -0.89% -0.45% -0.90% -1.37%
Source: PWC (2004) ‘Technical Assistance in bridging the “digital divide”: A Cost Benefit Analysis for
Broadband Connectivity in Europe’.

A3.3.6 Having established estimates of 2005 base cost data and forecasts of how these costs
are likely to change over the years 2006 to 2015, the cost of broadband provision for
each technology under consideration was then forecast through the use of service
availability and uptake scenarios developed by Atkins.

A3.3.7 For each technology, three separate forecasts of cost have been made based upon
central, high and low availability and uptake scenarios.

xDSL

A3.3.8 In the case of xDSL, the 2005 costs used previously to estimate the historical cost were
used as a basis for all forecasts. The 2005 unit costs are as provided in Table 3.10
below. These are based upon a typical 0.5 Mbit/s service per subscriber contended at
50:1.95

Table 3.10
xDSL Unit Costs (2005)

Cost Item Value

Fixed Capex (equivalent per user) £35


Variable Capex (per user) £88
Fixed Opex (equivalent per user) £40
Variable Opex (per user) £42
Source: Atkins’ estimates

A3.3.9 The above costs were decreased over time in line with Table 3.9 to arrive at estimates of
unit costs in the years 2006 to 2015.

95
We adopted a contention ratio of 50:1 as this is what BT uses as standard for its ADSL residential
service.

BBW English Final Version v2.doc 12


07/09/2006
0
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A3.3.10 In order to forecast a cost per annum for xDSL, the following calculations were made:

(i) total fixed capex = fixed capex (per user) x no. of new subscribers in year

(ii) total variable capex = variable capex x no. of new subscribers in year

(iii) depreciation = straight line depreciation of capex based upon a five-year asset life

(iv) total fixed opex = fixed opex (per user) x number of users

(v) total variable opex = variable opex x uptake

A3.3.11 The total cost per annum was then taken to be the sum of the depreciation charge, total
fixed opex and total variable opex. The forecast cost of provision via xDSL for the
years 2006 to 2015 is then the sum of the annual costs.

A3.3.12 The above was repeated for the central, high and low availability and uptake scenarios
to provide three forecasts of the cost of broadband provision via xDSL.

A3.3.13 We estimated the forecast costs of XDSL under the central case to be £336m.

High-Speed xDSL (xDSL2+)

A3.3.14 To arrive at forecasts of the cost of high-speed xDSL provision, the equipment and
service costs used to estimate the base 2005 xDSL costs were revised to account for
enhanced line cards and Customer Premises Equipment (CPE) and increased
backhaul requirements per subscriber. The forecasts for high-speed xDSL assume a
typical service of 10 Mbit/s per subscriber contended at 100:1. The estimated unit
costs associated with high-speed xDSL provision as of 2005 are as listed in Table 3.11
below.

Table 3.11
High-Speed xDSL Unit Costs (2005)

Cost Item Value

Fixed Capex (equivalent per user) £74


Variable Capex (per user) £103
Fixed Opex (equivalent per user) £30
Variable Opex (per user) £125
Source: Atkins’ estimates

A3.3.15 The above costs were decreased over time in line with Table 3.9 to arrive at estimates
of unit costs in the years 2006 to 2015.

A3.3.16 In order to forecast a cost per annum and hence a total cost of provision for 2006 to
2015, the calculations performed for xDSL were repeated using the revised unit costs
listed in Table 3.11. Again, this process was repeated for central, high and low
scenarios.

BBW English Final Version v2.doc 12


07/09/2006
1
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A3.3.17 We estimated the forecast costs of XDSL2+ under the central case to be £430m.

Cable Broadband

A3.3.18 The process of forecasting the costs associated with broadband provision via cable
was again identical to that employed for xDSL. The base unit costs for cable
broadband as of 2005 are as provided in Table 3.12 below. These assume a typical
service of 0.5 Mbit/s per subscriber contended at 20:1.

Table 3.12
Cable Broadband Unit Costs (2005)

Cost Item Value

Variable Capex (per user) £266


Variable Opex (per user) £142
Source: Atkins’ estimates

A3.3.19 We estimated the forecast costs of cable broadband under the central case to be
£160m.

High-Speed Cable Broadband

A3.3.20 For the purposes of this exercise, high-speed cable broadband is assumed to be any
cable broadband service offering speeds greater than 10 Mbit/s per subscriber.

A3.3.21 Again the process of forecasting the costs associated with broadband provision via
high-speed cable modem was identical to that employed for xDSL. The base unit costs
as of 2005 are as provided in Table 3.13 below. These assume a typical service of 10
Mbit/s per subscriber contended at 100:1.

Table 3.13
High-Speed Cable Broadband Unit Costs (2005)

Cost Item Value

Variable Capex (per user) £306


Variable Opex (per user) £299
Source: Atkins’ estimates

A3.3.22 The above unit costs are simply the unit costs of cable broadband (as per Table 3.12)
uplifted to account for enhanced equipment and increased backhaul requirements.

A3.3.23 We estimated the forecast costs of high-speed cable broadband under the central case
to be £209m.

BBW English Final Version v2.doc 12


07/09/2006
2
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Fibre-to-the-Building (FTTB)

A3.3.24 Atkins has recently been involved in two separate projects concerning the deployment
of FTTB. As such, the capex associated with FTTB deployment is based largely upon
the cost estimation work undertaken for these projects. The opex however is based
upon our informed assumptions and on estimates of backhaul costs, assuming a typical
service of 20 Mbit/s per subscriber contended at 50:1. The base unit costs as of 2005
for FTTB are as listed in Table 3.14 below.

Table 3.14
FTTB Unit Costs (2005)

Cost Item Value

Fixed Capex (per 16 users) £6,077

Variable Capex (per user) £1,110

Fixed Opex (per 16 users) £1,155

Variable Opex (per user) £635


Source: Atkins’ estimates

A3.3.25 Again the above costs were decreased over time in line with Table 3.9 to arrive at
estimates of unit costs in the years 2006 to 2015. However, in order to forecast a cost
per annum for FTTB, the calculations made differ slightly when compared with the
previous cases and are as follows:

(i) total fixed capex = fixed capex (per 16 users) x (availability/16)

(ii) total variable capex = variable capex x no. of new subscribers in year

(iii) depreciation = straight line depreciation of capex based upon a five-year asset life

(iv) total fixed opex = fixed opex (per 16 users) x (availability/16)

(v) total variable opex = variable opex x uptake

A3.3.26 The total cost per annum was then taken to be the sum of the depreciation charge, total
fixed opex and total variable opex. The forecast cost of provision via FTTB for the
years 2006 to 2015 is then the sum of the annual costs.

A3.3.27 The above was repeated for the central, high and low availability and uptake scenarios
to provide three forecasts of the cost of broadband provision via FTTB.

A3.3.28 We estimated the forecast costs of FTTB under the central case to be £285m.

BBW English Final Version v2.doc 12


07/09/2006
3
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Fixed Wireless Access (FWA)

A3.3.29 Atkins is currently involved in a major project concerning the design and
implementation of a regional telecoms network based upon FWA base stations for ‘last
mile’ access. As such, we have taken the detailed technical and cost data developed
during the course of this project and used this as a basis for forecasting the cost of
future FWA provision in Wales.

A3.3.30 The model developed assumes that the construction of an independent radio tower site
will be required to accommodate each FWA base station. It has also been assumed
that every such base station site shall be capable of accommodating up to 450
subscribers. An allowance for backhaul from the base station site to a network
operator’s point-of-presence has been made, assuming a typical service of 10 Mbit/s
per subscriber contended at 50:1. From this model, the base unit costs as of 2005 for
FWA provision are as listed in Table 3.15 below.

Table 3.15
FWA Unit Costs (2005)

Cost Item Value

Fixed Capex (per 450 users) £76,631

Variable Capex (per user) £921

Fixed Opex (per 450 users) £12,261

Variable Opex (per user) £379


Source: Atkins’ estimates

A3.3.31 Once more, the above costs were decreased over time in line with Table 3.9 to arrive at
estimates of unit costs in the years 2006 to 2015. However, in order to forecast a cost
per annum for FWA, the calculations made differ slightly when compared with the
previous cases and are as follows:

(i) total fixed capex = fixed capex (per 450 users) x (availability/450)

(ii) total variable capex = variable capex x no. of new subscribers in year

(iii) depreciation = straight line depreciation of capex based upon a five-year asset life

(iv) total fixed opex = fixed opex (per 450 users) x (availability/450)

(v) total variable opex = variable opex x uptake

A3.3.32 The total cost per annum was then taken to be the sum of the depreciation charge, total
fixed opex and total variable opex. The forecast cost of provision via FWA for the years
2006 to 2015 is then the sum of the annual costs.

A3.3.33 The above was repeated for the central, high and low availability and uptake scenarios
to provide three forecasts of the cost of broadband provision via FWA.

BBW English Final Version v2.doc 12


07/09/2006
4
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A3.3.34 We estimated the forecast costs of FWA under the central case to be £208m.

A3.4 SUMMARY OF COSTS

A3.4.1 We present in Table 3.16 the results of our broadband cost estimates.

Table 3.16
Estimates of Historical and Forecast Costs, not discounted

Year High case Central case Low case


(£m) (£m) (£m)
Historical

2000 1.0

2001 2.1

2002 3.7

2003 13.5

2004 43.0

2005 66.3

Forecast

2006 76.9 72.8 69.0

2007 87.8 80.9 73.6

2008 97.0 88.1 77.9

2009 112.8 100.0 85.0

2010 149.9 129.5 105.5

2011 193.7 166.3 133.7

2012 239.7 204.9 163.5

2013 284.4 242.1 191.9

2014 315.4 268.2 212.0

2015 323.5 276.1 219.1


Source: Atkins’ estimates

BBW English Final Version v2.doc 12


07/09/2006
5
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

APPENDIX 4 IMPACTS OF BROADBAND ON ECONOMIC


PERFORMANCE

A4.1 INTRODUCTION

A4.1.1 In this Appendix we review the findings of the literature on the impacts of ICT and
broadband on economic performance and consider the applicability of these findings to
the Welsh economy.

A4.2 REVIEW OF LITERATURE

A4.2.1 In this sub-section, we review studies of the impacts of investment in ICT and broadband
on economic performance. Although our specific interest is in the impact of broadband,
much of the literature relates to ICT, reflecting factors including the complementary
nature of investment in broadband and ICT, data limitations and that the impacts of
broadband on economic performance only just starting to become manifest. First,
however, we present a summary of our key findings.

Key Findings:

• investment in ICT does improve macroeconomic indicators;


• various attempts have been made to measure this;
• the effects are not universal; e.g. productivity improvements as a result of ICT
investment in the US have been higher than in Europe;
• an economy’s structure affects the outcome of ICT investment;
• there is much less broadband-specific (relative to ICT) literature available but some
relevant findings have still been made;
• it is possible to quantify some of the benefits of broadband;
• benefits only become tangible once broadband diffusion has passed a certain level -
30% has been suggested;96 and
• widespread availability of broadband is a sine non qua of a modern economy as is
widely being recognised in many developing countries.

ICT

Impact of ICT on economic performance

A4.2.2 There is some debate as to the exact relationship between ICT and economic
performance but what is not in question is that investment in ICT provides a positive
contribution to economic growth. Furthermore, the evidence suggests that ICT is a

96
Brian Condon, CEO of the Access to Broadband Campaign in the UK.

BBW English Final Version v2.doc 12


07/09/2006
6
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

growing component of economic growth. 97 From the literature, three main effects of
ICT on productivity and growth emerge:

• first, as a capital good, investment in ICT contributes to overall capital deepening (i.e.
more capital per worker) and therefore helps raise labour productivity;
• second, rapid technological progress in the production of ICT goods and services may
contribute to more rapid multifactor productivity (MFP) growth in the ICT-producing
sector; and
• third, greater use of ICT may help firms increase their overall efficiency, and thus
raise MFP. Greater use of ICT may also contribute to network effects, such as lower
transaction costs and more rapid innovation, which will improve the overall efficiency
of the economy.

A4.2.3 As for actually measuring the impact of ICT on economic growth, perhaps the most
comprehensive study remains that carried out for the OECD.98 The OECD found that
from 1995 to 2001, ICT capital contributed on average about 0.5 percentage points to
Gross Domestic Product (GDP) growth in OECD countries. Contributions amounting to
about one fourth of GDP growth over 1995-2001 were observed in the United States,
Canada, the Netherlands and Australia.

A4.2.4 The OECD’s research also showed that the contribution of ICT capital to GDP growth
has strongly increased since the first half of the 1990s when it amounted to only about
0.25 percentage points on average. In relative terms, the contribution of ICT capital to
GDP growth increased from about 16% of total GDP growth to about 20% from the first
to the second half of the 1990s.

ICT and relative economic performance

A4.2.5 Over the last decade economists have sought to explain why, given the common
availability in ICT at similar prices throughout the world, productivity growth in
European and other OECD economies slowed down after 1995 relative to the US. A
number of studies have attempted to account for this and from these studies three facts
stand out:

• First, ICT diffusion rates vary across the OECD (and the rest of the world) with the US
having the highest rate and Italy, Spain, Portugal and Greece, rather lower rates. ICT
is a set of network technologies and it follows that the more people and firms who join
and use the network, the more benefits those technologies generate.
• Second, in the US the impact of ICT capital on productivity initially occurred in the
ICT-producing sectors but moved quickly to ICT-using sectors, namely wholesale and
retail trade and finance. In Europe, in contrast, little acceleration in productivity in

97
ICT and Global Economic Growth, Khuong Vu, Kennedy School of Government, Harvard University,
November 2004.
98
The Economic Impact of ICT: Measurement, Evidence and Implications. OECD 2004

BBW English Final Version v2.doc 12


07/09/2006
7
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

ICT-using sectors is evident and growth rates actually declined in non-ICT


industries.99
• And third, ICT investment is lower. There is generally less ICT capital per worker
outside the US.

A4.2.6 A number of possible causes of different investment levels in different countries are given
within the literature:

• Costs of ICT investment goods. Although at a global level, costs appear to be similar,
there are a number of reasons why within a country they might be higher:
o Lack of competition. Where the supply of ICT goods is state controlled or
dominated by one supplier, prices will be higher than in more competitive markets.
o Barriers to trade. Tariffs on imported ICT components will also impact prices
within a market.
o Differential standards. E.g. requirements for different wiring standards, keyboard
layouts and so on.
• Associated cost of communications infrastructure and use once connected to the
network. For example, call charges are often cited as a barrier to internet usage.
This is less likely to be an issue in countries where the telecoms market has been
liberalised, again an area in which the US is at the forefront, although little comparison
of the growth and impacts of telecoms networks has yet been made between the US,
on one hand, and the rest of the OECD on the other. The US, Canada and Finland
stand out as having private rather than government owned telecoms sectors
throughout the period from 1980 to 2000, whereas Deutsche Telecom for example,
was privatised less than 10 years ago. The differential spread of telecoms networks
and their characteristics could help explain differential productivity growth if telecoms
developments are sources of technical change and externalities.
• Lack of security. This tends to apply more at the firm level and relates to the risks of
slow or unstable communications and unauthorised access to company information.
• Lack of educated personnel and/or specific know-how. This know-how could also be
managerial or organisational. A recent study postulated that superior productivity due
to ICT in US firms could be due in part to superior management and organisation of
those firms. 100 This was tested by looking at productivity improvements in overseas
offices of US multinationals and comparing them to local firms in the UK. The
researchers found that the differential impact of IT appears to fully account for almost
all the difference in total factor productivity between US-owned and all other
establishments.
• Market regulation. This applies to both product markets and labour markets. In
general, greater regulation is a block to innovation and part of this includes slowing
down the take-up of new technologies.

99
“The Networked Computer: The Contribution Of Computing And Telecommunications To Economic
Growth And Productivity” OR “Why Is There No New Economy In Old Europe? A Production Function
Approach”. Melvyn Fuss and Leonard Waverman, A Digital Transformations Working Paper, May 2005.
100
“It ain’t what you do, it’s the way that you do IT”, Bloom, Sadun and Van Reenen, London School of
Economics, September 2005

BBW English Final Version v2.doc 12


07/09/2006
8
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A4.2.7 More generally, we found that analyses of the impacts of ICT on economic growth with a
cross-country approach face two major statistical challenges: (1) the availability; and (2)
comparability of data on investment flows into ICT assets. For developing countries,
these data are virtually unavailable, especially from official sources. For some
developed countries, the data have been collected for a while but the statistical
methods employed for assembling the data differ considerably across countries.

The Impact of ICT in the UK

A4.2.8 Turning to the UK, one of the most frequently cited studies was carried out for the Bank
of England.101 It found that the ICT share of GDP output rose from 0.6% in 1979 to
3.1% in 1998. Furthermore, ICT accounted for 21% of GDP growth for the period
1989-99. From 1994 to 1998, ICT added, on average, 0.57 percentage points per year
to GDP growth. The report went on to suggest that the contribution of ICT to GDP
growth would most likely continue in light of the fact that the ICT share of GDP was still
only two thirds that of the US.

A4.2.9 There are also data available from more recent research. In 2003, Cisco Systems
commissioned a study from London Economics to: (1) assess the contribution of ICT
investment to the performance of the UK economy; (2) determine which sectors have
benefited the most from ICT investment; and (3) evaluate the extent to which the
productivity of ICT-using sectors has benefited from ICT investment.102 Key findings
were:

• ICT investment has made an important contribution to output growth in the UK over
the period 1992-2000. The results showed an economy-wide contribution of 0.8
percentage point annually. This is somewhat higher than the OECD average, which
is to be expected as UK investment in, and diffusion of, ICT is also higher than the
OECD average. The study also found that manufacturing was the sector that had
gained (relatively) the most in terms of output growth from ICT (43% of output growth
was due to ICT).
• ICT investment has also made a sizeable contribution (through capital deepening) to
labour productivity growth in the UK over the period 1992-2000. Again these
contributions have involved the largest sectors of the economy and when aggregated
at the economy level, ICT capital deepening made an average absolute contribution
of 0.76 percentage points, or 47% of the total labour productivity growth in the period.
• The contribution of ICT to output growth and labour productivity increases over time in
parallel with ICT investment.

101
Oulton, N. (2001). ICT and productivity growth in the UK. Bank of England Working
Paper no. 140,
102
ICT and GDP Growth in the United Kingdom: A Sectoral Analysis. London Economics, April 2003

BBW English Final Version v2.doc 12


07/09/2006
9
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

ICT and rural economies

A4.2.10 As noted earlier, Wales has a low population density. Research commissioned by
DEFRA in December 2004, into the use of ICTs in England’s rural economies might
therefore be of interest. 103 Below are some conclusions from the research:

• In general, rural businesses adopt ICT significantly more slowly than their urban peers.
ICT adoption increases as businesses get larger. However, at each size band, the
average level of adoption is lower in businesses located in rural areas, and this is not
just due to the different distributions of industries in urban and rural areas.
• This slower adoption is primarily attributable to a more limited range and intensity of
‘influences’ promoting the use of ICT, rather than ‘barriers to adoption’. In particular,
rural businesses are significantly less exposed to advertising, discussions with peers
and the influence of new recruits. Moreover, ICT decision makers tend to be older in
rural businesses, and this factor appears to be associated with lower ICT adoption
rates.
• Micro-businesses are particularly disadvantaged. The ‘ICT adoption gap’ between
rural and urban businesses is most pronounced in the 2-9 employment band, and this
is also where there is most disparity in the adoption levels of firms in different industry
sectors.
• There are few important differences across the various types of rurality. The
distinctions between rural and urban businesses in terms of ICT adoption and impact
are more marked than the mostly insignificant differences observed for businesses
based in different types of rural location. There was some evidence that ICT adoption
rates are lower in sparse rural areas than in less sparse areas. However, there was
little variation between the various types of rural area, in terms of the cited barriers to
adoption, influences on investment decisions and the importance attached to ICT.
• ICT developments are having a positive impact on rural economies. Higher levels of
ICT adoption are associated with higher turnover per employee and higher growth
expectations in rural firms. The more advanced ICT adopters consider that recent
developments in ICT have made it easier to operate from a rural location, and about
30% of urban businesses say that they may consider operating from a rural location
now that broadband is available.

• The most important productivity advantages of ICT only start to be realised when
businesses go beyond ‘basic’ adoption levels – i.e. adopting ICT applications over
and above the use of email and access to the worldwide web.

A4.2.11 The authors then went on to suggest the following key messages for consideration in
rural ICT policy development:

• There is a case for intervention, to address an information-related demand-side


market failure.
• There is an argument for focusing such interventions on micro-businesses.
• Existing mainstream public sector initiatives are positive – but unlikely to close the
rural-urban gap on their own.

103
ICT in England’s Rural Economies: A Final Report to DEFRA. SQW Consultants, July 2005

BBW English Final Version v2.doc 13


07/09/2006
0
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

• Intervention should seek to exploit the web as an information channel, and should
take advantage of the window of opportunity presented by the current boom in rural
broadband take-up.
• There is a prospect of a new digital divide emerging between rural and urban areas,
with the advent of next generation broadband and 3G services. Policy-makers will
need to consider their responses to this challenge.

Broadband

A4.2.12 Many of the ideas set out in the previous section also naturally apply to broadband.
However, it will take some time for the full impact of broadband on economic
performance to be known. This is because there is, in essence, a three stage process
involved in broadband enabling a significant impact:

• first, broadband has to be widely available;


• second, it has to be widely adopted; and
• third, it then has to be used to provoke the kinds of individual and firm behaviour
changes discussed below to enhance productivity and economic activity.

A4.2.13 The above factors, coupled with the fact that broadband has only been widely available
for a few years, means research into the macroeconomic impact of broadband is in its
infancy. Nonetheless, below, we consider some of the existing literature.

The Theoretical Basis for Broadband’s Economic Impacts104

A4.2.14 Broadband does not act on the economy in isolation, but as a complement to other
information technologies. The fact that it is always on and offers considerably faster
internet access than dial-up means that it is more convenient and responsive and has
led people to use it more intensively than its narrowband predecessor. Broadband is
an enabler for the use of computer-based applications that need to communicate.

A4.2.15 Adoption of broadband-enabled IT applications can affect the economy by changing the
behaviours and productivity of both firms and individuals. Studies on firms find the
highest payoffs in enhanced productivity appearing in those that commit most
intensively to integration of IT into new business processes. For example, some firms
simply use IT to make current business processes more productive; they use email and
web browsing to raise the quality and lower the costs of gathering market intelligence
and communicating with suppliers and customers. Others see the opportunity
presented by IT to re-engineer their entire approach to business; they develop and
integrate more complex “e-business” applications that can enable whole new business
processes and models. To the extent that the availability and use of broadband fosters
either type of IT adoption and usage by firms, we would expect productivity
improvements and other associated economic impacts to follow.

104
Adapted from: Measuring Broadband’s Economic Impact, William H. Lehr, Carlos A. Osorio, Sharon E.
Gillett, Massachusetts Institute of Technology, and Marvin A. Sirbu, Carnegie Mellon University

BBW English Final Version v2.doc 13


07/09/2006
1
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A4.2.16 Other studies have focused on the effects of IT on individual workers. For example,
one study found that IT tends to complement workers that perform non-routine
problem-solving and complex communication tasks, but substitutes for workers who
perform cognitive and manual tasks that can be accomplished by following explicit rules.
While both effects could be expected to increase productivity, the overall effect on
employment is ambiguous and would depend on the mix of different types of jobs in the
economy.

A4.2.17 While much of the IT productivity literature has focused on workplace usage, much of
the focus of broadband literature has been on residential deployments. Broadband at
home may of course be used for leisure pursuits, but it can also be expected to affect
the economy both directly and indirectly.

A4.2.18 For many knowledge workers, a residential broadband connection is a prerequisite for
working at home (enabling productive use of non-traditional working hours, flexible
work arrangements, or remote employment), or for establishment of a home-based
business, such as an individual consultancy (contributing to new business formation).

A4.2.19 Less directly, expanded broadband availability at home may raise the quality of the
labour force, for example through improved access to educational opportunities via
distance education programs, thus making a locale more attractive to potential
employers. Similarly, home-based access may improve quality of life, for example by
enabling more participation in community and civic activities, making a locale more
attractive to potential residents. Somewhat more directly, home-based access may
enable more effective job hunting, reducing unemployment by making labour markets
more efficient. It may also make workers more productive by reducing the overall time
needed for them to fulfil non-work obligations, e.g. online bill payment.

A4.2.20 As with firm usage of IT, however, the overall effect of home-based broadband usage
on local economic indicators is not obvious a priori. While online banking and shopping
may make local workers more productive, it is also likely to put competitive pressure on
local banks and retail stores, leading to ambiguous effects on the number of local jobs.
Furthermore, by making distant sources of goods and services available, broadband
could adversely impact on local competitors.

A4.2.21 Most of these hypothesized impacts are not measurable directly. Broadband
availability varies by community, but statistics are not tallied at the community level to
measure local GDP or use of capabilities like e-commerce and telemedicine. To create
hypotheses testable with available data, one needs to focus instead on how broadband
is likely to change other indicators that describe local economies. Potential indicators
to test for positive impacts from broadband include:

• Employment opportunities (e.g. measured by employment rate, share of high-


skilled/high-wage jobs in community, wage rates, and self-employment);
• Wealth (e.g. measured by personal income, housing values, or rents);
• Skills/quality of local labour force (e.g. measured by educational attainment, drop-out
rates, or share of work-force in more skilled jobs); and
• Community participation and quality of life (e.g. measured by voting participation,
mortality rates, or local prices).

BBW English Final Version v2.doc 13


07/09/2006
2
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A4.2.22 For most indicators, it is reasonable to expect that broadband’s impacts will be felt only
after some time lag and that the length of the process will vary depending on the
indicator.

Studies to date

A4.2.23 Below, we review some of the studies that have considered the macroeconomic
impacts of broadband. As with literature on ICT, many of the studies relate to the US
economy. In particular:

• One of the earliest reports was prepared for Verizon by Criterion Economics in the US
in 2001.105 The study estimated that broadband, acting through changes to consumer
shopping, commuting, home entertainment and health care habits, would contribute
an extra $500 billion (in Net Present Value terms) to GDP by 2006;
• A report by TeleNomic Research, supported by the New Millennium Research Council,
estimated that 1.2 million new and permanent jobs would be created from the
construction and use of a nationwide broadband network;106
• a Brookings Institution report estimated that “failure to improve broadband
performance could reduce U.S. productivity growth by 1% per year or more.”;107 and
• a report by Criterion Economics for the New Millennium Research Council which
estimated that the capital expenditure associated with the ubiquitous adoption of
broadband could increase US GDP by $179.7 billion and sustain an additional 61,000
jobs per annum and that ubiquitous residential broadband adoption could result in the
creation of more than 1.2 million jobs.

A4.2.24 The only major study to date that we have found for the UK is cebr’s The Economic
Impact of a Competitive Broadband Market. cebr estimated the contribution of
broadband to productivity growth by using the share of broadband spend in ICT spend
to pro-rate the results from then existing studies, which show that ICT had increased
UK labour productivity by around 0.1% per annum in recent years. cebr forecast
broadband’s annual contribution to productivity growth in the UK to be between 0.04%
and 0.22% by 2015. Using a macroeconomic model, cebr then estimated that by 2015
the productivity benefits of broadband would contribute between £5bn and £22bn per
annum to UK GDP. cebr’s estimates suggest that “broadband could have an economic
impact in the UK on potentially the same scale as electricity.”108

A4.2.25 Another study, by Allen Consulting, modelled the likely impact on the economy of
Queensland, Australia of investing in a true broadband network109 in the South East of

105
Crandall, R. and C. Jackson (2001), “The $500 Billion Opportunity: The Potential Economic Benefit of
Widespread Diffusion of Broadband Internet Access,” mimeo, Criterion Economics, Washington, DC.
106
Pociask, S. (2002), Building a Nationwide Broadband Network: Speeding Job Growth, White Paper
prepared for New Millennium Research Council by TeleNomic Research
107
Ferguson, C. (2002) The United States Broadband Problem: Analysis and Recommendations,
Brookings Institution Working Paper
108
Pg 22, The Economic Impact of a Competitive Market for Broadband, cebr, November 2003.
109
A “true” broadband network is a broadband infrastructure capable of supporting at a
minimum video, voice and data services and applications simultaneously over a single physical
infrastructure. True broadband delivers symmetric services at speeds greater than 10 Mbps

BBW English Final Version v2.doc 13


07/09/2006
3
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

the State, around Brisbane and Moreton.110 The region covered by the study has a
population around 1 million. The report argued that given the superior speed,
functionality and bandwidth of true broadband networks it is reasonable to expect that
there will be a further increase in productivity and cost savings for businesses that
move from existing broadband access technologies (such as ADSL and Cable) to true
broadband. Using a regional general equilibrium model of the Australian economy, the
study concluded that a true broadband network could generate an additional 15,000
jobs over 15 years and add at least $2.6bn AUD (in Net Present Value terms) to the
State’s GDP over the same period.

Community Level Studies

A4.2.26 By 2003, studies started becoming available based on the real broadband experiences
of individual communities. Early studies include a case study prepared for the DTI of a
municipal fibre network built in 2000-1 in South Dundas, Ontario 111. This township
comprises three villages, with a total population of around 11,000. The economy is
largely based on manufacturing and construction with significant agriculture, retail, and
service sectors. Throughout the 1990’s the economy, in particular the manufacturing
sector, was in decline, resulting in a loss of over 600 jobs for the township in the ten
years prior to 2000. In that year, the township decided to invest $750,000 (Canadian)
to build a fibre network with the objective of broadband-enabling the township and so
promote economic development. The study found that between June 2001 and April
2003, the following economic effects can be directly attributed to the fibre network in
South Dundas.

• 62.5 new jobs;


• $2.8 million in commercial / industrial expansion; and
• $140,000 in increased revenues and decreased costs.

A4.2.27 The researchers then estimated the following effects over the next two to four years:

• $25.22 million increase in GDP for Dundas County and $7.87 million increase for the
Province of Ontario;
• 207 person years of employment for Dundas County and 64 for the rest of Ontario;
and
• $3.5 million increase in provincial tax revenues and $4.5 million increase in federal tax
revenues.

A4.2.28 More recently, a study compared per capita retail sales growth in Lake County, Florida,
which invested in a municipal broadband network that became operational in 2001,
against ten Florida counties selected as controls based on their similar retail sales
levels prior to Lake County’s broadband investment. The study found that sales per
capita grew almost twice as fast in Lake County compared to the control group.

110
True Broadband: Exploring the Economic Impacts. Allen Consulting, September 2003.
111
Economic Impact Study of the South Dundas Township Fibre Network. Strategic Network Group for
the DTI, June 27, 2003.

BBW English Final Version v2.doc 13


07/09/2006
4
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

A4.2.29 Most recently, In April 2005 actnow, in collaboration with project partner BT,
commissioned SustainIT, and the University of Bradford to conduct a survey of the
impacts of broadband on businesses in Cornwall. 112 The survey received 433
responses from actnow’s business customers. The results show that broadband is
benefiting enterprises, individuals, the Cornish economy, society and the natural
environment by extending market reach and impact; making organisational working
practices more efficient; enabling staff to work flexibly; and substituting travel and
meetings with electronic communication.

A4.2.30 The key benefits enabled by broadband across the respondents were:

% of SMEs
Number of experiencing
responses benefit
Better access to important information 187 93.5
More professional image 174 87
Reducing telephone costs 161 80.5
Better relationships with customers 160 80
Reducing mail/ printing costs 152 76
Extending customer base 132 66
Better quality work 120 60
More productive staff 106 53
Improved profitability 200 49
Better relationships with suppliers 97 48.5
Reorganisation of work practices 90 45
Better internal communication 80 40
Reduction in stock levels and/or stock wastage 31 15.5

A4.3 IMPACT OF BROADBAND ON WELSH ECONOMIC PERFORMANCE

A4.3.1 In the previous sub-sections, we reviewed some of the literature regarding the impact of
broadband on economic performance. None of these studies focused on Wales. Below
we consider how best to apply the findings of the literature to Wales. However, such an
exercise faces a number of difficulties:

• First, the structure and characteristics of the Welsh economy are such that results
achieved elsewhere may not be applicable. For instance, the US economy is much
larger, has a very strong presence in all sectors (including ICT equipment
manufacturing) and has a relatively rapid rate of new technology adoption. In the US,
increases in ICT and broadband demand will have a direct and appreciable impact on
the output of the US manufacturing sector, which will not be the case in Wales.
• Second, as we have shown, the impact of ICT and broadband on the economy are
complex. The impacts will be spread over time. Wales is at the stage where
broadband is widely available and is increasingly being adopted, but the applications
are only just beginning to be realised. A broadband connection per se has no value to
customers. The value to customers of broadband access arises from the applications

112
Sustainable Broadband? The Economic, Environmental and Social Impacts of Cornwall’s actnow
Project, Prof P.James and Dr. P. Hopkinson University of Bradford and SustainIT, May 2005.

BBW English Final Version v2.doc 13


07/09/2006
5
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

for which it is used. These applications range from simple internet browsing and
email through to more complex business applications such as integrated supply chain,
customer relationship management, and back office outsourcing. The impact of
broadband on productivity and GVA will depend not only on the extent of its take-up,
but also on the uses to which it is put and how effective are the implementations.
• Third, interpretation of the economic data is subject to a lot of dispute and the studies
show a wide range of results. This is partly because of the normal econometric
problem of disentangling the impact of multiple causal factors, when all the relevant
time-series are moving simultaneously in a positive direction and the data-series are
of short duration. There is also the particular problem of broadband where its use and
benefits are so intrinsically inter-dependent with ICT and software applications. This
underlying level of uncertainty is worth noting. For example while South Korea has led
in the pace of broadband deployment, an OECD review in 2004 found that: “[South
Korea] is clearly the world leader in broadband infrastructure and has high levels of
consumer use. However business diffusion appears uneven despite rapid progress,
ICT investment and use remain around the OECD average in general, and ICT
impacts on business may be lower than expected.”

A4.3.2 In the light of these difficulties, we adopt a pragmatic approach. We take the most
relevant studies and adjust them as appropriate to the scale of the Welsh economy. We
show a range of results to capture the range of uncertainty that is present in the
academic literature.

A4.3.3 First we apply the results of the cebr study to Wales, apportioning an appropriate share
of the UK benefit. If we assume that the Welsh economy remains at around 4% of the
UK economy then by 2015, the effect of widespread competitive broadband will be an
additional £880m annually at 2005 prices (2.3% of Welsh GVA) based on cebr’s upper
bound; and £195m based on their conservative assumptions (0.51%). This calculation
must of course be treated with caution: cebr’s model was for the UK as a whole and
does not account for regional variations in economic structures and broadband uptake
rates. Moreover, Wales is still somewhat behind the UK as a whole in some important
areas, for example: as discussed in previous sections, broadband adoption lags behind
the UK as a whole; and there are fewer service providers in Wales than in other regions
meaning a less competitive market although this is changing.

A4.3.4 The projection in 2001 by Verizon was that by 2006 broadband would contribute an extra
$500bn to the GDP of the US economy. This is approximately equivalent to 4% of US
GDP. For the various reasons cited already, we cannot assume that Wales, nor the
rest of the UK, can capture a similar level of benefit. But it is plausible to suppose that
the UK as a whole can capture at least 60% of this level of benefit and Wales around
50% of this level of benefit, i.e. 2% additional GDP, over the next few years.

BBW English Final Version v2.doc 13


07/09/2006
6
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

APPENDIX 5 BREAKDOWN OF NET BENEFIT ESTIMATES

Table 5.1
Breakdown of the lower bound of net benefits of Broadband in Wales, discounted £m

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Private benefits 0.3 1.1 3.6 13.6 37.6 66.1 80.3 83.1 83.6 81.4 85.6 98.4 111.6 123.6 131.7 133.2

Public benefits 0.0 0.2 0.5 2.4 10.5 23.1 23.6 25.1 26.4 27.4 28.3 28.9 29.3 29.5 29.6 29.6

Costs - - 14.3 11.2 9.8 7.4 15.0 4.3 - - - - - - - -

Net benefits
(Total benefits – costs) 0.3 1.2 -10.2 4.8 38.2 81.7 89.0 103.9 110.0 108.8 113.8 127.3 140.9 153.2 161.3 162.8
Source: Atkins’ estimates.

BBW English Final Version v2.doc 13


07/09/2006
7
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

Table 5.2
Breakdown of the lower bound of net benefits of the Broadband Wales Programme, discounted £m

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Actual/forecast benefits and costs

Private benefits 0.3 1.1 3.6 13.6 37.6 66.1 82.7 89.9 93.8 94.7 103.4 120.5 137.8 153.6 164.7 166.5

Public benefits 0.0 0.2 0.6 2.7 12.0 26.3 32.5 36.5 39.7 42.2 44.0 45.2 46.0 46.3 46.4 46.2

Costs - - 14.3 11.2 9.8 7.4 15.0 4.3 - - - - - - - -

Net benefits
(Total benefits – costs) 0.3 1.3 -10.2 5.1 39.7 85.0 100.2 122.1 133.5 136.9 147.4 165.7 183.8 200.0 211.1 212.7

Counterfactual

Private benefit 0.3 1.1 3.3 10.4 26.2 43.7 57.2 67.1 74.5 80.1 91.0 107.4 124.9 141.8 154.9 160.3

Public Benefit 0.0 0.2 0.4 1.3 5.0 10.5 13.2 16.0 18.5 20.6 22.4 23.7 24.7 25.4 25.8 26.0

Total benefit 0.3 1.3 3.8 11.7 31.2 54.2 70.3 83.1 93.0 100.7 113.4 131.1 149.6 167.2 180.7 186.3

Net benefit of BBWP


(actual/forecast benefits
– baseline benefits) -0.0 -0.0 -13.9 -6.6 8.5 30.8 29.8 39.0 40.5 36.1 34.0 34.6 34.1 32.8 30.4 26.4
Source: Atkins’ estimates.

BBW English Final Version v2.doc 13


07/09/2006
8
Benefits of Broadband and the BBW Programme to the Welsh Economy
Broadband Wales Programme

APPENDIX 6 TABLE OF ACRONYMS

ADSL Asymmetric Digital Subscriber Line

BBW Broadband Wales programme

BBWO Broadband Wales Observatory

DSL Digital Subscriber Line

DSLAM Digital Subscriber Local Access Multiplexer

ELWa Education and Learning Wales

FTTB Fibre to the Building

FTTC Fibre to the Cabinet

FWA Fixed Wireless Access

GDP Gross Domestic Product

GVA Gross Value Added

ICT Information and communication technology

LLN Lifelong Learning Network

LLU Local Loop Unbundling

PSBA Public Sector Broadband Aggregation project

RIBS The Regional Innovative Broadband Support project

SMEs Small and medium-sized enterprises

VDSL Very high speed Digital Subscriber Line

BBW English Final Version v2.doc 13


07/09/2006
9