Friday, August 6, 2010


One of the key decisions of the Economic Renewal Programme (ERP) is the abolition of funding and support for the majority of small businesses in Wales. Instead, the savings made will go towards the £240 million required by the Welsh Assembly Government (WAG) to invest in a “next generation” broadband infrastructure for Wales by 2016.

Investment into critical new technologies can make a real difference to the productivity of businesses and there is certainly a case for extending the current broadband provision away from the main industrial urban and localities to the more deprived communities and those rural areas which still depend on dial up modems to access the internet.

However, the major weakness within the ERP is that the Welsh Assembly Government simply fails to make a coherent case as to why this is a better form of investment than supporting firms directly, and why government should fund this instead of the private sector.

Let’s start with the rationale that the investment in broadband will give a better return on public funds in terms of the number of jobs created.

One of the most critical reports on the role of broadband in economic development is “The UK’s Digital Road to Recovery” from the London School of Economics.  If we extrapolate from the employment generation data presented in the report, then it is estimated that a £240 million investment in next generation broadband would create or retain around 11,000 jobs in Wales for one year i.e. a cost of roughly £22,000 per job.

For those in government, the question is whether such an investment in economic development, which is what this programme is essentially about, represents real value for money. No case is made at all as to whether spending on next generation broadband will provide a better return as compared to other types of support that could be available to develop the economy, such as inward investment, start-up support or help for growth businesses.

For example, if business really wants better broadband, then simply making the £240 million available as a special repayable grant to all businesses in Wales that wish to invest in next generation broadband may be a far more effective method of spending public money.

The second issue is why should government subsidise such services at a time when telecommunications companies are increasing their investment in new technologies?

For example, BT has already announced in May that it will increase its plans for fibre-based fast broadband from 40 per cent to two-thirds of all UK homes, and this without any incentive from the UK Government.

In addition, other telecommunications businesses are coming up with innovations to extend their market share. Only last week, Virgin Media announced that it will trial ultrafast broadband over existing electricity poles in Caerphilly. If successful, this 'non-traditional' approach could significantly accelerate delivery of next generation broadband to millions of extra homes across the UK.

If the private sector is already expanding its broadband infrastructure, then why should the taxpayer subsidise such services? There is, of course, a clear argument to support those areas that are deemed “uneconomical” for further investment by telecomm companies. But surely, the whole point of investing in broadband to rural areas is to ensure that they do regenerate and create businesses that will utilise the technology in the future and pay companies such as BT for the privilege of doing so.

Given this, why on earth should government pay out what is essentially a grant to the telecomms providers to enable them to gain business from those new customers that they will gain as a result of the infrastructure investment by the taxpayer?

The analogy most used by politicians about broadband is that it is equivalent to building the motorways of the future.

Yet, the difference between roadbuilding and broadband and is that, unlike the former, the government is handing over these new information motorways, paid for by the public purse, to a group of  private sector firms that will then be charging “tolls” for businesses to use them.

Is that a fair and effective use of public money?

If the principle of the new ERP is to move away from the old style of grants, then why should WAG pay large telecoms companies to essentially extend their broadband networks across Wales and thus increase their profits.

Surely, the only logical way is to treat them the same as every other business in receipt of WAG funding and get them to repay the grant from the increased business they will gain once the networks are in place.

As I wrote last week, to abandon small business support as we come out of a recession and spend £240 million on broadband provision is either the biggest mistake in economic development history or an inspired vision for the Welsh economy.

Yet there seems to be little evidence for the latter conclusion in terms of the impact on job creation and the “value for money” in paying large private companies vast amounts of public money for broadband networks that they are expanding in any case.

Of course, this is not the first time that WAG has invested in such infrastructure having already spent £30 million on a fast broadband service called Fibrespeed in North Wales.

At the very least, one would have expected WAG to have undertaken a thorough evaluation to demonstrate the success of the take-up of this scheme, which is provided for businesses across the A55 in North Wales, before committing hundreds of millions of pounds of Assembly and European funding to expanding this programme across the rest of Wales.

Surely, in the absence of any other meaningful evidence for changing the whole direction of Welsh economic policy, it is the least that the Minister and his policy team can do to show those tens of thousands of small businesses that will no longer be backed by the Welsh Assembly Government that there is some method in this perceived madness.