This document explains the principles of gap funding for broadband infrastructure projects. It discusses how the gap is calculated as the difference between network build costs and expected future profits. Public funding is provided to cover the gap. There are mechanisms like cost clawbacks if the gap is later found to be overstated. Project financial models are standardized to calculate inputs consistently and determine the supplier's contribution and any profits to be shared with the local body. Regular reporting is required after deployment to verify costs and customer uptake versus forecasts.

1. Jenny Nuttall – BDUK VFM Team
March 2017
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Gap funding principles explained

2. Gap Funding Principles
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Capex Build Cost
NPV of Future
Profits
Gap
Public Funding given to supplier to build the network, up to the
level needed to close the gap
Government
goal, to minimise
gap, delivering
maximum
premises with
minimum public
funding

3. Government aims to confirm gap is not
overstated at bid stage
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All inputs must be justified with evidence. Models should be fully
transparent
NGA Build Cost
NPV of Future
Profits
= Supplier contribution
(Additional Supplier
Expenditure)
Gap
Network &
resource
components
X unit costCustomer
take up
Internal rate of
return (IRR)
Team forecast –
Key deliverables
Customer
revenues and
operating
costs
Direct Network
Build costs
Programme Management
Inflation
(Cost/revenues)

4. There are two key contractual
mechanisms to ‘fix’ any overstated gap
4Claw-backs correct where gap overstated at bid stage
NGA Build Cost
NPV of Future
Profits
Gap
Underspend
Capex claw-back
paid by Supplier
to LB at end of
deployment
Extra Profit
Take up claw-
back* extra profit
paid annually by
supplier to LB
over 10 year term
Revised Gap
Take up clawback calculated by comparing (Actual take up per Qtr vs forecast
take up per Qtr) x (Product unit Margin) x (% public contribution)
Actual NGA build
costs must be
fully evidenced &
assured. If actual
NGA build costs <
forecast in PFM,
subsidy reduced

5. Project Financial Models are standardised
Standardising supplier PFM input assumptions and methodology for
consistency and comparability, for example:
1. Costs must be incremental & directly attributable to building &
running the network
2. Must show NPV of (‘Profits’ + Gap) – Capex <= zero at appropriate
IRR
3. Project assessed over consistent timescale (20 years)
4. Quarterly (not monthly or Annual) granularity of inputs
5. Cash flow basis, not GAAP
6. Internal rate of return will be assessed to determine if reasonable
and appropriate. (With reference to risk, WACC, scale)
7. Interest owed on funding sources should be excluded
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6. Output Calculation from bid model Used for?
Additional Supplier
Expenditure (ASE)
NGA Build Costs Less public
funding
Identify efficiency savings
and ensures supplier actual
ASE is equal to bid model ASE
Connected customers Quarterly customer base over
term
Take up clawback
Product Unit Margin (PUM) (Total customer profit over
term) divided by total
quarterly customers
Take up clawback
Proxy profit per customer
Term Project Investment
Ratios (PIR)
Supplier capex contribution
as a % of total network build
Take up clawback
To determine profit share
The PFM is used for more than determining gap
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7. Reporting & Assurance – Continues for 7 years
post deployment
• At end of deployment – identify Capex efficiency savings
– Supplier provides calculation (Forecast capex per bid – actual capex
incurred).
• Build efficiency savings will be repaid to Local Body and may be used to
go further with NGA deployment
• From end of deployment to end of contract – Take up
clawback
– Supplier provides calculation (Actual take up vs forecast take up in bid
model TIMES PUM TIMES 1-PIR). Any positive difference (greater take
up than forecast) is calculated to establish LB share.
– LB share per quarter recorded and reviewed regularly – claw back is
repaid annually as earned or as recognised for accounting purposes
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8. • Permitted (Qualifying) expenditure is that Supplier expenditure
which:
• is incremental & directly attributable to bringing the infrastructure to the
location and working condition necessary for its intended use
• Supplier expenditure that will not attract the capital public
subsidy
• General Corporate or unabsorbed overheads
• Administration and general management costs
• Each milestone payment claim
• shall be provided with the following supporting documentation evidence (copies
of invoices, receipts, timesheets, payroll records and other accounting
information) that the claim is for Qualifying Capital Expenditure only and is in
relation to the scope of this Contract only;
Permitted Expenditure and evidence for Milestone
Payment claims
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Any questions?