BT guilty of underinvesting in UK broadband roll out, say legislators

Profile picture for user slauchlan By Stuart Lauchlan July 18, 2016
Summary:
BT has underinvested in broadband roll out in the UK in order to pursue its own commercial interests over the national infrastructure. Time for action to force change, say UK legislators.
bt-openreach
Openreach

Put more money into Openreach or face the consequences - a long overdue threat from UK legislators to BT about its work with the organization most responsible for the nation’s broadband roll-out.

MPs on the Culture Media and Sport Committee accuse BT of making decisions that favoured its own "priorities and interests”, while the quality of service offered by BT's Openreach subsidiary "remains poor”.

In its report, the Committee  says that this is down to under-investment by BT. The committee is "demanding" that BT pump significantly more money into Openreach or face seeing the firm forcibly split off in a “full separation of Openreach”.

The report states:

We believe Ofcom has been right not to rule out full separation; that option should be kept firmly on the table. Ofcom has said that the proposals BT has offered to date on governance, performance, status and other arrangements of Openreach have not gone far enough. In our judgment Ofcom must remain resolute in its negotiations with BT, to ensure that the reform necessary to establish the quality and availability of communications services needed for UK consumers and businesses is delivered.

If the regulator were to place more emphasis on Openreach’s quality of service, BT would voluntarily invest more in the infrastructure to avoid significant penalties. Should BT fail to offer the reforms and investment assurances necessary to satisfy Ofcom’s and our own concerns, then the regulator will need to set in train the steps to enforce full separation of the Openreach business.

The MPs argue that BT has prioritised its own commerical interests ahead of Openreach investment and broadband roll-out and has been

deliberately investing in higher-risk, higher-return assets such as media properties, and not investing in profitable lower risk infrastructure and services through Openreach.

The report states:

It came as a surprise to us that BT employs an investment hurdle rate significantly above Openreach’s actual cost of capital, as estimated and allowed for by Ofcom. This means that a potentially very significant amount of annual investment in broadband access and services, investment that would likely add to shareholder value, is not at present being made. While we understand the desire for BT and other providers to balance infrastructure investment with their own commercial interests, this forgone investment in maintaining, upgrading and supporting Openreach’s infrastructure is, according to our expert panel, damaging to public welfare, to shareholders and to consumers. BT should therefore take immediate steps to invest further in Openreach infrastructure and services, down to its cost of capital.

Damning

In a series of damning pronouncements, the Committee highlights:

  • The lack of transparency in BT Openreach's costs and deployment plans in relation to the BDUK programme has stifled local competition and thwarted other network providers' planning.
  • BT has allowed service quality levels to remain low at Openreach in recent years - from an arguably low base - while investment in Openreach has been flat. Ofcom was slow to introduce minimum service standards with financial penalties for Openreach, some nine years after its creation.
  • The shortfall in investment in Openreach could potentially be hundreds of millions of pounds a year.
  • BT Group is exploiting the position of vertical integration to make strategic decisions that favour the Group’s priorities and interests, at the expense of its access infrastructure business.  Its current structure allows it to use Openreach’s utility-type assets to cross-subsidise riskier activities elsewhere in the Group, while significantly under-investing in the access infrastructure and services on which a large part of the public rely.
  • Ofcom’s charge control regime has kept a downward pressure on prices, so that the UK’s communications prices are among the lowest compared with similar EU countries. But this mechanism has not been successful in holding Openreach to an adequate quality of service; and it is an open question how effective overall it has been in stimulating investment in Openreach’s infrastructure.

The Committee concludes:

Should Openreach remain part of the BT Group under a strengthened model of functional separation, BT should be obliged to allow Openreach to raise finance independently in the capital markets in its own right, and to make investments that meet the business’s own cost of capital. We have every reason to believe that Openreach would be a very attractive investment vehicle to longer-term institutional investors, which could in turn facilitate increased investment in infrastructure.

My take

I couldn’t agree more. As I’ve said time and again, customer-hating BT has done more damage to the roll-out of broadband in the UK than anyone else. Its essentially ‘private monopoly’ status is a national disgrace. Break the chains on Openreach ASAP. Something has to change, as the Committee notes:

Throughout this inquiry, it has been very clear that the communications sector is characterised by bad internal relations between its main players. With the exception of areas such as technical standards and disaster recovery there has been little co-operation between competitors. This is regrettable because there are other areas—such as training and skills—where more open discussion and co-ordination would benefit the whole industry and its customers. We understand that the industry will continue to be driven by competition, but we are disappointed by companies’ frequent recourse to litigation and failure to adopt a more cohesive approach.