COMMONS

BT must put house in order or face split

19 July 2016

In its report the Culture, Media and Sport Committee says BT is "significantly under investing" in Openreach, its infrastructure subsidiary. Based on a report commissioned from a panel of independent experts, the Committee concluded the shortfall in investment could potentially be hundreds of millions of pounds a year.

The Committee says BT has exploited its position to make strategic decisions that "favour the Group's priorities and interests" - and is likely to have sacrificed shareholder value and customer benefit as a result. Capital investment in Openreach has been broadly flat since 2009 until this year, and quality of service remains poor.

Investments in Openreach and Ofcom's role

The Committee is demanding that BT invest significantly more in Openreach, and allow Openreach much more autonomy over what it invests, when and where. It supports Ofcom's plans for establishing greater separation between Openreach and BT Group, but makes clear that if BT fails to "offer the reforms and investment assurances necessary to satisfy our concerns", Ofcom should move to enforce full separation of Openreach.

In the Committee's judgement, Ofcom has not placed enough emphasis in the past on improving Openreash's quality of service: it says the prospect of stiffer penalties should also encourage BT to voluntarily invest more in infrastructure.

Conclusions and recommendations

The Committee convened a panel of expert advisers for the inquiry, including nationally recognised specialists in finance, regulation, communications and infrastructure provision, whose expert report is also published simultaneously with our own report.

The report concludes:

Openreach

  • 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.  It arises because BT appears to be deliberately investing in higher-risk, higher-return assets such as media properties, and not investing in profitable lower risk infrastructure and services through Openreach.
  • 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

  • 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.

Reaching the "final five percent"

  • For those households and businesses in the "final five percent" there will need to be judicious deployments of interim technology solutions to provide improved connectivity to those households and businesses which currently have little or no coverage.
  • The challenge of reaching the final five per cent is likely to demand the active and willing co-operation of local communities wherever possible. BDUK will need to offer guidance and support in key areas such as: choosing the right technology solutions, raising finance, stimulating demand and minimising other costs of provision.

Expanding the USO

  • That there is a compelling case for expanding the current USO (Universal Service Obligation) for telephony and dial-up internet to cover broadband, given the vital role it plays in people’s lives. 
  • Ideally, the USO must be designed so as not to impose too great a burden on industry: to incentivise investment, without creating consumer detriment or overly inhibiting take-up.

Further information

Image: iStockphoto

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