Establishing world-class connectivity throughout the UK Contents

Conclusions and recommendations

BDUK programme

1.The progress made since 2010 in providing superfast broadband access has on balance demonstrated that the Government was right to go with the BDUK scheme which principally involved BT and deployment of its fibre-to-the-cabinet solution. The Minister was adamant that this decision was key to the programme’s rapid rollout. Without doubt, the alternatives would have been unaffordable in 2010 and would have taken very much longer to deploy. Clearly there has been a trade-off between competition, comprehensive coverage, speeds, costs and future proofing the network. Notwithstanding the problems and criticisms, BT and the local bodies are to be congratulated on reaching the 90 per cent coverage target. (Paragraph 29)

2.The UK is currently doing well in comparison to similar EU countries on superfast broadband deployment: geographic coverage and take-up of superfast broadband in the UK are the highest of the five largest EU economies, while prices are among the lowest. In spite of this, the UK scores very lowly on fibre-to-the-premises deployment and there are growing concerns that an over-reliance on Openreach’s copper access network, and its supposed lack of ambition for driving fibre to the premises across the country, could result in a hard-to-solve digital divide beyond 2020. (Paragraph 30)

3.As the BDUK programme enters its next phase, it is important that lessons are learned from the performance so far. Given its importance to the future of connectivity in the UK, its significance in addressing market failure and the lively debate about progress with superfast broadband rollout, we were surprised that Ofcom has not yet provided any detailed analysis or verdict on how the BDUK programme has performed so far as part of its ten-yearly strategic Digital Communications Review. This was a significant omission on Ofcom’s part. (Paragraph 31)

4.An unmistakeable downside of the BDUK programme was the lack of transparency in BT’s costs and deployment plans, the apparent effect of which has been to stifle competition and thwart other network providers’ planning. It is clearly unacceptable that BT has been allowed to get away with using such commercial secrecy in Government contracts when it may potentially have been the recipient of some £1.5bn of public funds to expand its own network base. Whether by accident or design, this has had the effect of reducing transparency and increasing uncertainty. Many households and businesses have been forced to hang on indefinitely to find out whether they would be covered, while competing network providers have been discouraged from making investments and capital commitments. (Paragraph 32)

5.One consequence of BDUK’s and BT’s rapid rollout is that the programme appears to have tackled the easier-to-reach premises first and has not delivered coverage to whole areas as such. This has left a patchwork of premises that have not been reached, and much uncertainty among local residents as to whether or not they will be connected or receive improved speeds and in turn has been compounded by repeated failure by BT to give accurate information on timing of deployment to consumers. Many counted as covered still appear unlikely to receive superfast speeds owing to the poor quality or length of the copper lines. It is yet to be shown whether and how far BT’s development of new technologies such as ‘Long Reach VDSL’ will improve the situation for those at some distance from a cabinet. (Paragraph 33)

6.Given the nature of the deployment, it is now absolutely essential that BT publishes full broadband speeds and coverage at a premises level, giving full transparency of those who are and who are not receiving superfast speeds so that other providers can, if needed, step in to pick up gaps in coverage. In its current negotiations with BT over the future of Openreach, Ofcom must insist on publication of this data, at the very least, for those BDUK intervention areas which have been covered using public money. (Paragraph 34)

Connectivity for small businesses

7.It is essential that the Government and Ofcom ensure that SMEs have access to reliable and affordable broadband and are not discriminated against by providers. The Government must prioritise delivering superfast broadband to new and existing business parks and fully connect enterprise zones, many of which still do not have superfast connections. The present system is not working for many businesses and we are concerned that BT is being perversely incentivised not to invest in FTTP in business parks by its present revenue income from dedicated lease lines (Paragraph 38)

8.The broadband connection voucher scheme appears to have been very successful in pooling demand and facilitating better connectivity for SMEs. We share the Minister’s enthusiasm for an extension of the scheme and see a strong case for further vouchers to support those businesses in areas not likely to be reached by superfast broadband or affordable commercial products, such as the many small business in remote rural areas in the “final 5%”. We regret the ending of the scheme without due notice. This should not be repeated. (Paragraph 42)

Connectivity in the devolved nations

9.It was an important step to devolve operational responsibility for improving connectivity to the devolved administrations. They have all made good progress despite their more rural and challenging geographies. All three nations have experienced similar challenges and appear to share a recognition of the imperative to drive more investment from the private sector into the UK’s telecoms infrastructure. It will be important that DCMS and Ofcom fully involve the devolved administrations in future policy making and the design of future interventions for broadband and mobile, given that a one-sized approach is unlikely to work for all. (Paragraph 47)

Mobile coverage

10.The Government and Ofcom have worked well together to secure investment from the mobile network operators to achieve agreement on reaching a 90% geographical coverage by 2017. Ofcom has successfully designed spectrum auctions so that coverage obligations are a key part of these exercises. The Government will undoubtedly achieve better coverage for mobile through the release of 700 MHz band and others once they become available. When these bands are auctioned there will clearly be a trade-off between spectrum price and the obligations on the licence holders. To facilitate investment by the operators, the Government may well need to place additional emphasis on achieving coverage, and on the role that mobile will play in meeting the universal service obligation for broadband, rather than primarily maximising revenue from the auction. (Paragraph 57)

11.Given the progress being made and the undertakings agreed by the mobile network operators in 2014, the Government should, as it has acknowledged, continue cutting red tape, reform the Electronic Communications Code and take further steps to provide a conducive environment to investment, and easy access to fairly-priced backhaul connectivity. (Paragraph 58)

Reaching the final five per cent

12.We consider that there is an important, but limited, role for satellite provision in meeting the overall challenge of delivering affordable broadband services. Satellite providers are particularly relevant for extreme rural provision, which might incur supplementary costs beyond a potential standard USO tariff structure. They are also relevant for expedient provision to bridge a gap until terrestrial services gradually extend through to most of the premises as yet beyond the BDUK roll out. (Paragraph 65)

Support for local communities

13.Clearly, in supporting community action in the final five per cent, Government and local authorities will need to consider how best to advertise available solutions to those with poor connectivity. (Paragraph 69)

14.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 should offer guidance and support in relation to key areas such as: choosing the right technology solutions, raising finance, stimulating demand and minimising other costs of provision. (Paragraph 70)

Providing access to backhaul

15.Opportunities for the rollout of fibre to remote nodes should be fully investigated by Ofcom as part of an overall solution for rural connectivity. Access to affordable, reliable backhaul allows communities to benefit from alternative solutions and gives them opportunity to build their own networks such as with B4RN in Lancashire. To assist with deployments, Ofcom should have an important role in overseeing the mapping of national availability of fibre together with a schedule of rates, including suitable spare capacity of public-owned assets. (Paragraph 73)

16.A positive feature of the BDUK gap-funding model is that local bodies receive a refund from BT where there is higher-than-forecast take-up of superfast broadband services. It remains questionable whether the original 20% take-up rate set in these contracts was too low, but the money available for reinvestment will mean that a significant further percentage of premises will be covered beyond the 95 per cent target. Local bodies must be entirely free to choose how to reinvest this money and to spend it with alternative providers other than BT Openreach, if they consider that as being a more appropriate and cost-effective option. (Paragraph 79)

Supporting start-ups

17.We agree with Government that a demand-led intervention for bringing connectivity to remote, rural communities is the right way forward for the “final five per cent”. Given the challenge of stimulating demand and covering the costs of accessing backhaul will be a huge barrier to cross for some remote communities, we recommend that the Government evaluate the case for a rural voucher scheme to pool demand and contribute to the cost of backhaul access for network builders (Paragraph 82)

Towns and cities

18.We consider probably the most effective way of providing access to broadband for those in urban or suburban environments where the market is currently not delivering access is through the introduction of a universal service obligation where a householder would have the legally enforceable right to an affordable and reliable internet connection. (Paragraph 85)

London Underground

19.Given that London is a world-class city and tourist destination, there must be an expectation now that its principal transport routes have full mobile and internet connectivity. The challenge of providing the London Underground network with connectivity is undoubtedly huge and expensive, but partnerships with private infrastructure groups may be able to facilitate a solution. A quid pro quo for any partner might be special access to the Underground’s passive infrastructure running under London’s streets, which could enable cost reductions and wider network development and upgrades across the Capital. There is also a vital need to improve mobile reception along principal rail routes. (Paragraph 87)

Right to broadband

20.Rather than introducing two USOs, a single USO should be sufficient to accommodate the typical needs of both residential and small business users, which would facilitate home working. For those businesses that require above average speed connections, it is reasonable that they pay extra for these services, as they do for others such as business banking or other ancillary services. As a USO would be running principally on residential-grade infrastructure it could be complex to operate two fully specified USOs, one for home use and another for SMEs. Although some adjustments could be managed at an exchange level, which could make some differentiation possible, we expect in practice this would likely cause significant technical, operational and commercial challenges. (Paragraph 101)

21.We believe that there is a compelling case for expanding the current USO for telephony and dial-up internet to cover broadband, given the vital role it plays in people’s lives through facilitating interactions with friends and family, and commercial and public services. A USO should allow all to have access to decent and reliable broadband services wherever they live. The design of a new USO should be in line with the Government’s and Ofcom’s aspiration for competition in broadband delivery, both at the service and infrastructure level. 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. (Paragraph 116)

22.We support the Government’s preference for an industry-funded scheme at this stage. Given that the rollout of superfast broadband has been supported by £1.7bn of public funding and will bring coverage up to nearly 95 or 96 per cent of premises, we believe a demand-led approach is now appropriately funded through a levy on communications providers. Like the history of other utilities, this will involve all users covering—up to an agreed limit—the higher costs of connecting the remaining few who wish to connect. An industry levy in our view could legitimately apply to all communication providers including mobile network operators given that mobile broadband will be part of the solution to delivering a national USO. (Paragraph 117)

23.We believe Openreach would be the obvious backstop provider of the broadband USO in many regions as the owner of the national access infrastructure. Where no provider was willing to bid for the USO undertaking in a particular area, then Government or Ofcom would need to decide whether it would be Openreach or another provider who would meet the obligation and compensate them for doing so through the levy. (Paragraph 118)

24.There will be no advantage in setting the USO’s speed and other specifications too high at its introduction, since worthwhile interim solutions to improve connectivity such as wireless solutions may not achieve ambitious data downloads and uploads in certain locations. In addition, a higher specification would force industry to pass on the extra cost to consumers as well as in higher charges, and would also reduce the attractiveness of the providers’ retail offers and packages. We believe that the Government is right to follow Ofcom’s advice to set it at 10Mbps as a minimum at the start. However, the need for an increase in the USO minimum download speed to 30Mbps by 2022 is entirely foreseeable, and the Government should be making active plans for this eventuality. (Paragraph 119)

25.We recommend setting a single USO for broadband which accommodates the reasonable requirements of both domestic and average small business use, given that delivery is over a residential-grade infrastructure. This would be workable and limit distortions to the commercial broadband markets. The USO’s specifications will need to define a range of important factors that affect the experience of household or small business connectivity. As well as download speeds, these factors include minimum upload speeds, maximum delay and maximum error rates. (Paragraph 120)

26.Wherever it is realistic, the Government and Ofcom should ensure that the design of the broadband universal service should use and extend existing commercial and community networks, rather than displacing them. We heard in evidence that it should be possible to set incentives for Openreach to meet a USO through buying in services from existing infrastructure providers rather than seeking to overbuild them itself. A diverse structure of physical infrastructure competition is clearly beneficial, not least in allowing benchmarking of infrastructure construction costs and exploiting different techniques and technologies. Ofcom and the DCMS should work together as necessary to establish a regulatory framework that promotes diversity within the provision of a USO. (Paragraph 121)

27.In allocation of a USO, an open procurement process should take place where there is transparency and suitably-sized procurement lots to encourage competition among all providers, small and large. Smaller lots appear to suit smaller alternative network providers offering hybrid solutions but we recognise economies of scale and scope can be gained from larger deployments. We envisage Ofcom, or another similar body, taking on an alternative dispute resolution role to arbitrate where disagreements over designation occur. In addition, Ofcom or another body would need to choose the areas to be awarded and run the tendering process. (Paragraph 122)

28.There will need to be a regime in place to conduct periodic reviews of the minimum requirements of the USO and any other conditions attached to it. Those companies bidding would need to be fully aware of the timescales for reviewing the USO and be incentivised to invest in solutions which had a credible upgrade path. Ofcom would need to provide clarity over the likely evolution of the USO standard in line with its ongoing communication market analysis and reviews. (Paragraph 123)

29.Whilst we realise that a USO will take time to implement, given the costs and technical feasibility work that is required as well as the mapping and designation of areas for tenders, we would nevertheless urge Government to introduce the USO at the earliest point, possibly as early as 2018, once the BDUK rollout is due to complete (Paragraph 124)

A fibre future

30.Given the rise in alternative providers, we agree with Ofcom that the future must be about infrastructure competition as well as service competition. In line with this aim, the Treasury’s plan to set up an investment fund for alternative network developers should provide the financial support necessary for network building and enable challenger companies to achieve adequate size and scale to allow them access to low-cost debt which would help enormously to accelerate scaling up of alternative network infrastructure builders in the UK. (Paragraph 135)

31.In the context of driving further fibre deployment, we see the choice facing Ofcom as between satisfying the needs of consumers now, i.e. by maintaining lower prices; or the needs of consumers of the future, by encouraging investment in fibre networks and allowing a pricing freedom to incentivise alternative providers to invest. The price of copper broadband product LLU will no doubt keep a check on the fibre price. Not introducing a wholesale price cap on Openreach’s fibre broadband for a while more would allow other providers to continue to make a sufficient return on their investments for further network deployment. (Paragraph 142)

Access to ducts and poles

32.The requirement of easy access to BT’s passive infrastructure on reasonable terms is vital, as it will allow network builders to come to better investment decisions. This issue should have been given a higher priority by Ofcom much earlier. Key to its success will be Openreach providing online access infrastructure maps so that providers can plan their deployments. Pricing will also need to be regulated in a way to encourage investment. Openreach’s processes must be realistic and flexible to meet alternative network builders’ needs and not just those of BT, and Openreach must demonstrate a willingness to deliver access arrangements that are flexible and encourage take up. (Paragraph 148)

33.Given the lack of progress since 2009 in increasing third parties’ access to BT’s infrastructure, Ofcom must treat this issue with much more urgency. It should set out a programme of work to facilitate take-up of access to Openreach’s ducts and poles facilities by non-BT providers. Access arrangements will need to be supported by an Alternative Dispute Resolution process to resolve any problems, perhaps in line with the mechanisms used to support effective functioning of the Electronic Communications Code. (Paragraph 149)

Openreach’s performance since 2005

34.BT has failed to improve already poor quality levels at Openreach in recent years, while overall investment has remained flat until very recently. For its part, Ofcom was slow to introduce minimum standards of service with financial penalties for Openreach, happening some nine years after its creation. Ofcom regulates for competition, and its 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. (Paragraph 171)

A new broadband utility

35.There appears to be compelling evidence that 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. BT does not lack access to capital. 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 Openreach. (Paragraph 186)

36.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. At the same time, BT’s use of an investment hurdle rate which is 1.6% above Openreach’s cost of capital means that a potentially very significant amount of annual investment in broadband access and services, investment that would add to shareholder value, is not 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 damaging both to public welfare, to shareholders and to consumers. We believe there is a pressing need to liberate more of Openreach’s revenue for investment in broadband and the evolution of its telecoms infrastructure. As a result there is a need to consider closely BT’s governance and capital structures as well the adequacy of its oversight and regulatory arrangements. (Paragraph 187)

37.On the evidence presented, it seems very likely that Openreach would invest more in upgrading its infrastructure if it were a separate company, since it would not be competing with other Group businesses and would be freed from the Group hurdle rate on investment. By adopting its current approach, BT is likely to be sacrificing shareholder value and public benefits that would flow from these investments. This is likely to mean that substantial amounts of money—potentially totalling hundreds of millions of pounds a year—are not being invested in developing and upgrading Openreach infrastructure which is critical to the UK economy and most people’s lives. We therefore recommend that Ofcom undertakes an assessment to ascertain the financial effect of BT’s failure to invest in Openreach at its true cost of capital. (Paragraph 188)

38.We have considered the case made by Professor Helm for establishing a standalone broadband utility provider using a regulatory asset base model. While the concept of having a single system operator could be conducive to the management of a universal service obligation for broadband, we believe the differences between the communications market and other traditional utility markets are too great. There is already a wide level of competition in the communications access infrastructure market, and real potential for this to grow. It is not clear to us how the presence of a utility-style operator would be compatible with promoting competition or would work successfully alongside current market players such as Virgin Media, to say nothing of the many other smaller providers of broadband access infrastructure, without stifling competition and the growth of alternative networks. We also consider that there is a significant risk of disruption to investment in and by Openreach, were BT forced into a structural separation. (Paragraph 201)

An independent Openreach?

39.Ofcom set out a very cogent case in its Digital Communications Review for full separation of Openreach from BT Group, yet it stopped short of making an outright recommendation for such action at that stage given concerns over difficulties of implementation, possible disruption to investment and likely response by BT. It is a very difficult judgment call as to whether the benefits of full structural separation would outweigh the likely significant disruption and fall-out to the wider industry and consumers. However, there is good reason to suggest that a more independent Openreach might increase infrastructure investment significantly. (Paragraph 202)

40.We consider 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 made 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 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—an area which Sharon White admitted has been comparatively ignored until now—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. (Paragraph 203)

41.In any event, in order to cement Openreach’s independence, we recommend that in future Openreach should be required to set out and publish a five-year strategic investment plan for comment and agreement with the BT Group Board. This would enable it to set out its financial needs, in a transparent and comprehensive manner. 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, who could in turn facilitate increased investment in infrastructure. (Paragraph 204)

42.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. (Paragraph 205)

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18 July 2016