Using broadband infrastructure investment to help engineer economic recovery

Last monday the Information Society Alliance (EURIM) organised a meeting to discuss how market forces could and should be unleashed to pull through investment in broadband and bring about economic recovery. We learned how Felixstowe, the hub of European trade with China, is cut off from the rest of the UK with third world communications (its broadband and rail service would put most African and South American ports to shame). Meanwhile the communities of Cumbria have accessed world-class expertise to install high capacity communications networks at a fraction of the cost quoted by the major players. 

The “meat” in the meeting was a draft report produced by Bob Franklin, Chief Accountant for BT at the time of the flotation, on Making Broadband Investment Markets Work

Broadband revenue streams, including business, government, advertising are very much larger than the retail market that is commonly quoted. They are already in the range £50 – 100 billion ratehr than £5 – 10 billion. More-over those revenues are now seriously constrained by capacity. We now have bandwidth rationing (alias “traffic management”) at almost every level in the network – using almost every mechanism except price!  All this in parallel with marketing hype for products and services that are likely to result in a quadrupling or quintupling of consumer demand by the time of the Olympics and an almost wilful ignorance of the scale and nature of business demand.

More-over the bog standard utility return, before adding services, is now very attractive. The local loop now cross-subsidises the rest of BT, instead of the other way round. Hence the sudden expansion of the infrastructure programmes of BT and Virgin.

The need is to allow markets to work so that BT, Virgin and the other major players can raise billions more in the market to make investments that will handsomely reward their investors at the same time as local communities use “alternative” funding models to reap similar returns by funding “alternative” infrastuctures to serve those areas which are uneconomic for the business models of the major players. And Public Sector needs and budgets (including the delivery of eemrgency services, security, welfare, health and education) should be part of both markets.

The next step is to for the Communications Group of EURIM to set up a sub-group to review and expand the draft, involving corporate planners and fund managers as well as the current and would-be operators, equipment suppliers and infrastructure builders. The aim will be to educate government and regulators as to what they have to do to make investment in UK broadband, instrastucture as well as products and service) as attractive as in Africa, Brazil, China etc. The core point being that if policy is to rely on market forces, then the UK has to compete globally for private sector investment funds.

That raises issues that go well beyond broadband. Our whole economic recovery depends on making the UK, once again, an attractive location for economic investment in business operations to serve the rest of the world. 

The Prime Minister and Chancellor have rediscovered the need to tell the world that the UK is “open for business”.

Have officials and regulators yet done so?

I have just been asked to comment on a response to the current BIS consultation on principles for economic regulation of  infrastructure utilities (note the deadline for submissions is barely a week away).  

Current UK regulatory policy for the Utilities is based on what I was taught (London Business School MSc06)  was precisely the wrong basis. We were told that monopolies should be regulated on price and quality of service – not rate of return. They should be rewarded for finding cheaper and more efficient means of delivery, not for performing better at regulatory games at customer expense.  

The current approach remains symptomatic of the commercial and financial ignorance of the brilliant officials and advisors who brought us the trillion pound Enronisation of public sector assets (from the lawyers’ railway though PFI’d schools, hospitals, barracks, air tankers etc to an outsoruced and mortgaged future) that we have seen over the past two decades.

Each lesson in the first half term of the MSc06 “introduction to accounting” course began with a ritual chant of “Price is not a function of cost” for several minutes. The punch line was “price is what the market will bear. If you cannot make it for less you should be in business. If you can make it for a lot less, hide it for as long as possible.” 

One of those who chanted alongside me turned £100,000 into £12 million in 18 months because Treasury officials (and their very expensive advisors) did not understand the difference between a risk business and a simple leasing deal when they privatised British Rail. He could not believe twhat was being done, played by the rules and was bought out as soon as the markets realised what had happened. Another of my class chaired the Public Accounts Committee enquiry into what had happened. The atmosphere at next Alumni re-union was “interesting”.

My comment on the submission to BIS was on the need for HMG to listen to the corporate planners and investment managers who will “decide” whether their organisations efforts and their clients funds are used to restart investment in the UK infrastructure (broadband, power suppliers etc.) or used to get a better return in Australia, Bolivia or Canada .. . 

The new UK/EU Competitiveness Group of the Information Society Alliance has been discussing how to address this and two days ago I sat in on a meeting to plan how to extend our approach to the whole of smart infrastructure investment (i.e not just broadband) – with the objective of also positionng the UK as an exporter of the technologies not just the expertise.  

We should not, however, under-estimate the challenge. My own experience as a corporate planner was that the governments of most other nations were less capricious and more likely to deliver their end of a long term investment package than the mix of conflicting tribal interests and short-termism that we faced in the UK.  Changing the UK culture will require sustaoined effort, not just a one-off exercise.