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BT has “significantly under-invested” in its Openreach infrastructure division to the tune of hundreds of millions of pounds a year, a report by the Culture, Media and Sport Committee has concluded.
The committee, presided over by a panel of independent experts, said the investment shortfall has been at the detriment of customers and BT shareholders and must be rectified.
The shortfall has arisen, according to the committee, because of BT’s decision to prioritise investments in “higher-risk, higher-return” initiatives, while neglecting to pump money into the profitable services and infrastructure that fall under Openreach’s remit.
“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,” the committee said in a statement.
If BT refuses to overhaul the way Openreach operates – both from an operational and investment perspective – the committee said it would call on Ofcom to revisit separating the subsidiary from the telco’s control.
The regulator previously ruled in favour of allowing Openreach to remain a part of BT Group, as confirmed by the initial conclusions of its Strategic Review of Digital Communications report in February 2016.
The review echoed some of the committee’s findings and made the case for Openreach to be given greater control of its budget and strategy, which Ofcom acknowledged could pave the way for it to be spun-out of BT at a later date.
Improving service quality
Aside from these recommendations, the committee called on Ofcom to step up its involvement in pushing Openreach to improve the quality of service it offers, and accused the regulator of being slow to act on this issue in the past.
“Ofcom was slow to introduce minimum services standards with financial penalties for Openreach, some nine years after its creation,” the committee said.
“Ofcom has not placed enough emphasis in the past on improving Openreach’s quality of service. The prospect of stiffer penalties should also encourage BT to voluntarily invest more in infrastructure.”
The committee also wants Openreach to be afforded the opportunity to operate with a far higher degree of autonomy so it can make its own decisions on where and what it wants to invest in.
As part of this, the committee wants Openreach to be given an opportunity to create and publish a five-year strategic investment plan to be approved by the BT Group board.
“This would enable it to set out its financial needs, in a transparent and comprehensive manner,” the committee’s report into the issue stated.
“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 to longer-term institutional investors, which could in turn increase investment infrastructure,” it added.
The report comes several months after regulator Ofcom published its Business Connectivity Market Review, and ordered BT Openreach to improve its processes for installing high-speed connections to large businesses and cut its wholesale pricing.
BT bites back
In a statement to Computer Weekly, BT took umbrage to the committee’s under-investment accusations, before describing the data used to compile its findings as “largely historic”.
“We are disappointed to be criticised for having invested more than £1bn a year in infrastructure when the UK was emerging from recession and rival companies invested little. As the report acknowledges, BT’s investment has made the UK a broadband leader among the major economies in Europe,” a BT spokesperson said.
“Today’s report is largely historic given Openreach investment is 30% higher than it was two years ago and it will grow again this year. We are already pumping in hundreds of millions of pounds of extra money and we have also committed to invest a further six billion pounds over the next three years.”
On the issue of service quality, however, the organisation said there is room for improvement, before pointing to the recent commitments it has made around tackling this issue.
“We agree that service levels have to improve. Yesterday [18 July 2016] we announced that we are making significant progress in this area. Thousands of engineers have been recruited and we are fixing repairs and installing lines quicker than before,” the spokesperson said.
“We are in discussions with Ofcom about increasing the autonomy of Openreach and are hopeful that a settlement is possible that will meet the concerns of the committee.
“Separating Openreach from BT would lead to less investment, not more, and would fatally undermine the aims of the committee,” BT added.
Read more about BT Openreach
- Frances Murphy, partner, and Joanna Christoforou, of counsel, from the London office of global law firm Morgan Lewis examine Ofcom’s review of BT’s Openreach.
- BT Openreach will be forced to cut the wholesale prices it charges for high-speed business leased lines and improve its performance in installing them, following the conclusion of Ofcom’s Business Connectivity Market Review.