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Openreach as a “distinct entity”: a step far enough?

(Image credit: Image Credit: Elliott Brown / Flickr)

It is now several weeks since it was announced the Openreach is going to become a distinct, legally separate company with its own Board, within the BT Group.  As the dust starts to settle Dave Millett of telecom consultants Equinox takes a detailed look at what this means.

The backdrop to the announcement was increasing evidence that the UK was lagging behind other developed countries in its access to superfast broadband, never ending complaints about quality of service and that Openreach was favouring BT with its rollout of services.

Certainly, the most recent report from the European Fibre To The Home Council shows how badly we lag when you look at the percentage of the premises.

The UK is not absent because of Brexit but because we do not meet the minimum threshold for inclusion despite us having the fifth largest GDP in the world.

By the way the Council counts superfast as at least 100 mbps per second if not 240 mbps compared to the definition Government and BT have used which is 24 mbps.

What is actually happening within the agreement, which is based upon voluntary commitments submitted by BT, that Ofcom has said meet its competition concerns?

Once the agreement is implemented:

• Around 32,000 employees will transfer to the new Openreach Limited following TUPE consultation, and once pension arrangements are in place
• Openreach Limited will have its own branding, which will not feature the BT logo
• The Openreach CEO will report to the Openreach Chairman with accountability to the BT Group Chief Executive with regards to certain legal and fiduciary duties that are consistent with BT’s responsibilities as a listed company
• Openreach will assume greater independence under its own Board of Directors.  This Board will set Openreach’s medium term and annual operating plans and determine which technologies are deployed, but within a strategic and financial framework defined by BT

Will this change actually make any difference?   It needs to be remembered that BT has fought tooth and nail for year against any reduction in its influence over Openreach.   Does BT see this as the lesser of two evils or does BT believe that in practice it will not make any real difference?  Some key details could point towards the latter.

BT will still have right of veto over who is appointed as Chief Executive of Openreach – so if they think someone might actually want to operate to independently they can stop them being given the job.

In the short term BT will still provide the actual money for the investment.  Is that likely to go up dramatically? BT has just spent £1.2bn on football rights and owes the pension fund £10bilion. It is also covering the losses of the recent accounting scandal in Italy.  Notably it has committed to raise dividends for its shareholders for the next few years.

Openreach will be free to explore alternative co-investment models in private with third parties.  However, this would have been much easier had they been fully independent. It also means BT may be able to cuts its investment correspondingly.

Crucially for BT, Ofcom agreed that it can retain full ownership of the network assets, with Openreach able to control them via a contract known as an agency agreement. The company feared hundreds of millions of pound of extra costs if it had been forced to transfer the assets as well as the staff.  Other countries have separated the assets.  For example, Botswana privatised its equivalent of BT in 2016. It retained the fibre infrastructure in a separate company as it is seen as key to the national economy.

BT effectively still controls the purse strings and has the power over the person in the top job.  Certainly the stock market thought it was good news for BT. The share price rose four per cent on the day of the announcement.

While BT will consult with others, e.g. SKY and Talk Talk, over its investment strategy, they all have residential TV products to sell. This is where they make most of their money, and is why consistently businesses are being ignored and not served.  Who is speaking up for the vast numbers of businesses that don’t have access to fibre?  One response is the various independent fibre investment programmes both in cities such as Edinburgh and rural community projects such as B4RN.

One of the arguments against the full separation of Openreach was the deficit on the BT pension scheme (mentioned above).  But apparently to allow staff to be transferred to Openreach, the Government is in talks to extend the Crown Guarantee that underwrites it. If this happens UK taxpayers are liable to plug the deficit in Britain’s biggest private sector retirement fund if BT hits financial trouble. Ensuring that security is retained by a legally separate Openreach will require new legislation, which Treasury officials have begun drafting.  So how is that different to a full separation?

Ofcom still has much to do to convince us that it has not just bottled another opportunity.  It will soon set out proposals for new wholesale price controls for the current generation of superfast broadband.  BT currently has freedom to set the price to allow it to recover the costs of the upgrades. The details of the new regime will be crucial to Openreach’s investment plans.

Finally this split does not appear to address the current poor service levels of Openreach – i.e. will customers be able to talk direct to Openreach and get compensation for missed appointments and delays?  There is no mention yet of penalties for Openreach if they miss targets, which they consistently do.

Time will tell if this separation was sufficient to improve the UK’s infrastructure, The trouble is that by then it might be too late to remedy if it doesn’t work.

Dave Millet, Director, Equinox
Image Credit: Elliott Brown / Flickr

Dave Millett
Dave Millett has over 35 years’ experience in the Telecoms Industry. He now runs Equinox, a leading independent brokerage and consultancy firm.