Openreach: BT and industry response
July 26, 2016
By Colin Mann
In response to Ofcom’s proposals to make Openreach more accountable, BT confirmed it had volunteered “significant” governance changes to further increase the independence and transparency of the unit. It believes these unprecedented changes, elements of which have been welcomed by Ofcom, can form the basis for a fair, proportionate and sustainable regulatory settlement. They can also help Ofcom conclude its review and achieve its aims in a quicker timeframe.
The changes will enable BT to focus on its plans to further improve the UK’s digital infrastructure. The UK is already the leading digital economy in the G20 and BT will help it maintain that lead by investing a further £6 billion in its fixed and mobile networks over the next three years. Capital expenditure has risen by more than thirty per cent at Openreach over the past two years and will rise again this year as the business focuses on delivering better service, broader coverage and faster speeds.
The main governance changes include: the creation of an Openreach Board with an independent Chair and a majority of independent members; the greater delegation of strategic, operational and budgetary responsibilities; and an enhanced consultation process with industry on future investment plans. BT believes the re-organisation of Openreach addresses the concerns relating to governance set out by the Culture, Media and Sport select committee which last week requested that BT “allows Openreach much more autonomy over what it invests, when and where”. The changes also meet all of the objectives Ofcom outlined for the strengthened independence of Openreach in February 2016.
- “More independent governance, with a responsibility to serve all customers equally”. BT will establish an Openreach Board as a board committee of BT plc, BT’s main operating company. It will have a majority of independent members, including the Chair, all to be appointed in consultation with Ofcom. The Board will be accountable for Openreach’s strategy and operational delivery. The Openreach CEO will be accountable to this Board and will report into the BT Group Chief Executive. An obligation for Openreach to serve all its customers equally will be included in the Articles of Association of BT plc. This will supplement the legal obligations set out in the current regulatory Undertakings and strengthen Openreach’s purpose to serve all of its customers equally.
- “Increasing Openreach’s autonomy over budget and decision making”. Openreach and its Board will enjoy a high level of autonomy. Openreach will produce Annual Operating and Medium Term Plans setting out its budgetary, strategic and operational objectives. The Openreach Board and CEO will also control how they deploy capital, within the overall budget agreed with the BT Board. This is in keeping with its wider corporate responsibilities and its legal duties as a public company
- “Improving Openreach’s approach to consultation with customers”. A formal three stage process will be introduced whereby industry will be consulted in advance on substantial investment decisions and the development of new products. This process will include an early stage during which Openreach can engage with its communications provider customers on a confidential basis.
- “Enhancing Openreach’s operational capacity”. Openreach will have access to sufficient capabilities and resources to make its own decisions and run its own operations.
Gavin Patterson, BT Group Chief Executive, said: “The UK is the most digitally advanced nation in the G20 and further investment is required if it is to keep and extend that lead. That’s why we are poised to invest a further six billion pounds in our UK networks over the next three years”.
“We have listened to Ofcom and industry and are introducing significant changes to meet their concerns. These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested.
“Openreach is committed to delivering better service, broader coverage and faster speeds and these changes will enable it to do just that. Our proposals can form the basis for a fair and sustainable regulatory settlement and we believe they can also enable Ofcom to bring its Review to a speedier conclusion.”
BT’s re-organisation of Openreach will provide all the benefits that Ofcom is seeking while avoiding the extensive, disproportionate costs that would be incurred if assets had to be transferred into a newly incorporated subsidiary company. It will also ensure that Openreach continues to benefit from being part of the larger BT Group, which helps to reduce the risk it faces when investing in new products.
Openreach will remain a heavily regulated business with Ofcom determining the prices for more than ninety per cent of its products. It will continue to be overseen by Ofcom which already has powers to ensure that Openreach serves all of its customers on an equal basis, supporting what is an intensely competitive retail market. BT’s governance changes will serve to supplement and reinforce this existing regulation.
Patterson added: “Proportionality has to underpin any regulatory solution and we believe our proposals are a bold and appropriate response to the concerns outlined by Ofcom and others. We have considered the more extreme solutions proposed by others but they would be overly complex, disproportionately costly and time consuming to implement. They would also undermine Openreach’s ability to invest and create years of uncertainty.”
BT has discussed its governance changes at length with Ofcom over many months. It formally notified them on 19 July, stating that it intends to implement them within six months, subject to Ofcom agreeing to vary the existing Undertakings. It is calling on Ofcom to support these proposals as the best way forward for the country and as the foundation for the competition and investment in digital networks that the UK needs.
The Government welcomed Ofcom’s recommendations, saying BT’s own proposals were inadequate. A Department for Culture, Media and Sport spokesman said: “Nine out of 10 homes and businesses now have access to superfast broadband, but our goal is to make sure the UK builds the right infrastructure to maintain our position as a world-leading digital nation.
We are clear that a more independent Openreach is needed to benefit consumers and the UK’s digital infrastructure. We are concerned that BT’s proposals do not go far enough and think it is right that full structural separation remains an option.
Swift and clear action is needed to give certainty to consumers, industry and investors in the UK’s broadband infrastructure, and which delivers rapid improvements in the level of investment and service.”
Jeremy Darroch, Group Chief Executive, Sky, which had lobbied for Openreach’s full separation said: “Today’s proposal to create a legally separate Openreach is a step in the right direction, although falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need.
In particular, leaving Openreach’s budget in the hands of BT Group raises significant questions as to whether this will really lead to the fibre investment Britain requires.
At the end of the day, Ofcom’s changes will only work if they deliver better outcomes for customers.
It’s now important that the changes Ofcom have mandated today are implemented rapidly, fully and without dilution. We are encouraged by Ofcom’s stated commitment and willingness to use its powers to hold BT’s feet to the fire.”
Kester Mann, Principal Analyst, Operators at CCS Insight, said Ofcom’s proposals were about as radical and stringent as they could have been without taking the ultimate step to separate structurally Openreach from BT. “They show clear focus to address flaws within the current model and a desire to bolster broadband infrastructure service and deployment in the UK.
The decision not to force BT to split Openreach comes as little surprise. It would have been the most controversial action the regulator could have taken and would still not have offered guaranteed improvements for customers. Indeed, the time to implement, associated costs and market disruption – potentially leading to years of legal battles – would have threatened short-term infrastructure investment.
Although BT will breathe a sigh of relief that Openreach will remain a part of the group, Ofcom’s strongly-worded statement should leave it under no illusions that it needs to up its game. Indeed, the threat to hive off Openreach still remains if it is unable to act more independently from the BT group.
Inevitably, BT’s rivals will criticise Ofcom for being too lenient. But although they campaigned hard for formal independence, today’s outcome still represents a partial victory. Structural separation was always a long-shot and companies such as Sky and TalkTalk will stand to benefit from greater infrastructure investment, customer service and independence.
Today’s announcement doesn’t draw a line under this controversial and protracted issue. Ofcom is now opening a consultation on its proposals and by inviting further comments from interested parties, so expect the next round of lobbying to soon commence. In the interest of stability and market certainty, the sooner final plans can be drawn up and implementation gets underway the better.”
Fiona Keenan, strategic insight director at Kantar Worldpanel, described Ofcom’s decision as “a step change” for the UK telecoms market, suggesting that the proposed reforms should go far in fostering a more consultative, transparent approach to infrastructure development, as well as increasing investment. “It should also suppress concerns from other providers who have always felt that BT’s control over Openreach has stymied their growth. Coinciding as it does with wider changes in network quality targets and new rules to make switching providers easier, Ofcom’s decision should usher in positive changes for the consumer.
The question is how long it will take to implement these changes and whether the impact will be as far-reaching as Ofcom seems to expect. The likes of Sky and TalkTalk have long been using the problematic status of Openreach as a free pass to explain their own shortcomings, but that’s not the whole story. Whether ultimately we’ll see cheaper and faster broadband for the general public remains to be seen,” she added.
Meanwhile, advanced-televison.com’s editor-in-chief Nick Snow offers his personal take on the Ofcom decision.