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Written evidence submitted by BT Group
DCMS COMMITTEE INQUIRY: BROADBAND AND THE ROAD THE 5G
- The importance to the UK of widespread and resilient digital connectivity has been thrown into even sharper relief as the country responds to the Covid-19 outbreak. BT’s networks and the UK’s wider digital infrastructure has managed significant increases in demand and a reshaping of daily internet traffic effectively, driven by mass home working and school closures.
- As we look towards addressing how best to support the UK’s recovery, achieving the Government’s gigabit connectivity ambition has taken on even greater importance, with research showing that meeting this goal could boost the UK economy by £60bn by 2025, which would help post Covid-19 economic recovery significantly and create jobs across all four nations.
- BT is committed to a full fibre future. We have very recently announced a £12 billion investment to enable Openreach to pass 20 million homes across the UK by the mid-to-late 2020s, funded in part by a difficult decision to suspend dividend payments to shareholders. A significant proportion of this build will be in rural areas.
- For most of the country, gigabit-capable connectivity will be delivered most efficiently through full fibre. Most of the financing needed to deliver a nationwide full fibre network will continue to come from the private sector. However, that investment is risky and has a long payback period. Stimulating the level needed to support the necessary scale and pace of build requires a public policy and regulatory framework that reflects this. Government must address the barriers to deployment that operators face across the UK to enable roll-out to happen as quickly as possible.
- The policy and regulatory approach envisaged by the 2018 DCMS Future Telecoms Infrastructure Review (FTIR) – which sought to put in place conditions for infrastructure investment and network competition – remains, broadly, right. The FTIR segmented the UK into three categories of premises based on the expected market conditions for fibre deployment. In our view, this kind of categorisation is a credible basis on which to move towards the Government’s ‘
- The first category (c.70% of the UK) is made up of premises where more than one fibre builder could potentially see a business case to deploy and where, therefore, network-level competition is possible. Second are those premises (c.10-20%) where it will likely only be commercially viable for only one operator to connect premises to full fibre (albeit with competition at the retail level). And third are those premises (c.10-20%) in remote and rural areas where it is highly unlikely for there to be a business case for any company and where, therefore, public funding will be necessary to deliver it.
- The precise size of each of these three segments will ultimately depend on the actions taken by the Government and the regulator according to their assessment of the viability of commercial investment and the costs of connecting premises to full fibre.
- However, if the Government’s 2025 target for nationwide coverage is to be a credible ambition, significant and urgent progress to create the necessary deployment and investment conditions is required:
- Investors need a stable and predictable regulatory regime. Ofcom’s recent Wholesale Fixed Telecoms Market Review (WFTMR) is a significant step forward but more is needed to fully unlock investment.
• Deployment barriers must be removed comprehensively and a business rates exemption for all new fibre must be introduced. BT will shortly publish new independent analysis which shows that the market, given current deployment and investment conditions, is only likely to deliver full fibre connectivity to 75% of UK homes and businesses, with 100% coverage only likely by 2033. Removing long-standing barriers, such as those related to use of other infrastructure, wayleaves and streetworks will accelerate deployment, making a 2025 target more realistic and making a further 10% of the country commercially viable, reducing the need for public subsidy.
• There needs to be an ambitious plan for rural areas. The starting point for this is designing the £5bn public investment programme in full fibre effectively. But further action will be needed to ensure rural areas are built to at a similar pace to the rest of the country – in particular, with appropriate policy direction from the Government, we think there is scope to harness industry competition and cooperation in areas where it will only be commercially viable for one network to deliver a full fibre connection to increase the number of premises passed.
• Rapid take-up by consumers and businesses of full fibre products when available is key – and could be supported by Government intervention. The industry is currently investing in full fibre ahead of demand for gigabit-capable connectivity – so action to increase consumer and business take-up of full fibre services will improve operators’ business cases is needed. This would also ensure that the UK can realise the economic and social value of full fibre as quickly as possible. We believe that this could be best achieved by: actively supporting Openreach in pursuing their fibre switchover and copper switch off programme; central and local government acting as scale anchor tenants for full fibre, driving more public services online; and subsidising gigabit-capable connectivity for disadvantaged and vulnerable customer groups.
- We believe that the Government should develop, as soon as possible, a clear roadmap that charts how and when these key policy and regulatory decisions will be implemented to enable the industry to accelerate its investment and build activity.
- 5G will also play a key role in delivering ‘gigabit capable’ connectivity, but further support is needed to accelerate rollout. BT, through its EE network, is currently delivering the largest 5G footprint in the UK. We currently have coverage in over eighty towns and cities nationwide, with roll-out continuing on a demand-led basis (i.e. where additional capacity is needed to support increased customer demand for fast, reliable mobile connectivity). To support that effort – and to ensure the UK is best placed to exploit the significant economic advantages as 5G matures – further Government action is necessary.
- Covid-19-related challenges have had a clear impact on the rate at which BT is able to expand 5G coverage and upgrade existing 4G infrastructure, with greater difficulties in gaining access to sites and ensuring all works can be performed with adherence to social distancing rules. Openreach has also faced issues in building fixed fibre networks during this period with issues obtaining permission to build, access buildings and shortages of resources. The longer-term implications for deployment are still unclear, but we are confident that we will be able to accelerate activity in the second part of the year to make up for at least some of this. We are likely we will face a capacity bottleneck and it may be difficult for us to make up lost ground in the medium term without further local and central government support.
- Finally, we want to work with the Government, the security services and Parliament to develop the detail of the approach to the use of ‘High Risk Vendors’ in our digital networks – set out by the recent Telecoms Supply Chain Review – to ensure the transition to new requirements is manageable, the industry can progress with certainty and we can continue to make significant investment in upgrading the UK’s digital infrastructure.
Investors need a stable and predictable regulatory regime
- The Government, in its policy framework, supports the promotion of competition and commercial investment, with regulatory intervention only where necessary. Where intervention is needed, the Government calls for stable and long-term regulation that incentivises network investment and ensures fair competition between operators. The National Infrastructure Commission (NIC) also says that investors in 'major transformational projects' need certainty that regulators' views on prices will not change 'half-way through'.
- Ofcom has recently published its WFTMR. Its proposals are a significant step forward. Where intervention is needed, they go a long way towards signalling the stable and long-term regulation that will incentivise network investment and ensure fair competition between operators. We particularly welcome proposals to support the retirement of our copper network so we can avoid running two networks at once. Aligning wholesale prices with inflation (with a modest premium for fibre services) will help everyone’s business case, and help us invest in harder to reach areas. But more is needed to fully unlock the scale and pace of investment required to deliver gigabit capable networks everywhere by 2025.
- Ofcom should confirm its message to investors that its pro-investment pricing policy will endure – specifically. In particular, it should offer assurance that it will commit to:
- Indexation of legacy pricing to remain in place for the entire period of transformation from copper to fibre.
- No additional regulation of higher speed products (i.e. higher than the standard 40Mbps download/10Mbps upload product) for a period of time that is more consistent with the actual investment horizons. These will exceed fifteen and possibly twenty years, rather than one or two market review periods.
- As part of this, we expect Ofcom to take a more specific position on our (and other investors’) fibre investment risks and ‘fair’ returns. This is critical to support competitive long-term fibre investment and better reflects the long payback period on investment. Ofcom should be more explicit about how it intends to treat the commercial 'bets' we are taking, should it decide to cap wholesale prices for the higher speed full fibre services in the future. Downsides to fibre investment exist, even after allowing for the support provided by Ofcom's proposals. Investors want to know what opportunity they have to generate returns that compensate for these risks before Ofcom would step in to limit them through regulation. All firms who are sinking private capital into enhanced broadband services care about this, because any regulation of BT in the future affects the returns everyone makes.
- We believe Ofcom’s proposals do not go far enough in removing regulation where it is no longer necessary. Ofcom should go further in facilitating (rather than putting at risk) wholesale deals that will deliver real benefits to customers by enabling commercial investment in gigabit-capable networks at competitive prices.
- Ofcom’s market analysis does not sufficiently reflect the competitive environment that already exists. Virgin Media, the market leader in ultrafast broadband (by a factor of seven), has agreed a merger with O2, potentially creating a range of synergies and convergence opportunities. It is also expanding as a fixed network operator and considering wholesaling and co-investment. Other competitors are consolidating and scaling up their plans. Internet providers like Sky and Talk-Talk are ‘shopping around’ to deliver competitive fibre services to homes and businesses.
- All competitors to Openreach have access to their ducts and poles. However, Openreach must build an entirely new network from scratch. We do not believe that the market dynamics we see are consistent with the view that Openreach can behave independently of its customers, competitors or consumers. Ultrafast investment is already accelerating and telecoms markets are much more competitive than Ofcom has reflected in the WFTMR.
- We believe a clearer recognition of the competitive forces already present and growing in the market – from Virgin’s gigabit-capable network, the roll-out and planned build from CityFibre and other ‘altnets’ and the commercial leverage that major communications providers such as Sky can exert over wholesalers – should enable Ofcom to go further by deregulating.
- Allowing these competitive forces to play out is likely to benefit consumers by delivering both more investment and lower prices than would otherwise be the case. Commercial deals and partnerships that share the risks and gains of network investment are being struck (or negotiated) widely, following the lead of fibre-rich countries like Spain and Portugal. The UK Government has said that firms should have flexibility to manage risks in this way, and it expects Ofcom to facilitate such arrangements 'where appropriate'. Openreach’s ability to compete fairly and negotiate agreements with communication providers is critical to manage the substantial risks of investing in full fibre at scale and at pace, particularly given Virgin Media’s established (and sunk) ultrafast network.
- We also believe that Ofcom should apply the same pricing approach in non-competitive areas as elsewhere in the country to support investment by BT. We have already announced that a significant proportion of our planned £12bn investment will benefit rural areas and we are currently engaging with Ofcom on the specific regulatory conditions we need in these areas to help us get going quickly.
Deployment barriers must be removed comprehensively and a business rates exemption for all new fibre must be introduced
- In order to reach the build rates necessary to achieve the Government’s targets, all deployment barriers must be removed as quickly and holistically as possible. New analysis we have commissioned from Analysys Mason shows that – given the current deployment environment – the industry is unlikely to be able to cover more than 70% of UK premises by 2025.
- The analysis also suggests that currently only about 75% of premises would be commercially viable for the market to serve without public subsidy. The remaining 25% (nearly eight million premises) would therefore require Government funding, well beyond the expected scope of the Government’s £5bn programme. The challenge is greater in Scotland (73%), Wales (64%) and Northern Ireland (62%).
- However, greater momentum behind current barrier busting effort could dramatically reduce the time to deliver full fibre for all, and substantially increase the number of premises that the market can deliver it to without Government funding being needed. The analysis suggests that addressing key barriers would support delivery of full fibre to 96% of UK homes and businesses by 2025, and to 100% by 2027. They could also see the number of premises that can be connected by the market alone with no public subsidy increase from 75% to 85%, or an additional 3.2m homes and businesses. These reforms include:
- Reforming planning, ‘wayleave’ and streetworks rules to make it easier to lay new fibre all around the UK.
- Implementing plans to legislate for all newly built homes to have open access fibre connectivity and improved access rights for operators into flats and apartment blocks.
- Giving fibre builders the ability to make use of other infrastructure (electricity, water and other duct assets where available) in order to deliver a new fibre network at realistic prices and on sensible terms.
- Introducing an immigration regime that is supportive of bringing in the required workforce, and in parallel supporting a re-training programme to ensure availability of suitably skilled engineers and deployment personnel staff to support fibre network design and build.
- Ensuring that Local Authorities allow the use of innovative approaches to laying new fibre in line with recently published Government guidance.
- Furthermore, an exemption from business rates for new fibre build will significantly impact the business cases for commercial fibre investment. It would enhance the wholesale revenue aspect of any investment case and, importantly, significantly reduce the risk profile of that investment given the significant variability seen in business rates applied to digital networks at recent re-valuations. Removing this additional cost for fibre services and the risk that it could substantially change multiple times within the investment period would be a significant signal to investors of the Government’s commitment to a fibre future.
- Without such a change, BT’s overall business rates liability is set to increase significantly as we transition customers to full fibre. This creates real disincentives – under the current regime the faster we make that transition, the faster our rates liability increases. We had hoped that the Chancellor would explore a complete exemption for fibre deployment in his first Budget and, following it, we would therefore encourage the Treasury to prioritise digital infrastructure as it begins its expected business rates review.
- In terms of reducing deployment costs and timescales, the Telecoms Infrastructure (Leaseholder) Bill currently progressing through Parliament may help at the margins in improving access to apartment blocks and flats. However, it is not sufficient and does not reflect the need to radically improve the ability of operators to deploy digital infrastructure. Indeed, ministerial comments made during the Lords Committee Stage regarding concerns with “unintended consequences” of providing industry with further rights of access were disappointing.
- We have seen the Government confirm it will revise the Building Regulations (2010) to mandate full fibre connectivity be facilitated in all new build homes. This is a welcome step. Openreach have offered a number of incentives to developers which have seen higher take-up of full fibre connectivity into the new homes they are delivering. However, up to 20% if the 200,000 new premises being built every year still do not have full fibre installed at construction. Secondary legislation is required to correct this.
- It will be vital that forthcoming legislation here has a requirement for such connections to ‘open-access’, meaning that internet service providers can buy wholesale access from the network builder, and then sell it to customers. If not, a developer could simply build the fibre connection and restrict access to only those providers it chooses, such as itself. We have already seen examples of some housing developers acting in this way, and setting themselves up as monopoly service providers for internet services in the developments they build. From a consumer perspective, this means a limited or no choice of provider, and therefore having to pay whatever price is given to them to get full fibre with no ability to switch if they see lower prices or the service is poor.
- The Government should also make the revision of the Communications (Access to Infrastructure) Regulations 2016 a key priority. These set out the basis under which network builders can share physical infrastructure with each other, as well as other utilities such as gas, electricity and water. As the Government has acknowledged, these measures have had limited success in the UK to date, particularly given the complexities of negotiating contractual terms that work for parties with different levels of risks and needs. Reforms will need to ensure that fibre builders are supported in using infrastructure already in place for other utilities (gas, water, electricity) on fair and equal terms. Analysys Mason project that effective use of this existing infrastructure could cut three years off the projected date by which the UK could expect 100% full fibre coverage.
- Wider use of the latest techniques – such as ‘micro-trenching’ – for laying fibre by fibre builders would also accelerate build – potentially saving two years on delivering full fibre for 100% of UK premises. This requires support for training engineers with the right skills and (where necessary) an appropriate immigration regime in place. Supporting wider use of these techniques will also require all local authorities to review and implement the guidelines outlined by the Department for Transport in their recently update to “Specification for Reinstatement of Openings in Highways”. These explicitly recommend the use of these innovative techniques and suggest that their use should be permitted by fibre builders when digging up roads unless there are clear safety issues
- Planning and permit rules for laying fibre also require reform. This would eliminate substantial amounts of ‘dead time’ for engineering teams who are waiting for planning approvals in rural areas and for permits to perform ‘street works’ in urban areas. Even a modest reform could on its own would save a year on delivery of full fibre.
- In parallel with that, serious consideration should be given to allowing the laying of fibre, in the same way that (for example) water pipes can be built across private land. In exchange for the right to lay pipes, landowners are entitled to compensation equal to the depreciation in value of the land caused by the work. The same regime could be applied to code operators, with the accelerated procedures applied to resolve any disputes that may occur as a result.
Government, working with industry, needs to develop an ambitious plan for full fibre deployment in rural areas
An effective approach to publicly funding the 10-20% of UK premises that will not support commercial investment must be developed
- As the Government has rightly recognised, it will not be commercially viable for up to 20% of all UK premises to be provisioned with full fibre. Public subsidy is going to be necessary for these premises to be connected to it. It is equally important that the process of awarding the £5bn outlined in the recent Budget is designed efficiently and that any public money is awarded to network builders who will offer ‘open-access’ to service providers who want to deliver gigabit-capable connectivity over them.
- Several steps are going to need to be taken as quickly as possible to support the Government’s ambition:
- Rapid resolution of the procurement process, alongside completion of whatever EU state aid clearances are necessary in the context of the UK’s current and future relationship with the EU.
- A clear commitment from the Government that any successful bidders will be placed under an obligation to make any network they deliver with public money open to all service providers that wish to use it, and to put in place the technical and commercial architecture necessary for large and small providers to use such networks effectively. Without this, effective competition at the retail level for gigabit connectivity will not be possible.
- The Government must outline a bid sizing and delivery process that maximises the speed by which successful bidders can deliver networks.
Government should consider action to harness industry competition and cooperation in areas where it will only be commercially viable for one network to deliver a full fibre connection
- There will also be parts of the UK where commercial conditions are unlikely to support more than one network delivering gigabit capable connectivity. Put simply, this is because there are not enough potential customers to support multiple networks all competing for wholesale or retail customers.
- BT wants to provide the investment necessary to reach just over 60% of the Government’s target. But we will not be the only provider. Other companies’ stated ambitions for fibre already total nearly 15 million premises, or almost 50% of the total, when added together. There are some parts of the UK where those operators may need to co-ordinate to reduce the scope for overbuild so that broadband at top speeds can be made available to the highest number of premises possible while minimising the need for public funding.
- We consider that in these areas a co-operative process may need to be established, facilitated through appropriate policy direction by the Government. Any such Government-led system of co-operation would need the following issues to be addressed:
- How such areas are identified: the industry will need to come to a consensus view, alongside Government and regulator, on the parts of the UK that can sustain competition from multiple gigabit capable networks; the parts that are completely unviable for the market to deliver to; and resulting from this, the areas where neither of the above is likely and where commercial build by a single provider therefore feasible.
- A Government led process for greater transparency across the industry of planned build locations in the latter areas to avoid ‘accidental’ overbuild.
- What commitments any single network builder would have to make in order to ensure effective competition at the retail level.
- We believe there is a clear role for the Government and industry to work together as part of a facilitated national framework for fibre rollout that adds up to more than sum of individual companies’ plans.
Rapid take-up by consumers and businesses of full fibre products when available needs to be encouraged
- Investing in building a new full fibre network is expensive; however, once built it should be lower cost to operate. Operating two networks in parallel, a copper one and a fibre one, is both inefficient and expensive. It is therefore vital that the new fibre network is used once it is built, enabling the old copper network to be retired and the costs of running it saved. Measures that enable Openreach to swiftly transition customers off the old copper network and onto new fibre are essential if this is to be achieved.
- We welcome Ofcom’s efforts to ensure that regulation supports efficient switchover once full fibre networks are built in an area. The trials that Openreach are conducting on the practicalities of this with its wholesale customers will also inform this process. Ensuring this process works is essential for the fibre investment case.
- Clearly, the more demand exists for full fibre connectivity the better the investment case for fast-paced roll-out. Most focus to date has been very much on the supply-side, but Government action to boost demand for fibre connectivity would speed up investment and enable the UK to realise the benefits of full fibre connectivity more rapidly.
- BT’s investment over the past decade means that 97% of premises have access to at least superfast broadband speeds at very affordable prices via ‘Fibre to the Cabinet’ (FTTC) technology. Even though we know FTTC is not the infrastructure the UK will need for its digital future, it is enough for most people’s needs today. So, the single most important thing that the Government can do to drive demand for fibre is to support the migration of customers on to fibre.
- The UK broadband industry, via the Broadband Stakeholder Group, has recently commissioned a study of multiple countries across the globe that have also sought to address this issue of demand for full fibre to learn what actions might work in the UK. This report highlights that supporting take-up is key to achieving the Government’s ambitions for accelerated deployment of gigabit-capable networks and will be integral to post-COVID-19 economic plans. It makes several recommendations to Government to help underpin this. In particular, that they should:
- Improve consumer and business understanding of the benefits of gigabit broadband.
- Incentivise take-up of new gigabit broadband connections and address issues of affordability.
- Make use wider use of digital products and services to support the economy and society in a post COVID-19 era.
- Facilitate eventual switch-off of the legacy copper network by securing buy-in from all relevant broadband industry stakeholders.
- It is very difficult to know what businesses will do in terms of embracing more digital activity and remote working as the UK emerges from the restrictions in place as a result of Covid-19. But there is no doubt that retaining a degree of remote working would support an ongoing reduction in carbon emissions and in air quality, whilst also supporting demand for the kinds of innovative services full fibre can deliver. BT is keen to work with Government and our business customers to grasp this opportunity and, in particular, to support initiatives around digital transformation of public services. Furthermore, the role of Government as an anchor tenant for fibre investments, and as an exemplar in using gigabit services, transitioning to full fibre early for all government buildings and services, can be very beneficial.
5G will also play a key role in delivering ‘gigabit capable’ connectivity – further support is needed to accelerate rollout and counteract Covid-19-related deployment delays
- BT is currently delivering the largest 5G network in the UK, with EE now serving eighty towns and cities nationwide. Even before the Covid-19 outbreak, we believed several measures needed to be progressed by Government to enable us to expand the scope of this network efficiently.
- The Covid-19 crisis has had a range of impacts on the rate at which we are deploying of 5G, as well as our efforts to improve the capacity and coverage of our 4G network. In line with Government guidance, this work has continued through the ‘lockdown’ period where possible. However, restrictions on access to some locations, as well as staff availability, has meant a slowdown in deployment. So the need for central and local government support to help us recover deployment rates has become even more important.
- In particular, we will need to see DCMS and MHCLG progress their joint consultation on reforming planning rules for new 5G infrastructure and ensure that in doing so the planning system governing deployment of gigabit capable infrastructure is technology neutral. Today, ‘fixed line’ digital infrastructure – such as telephone poles and street cabinets – does not need any planning consent from a local council. A network builder must merely notify that council before they are built. We believe the same rules should apply in a mobile context.
- Gaining planning consent for a new 5G site is only a first step. A network builder must approach the owner of the land or building where they need to build or upgrade a site to discuss rent and the terms of ongoing access. We always aim to reach a consensual and mutually beneficial arrangement on these issues and we focus on good landowner relationships. But there are occasions where we are frustrated by a lack of engagement. Any such disagreements are resolved through the Electronic Communications Code (ECC) process, which was substantially revised by the Digital Economy Act (2017). Ultimately, they are adjudicated in England and Wales by the Lands Tribunal and its equivalents in other devolved nations.
- During the 2017 Act’s second reading, the then Secretary of State outlined that “The new electronic communications code recognises that digital connectivity is as important as a connection to water or electricity supplies. Providing new rights to install communications infrastructure will herald a revolution in rural connectivity, bringing the digital economy to all parts of our nation.”
- Since the Act passed, the Government, industry and some local authorities have invested much effort in trying to ensure that this vision becomes a reality. Many landowners see the benefits that supporting new digital infrastructure delivery can deliver, and several consensual agreements based on the terms of the new code and the valuation approach it introduces have indeed been concluded.
- But for the most part, it has proved extremely difficult to get landowners and their agents to engage meaningfully with the processes the new Code establishes. Many are reluctant to enter negotiations, and there have been examples of agents actively seeking to frustrate the new processes it establishes. Moreover, recent Lands Tribunal decisions have had a significant blocking effect on the rate that existing Code agreements are being renewed; the transition from the old regime to the new is proving very difficult and, while case management is happening fairly quickly, some cases are being listed for adjudication by the Lands Tribunal up to twelve months after date of application.
- In sum, while the intentions behind the new Code were right, it is clear the ECC is not working as intended and this presents a significant threat to the Government’s digital strategy and the associated economic benefits. We have proposed that DCMS should review the ECC and that central and local government must take a greater leadership role in ensuring their assets are made easily accessible for mobile deployment on Code terms.
- The Government’s digital infrastructure toolkit recommends that all local authorities and central Government Departments should catalogue their existing assets and make them available to network builders under the terms of the new ECC. Some local authorities, such as Norfolk County Council and Wolverhampton, have done this already. Others have not. We need to see full adoption of the recommendations of the Government’s digital infrastructure toolkit across the public sector.
 CEBR, Full fibre broadband: A platform for growth (October 2019)
 DCMS, Statement of Strategic Priorities for telecommunications, the management of radio spectrum and postal services, (October 2019)
 National Infrastructure Commission, Building a Digital Society (2018)
 Hansard, HC 13 September 2016 Column 775