All for broadband and broadband for all

In the run-up to last week’s UK General Election, the main political parties supplemented headline-grabbing policy announcements around Brexit policies and the NHS with outlines of their plans for supporting investment in key national infrastructure. Among the announcements were those in support of ensuring that all homes and businesses should have access to very high capacity broadband. With the Conservative Party now in power and promising to deliver gigabit-capable networks for all by 2025, we ask how can this be achieved?

Investors given the all clear…

The results of last week’s General Election caused quite a stir in the press, but the increased certainty and political stability are likely to be a boost for many investors in crucial infrastructure for the UK.

For broadband providers in the UK—not only BT/Openreach but other investors in new infrastructure for very high capacity full-fibre and DOCSIS networks such as Virgin Media/Liberty Global, CityFibre, Hyperoptic and Gigaclear—the race is on to provide gigabit-capable broadband connections to homes and businesses throughout the UK.

Any investment that was temporarily paused following the Labour Party’s election campaign announcement—i.e. that it would nationalise the infrastructure arm of BT (Openreach) under the promise of free broadband for all—should now resume. Investors can be confident that the state will not be nationalising broadband and the associated risk of undermining the investment and network build that has already been undertaken should now have fallen away.

However, the Conservative Party’s ambitious target of gigabit-capable broadband networks to every home and business across the UK by 2025 will require a significant increase in pace and geographical coverage of investment if this target is to be met.¹

…but challenges remain

Despite the potential for significant benefits to society as a whole and at a local level, the goal of gigabit networks for all by 2025 remains a significant challenge.² As discussed in a recent Oxera article, the implementation of large investment projects can take time.³

Furthermore, with the extremely large cost of the investment, the ability to make a return on the investment and the commercial viability of any solution is clearly crucial. This will be a particular concern where there is a threat of future regulation that might affect lifetime returns, as well as the need to invest in more rural areas, where investment costs per premises will be higher and potential demand (the number of homes and businesses) lower. Therefore, leaving the achievement of the 2025 target entirely to ‘the market’ and private investors may not be enough.

A little help from our (Right Honourable) friends…

The Conservative Party has recognised some of these difficulties and, in its manifesto stated that it would, therefore, announce ‘…a raft of legislative changes to accelerate progress and £5 billion of new public funding to connect premises which are not commercially viable.’⁴

However, the devil will be in the detail. For example, the government needs to clarify which areas will be eligible for the funding (perhaps building on the initial findings of the July 2018 Future Telecoms Infrastructure Review).⁵ There are also questions regarding whether £5bn will be enough to ensure the full roll-out of services to these areas, and whether this can be done without breaching state aid rules (and this is without considering the question of which state aid rules will apply after Brexit).⁶

…and the telecoms regulator?

Regulatory policy could also be used as a tool for stimulating investment by being very clear on how any project may be regulated in future to allow investors to assess the expected returns of their investment with confidence.

For example, in an attempt to incentivise investment, the European Electronic Communications Code (which must be translated into national law by the end of 2020) introduces new conditions relating to co-investment agreements, including a promise (subject to certain conditions) not to regulate operators with significant market power (SMP) that enter into an investment agreement with at least one other operator.⁷

In the UK, the risk of future price regulation will be of particular concern for BT, and, by extension, other investors in gigabit broadband networks. For some services, or in some parts of the country, the telecoms regulator (Ofcom) might deem it necessary and appropriate to mandate cost-based access to network elements to ensure that retail providers such as Sky and TalkTalk can continue to compete at the retail level even where they do not invest in their own full-fibre network.

In this case, the regulator must clearly indicate how the project might be regulated in future to allow investors to assess the expected returns of their investment. This is related to the principle that all investments should be regulated in a way that provides investors with a ‘fair bet’ (see the box below).

It is important for the fair bet framework that the assessment of returns is conducted over the lifetime of a project. For very high capacity networks, this will require time horizons of 20+ years.

While it may not be possible for national regulatory authorities (NRAs) to make detailed regulatory decisions that last this long, it will be crucial for investor confidence that NRAs adopt a framework that explains how the fair bet principle can be honoured over this timeframe. This should, for example, include a full risk analysis of the business case, to be undertaken upfront (before the investment takes place).

The UK is not alone

Of course, the UK is not alone in grappling with the investment challenge alongside ambitious national targets to ensure widespread availability of very high capacity networks. Other countries throughout Europe and further afield are facing similar challenges.

While the number of private investors present in the market may vary from country to country, and the policy choice of pushing for full-infrastructure competition or service-based competition facilitated by access regulation may differ, in many cases, the SMP operator will continue to play an important role in supporting the overall roll-out target.

In this regard, regulatory certainty is key to allowing investors to assess the expected returns of their investment with confidence and make a compelling business case for the investment. Regulators and SMP operators need to open a productive dialogue to understand the exact costs and risks that the operators are facing, then take these into account when designing any future regulatory intervention to ensure this will not undermine the investment.

Oxera has been at the forefront of the debate in this area, helping to develop regulatory frameworks and risk models that can be used to implement the fair bet principle in practice in both the UK⁸ and New Zealand.⁹

¹ Conservative Party (2019), ‘The Conservative and Unionist Party Manifesto 2019’, p. 28.

² See Oxera (2019), ‘Gigabit broadband: what does it mean for consumers and society?’, November; and Oxera (2019), ‘The impact at a local level of investments in Very High Capacity Networks’, September.

³ Oxera (2019), ‘Investment promises from politicians—should we believe them?’, Agenda, December.

⁴ Ibid.

⁵ Department for Digital, Culture, Media & Sport (2018), ‘Future Telecoms Infrastructure Review’, July.

⁶ Oxera (2019), ‘‘Brexit means Brexit’, but will state aid rules in the UK be lost in transition?’, Agenda in focus, September.

⁷ Oxera (2019), ‘EU broadband: co-investing in a faster future’, Agenda in focus, September.

⁸ Oxera (2017), ‘Does Ofcom’s approach in the WLA market review honour the fair bet principle?’, prepared for Openreach, June.

⁹ Oxera (2019), ‘Compensation for asymmetric type 2 risks’, prepared for Chorus, July.