A 10 Point Plan for a better Openreach 7 July 2016 Why are we here - - PowerPoint PPT Presentation

A 10 Point Plan for a better Openreach

7 July 2016

Why are we here today?

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Almost no-one thinks the current market structure is working

“Given the concerns identified, continuing the status quo is not an option.” Ofcom Initial Conclusions

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Almost no-one thinks the current market structure is working…

The Government agrees with Ofcom’s view that the current relationship between BT and Openreach will not deliver the country’s needs for more competition, better innovation and better service. The Government believes Ofcom should be firmly focused on taking whatever action is needed to correct the competition problems identified, and to promote the growth of the digital economy, however radical a change that might be. Government response to Ofcom’s Initial Conclusions

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The case for splitting is fairly compelling. Full structural separation of Openreach, the part of BT that builds and maintains the UK's main network of telecoms infrastructure, from the larger part of BT which serves end-users, could focus management effort on both sides. Investors might see financial results that go beyond the ho-hum numbers just reported. October 2015

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Now we know. The report by Ofcom makes it clear that for all the special pleading and claims of billions of pounds of investment [BT’s] stewardship has neither been fair to competitors nor helpful in ensuring Britain has the quality and speed of broadband required for a digital economy. That is why the regulator is demanding ring-fencing and structural independence for Openreach. February 2016

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MPs have called for full separation of BT's Openreach unit… the most radical of the three routes still available to Ofcom chief executive Sharon White. She has already ruled out the status quo, leaving tighter regulation under the current structure or support for new competing infrastructure as the remaining two options. January 2016

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Beyond the politics, the numbers tell the real story. Even with BT's wishy-washy promises today, Britain would still be far behind other European countries on fiber. (Don't even look at Japan or Korea, where fiber is ubiquitous -- it's just depressing.)Europe's fiber leader is Telefonica, which spent heavily to build the network in Spain despite a deep recession. France's Orange is also no slouch.BT should do more -- capital expenditures need to rise and its obsession with G.fast

• abandoned. If not, regulators will have a solid argument that it's a poor steward of

such a key piece of national infrastructure. BT could then lose control over the cash cow that is Openreach. May 2016

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Gavin Patterson, BT’s chief executive, last week said he wanted to reduce the company’s reliance

• n Openreach cashflows.

This is in part a necessity: Ofcom is already tightening the regulatory controls that have allowed BT to make excessive profits from its monopoly for the last decade. It is not too hard to imagine a point at which the headwinds get strong enough for BT shareholders – other than Deutsche Telekom, anyway – to start agitating for a voluntary separation. May 2016

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The concern, though, is that BT may be dragging its feet on investing in Openreach’s largely copper

• network. Rather than fully convert the system to

high-speed fibre, the company is trying to upgrade its existing network with a less efficient technology called G.fast. Ofcom, as well as rivals, believe Openreach may have an incentive to put BT's interests above those of the public. February 2016

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The act of ring-fencing Openreach and giving it a separate board, accounting and other structures makes for an easy stepping stone for an eventual split and divestment into a separate company. Of course there are complications for a large workforce of more than 30,000 and their BT pensions which are topped up annually by the company. But this is bread and butter work for corporate financiers and pensions

• consultants. It is no excuse for hanging onto full

control of creation of the most efficient and best fibre broadband network. February 2016

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Four areas of concern

Effective ective reg egula ulation tion Compe mpetition tition Networ work invest nvestme ment nt Quality ity of servi vice ce

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200 400 600 800 1,000 1,200 1,400 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Current market structure provides no incentive to invest in FTTP; UK is nowhere on international league tables

Networ work invest nvestme ment nt

Openreach Capital Expenditure

Capital expenditure (£ millions) FTTC Roll out Other

Source: Frontier Economics, BT

• Av. annual capex

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Regulatory concerns over weaker competition as the market moves to superfast broadband

Compe mpetition tition

40% 67% All Broadband Superfast Broadband c.50% 0% c.30% 30% Broadband nd market t sha hares (Dec-15, excl.

• l. cable)

le)

Source: Sky estimates

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Openreach’s quality of service is now recognised to be sub-standard

Quality ity of servi vice ce

Line faults

increase 2013 -15 faults per annum

“We have concerns about Openreach’s capacity to manage faults…This is a significant cause for concern.”

Source: Ofcom

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Regulation becoming ever-more complex & contentious

Effective ective reg egula ulation tion

• Regulation has to deal with horizontal issues, and BT’s vertical

integration

• Encourages Ofcom to develop new, complex & contentious regulation

(e.g. VULA margin test)

Increased separation of Openreach addresses these issues

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Structural separation is the best solution to these concerns

Effective ective reg egula ulation tion Compe mpetition tition Networ work invest nvestme ment nt Quality ity of servi vice ce

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Structural separation makes BT Retail’s business contestable

Networ work invest nvestme ment nt Quality ity of servi vice ce

• Real competitive pressure on Openreach to invest in more fibre and

improve quality

Source: Sky illustrative estimates

• Payback on FTTH investment critically dependent on take-up
• Being able to compete for BT Retail’s business makes

alternative infrastructure investment far more viable

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Level playing field for competition; simpler regulation focused on Openreach

Competition Regulation

• No longer any incentive for Openreach to favour BT’s retail divisions
• Level playing field creates tougher competition
• No need for complex regulatory interventions – Undertakings etc.
• Ofcom can focus on regulating Openreach
• Rest of BT becomes unregulated

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For now, Ofcom is looking at “legal separation”

“We will therefore consider whether a strengthened model of functional separation could deliver the greater independence and autonomy for Openreach that we believe is necessary. If functional separation cannot be strengthened, we reserve the right to take forward structural separation.” Ofcom Initial Conclusions

A 10 point plan for a better Openreach

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The 10 point plan is aimed at supporting Ofcom in its efforts

Openreach provides on an equal basis 7 Openreach consults with all its customers 8 Openreach is no longer the only provider BT can use 9 Openreach does not inhibit investment by others 10 Creating an Openreach that delivers for all Reforming Openreach’s governance Giving Openreach the tools that it needs

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Reforming Openreach’s governance

Lega gally separate e Openre reach

• Openreach becomes a company
• Leverages normal company law requirements to deliver transparency
• Articles of Association set out Openreach’s purpose
• Openreach able to contract, hire employees, own assets in its own name

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Indep epen enden ent Openre reac ach Board

• Openreach Board will be appointed via a documented, independent process in accordance with UK

Corporate Governance Code

• Chair should be independent of BT and Openreach
• NEDs to make up majority of the Board

.

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Indep epen enden ent ov

• versi

rsight ght and adjudi udica catio ion n body

• Draws on merger practice
• Role is to oversee transition, and adjudicate on any disputed issues that arise
• Takes administrative burden off Ofcom

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Giving Openreach the tools that it needs

Openre reach ach owns s its assets ets

• It will no longer share infrastructure or personnel with BT Group
• Instead, it will have its own finance, legal, strategy, product design and system teams that operate entirely

independently of BT Group. It will take responsibility for its own relationship with the regulator and other external stakeholders.

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Indep epen enden ent brandin ding

• No more ‘a BT Group Business’ on vans
• Partly symbolic, but also necessary to reduce cultural interdependence

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Openre reach ach is financ ncially ially indepen enden ent

• Can borrow in its own name
• Payments to BT via dividends. Dividend policy sits with Openreach
• Sets its own budget

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Creating an Openreach that delivers for all

Openreach ach provides on an equal l basis

• Beefed up version of current ‘equality of inputs’ requirement

7 Openreach ach consult lts with h all its customer mers

• An obligation to engage in industry-wide consultation on matters relating to strategy, plans and

development of new services.

8 Openreac ach h is no l longer the only provider BT BT can use

• BT’s consumer division can now engage in open procurement processes which allow other operators

the opportunity to provide network services to BT.

9 Openreach ach does not inhibit it investment ment by others 10

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Changes are not hard to deliver

• BT has proven capability to deliver complex projects when it wants to, or has to

– Integration of EE – FTTC roll out

• Existing functional separation of Openreach does most of the heavy lifting
• Other objections raised by BT don’t hold water
• ‘Pensions’ top of the list
• Sky commissioned independent experts, who advise that issues are not complex

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Pensions

• The types of pension-related issues associated with setting up Openreach as a wholly owned

subsidiary of BT are standard ones that arise when companies change their structure. It does not raise any novel or particularly complex issues

• There are several straightforward options for dealing with the BT pension plan in the event that

Openreach was constituted as a separate company

• These options could be made easier if the 'Crown Guarantee' attached to BT's old pension

scheme (which only applies in the unlikely event that BT is wound up) was changed (without increasing the government’s liability)

What next?

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What happens next?

• Ofcom is on track to publish proposals at the end of July
• Will have more clarity over process after that
• We will continue to engage with Ofcom and Government