Jeremy Warner's Outlook: Ofcom sidelined in broadband review

Francesco Caio, former chief executive of Cable & Wireless, is no doubt a talented chap who knows an awful lot about modern telecommunications. The future of broadband Britain is an equally worthy cause.

Yet is it really necessary for the Department of Business, Enterprise and Regulatory Reform to order an independent review into why no one is prepared to make the investment necessary to ensure that 100Mbps of bandwidth or more is streamed into everyone's home and business?

What's the point of Ofcom, the communications regulator established at huge cost to the taxpayer and the industries it regulates, if it is not to address issues of precisely this sort?

Or perhaps Shriti Vadera, the business and competition minister who seems to be in charge of the new review, and her ultimate masters in Downing Street, don't have any confidence any longer in Ofcom's ability to find solutions.

The answer to the question the review sets out to establish is in any case fairly obvious. Britain has one of the most competitive telecommunications and broadband industries in the world, but that also makes it too fragmented for the huge infrastructure investment necessary to ensure Britain is fully set up for Web 2.00 and Web 3.00.

The Government is hoist on its own petard. High levels of competition have resulted in some of the lowest broadband prices in the world, but also an environment in which there is no one with the possible exception of BT with the financial muscle necessary for the task of rewiring the whole country with fibre optic cable.

BT won't do it because it doesn't trust the regulator to give the rate of return necessary to justify the investment. In any case, it is not convinced that people would be prepared to pay for the infrastructure even if it its price were underwritten.

Other countries such as France and Germany which seem to be ahead of Britain in rolling out the necessary infrastructure have got there before us because a more statist approach has been adopted, with incumbent telecoms players allowed to charge high prices to invest in tomorrow's technology.

The issue of how to persuade BT to invest in a twenty first century infrastructure is as old as New Labour itself. Before he came to power, Tony Blair signed a Faustian Pact with BT's then chairman, Sir Iain Vallance, under which BT would indeed make the necessary investment in fibre optic infrastructure in return for various regulatory concessions, including a level playing field with cable on pay TV. Once in power, the arrangement was quietly dropped. The imposition of a windfall profits tax on BT drove Sir Iain into such a rage with his new political friends that he vowed never to vote Labour again. There was certainly no question of betting the company on a twenty first century infrastructure after that.

Nor would his successors be so rash as to commit to a national programme of investment without guaranteed arrangements on rates of return which would undermine present, high levels of competition in the market for broadband.

Meanwhile, Ofcom is left twiddling its thumbs wondering whether it has been sidelined. Ofcom is these days run by the person who, as policy adviser on media and telecoms to Tony Blair, recommended the establishment of this monstrous communications regulator in the first place, Ed Richards. He created his own job.

It was never obvious why you would want to combine content and infrastructure regulation under one roof, and the more time that elapses, the less obvious it becomes. Indeed, it is sometimes hard to work out what the purpose of Ofcom is at all, with alternative competition regulators making all the running on issues such as the BSkyB stake in ITV.

The old Oftel, a reasonably effective telecoms regulator while it lasted, seems to have vanished without trace since being subsumed into Ofcom, which is perhaps why Mr Richards has been frozen out of the current review. You have to wonder what the politics of Mr Caio's appointment are now that Gordon Brown is firmly entrenched at Number Ten. Its all very odd, and quite unlikely to produce solutions on Britain's looming loss of competitiveness on telecoms infrastructure.

Concern grows over SWF investment

In a little reported announcement this week, the Australian government unveiled a series of measures designed to crack down on sovereign wealth fund investment. In future, the country's Foreign Investment Review Board will be obliged to consider whether "an investor's operations are independent from the relevant foreign government" and whether prospective investors operate at arms length from government.

Though the government doesn't directly make the connection, it is fairly obvious who these measures are aimed at. Aluminium Corporation of China (Chinalco), the state owned aluminium group, recently bought a 9 per cent stake in Rio Tinto in conjunction with Alcoa of the US.

As long as that's where it stops, the Australians are probably OK with it, but anything approaching a controlling stake is going to raise concerns. The Chinese are now far and away the largest buyer of Australia's abundance of natural resources. If they control the companies that mine these resources, they can begin to interfere with pricing and much else besides. What's in the customer's interests is not necessarily in Australia's national interest.

The Chinese have already issued a series of warnings to the effect that developed countries should not discriminate against investment from developing nations. Any attempt to do so would be regarded as a form of protectionism.

This would be perfectly true if the investment were being made by private sector companies for entirely commercial reasons. In fact, much sovereign wealth fund investment is government directed for strategic, national purposes, and even when it pretends not to be, there is the suspicion that it is.

The Chinalco stake in Rio is portrayed as an entirely commercial endeavour, yet the company is state owned, its chairman is a senior member of the Communist Party of China's central committee, and in any case, Chinalco almost certainly couldn't afford even this quite limited investment, let alone any more, unless it was being bankrolled by the state.

There is nothing wrong as such with China attempting to develop national champions on the global stage of mineral resources, yet there plainly is an issue for other nations if the intention is to claim these resources for the wider but sole benefit of China Inc.

Again, there is nothing wrong with sovereign wealth fund investment as such. Some of Wall Street's largest banks have good reason to be grateful for their largess. Yet the moment governments become involved in private investment, there is a risk of politicisation.

Ignoring the aberration of Northern Rock, we don't do it here in the UK any longer, nor do they do it in the US. It is therefore entirely reasonable to put in place rules to stop others doing it too. It is not Australia's purpose to discriminate against SWFs or Chinese aluminium companies because they are foreign, but it is very much its intention to stop foreign governments on some kind of a national mission interfering with its industries to the detriment of the free market and the interests of its own citizens.

The US is similarly determined to prevent the politicisation of its markets. Only Britain seems to maintain an entirely open-doors attitude to the SWFs. The Government's rigid adherence to its principles is commendable in some respects, but it is also naive. Very few SWFs seem prepared to sign up to the sort of international code of conduct which would provide comfort on these issues. Until they do, politically directed investment of this sort should be treated with the utmost suspicion.