If Theresa May wants to improve productivity, she needs to start with our broadband

We hear a lot of talk from politicians about the urgency of improving the UK’s poor productivity. Upgrading digital connections is plainly a vital element of delivering that. How can we encourage more people to set up businesses if they cannot get reliable and fast broadband?

Ben Chu
Monday 01 August 2016 11:27
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BT has struggled to persuade MPs and regulators that its ownership of the Openreach network does not hamper competition
BT has struggled to persuade MPs and regulators that its ownership of the Openreach network does not hamper competition

As readers will know, when your broadband fails these days it’s like having your home’s water or gas shut off. No longer a luxury, a functioning internet connection has become an essential utility.

My home’s broadband has been intermittently failing for the past couple of months. Sky is my provider. But the phone line into my home, the source of the fault, is the responsibility of BT Openreach. In our efforts to get the service fixed, Sky customer service agents have been forced to liaise with Openreach, which owns most of the country’s ducts, cables, poles and other major telecoms infrastructure.

I actually cancelled my BT broadband contract a year ago after losing patience with their dismal customer service. But it turns out BT is like the Hotel California: you can check out anytime you like but you can never leave.

As BT belatedly sent an engineer around to look for the fault on my line last week, by coincidence, the head of the UK’s telecoms regulator Ofcom, Sharon White, made an announcement.

She said she had listened to the many representations urging her to use her regulatory powers to force BT to hive off Openreach as a separate company focused on improving the nation’s telecoms infrastructure. She acknowledged the unit’s history of poor customer service and underinvestment under the ownership of BT, particularly in new fibre technology.

Nevertheless, she said the regulator’s sword would remain in its scabbard. Instead, she said BT would have to establish Openreach as a legally distinct company within the group. It would have a separate board and operational autonomy, but its overall budget would still be set by BT and it would still pay dividends to BT shareholders. BT’s share price duly spiked and its chief executive Gavin Patterson struggled to disguise his delight.

White had arguments for stopping short of full separation. She said it would be legally problematic because of various BT company contracts that would need to be unpicked. She also cited headaches over how to deal with the BT pension fund. Service improvements, she assured us, could be delivered while Openreach remains within the BT corporate family. White apparently believes she can drive better outcomes through regulatory pressure on BT from her Southwark office.

She is very likely to be wrong about that. As the economist Dieter Helm says, there are inherent tensions in the current arrangement whereby BT sells telecoms services to customers and is also charged with investing in infrastructure that benefits rival providers. “In the end, detailed and intrusive conduct regulation cannot overcome the problems created by BT’s deep conflict of interest,” he has argued.

Corporate structure matters more than competition regulators seem to appreciate. Structure defines managers’ incentives and managers’ incentives are what ultimately drive delivery for customers. If the incentives are not aligned even the smartest and most proactive regulators will struggle to ensure customers get properly served.

Take the corporate basket case that is Southern Rail. Who runs this failing franchise? Govia Thameslink Railway, which also runs three other important London rail lines. GTR, in turn, is owned by a parent called Govia, which runs other rail franchises around the UK. Govia, in turn, is jointly owned by the FTSE 250-listed Go-Ahead Group and Keolis, a French transport group.

So who is ultimately responsible for the fact that Southern Rail customers, who pay thousands of pounds a year for season tickets, don’t get to work on time in the morning because their train service is so catastrophic? Whose job is on the line if Southern Rail fails to deliver? Who is driving service improvement? The boss of GTR? The head of Govia? The Go-Ahead head honcho? Does the chief executive of Keolis even know about the fiasco at Southern Rail?

Similarly, who’s ultimately responsible for Openreach? Will it be the boss of the new autonomous division? Or will it be Gavin Patterson? Where will the buck stop?

The job of competition authorities is not just to ensure a healthy mix of providers, but to create clear lines of accountability for customers and politicians. They should also be looking to ensure a focus for management, given that distant outposts of empires are unlikely to get the attention from the top they deserve. The fact that BT, under the ambitious Patterson, is currently trying to turn itself into a major sports broadcaster is reason enough for Openreach to be carved off.

We hear a lot of talk from politicians about the urgency of improving the UK’s poor productivity. Upgrading digital connections is plainly a vital element of delivering that. How can we encourage more people to set up businesses if they cannot get reliable and fast broadband?

And how can we expect firms to increase their customer base if they cannot rely on the train to get them into London on time for business meetings? For that matter, how can we expect people to expand their operations if they cannot get the loan finance from big banks?

Ministers and competitions authorities (who are indirectly influenced by ministers’ appetite for reform) have been far too pusillanimous when it comes to imposing structural reform in these markets.

It’s farcical that Ofcom is shying away from mandating the full separation of Openreach because of third-order concerns about the BT pension scheme. It’s ridiculous that our bloated universal banks have not been divided up to create more lenders who have a clear focus on servicing small businesses. And it’s a joke that Govia has not yet been stripped of its Southern Rail franchise.

Theresa May has recently spoken about her desire “to use – and reform – competition law so that markets work better for people”. The Prime Minister does not have to search hard to find her policy agenda. It’s time to listen a little less to the lawyers and lobbyists, who will always find a thousand reasons not to wield the sword, and to pay more attention to competition economists and historians.

Let Ms May follow through where all her predecessors have baulked, starting with Openreach.

My own broadband issues? Thanks for asking: still not fixed.

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