Yahoo Finance How feasible is Labour's free broadband plan and part-nationalisation of BT?
Labour’s pledge to provide free full-fibre broadband to every home and business in the UK, including part-nationalising BT and introducing a tax on the tech giants to help pay for it, is an eye-catching offer to potential voters – but raises a host of questions about the feasibility of such a move.
So what is full-fibre broadband and why is it important to the UK?
Full-fibre networks use fibre optic cables to deliver broadband directly to homes and business premises at speeds of more than one gigabit per second – which allows an HD movie to be downloaded in less than 50 seconds.
Until recently the government had been focused on rolling out only “superfast” broadband, which uses a slower mix of part-fibre, part-copper wire to homes, which has much slower download speeds.
How does the UK compare with other countries on superfast broadband?
The UK is an embarrassing full-fibre laggard on the world stage, with only 8% of homes able to get it. This compares to countries such as Portugal, which has full fibre to 89% of homes, and Spain, which is at 71%.
When Boris Johnson came to power earlier this year he made a bold pledge to accelerate the rollout of full fibre, which the government has referred to as the gold standard of broadband, across the UK by 2025. His £5bn plan – to deliver full fibre nationwide eight years quicker than original government planning – was criticised by experts as not achievable.
Johnson subsequently watered down the plan to achieve “gigabit” speeds, which would allow the inclusion of speed upgrades by companies including Virgin Media, which are not actually full fibre.
How easy would it be to nationalise BT?
Labour’s plans do not involve nationalising all of BT, just Openreach, which operates the UK’s broadband network, and other parts that relate to broadband provision, such as the retail arm BT Consumer.
Openreach was set up as a subsidiary of BT in 2006 but two years ago was legally separated from its parent company by the telecoms regulator, Ofcom, to counter complaints from rivals that its lack of independence was limiting competition in the market.
That separation would make the nationalisation of Openreach much simpler but taking the business into state ownership would be a daunting proposition.
Openreach employs about 32,000 staff – almost a third of BT’s global workforce – and has a turnover of about £5bn.
It is responsible for the rollout of full fibre across the UK, which at an estimated cost of £35bn is the biggest infrastructure project after the HS2 rail project.
What will nationalisation mean for BT’s rivals?
Labour’s pledge to give broadband away for free – the average current cost per household is £30 a month – backed by government funding would be bad news for rivals such as Virgin Media, TalkTalk and CityFibre, who are also investing in full fibre. They could rethink whether it is worth investing. Indeed, Labour’s John McDonnell suggested on Friday morning that Virgin Media and co could end up under the ambit of the new nationalised business, British Broadband.
There is also the danger that nationalising Openreach could mean the return of the very problems that forced Ofcom to step in and legally separate the business in the first place – accusations that BT put its own interests first and dragged its heels with investment. In 2017 Ofcom fined BT £42m, the largest penalty it has ever imposed, and ordered the company to pay £300m in compensation to rivals over delays installing high-speed internet connections.
Could the government and BT shareholders agree a fair price for Openreach?
There is likely to be significant difficulty valuing British Broadband, which is what Labour would call a nationalised Openreach. Bloomberg has valued it at £15bn.
The Labour party has said parliament would decide what to pay but it would have to be a fair price to get the backing of employee shareholders, pension fund investors, small shareholders and big overseas investors. Germany’s Deutsche Telekom, which has 12% of the business, is likely to be a tough negotiator, for instance.
But it would likely cost less than it would have done a few years ago. BT’s share price was 500p in 2015 but is now only 191p. Labour has said that BT shareholders would get government bonds in return for their shares, which pay a lower dividend than BT investors currently receive.
Would nationalising broadband work?
Australia has tried to do this with its National Broadband Network and it has been branded one of the biggest infrastructure failures in its history. Set up in 2006, the government’s plan was to roll out full fibre to 93% of all premises, although over the years this was watered down to a “multi-technology mix” using different technologies offering varying levels of speed and service to consumers. “Only one other country in the world has come close to going down this route, Australia,” says Matthew Howett, the principal analyst at telecoms research firm Assembly. “And for a good reason – it’s hard, expensive and fraught with difficulty. Australia’s NBN is years late, massively overbudget and offering speeds and technology a fraction of the original political intention.”
Could the policy fall foul of policies on state aid?
The EU has strict rules against state aid – or government subsidies that benefit one EU company at the expense of others – but according to some commentators, there are no regulations against businesses becoming entirely state-owned.
As its name suggests, "State aid" prevents the State aiding those in competition, thereby avoiding unfair competition in the market place
This does not prevent the State taking ownership
Many EU states, eg France, have nationalised industries alongside State aid rules— David Allen Green (@davidallengreen) November 15, 2019
How would Labour’s plan to tax tech giants such as Google and Facebook work?
The tech tax is a means of paying for the broadband policy. Labour has estimated that the costs of maintaining a UK-wide full-fibre network will cost about £230m a year – analysts say the annual maintenance costs are in the range of £1bn to £2bn. According to BT’s annual report, the division’s operating costs are more than £2bn a year. It has more than 30,000 staff and an annual wage bill of more than £800m.
To cover operating costs, Labour plans to introduce a tax on multinationals, including Google and Facebook. Labour’s plans on this are light on detail but include a proposal to “tax UK-based multinationals on the share of their global profits that reflects their UK share of their global sales, employment and assets”.
It is not clear how this would work in practice but it could lead to a rethink by some of the tech giants on future investment in the UK. Last year the then chancellor, Philip Hammond, proposed a “narrowly targeted digital services tax” on online firms making more than £500m globally.
Is BT’s pension deficit an issue?
Ofcom, the communications industry regulator, examined the possibility of breaking up BT in 2016 and cited BT’s £4.5bn pension deficit as one of the reasons why it would not be a good idea. Steve Unger, Ofcom’s director of strategy, said at the time a full-blown separation would trigger “very significant costs” related to the deficit.
What would it mean for consumer choice?
Large numbers of households switch between broadband providers regularly to chase better deals, using comparison sites that would presumably become redundant if the UK moves to a single supplier model. Consumers switching typically gain prices about £8 a month lower than loyal customers. But Ofcom has warned that as many as nine million households are on “out-of-contract” deals and paying much higher monthly fees.
BT has a 34% share of the 26.7m fixed broadband connections in the UK
BT has a 34% share of the 26.7m fixed broadband connections in the UK, according to Ofcom, with the remaining market split almost equally between Virgin Media, TalkTalk and Sky.
Competition has not necessarily produced the lowest prices, however. According to research by Cable, a price comparison site, Italy has Europe’s cheapest broadband, with the UK fifth, behind France and Germany. The UK scores particularly poorly on a cost-per-megabit basis, ranking 21st out of 29 countries.
