BT dodges Openreach spin-off, but Ofcom calls for more money, independence

Ofcom has proposed BT's Openreach arm should become a distinct company to deliver the best services to the UK, but rivals have argued the mooted plans do not go far enough.

BT's wholesale arm has been criticised for not being dynamic enough and tacitly propping up BT's own market position. This lead Ofcom to call in February for Openreach to become more independent from BT.

[Read more: Industry urges ofcom to take hard line as BT averts Openreach spin-off]

Its proposed model, which was published this morning, argued Openreach should become a legally separate company within BT Group, with an independent board of non-executive directors appointed and removed by the telco in discussion with Ofcom. It would operate its own strategy and spend a budget set by BT Group.

As well as its own Articles of Association, the new Openreach would have its CEO appointed by its own board and not BT Group. There would also be no direct lines of reporting between Openreach executives and BT Group.

Openreach would have to consult formally with customers such as Sky and TalkTalk on large-scale investments. Ofcom suggested there should be a "confidential" phase when talks can go ahead without BT Group's knowledge.

Staff would be employed by Openreach, rather than BT, with the view for it to develop its own organisational culture. The company would also carry its own branding.
Openreach would also own its physical network, allowing it to make decisions dependent on the investment and maintenance of its infrastructure.

Ofcom said: "This model would provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption – to industry and consumers – associated with separating the companies entirely."

BT said it was moving to adopt some of the proposals and claimed they would help BT improve the country's digital infrastructure. The organisation was heavily criticised by MPs last week, who accused it of under-investing to the tune of hundreds of millions of pounds.

However, Ofcom noted BT did not refer to the need for Openreach to be a legally separate company or for Openreach to talk to customers without its knowledge.

Gavin Patterson, BT Group CEO, said: "Openreach is committed to delivering better service, broader coverage and faster speeds and these changes will enable it to do just that. Our proposals can form the basis for a fair and sustainable regulatory settlement and we believe they can also enable Ofcom to bring its Review to a speedier conclusion.”

Interested parties have until 4 October to respond to the proposals, although some rivals have already criticised the plans as not going far enough.

Jeremy Darroch, Group Chief Executive, Sky said: “Today’s proposal to create a legally separate Openreach is a step in the right direction, although falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need."

He said the decision to leave Openreach's budget in the hands of BT Group raised doubts about whether the UK would get the necessary investment in its fibre infrastructure.

He added: "It’s now important that the changes Ofcom have mandated today are implemented rapidly, fully and without dilution. We are encouraged by Ofcom’s stated commitment and willingness to use its powers to hold BT’s feet to the fire.”

Dido Harding, TalkTalk CEO, said: "“Legal separation still means that a highly complex web of regulation, and BT has proven itself expert at gaming this system. There is nothing to suggest they will not continue to do so in the new system.

"Structural separation is cleaner, with less red tape – and removes BT's ability to exploit loopholes in the regulation. In taking one cautious step forward, I fear Ofcom may in practice have taken five steps back."

Mark Collins, Director Strategy & Policy at CityFibre, said: “Fundamentally, today’s proposals do not address Ofcom’s key objectives of reducing the country’s dependence on Openreach and encouraging essential investment in fibre. Whilst correctly identifying Openreach as the principal source of the industry’s dysfunction, it is hypocritical of Ofcom to focus on a restructured Openreach as a panacea.

"Further debate and navel-gazing as to the appropriate structure of BT will continue to create a period of uncertainty at a time when the industry needs clarity, direction and competitive investment. Openreach has a critical role to play, but it is not prudent to entrust them with sole responsibility for our digital future."

Matthew Howett, Practice Leader, Regulation at Ovum, said Ofcom's proposals amounted to running Openreach as "a separate entity in all but name" and could achieve more than years of legal action and a forced separation.

He added: "Many of the things proposed by Ofcom, and that are being offered by BT, could be enacted within months. Attention and money could then turn to getting on with delivering what this review is ultimately all about – making sure Britain has the broadband infrastructure fit for the next decade.

"Nevertheless, for some, only full structural separation will be enough and it is important to note that Ofcom have kept this option on the table should its proposed model not deliver. Given the enormous costs and uncertainties, coupled with the weight of evidence, for Ofcom to proceed with structural separation now would be a disproportionate response, even if it could be practically delivered."

Earlier this month, Openreach began trialling new pole and duct sharing processes with five telcos. Last week Openreach's CEO said it was connecting customers and dealing with problems at its fastest ever rate, but added work remained to be done.

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