Our reliance on digital connection has never been more acute, nor so salient in the public consciousness. The news that BT – the UK’s largest telecoms and digital infrastructure company – is the target of a private equity takeover therefore matters for all of us.
Only 13 per cent of UK households have access to full-fibre broadband, and improving this dismal figure has been named as a priority by the Conservatives and Labour alike. In apparent recognition of this issue, BT this spring announced an investment of £12bn in expanding full-fibre infrastructure. However, a private equity takeover would raise serious questions about the realisation of this investment commitment, and potentially spell disaster for the delivery of universal full-fibre access.
The investment required to universalise full-fibre broadband is at odds with the private equity model of business, which is characterised by debt-fuelled acquisitions and highly leveraged portfolio companies. Private equity has become notorious in recent years – even among the editorial board of the Financial Times – for its practice of “predatory value extraction” – using a small amount of its own capital to acquire companies before loading them with debt, paying executives and investors handsome dividends and swiftly exiting companies at the first sign of trouble. As, for example, economist Mariana Mazzucato documents extensively in her book, The Value of Everything, private equity ownership of UK water companies has resulted in chronic under-investment despite an explosion of debt.
This pattern means the acquisition of BT by private equity bodes poorly for the maintenance of vital digital infrastructure, let alone its expansion, particularly to those less profitable and harder-to-reach communities who would benefit most from improved connectivity. Even prior to its troubles this year, BT had exhibited declining capital expenditure amid rising shareholder payouts (£1.5bn was paid out in dividends in 2019 alone). And although investment has begun to rise in recent years, the company’s financial filings over the past 15 years show an average Capex/Depreciation ratio – a measure of investment – below the value typically expected for energy and utility companies, particularly when they have both high maintenance costs and, as in the case of BT Openreach, urgent demands for investment in new infrastructure.
The result: the UK is ranked 35th out of 37 countries assessed by the OECD for the proportion of fibre connections in its total fixed broadband infrastructure. A slow roll-out of such a vital infrastructure is matched by a stark digital divide, one that the pandemic has brought sharply into focus: around half of households in the country depend on early 20th-century infrastructure for internet use, more than half of all of the UK’s 650 constituencies have below 5 per cent full-fibre coverage, and just 47 per cent of those on low incomes use broadband internet at home.
These inequities arise from our market-led approach to digital infrastructure development, predominantly undertaken by, and to the benefit of, an oligopolistic set of for-profit corporations. This has created shared problems, from prioritising shareholder returns over investment to digital redlining as companies cherry pick provision, under-serving poorer areas and marginalised groups. For example, the US – which shares many of the UK’s approaches to full-fibre roll-out – is 43rd in the world for bandwidth per user despite having the world’s largest digital economy. The takeover of BT by private equity would crystallise and accelerate these trends.
Another digital world is possible. But delivering it will require moving beyond the “regulatory state” and market-oriented approaches that have dominated the development of digital infrastructure in recent decades – and which, while delivering a rich stream of dividends for private investors, has led to the slow roll-out of full fibre, increased corporate concentration and control, and cemented a deep digital divide.
Instead, we should organise vital digital infrastructures – such as the rollout and maintenance of the full fibre network and 5G – as a 21st-century public good, underpinned by democratic ownership and governance. And internet access should be guaranteed as a 21st-century human right as part of an ambitious universal basic services agenda, recognising it is now – in the age of pandemics and digitalisation – foundational to our ability to lead connected, fulfilling lives.
Underpinning a new era of digital connection should be a new public infrastructure company tasked with rolling out a 100 per cent full-fibre network by 2030. Instead of the leveraged buy-out of BT by private equity, Openreach (and the parts of BT Group relevant to rolling out the core network) should be taken into public ownership with a mission to connect the nation. Far from representing “broadband communism”, a monopoly provider would, according to the UK government’s own analysis, deliver a nationwide full-fibre network faster and at significantly lower cost than private companies. And full-fibre roll-out driven by a public infrastructure company would be cheaper still, eliminating the need to pay dividends with earnings reinvested to improve and expand the network, and with a substantially lower cost of borrowing compared to private companies.
Not only would a mission to connect the nation to a full-fibre network provide good jobs across the country via a digital “retrofitting revolution”, but building a democratic 21st-century digital network would open up a more innovative and experimental future. This would reshape digital infrastructures as sites of participation and democratic planning, and allow us to build the sophisticated systems needed to decarbonise energy, heating and transport, which must be at the heart of a transformative green recovery.
The extraordinary response to Covid-19 has prompted many to argue we are in new times for economic policymaking. Yet – with BT poised to move from public ownership to private equity within little more than a generation – clearly old habits die hard: the pursuit of profit over shared needs drives the UK’s approach to delivering vital infrastructure. An alternative approach, rooted in the democratic ownership and governance of digital infrastructure, is urgently needed. In place of private enclosure and wealth extraction, the time has come for universal access and connectivity.
Mathew Lawrence is director of Common Wealth and Adrienne Buller is senior research fellow