Why publicly owned broadband isn't as radical as it seems

Labour’s broadband policy is simply the latest instalment in a long history of nationalising telecoms, in which Liberal and Conservative parties have led the charge.

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The Labour Party’s plan to nationalise BT’s networks and roll out full-fibre broadband to households across the UK was treated by the media as a startlingly new initiative. The plan uses futurist technology to shape a 21st-century economy, and would substitute the slow, piecemeal progress of the private sector with public ownership. But if we take a longer view of history, the policy is merely the third instalment in a far longer political story of nationalising telecoms in which the Liberal and Conservative parties historically led the charge.  

In 1868, the networks of the private telegraph companies – the first electric telecoms system – were taken into public ownership by the Conservative government of Benjamin Disraeli, with the support of Gladstone’s Liberal Party. This was the first modern instance of the state nationalising telecoms, and the reasons for doing so chime with our current predicament. About 70 per cent of the population had no or poor service, because, as academic Hardy Wickwar once put it, private telegraph offices were “concentrated where they could win most trade and earn most profit, and therefore did not offer the advantage of speedier communication with the outlying villages and suburbs”. In contrast, an official report at the time showed that state-run telegraph systems elsewhere in Europe provided better services at far lower prices. The obvious solution was nationalisation of the companies under the control of the Post Office, which had a far wider network of offices than existing private companies.  Within two years, the number of telegrams sent had doubled, and the price of the average telegram fell by one-third. 

The second step in this longer political project happened just over a century ago. In 1911, the Liberal government, with support of the Conservatives, nationalised telephone networks. As the Liberal minister Herbert Samuel recognised: “it would be wrong to leave a service which had become so essential to the social and commercial life of the country in private hands”. So the Post Office again took over patchy private networks and transformed them into a system to meet the nation’s needs. And it worked. Not only did the plan provide a better service, but it did so at lower cost – and offered the quality of an inner-city service to rural subscribers in the countryside.  

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Over a century later in 2019, Labour became the third UK political party to propose nationalising telecoms technology in response to private sector failures. Given this historical precedent, the policy is hardly surprising. The more interesting question is why the Conservatives, and the Liberal Democrats, no longer support the move. 

Though many have objected that Labour’s proposal would be too costly, analysing the benefits and costs suggests otherwise. The most easily quantified benefit is that the cost of capital will be much cheaper under public ownership.  Instead of paying out dividends to BT shareholders at a rate of over 14 per cent, plus interest on private loans at over 4.5 per cent, a nationalised company could raise capital at less than two per cent – which means an annual saving, for the Openreach division alone, of over £400m – enough to finance a fifth of the cost of universal fibre to every home. 

And under public ownership, public objectives become the company’s objectives. Governments often have to create complicated and costly incentives for the private sector, or subsidise unprofitable areas, to ensure that coverage reaches remote and rural areas. A publicly owned broadband programme could be developed through direct planning; it could be more transparent, more accountable to the public, and more flexible to public demands.

The initial cost of nationalisation is the amount that the state would have to pay to current private shareholders. This amount is decided by parliament on a case by case basis. If it’s based on the actual value of shareholders equity, rather than market value, the cost for Openreach alone would be about £2.5bn.  But given the annual £400m saving in the cost of capital, the nationalisation of BT Openreach would generate savings to easily cover the £2.5bn cost of shareholder compensation within seven years. And the cost of installing a universal fibre network publicly is also lower. According to a 2018 government report, a state-owned monopoly could deliver 100 per cent fibre coverage for around £20bn; this compares to £32bn if the network is rolled out by a number of private companies. Moreover the state would have flexibility in how it met these costs: it could either charge users of the network, pay for the costs of the network through general taxation, or levy specialist taxes on the internet companies that stand to benefit most from a universal fibre network – Amazon, Google, Facebook and Netflix.  

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In the last century, electrification, particularly in rural areas, became a legendary episode in the nation-building projects of countries such as the USA, France and Ireland. It’s continued to be a beacon in developing countries like post-apartheid South Africa and Brazil, where universal electrification was termed luz para todos, or “light for everyone”. Planned, integrated universal networks make no economic sense to private companies – they’re far too large, and fail to select the most profitable areas of business. Private companies demand that universal programmes are broken down into “bankable projects”, which can then be selectively tendered for by different network companies based on their anticipated revenue stream. Often, this leaves the unprofitable parts of a project – such as delivering broadband to the UK’s rural areas – ignored. Meanwhile, the market for services creates an artificial framework of competition between different providers, such as Virgin, TalkTalk, which further fragments provision.

Universal fibre connection would have both economic and social implications: rolling out a publicly owned network would generate cost savings and efficiency gains, and ensure universal, equitable internet access for every household. Greater bandwidth could allow the NHS to develop systems of care for the remote and the housebound and schools and universities could share research and deliver teaching. Compared to the benefits of universal broadband, a patchy private-sector system is unnecessary and dysfunctional. The possible futures inscribed within a public broadband system could be transformative.

David Hall is director of the Public Services International Research Unit.