BT unveils £1.5bn plan to bring faster broadband to millions

BT showed its hand on next-generation broadband yesterday with a proposal to spend £1.5bn bringing super-fast access to up to 10 million households by 2012, contingent on Ofcom's agreement to regulatory changes.

The communications giant is suspending its £2.5bn share buyback programme after just £1.8bn to help fund the programme, which will also subsume some £500m that would have been spent on the existing copper network. The programme will kick off immediately, with some £100m of additional capital expenditure this year and another £800m to come over the following three.

But unless key demands are met, the scheme will founder after the first £100m. "We are making an offer we think is good for the UK but if we can't reach an agreement with Ofcom for a package of changes that give us confidence that we can earn a fair rate of return, then we won't do it," BT chief executive Ian Livingston said. "As things are today, we would be guaranteed to lose money."

The details of the scheme are yet to be finalised but BT is keen to emphasise its commitment to providing wholesale access, just as it does with the existing network, and its interest in rural as well as urban projects. Discussions with regional groups and local authorities will help establish suitable areas for investment, as well as structural funding opportunities. The proportion of fibre-to-the-cabinet (FTTC) – offering speeds up to 40mb/s, as opposed to fully-fledged fibre-to-the home (FTTH), which offers up to 100 mb/s – will be determined by demand.

The business case for next-generation infrastructure investment remains uncertain and, despite all the warm words about progress yesterday, BT's position is only subtley different from that made clear last year, when the debate about the UK's next-generation infrastructure began. Mr Livingston said: "We have moved from saying we won't do it because of the following problems, to saying that we will do it if these things are sorted out."

Most crucial is the issue of a fair rate of return. BT is already tussling over the prices its OpenReach network division is allowed to charge for access to the copper network. Fibre investment is risker and more expensive, so Mr Livingston is pushing for a higher rate – possibly of up to 12 per cent. The other deal breaker is the universal service obligation. Unless it is scrapped, fibre investment is uneconomical because it means running two networks in parallel, says BT.

A more contentious question is how far BT's investment should lead to other operators with high-speed networks – the most obvious being Virgin Media – being forced to provide wholesale access, just as BT is on copper. "We can't be in a situation where BT spends £1.5bn on an investment that is opened up to everyone, while another company says they will keep their network closed – that creates a distorted market," Mr Livingston said.

The £1.5bn proposal was welcomed yesterday. The Broadband Stakeholder Group said it was a significant step forward. Ed Richards, the chief executive of Ofcom, described the plan as "a clear sign that the UK market is moving in the right direction", although he did not comment on the specifics. VirginMedia supported the calls for regulatory clarity, although it dismissed the proposal that cable networks be regulated as academic.

City analysts were less impressed. BT's share price closed down 4.8 per cent at 192.3p due to concerns about risk, and industry watchers characterised the programme as at least partly an insurance against the findings of two next-generation broadband reviews, from Ofcom and the Government, due later in the year.