Amid all the current Brexit excitement and anxiety, telecoms is getting relatively little attention. The government was even reported to have classified the sector as “low priority” for negotiations in an internal document leaked last year.
But in fact the UK telecoms industry, its 180,000-strong workforce, and all its customers – which is to say, pretty much every UK citizen – have lots at stake in the process.
BT, the industry’s largest employer, is a global business which sells services to every EU member state – even to EU institutions themselves. Vodafone generates half its revenues from the EU. Liberty Global, owner of Virgin Media, is also heavily invested in European markets. O2 is owned by Spain’s Telefonica.
And all are governed by an EU-wide regulatory framework transposed into domestic law and implemented by national regulators. In the UK, Ofcom’s powers are determined by EU rules and its decisions are subject to EU approval. The result of the government’s negotiations with Brussels – and any subsequent ratification processes – will have huge ramifications for the sector.
The threat of “no deal”
The most immediate risk is a “no-deal” outcome, with the UK crashing out of the EU next April with no transition period or agreement on withdrawal terms or a future relationship. There is little doubt this would be hugely disruptive and damaging to the sector.
Most serious would be the questions it would raise for thousands of EU nationals working in the UK telecoms sector – as well as the many UK citizens working for telecoms companies on the continent. Like most other industries, telecommunications depends on an internationally mobile workforce – from specialists in R&D or cybersecurity to those building or maintaining physical infrastructure. There is as yet no certainty on what would happen to their employment or residency status if the proposed withdrawal agreement is not confirmed by 31 March 2019.
A “no deal” scenario would also create immediate operational and financial challenges for UK telecoms businesses. One would be free flow of data – the very lifeblood of the industry.
Outside the EU, the UK would need “data adequacy” status for personal data on EU citizens to be transmitted across its borders, but this could take years to agree.
In the meantime companies and organisations would have to resort to complex, costly and time-consuming legal work-arounds. BT has warned it would have to amend contracts with up to 18,000 suppliers. Vodafone has warned that it might have to move technical facilities and rethink network design.
Another challenge would be “roaming” charges faced by UK customers using mobile phones on the continent. These charges are now banned by a 2015 EU regulation made possible by a reciprocal cap on wholesale rates that mobile operators can charge for giving each other’s customers access to their networks.
But without an agreement allowing UK operators to continue this arrangement outside <and within?>the EU, they could be charged through the nose for accessing continental networks, forcing them to restore steep roaming charges or find the money elsewhere.
A “no-deal” situation would also be likely to have a wider impact on the UK economy, levels of demand and confidence that could hit telecom businesses’ bottom line and access to finance.
The Economist Intelligence Unit has predicted that mobile revenues would be hit and telecoms investment would “tail off sharply”. At a time when employers in the sector are already shedding jobs, the additional hit of an economic downturn could be devastating.
A future relationship
If this is averted and some kind of agreement on a future relationship can be reached, a lot still depends on what that looks like.
Possibilities range from a Norway-type arrangement which keeps the UK within the “Single Market” and covered by its rules, to one that means the UK sets different regulations for its economy – which is currently the Prime Minister’s proposed approach for service sectors like telecoms.
Key tests
Prospect has set out several key tests for any deal, including:
- free movement of workers and their families
- continued participation in key agencies and research programmes
- maintenance of high regulatory standards
- maximum access to EU markets to protect jobs.
Employers and stakeholders in the telecoms sector have adopted very similar priorities.
BT has called for “a positive, constructive, enduring and certain relationship with the EU”, based on an “open trade model with an accent on zero tariffing as well as the minimum possible non-tariff or customs barriers”, and allowing it to move employees across the EU and access the skills and talents it needs.
Vodafone has also said that “freedom of movement of people, capital and goods are integral to the operation of any pan-European business” and that “it remains unclear how many of those positive attributes will remain in place once the process of the UK’s exit from the European Union has been completed”. It could then decide to move its HQ out of London, it has warned, though saying its Newbury base would be unaffected.
R&D critical
Continued involvement in European research networks and programmes is also critically important. BT, one of the largest private sector spenders on R&D in the UK, is actively involved in Horizon 2020 and was the largest UK industry participant in its predecessor. European collaborative networks were critical to innovations like G.Fast high speed broadband.
In BT’s words: “…in global markets, like ICT, today’s collaborative research is tomorrow’s area of commercial competition. Should UK academia and industry be unable to engage effectively with these European research programmes, especially topics such as Internet of Things and 5G Networks that are a major part of the current H2020 research programme, the UK’s digital competitiveness will be adversely affected.”
Regulation and industrial strategy
On regulation, most voices in the industry have stressed the need for stability and certainty, and maintaining alignment with EU frameworks wherever possible. The signs are that the UK government is planning to proceed with the transposition into UK law of the latest package of EU telecoms regulation, the European Electronic Communications Code, agreed on by the European Parliament and Council in June.
However the Department for Digital, Culture, Media & Sport does also seem to be planning a review of UK telecoms legislation to see how it “could be modernised post-EU exit”. If the outcome of the Brexit process allows for this, it could take a number of directions.
Historically, European telecoms regulation has tended to prioritise competition and cost-reduction – sometimes at the expense of investment and employment, according to UNI Europa, the federation of services and skills sector trade unions, including telecoms, of which Prospect is an affiliate.
If anything, Ofcom has tended to be even more focused on these objectives, and might be expected to push further in this direction if no longer constrained by European rulings.
There have been suggestions that independence from EU frameworks would mean we are more likely to see a forced sell-off of Openreach after its separation from BT – something which new Brexit secretary Dominic Raab is reported to favour. BT seems nervous about losing its option of appealing Ofcom decisions to the European Commission.
Ofcom’s chief executive Sharon White has also expressed opposition to the EU’s reluctance to intervene directly in telecom retail markets. One well-placed observer has suggested that after Brexit we could see government attempts to control or cap prices paid by mobile, fixed-line or broadband subscribers, as is now proposed for the energy sector.
On the other hand, BT has argued that Brexit could be an “opportunity” to “establish regulatory policies that enable the communications sector and industrial strategy of the 21st century, in particular to underpin investment, to be forward looking and embrace innovation”.
This could include recognising longer commercial investment cycles, allowing higher returns for higher risks, better integrating regulation across “converging” markets such as telecoms and pay-TV, and rebalancing “potentially competing outcomes” – recognising, for example, that “a focus on reducing prices and cutting costs… can have a negative impact on service and innovation in the medium to longer term”.
Mobile market
Regulatory divergence could also have implications for the structure of the UK’s mobile market. The European Commission has opposed arguments for mergers in European mobile markets, and in the UK, blocked Three’s attempt to take over O2 – with Ofcom’s full support.
But the UK government recently surprised many by appearing to open the door to reducing the number of major mobile providers if the current four-player structure proves too fragmented to deliver the investment needed for 5G network upgrades.
Apparently contradicting Ofcom’s official view, its Future Telecoms Infrastructure Review acknowledges that “there can be a tension between incentivising investment (with positive consumer benefits in the longer-term) and protecting consumers from the risk of higher retail prices in the short-term”.
Public investment
EU competition rules also cover the use of government tax breaks and public investment programmes to support the telecoms industry. The Broadband Delivery UK scheme to extend and improveinternet connections throughout the country, needed to be designed to meet European Commission approval. The government’s policy of exempting fibre-optic upgrades from business rates was also challenged under “state aid” rules.
In the aftermath of the referendum result, BT’s then chair Mike Rake (who had campaigned to remain), said “it will give us, I think, some flexibility on industrial policy, on industrial strategy, the state aid rules won’t apply to the same extent”.
At minimum it could make for faster decisions and implementation – the initial launch of the broadband scheme was significantly delayed by the need to secure European approval.
Environment Secretary Michael Gove has claimed Brexit will enable better mobile and broadband provision to rural areas, alleging that “inside the EU, rules on state aid have prevented us from investing in broadband in a way that is best for the UK”.
Others have suggested the government could have more leeway to support investment in ultra-fast or full fibre connections, or research and development in areas like 5G.
Telecoms and the UK’s future
All this matters because the telecommunications sector will be absolutely critical to the UK’s ability to prosper in the years ahead.
The infrastructure, services and innovations it provides, the connections and innovations they enable, are the indispensable platform underpinning the UK’s strengths in digital, creative and high-tech sectors, and the productivity improvements the government wants to see across the economy.
Decisions made between now and 29 March next year could determine its ability to make that essential contribution.