The rollout of the next generation of broadband networks is now a step closer in Britain, with a regulatory regime designed to promote private sector investment and competition. The communications regulator Ofcom has outlined its proposed approach. It will allow BT to receive a return on its proposed £1.5 billion investment in fibre-optic connections to street cabinets. Within three years, half the country could have a choice of providers offering speeds of 40Mbps or more.

Ofcom has effectively said that BT will be free to set the wholesale price for broadband products to receive a rate of return that reflects the cost and risk of investment. It will still have to offer fibre-based broadband services to other providers on equal terms to its own retail division.

“Our message today is clear: there are no regulatory barriers in the way of investment in superfast broadband,” said Ofcom chief executive Ed Richards. “We want to promote investment but also ensure that there is fair and effective competition for the future.”

It is a positive outcome for BT, which has been holding out on its investment plans until it could achieve such regulatory relaxation. It now has the green light to invest in fibre to the cabinet to reach at least 40% of households in the UK by 2012.

“This is an important step and will allow the market to develop the next generation of the UK’s broadband infrastructure, which is so critical to the UK’s future as a knowledge-based economy,” said Ian Livingston, the chief executive of BT.

The proposed investment by BT over three years is relatively modest in telecommunications terms. It is less than the profits of £1.7 billion it reported on revenues of over £20 billion in 2008.

The BT plans are initially likely to be limited to more densely populated urban areas, leaving much of the country with limited broadband access. Covering the whole country could cost billions more, and the cost of taking fibre to the premises nationally is put at round £25 billion.

Such sums seem staggering but are far less than the amount the government has spent bailing out the British banking system. To put them in context, the country spends over £130 billion a year on social security benefits. Yet the economic benefits of genuinely high speed data services could be considerable.

While Ofcom has concentrated its attention on BT, Virgin Media already offers speeds of up to 50Mbps which will be rolled out across its cable network by the summer, within reach of half the population. So far the cable company has avoided the possibility that it will be required to open up access to its network or the ducts through which it runs.

Virgin Media repeatedly states its service is “delivered through fibre optic cable” although the connection to the consumer is through a conventional coaxial cable. Nevertheless, it will still be able to support higher speeds than existing telephone lines, possibly 200Mbps or more.

The fastest broadband from Virgin Media is still a premium service at around £50 a month, although ironically it is cheaper in a bundled television and telephony package.

In its interim Digital Britain report the government proposed that every home in the country should have access to broadband at 2Mbps by 2012. This seems a relatively modest ambition, given that this is already available to more than two-thirds of homes in the country. In three years time such speeds will appear positively pedestrian.

What is missing from public policy is any vision regarding the provision of significantly higher speeds. That means rates of at least 100Mbps, which is after all only that of an average office network.

Nevertheless, the way now seems open for private enterprise to invest in fibre optic infrastructure, without necessarily having to offer a universal service or open up networks to other providers.