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Ministers and regulators have just two years to find ways of encouraging investment in the next generation of high-speed broadband, or the UK’s competitiveness will suffer, according to a report published on Monday.

Existing internet access networks, and those being rolled out, will be too slow to meet the demands of the most bandwidth-hungry businesses and households by 2012, the Broadband Stakeholder Group report warns.

Pressure on broadband pricing means commercial incentives for building the necessary infrastructure are “particularly weak” in the UK, according to BSG, a government advisory group composed of telecoms companies, content providers and regulators.

“If steps are not taken [by 2009] to prepare for next-generation broadband, then we may well find ourselves in a position where it is too late to catch up,” said Kip Meek, BSG chairman.

BT will start offering broadband download speeds of up to 24 megabits per second from next year – three times its fastest existing speed – as it rolls out its £10bn 21st century fixed-line network. Virgin Media plans to offer up to 20 mbps from June and is testing a 50 mbps service.

However, France Telecom is already trialling broadband speeds of up to 100 mbps in Paris, and Deutsche Telekom has plans to offer speeds of up to 50 mbps in 50 German cities next year.

Mr Meek, a former executive at Ofcom, which regulates the communications industry, said faster technologies such as an optical fibre network reaching 90 per cent of homes and businesses could cost up to €14bn (£9.6bn).

He called on ministers to set targets to ensure the UK remains in the top quartile of Organisation for Economic Co-operation and Development states in terms of broadband services by 2012 and to consider reviewing how the non-domestic rating system applies to broadband infra- structure. Ofcom must ensure that regulatory uncertainty does not hold back the market, he said: “It needs to provide the right balance between giving incentives to invest and ensuring competition going forward.”

He added that broadband providers, locked in a pricing battle since the emergence of “free” broadband packages, must find alternatives to flat-rate pricing if their investments are to pay for themselves.

Intervention may be justified by the need to address market failure or ensure equitable access to the benefits of fast broadband, the report argues, but “poorly targeted interventions could pre-empt the market, distort competition and actually deter or duplicate private investment”.

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