BT's ownership of Openreach has robbed the fibre network rollout arm of hundreds of millions of pounds in investment every year, a group of MPs has concluded.
The Culture, Media and Sport Committee called on the telco to free up more cash to plough into developing the UK's broadband infrastructure, and said an option to fully separate BT and Openreach "should be kept firmly on the table".
BT acknowledged improvements are required but said it is already investing more money, adding that service has got better.
The committee also criticised telecoms regulator Ofcom for failing to hold Openreach to a good standard of service.
An Ofcom spokesman said: "We agree with its conclusions that Openreach's performance has not been good enough and that the UK needs greater competition between broadband networks.
"We've introduced minimum standards for Openreach's quality of service, getting tougher each year, and we now intend to extend these further."
The committee's report, titled Establishing world-class connectivity throughout the UK, found that Openreach is fighting for investment with other arms belonging to BT.
This situation means "substantial amounts of moneypotentially totalling hundreds of millions of pounds a year are not being invested in developing and upgrading Openreach infrastructure which is critical to the UK economy and most people's lives", the report found.
A BT spokesman said investment in Openreach is 30 per cent higher than it was two years ago, and that service is getting better, but added: "We are disappointed to be criticised for having invested more than 1 billion a year in infrastructure when the UK was emerging from recession and rival companies invested little."
Is BT Openreach separation on the cards again?
Calling on Ofcom to conduct an investigation into the financial impact of BT's lack of investment in Openreach, the committee said full separation had risks, but added: "There is good reason to suggest that a more independent Openreach might increase infrastructure investment significantly."
The report comes months after Ofcom's own 10-year review of the telecoms landscape landed just short of recommending BT and Openreach be separated, instead calling on BT to open up its ducts and poles to competitors.
An Ofcom spokesman said: "We welcome the committee's report, which supports Ofcom's ambition for everyone in the UK to have access to reliable and affordable telecoms services.
"We're requiring BT to open up its underground tunnels to allow other operators to connect advanced fibre lines directly to homes and offices to reduce the country's reliance on Openreach. That competition can, in turn, encourage Openreach to invest more."
However, the report called on Ofcom to "treat this issue with much more urgency", asking it to set out a programme giving rivals more access to the infrastructure.
BT itself began trialling a new way of giving rivals access to its ducts and poles earlier this month.
Paolo Pescatore, director of multiplay and video at analyst house CCS Insight, told IT Pro the threat of separation is being used to force BT to provide better service.
He said: "This is just the latest tussle between BT and the authorities as well as rivals. More so given that many want Openreach to be separated from BT. Ultimately the threat of functional separation is being used as a bargaining chip to improve service levels and boost investment. BT is putting up a strong defence and has acknowledged some shortcomings."
BT is in discussions with Ofcom about increasing Openreach's autonomy, and the spokesman added: "Separating Openreach from BT would lead to less investment, not more, and would fatally undermine the aims of the committee."
Future investment
BT claimed it will continue to put money into Openreach, saying hundreds of millions of pounds are already funding the body, with 6 billion in funding coming in the next three years.
"We are hitting all of Ofcom's service targets and are determined to exceed them given customer expectations are rising all the time," the BT spokesman said. "Thousands of engineers have been recruited and we are fixing repairs and installing new lines quicker than before."
CCS Insight's Pescatore said: "We are still awaiting a conclusion to Ofcom's strategic review of the UK telecoms market. Regardless of the outcome, BT will always continue to be under pressure to perform, but the lack of a binding resolution prolongs underlying uncertainty about the future structure of the UK telecommunications market."
