David Forman David Forman General Manager - Information Communication and Technology - CPR Communications

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Australia’s NBN: A big risk for a big vision

  • In a world seemingly universally lamenting the lack of political “Big Visions”, Australia’s National Broadband Network looms large. Big investment, big ambition, big reforms, big – well, just about everything to do with the NBN is big, including the political risks.

    The NBN is the biggest infrastructure investment ever in Australia, with a total price tag estimated at about $A43billion over 10 years. Public investment in it will peak at $A27 billion. The balance will be funded private debt and through the revenue that will begin to come on stream as commercial services are progressively connected.

    Every Australian household will be offered a connection with a download speed of at least 12mbps. For 93 percent of Australian households, the connection will be a fibre to the home connection with an initial maximum download speed of 100mbps, with 1 gigabit services already in trial. The remaining seven percent of the country will be offered wireless or satellite connections, ensuring even the most remote Australian community will be brought online.

    It will also result in the progressive partial structural separation of the incumbent telco, Telstra, which the Australian competition regulator has argued is the most vertically and horizontally integrated telco incumbent in the world. As the NBN rolls out and turns on its FTTH footprint, Telstra will disconnect its copper access network to Australian households.

    To support retail competition, NBN will offer only wholesale services on a no-discrimination basis. It is intended to create the perfect level playing field for retail competition.

    The Australian Minister responsible, Senator Stephen Conroy, has been recognised with international awards and keynote speaking engagements from across the globe. The commitment to the ubiquitous broadband for Broadband was crucial in the return of the Government after the 2010 Federal election. The Independent MPs that the Government needed to form a Government after a knife edge election result made clear that the NBN’s promise of broadband in regional Australia was at the forefront of their thinking.

    But it has been attacked vociferously by the Opposition parties, who have promised to “destroy” it. It has been the subject of relentlessly negative campaign by News Corporation newspapers, which began their attack on it when it emerged as a key election issue.

    The NBN will also result in the mothballing of two cable TV networks, at least for the purpose of delivering broadband. This has raised the hackles of some economists, especially those overseas who are informed by the competition between cable and telco companies in North America and parts of Europe.

    As a case study in public policy, the NBN is unique because it reflects the peculiar conditions that gave rise to it.

    However, many of the underlying policy dilemmas that the Government faced as it developed the idea will be familiar to policy and regulatory thinkers around the world. Namely, the closely inter-related problems of  how to stimulate the transition from the copper access network to the fibre to the premises network that everyone believes is the fixed line end game, and, how to manage the market power inherent in the ownership of the last mile by incumbents.

    And, underlying all of this, policy makers’ growing awareness of the importance of broadband for future economic growth.

    The NBN came out of rising concerns at the lack of competitiveness in Australian telecommunications, coupled with a strident and demanding management at the incumbent telco, Telstra.

    Telstra imported a management team from the US in 2005, and they quickly launched an aggressive anti-regulation campaign.

    The cornerstone of the Telstra management campaign was a demand for radical relaxation of competition regulation coupled with claims that Australia broadband availability and performance were a “disgrace”. The campaign imitated the approach of Deutsche Telekom at the time, but was more strident: Telstra demanded regulatory relief before it would invest in network upgrades to deliver better broadband, and even threatened to allow the copper network to fall into disrepair.

    But Telstra’s arguments received little sympathy from policy makers who were already concerned that competition in Australian telecommunications was weak compared to the rest of the developed world. The result was that Australia’s costs of communications services were high and going higher in published OECD league tables, at the same time as broadband penetration rates were mediocre and getting worse.

    The Competition regulator had for years pointed to Telstra’s integration as the root cause of the problem. Vertically, Telstra reached from the traditional telecommunications network into retail markets, and horizontally, through its control of the biggest mobile network and the biggest Pay TV cable network and content provider.

    Unsurprisingly, Australia had not enjoyed the benefits of competition between telecommunications and Pay TV companies that had stimulated broadband across North America and much of Europe.

    In this environment, Telstra’s campaign to highlight that Australia was falling behind the world in broadband succeeded in focusing the minds of policy makers on both the causes and the implications of this trend. Economic departments drew some important conclusion that framed the ultimate policy decision.

    Firstly, there were few extraneous levers available to developed economies to stimulate a step change in national productivity. The most obvious, a massive injection of skilled migration, was politically unviable. But another, a massive injection of business inputs efficiency, could be achieved through universal very high speed communication.

    Secondly, these benefits from a broadband network investment were classic economic externalities. Because the builder and owner of a broadband network in a competitive market could not recover the broader economic benefits, they would either argue for above normal profits (i.e protection from competition) or subsidy. Indeed, around the world, this was exactly the debate policy makers were confronting as the limitations of telephone networks built on copper wire customer connections were exposed by the growing demand for broadband.

    With competitors railing against Telstra’s proposal as an anti-competitive plot and Telstra threatening an investment strike, the Government invited interested parties to put forward offers to build a new national broadband network in mid 2007. A change of Government in October 2007 resulted in this pseudo-tender being tweaked. Added was the promise of $4.7 billion in public money to ensure the rollout reached citizens in commercially unviable locations, along with other conditions designed to reduce the advantages Telstra enjoyed over other potential bidders, such as information about the existing network.

    After a year-long process, the Government pulled a rabbit out of its hat when it announced it had rejected all bids as not providing value for taxpayers’ money. Instead, it would proceed to build the NBN itself, using Fibre to the Home (FTTH) technology.

    It later emerged that the Government had been advised that the fibre to the node, or cabinet (FTTN/C), technology being proposed by all national bidders was not a viable option. Firstly, while it was an evolution of the existing copper network, it was not an evolutionary step toward FTTH. It was not the optimal architecture for future FTTH and about 70% of the cost of the network would go to active equipment that would be scrapped.

    Secondly, the copper had been so degraded over the years that it would cost an estimated $A2billion to carry out repairs necessary on thousands of copper lines between nodes and households to make them capable of carrying DSL signals.

    And finally, Telstra, which owned the copper access network, would only build FTTN under regulatory conditions that were unacceptably anti-competitive. If the Government attempted to force it to allow another potential bidder to use the copper, Telstra could be able to take a legal action to seek compensation in the order of $A15 billion.

    The Government in effect broke out of its bind by simultaneously announcing the NBN and a review of regulation that ultimately determined that Telstra should be forced to functionally separate its wholesale and retail businesses along the lines of the BT separation, unless Telstra chose to structurally separate in co-operation with the company rolling out the NBN (NBN co).

    Telstra announced in mid 2010 that it had reached an agreement to progressively structurally separate, and in turn leasing to NBN co access to its ducts and other network assets.

    The proposal passed a major hurdle in October 2011 when Telstra shareholders finally voted to accept the agreement with NBNco, removing one of the last major barriers to the rollout moving into top gear. NBNco announced the same day that it had passed 18,000 households and planned to have lines built or under construction that passed almost half a million in a year. Live connections in September 2011 were limited about 700 trial households, but in October NBN co moved from trial to commercial rollout phase, allowing retailers to make commercial connections to new customers, including retail customer “churn”, so the number of connected customers was expected to ramp up quickly.

    However, these big steps forward have all taken place in the context of a collapse in public support for the Government in all the major opinion polls, and a continued commitment by the Opposition to stop the FTTH rollout as soon as it next gains office.

    The Opposition has said it will instead roll out FTTN to deliver faster DSL services, which is calls more affordable and capable of adequate download speeds. Unresolved, however, is how it would prevent the debate once again becoming mired in a fight with Telstra about its property rights, and demands for regulatory reform before it would co-operate with the proposed alternative policy.

    This would in many ways see the debate in Australia wind back to where it was in 2007, an outcome that no one would welcome. The Opposition, as it gets closer to an election due by 2013, will have to engage in some visionary and creative policy thinking of its own if it wishes to avoid this outcome. In the meantime, the Government is hoping that the NBN rollout will be too progressed, and proving too popular, to be stopped by then.

    Whatever the politics of the next few years, Australia is certain to remain a market to watch.

    David Forman
    About David Forman David Forman works as General Manager - Information Communication and Technology at CPR Communications
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