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From across the Tasman

01 Jun 2010

Australia and New Zealand have been leading the world again, this time in what seems to be the crazy idea of government getting back into the “telco biz” as investors in networks. We’ve led the world before in apparently crazy ideas like giving women the vote, and were very early participants in telco deregulation.  But just as with voting systems and the initial move to deregulation, we are taking a very different approach to this issue. The motivation in both places is common: the realisation that once you move to fibre access, the network clearly is ‘sub-additive in costs’ (or a natural monopoly) and a realisation that the private incentives of listed telcos do not match with the public policy objectives.In the Australian case that void was demonstrated by the proposals by Telstra in 2005 to build a Fibre to the Node Network (FTTN). In various scenarios advanced over the year, Telstra at least required “a satisfactory regulatory outcome” and, for some penetration levels, a government contribution. Telstra’s wholesale customers proposed an alternative model that was in essence a producers’ co-op, but they too needed regulatory changes.The Howard government in 2007 tried to choose between them by effectively starting a tender for the regulatory setting. Thankfully an election intervened and this somewhat strange idea was terminated.The Rudd government was elected on a promise of investing $4.7 billion in a new National Broadband Network (NBN) that would deliver speeds of 12 Mbps to 98% of the population. A condition of the investment was that the network be an open access wholesale network. The intention was pretty clear: that the government investment would act as a trigger to restructure the industry, in particular that Telstra would embrace the opportunity of someone else investing in the network and would separate voluntarily.The process of implementing the promise was a tender using government procurement rules totally unsuited to the nature of the project. As the Australian National Audit Office reported, the government’s approach to the tender was to “pursue a process that maximised competitive tension between potential proponents and promoted innovation”. It is a very strange process where the loser of a tender becomes the customer of the winner.  A process designed to bring the telcos together rather than continue to set them apart may have been more productive.Telstra in the end did not submit a proposal that met the minimum requirements, and the expert panel set up by the government decided not to recommend any of the other proposals. At the same time the expert panel advised the government that a strategy of pursuing a Fibre to the Premises (FTTP) network was more viable, especially since the FTTN proposals involved capital expenditure that would be ‘stranded assets’ in a future FTTP network, and that future bandwidth requirements would need an FTTP architecture.On 7 April 2009 the government announced a new direction for the NBN with the network to be built by a new Government Business Enterprise (or, in Kiwi, State Owned Enterprise), NBN Co, that would seek private equity to 50%, would build an FTTP network delivering 100Mbps to 90% of premises and 12Mbps to the remainder using advanced wireless and satellite services. The announcement stated the total cost would be up to $43 billion. The announcement has resulted in a degree of misinformation – including exactly how much the government itself will spend. The combination of private equity and the ability of NBN Co to raise debt finance meant the intended the cash contribution of government may still be limited to the initial $4.7 billion.