“NBN Co needs to be a monopoly wholesale provider for it to be economically viable”.
This was the view espoused by Dr Ziggy Switkowski after being appointed chairman of NBN Co by the Coalition in 2013 to implement its ‘Faster, Affordable, Sooner” version of the NBN.
This monopoly reality contrasted with the views of the key Coalition politicians, Malcolm Turnbull and Paul Fletcher, who prior to coming to political power had been sharply critical of the NBN Co’s monopoly direction (see here and here).
Nevertheless, Switkowski was able to get significant protection for NBN Co’s monopoly with
fixed line competitors forced to operate as wholesale-only operators subject to ACCC pricing determinations, and
contribute to NBN Co’s regional and rural loss making services via a $7 per month levy imposed on all wholesale services.
Such regulation has certainly been effective in limiting NBN Co’s competition from fixed network operators (TPG Telecom and various greenfield operators). The mobile network operators were exempted from these regulations, even though as far back as 2016 it was clear that new 5G technologies would enable fixed wireless broadband offers to compete against NBN Co.
However, time and technology is finally catching up with NBN Co and they are exposing the frailty of its business model as the competition begins to bite.
In its latest documents supporting a revised Special Access Undertaking to the ACCC, NBN Co highlights that it is under significant threat from competition.
“These [competition] risks already constrain nbn’s pricing well beyond the SAU’s current price controls, and will continue to do so under the new price controls proposed in this Variation [of the SAU]”
NBN Co is now clearly highlighting that the monopoly pricing restraints proposed in its new SAU proposal, with a $31.5 billion write-off of incurred costs, will not be the primary binding factor on its pricing plans. Instead, it will be competition that determines NBN Co’s plans for pricing broadband services.
NBN Co has for the first time disclosed ‘net churn’ statistics that highlight approximately 249,000 (or 3.6%) of premises moved away from the NBN in FY21. This is expected to rise to 285,000 premises in FY23.
Competition in apartment blocks (ie. Multi-Dwelling Units or MDUs) is seeing higher churn rates as alternative network operators target these areas.
Mobile network operators (MNOs) also have strong incentives to churn customers to their mobile networks rather than use the NBN. Predictions of 1.2 million premises by June 2024 using fixed wireless subscriptions are cited to highlight the competitive pressure NBN Co is under.
New Pricing Plans
NBN Co has proposed new pricing plans for its lower (50Mbps or less download speeds) and higher (100Mbps and above download speeds) speed products and it is clear that the fixed wireless broadband offers from the MNOs are a big factor in shaping the plans.
The prices for the higher speed plans have been reduced in order to attract more customers on to these plans, because a fixed broadband network is better able to provide these higher speeds and the corresponding higher download demand (ie. volume of data downloaded) than mobile networks (where spectrum limitations will eventually become a problem).
NBN Co acknowledges that customer takeup of these high speed plans is ‘quite elastic’, meaning that cheaper prices should increase the number of customers on these plans. This will look to secure the good high paying customers for NBN Co, rather than having them churn to the MNOs.
On the lower speed plans (and hence lower download demand) NBN Co has generally increased prices (except for the 25Mbps product) with the retention of charges for utilised CVC capacity above allocated amounts. This is a clear signal to NBN Co’s customers (ie Retail Service Providers including MNOs) to move their customers up to higher speed plans rather than take the risk of higher CVC charges on these plans.
So is NBN Co effectively seeking to abandon the lower speed, more price sensitive segment of the market to the MNOs? It would appear this is the case, at least for the time being. In the long run, the MNOs will only be able to place a portion of their fixed broadband customers on their mobile networks without overloading and degrading the quality of their precious mobile investments.
NBN Co may be playing a longer game by looking to encouraging the MNOs to put a limited amount of their customer base on the lower speed plans on their mobile network and pushing the remainder up to higher speed plans. It is a risky strategy for NBN Co and NBN Co’s financials may take a hit if it doesn’t go to plan.
“The extent of competition and substitution risk outlined above mean that nbn faces substantial revenue sufficiency risk. The consequence of this is that nbn faces the risk of being unable to generate sufficient cashflows to sustain its business and continue to invest in the network to meet its policy obligations and the needs of end-users.”
The inability to raise prices due to competition is likely to be the main factor that affects the ongoing financial sustainability of NBN Co.
If this is the case then it is more consequential than the write-down that naturally follows from the capping of the ICRA account examined in a previous blog post.
As highlighted above revenue constraints will affect NBN Co’s ability to invest in its network – a fundamental requirement for any telecommunications provider. Capital expenditure is necessary to replace older technologies and ensure users are able to receive the latest improvement from newer technologies.
Of major consequence will be the need to invest in regional areas – where losses on capital expenditure will be inevitable due to high costs and lower revenues.
NBN Co will need to find new revenue sources to counteract the effects of competition. One important one will be to re-organise funding for regional Australian infrastructure as I have explained previously.
The debate over the value of NBN Co is back in the headlines.
This was triggered by NBN Co’s offer in its latest Special Access Undertaking variation to cap its ability to recover losses it has made on its investment in building and operating the network. These losses are captured in a special regulatory account known as the Initial Cost Recovery Account or ICRA.
The Australian Financial Review quoted me in the article highlighted above as follows :
Former NBN chief technology officer Gary McLaren told AFR Weekend it did not make sense to reduce the cost recovery target without writing down its total value.
“I can’t understand how you would write down the ICRA [Initial Cost Recovery Account] and not the equity value,” he said.
Essentially the ICRA is an accumulation of losses, on a yearly basis, that NBN Co has incurred based on its:
Unrecovered Cost – which is the amount that its actual revenue falls short of the revenue it would have needed if it was to have earned a commercial rate of return (ie. the risk-free interest rate plus 3.50%) on the assets it has prudently invested in (known as the Regulated Asset Base), plus
The commercial return (again the risk-free interest rate plus 3.50%) on its previous year’s ICRA balance, as it would have had these amounts to invest if not for the losses it had incurred.
The ICRA’s purpose is to allow NBN Co to recover its initial losses incurred during its start-up phase at a later stage, but no more than what a non-monopoly business would be able to earn. This is a key way of regulating NBN Co so that it doesn’t earn excessive profits (or what economists call monopoly rents).
NBN Co has estimated that as of the end of this financial year (2022/23) the accumulated losses in the ICRA will be $44 billion.
This is an increase of approximately $5 billion from its last financial year (2021/22), highlighting that NBN Co is still not generating anywhere near enough revenue to give it a commercial return and recover the opportunity cost from all its incurred losses to date.
NBN Co has now offered to cap the ICRA account at $12.5 billion – a reduction of $31.5 billion from its 2022/23 estimate.
However, the ICRA would have likely continued to grow for some time if it weren’t capped so the actual reduction will be significantly higher as each year goes on.
Why does capping the ICRA necessitate a write-down?
The government’s equity stake in NBN Co is $29.5 billion, with this funding being provided by both Labor and Coalition governments up until 2017/18. NBN Co has raised an additional $24.8 billion of debt which has been provided by both the government and the private sector.
This represents funding injections of $54.3 billion, with this expected to rise to $57 billion in 2023/24 according to the 2020 Corporate Plan.
The new Labor Government has committed to providing an additional $2.4 billion over the next four years. Assuming this is in addition to the forecast financing flagged in the 2020 Corporate Plan this adds up to a total funding injection of $59.4 billion of which the government equity component is $31.9 billion.
NBN Co’s Regulatory Asset Base (RAB) as of FY22 was $29.3 billion which is essentially the capital expenditure invested in its network less depreciation (adjusting for inflation).
As mentioned above, NBN Co is only able to earn a commercial return on this part of the funding it has received so far, except to claw-back the stored losses held in the ICRA account. The RAB changes as NBN Co invests in its network (capital expenditure) and accounts for the depreciation of its network assets. It also increases in line with inflation.
As NBN Co seeks to invest approximately another $5 billion over the next four years in its network it would be expected that this asset base will essentially remain flat as capital expenditure plus inflation approximately equals the amount of depreciation.
Based on these assumptions we can attempt to construct how NBN Co’s funding in 2025 maps to its Regulatory Asset Base.
The above graph highlights that the RAB is approximately the same as the Group Debt that NBN Co is estimated to be carrying in 2025. The funding NBN Co has received that is not part of the RAB (Non RAB in the above graph) will be approximately equal to the government’s equity.
NBN Co can only earn a commercial return on the RAB amount – not the Non RAB amount. The ICRA is the mechanism by which returns can be obtained on the non-RAB amount of funding that has been provided.
NBN Co must pay interest on the Group Debt and this interest must come from the Return on Capital that NBN Co is permitted to make on its RAB.
So the critical issue for NBN Co is what interest rate it will pay on its Group Debt as this will be approximately the same as the RAB.
If it pays an interest rate approximately equal to the commercial return it is allowed to make (risk-free interest rate plus 3.5%) then it will not be able to make any return to its equity holders (ie. the government), except for the amount it is able to claim from the ICRA once it is profitable. Previously this amount was growing as NBN Co’s losses mounted, but now under the new SAU offer, it will be capped at $12.5 billion.
The Productivity Commission has just completed an exhaustive analysis of NBN Co’s debt funding in its investigation of a complaint regarding the competitive neutrality policy that should apply to government-owned businesses.
It found that NBN Co is not currently complying with the competitive neutrality provisions because its interest rate on its private debt has been priced at a higher investment grade due to government ownership.
The advantage obtained by NBN Co is in the order of 3.2 to 4.2% in interest terms and should involve NBN Co paying the government approximately $320 million per annum to the government for this benefit on an annual basis.
As discussed above the maximum return NBN Co can earn on the RAB is the risk-free rate plus 3.5% under the offered SAU. So it can be seen, that if NBN Co was paying a fair rate of interest on its debt of 3.2 to 4.2% above the investment grade rates (ie. AA and BBB-rated debt) then it would have no return available for its equity holders.
Of course, if the government ignores its own competitive neutrality policy, NBN Co could continue to pay an interest rate that is less than the risk-free rate plus 3.5%. This saving in interest could then be used to provide a return on equity. But this would only be a very small return on the government’s equity stake.
As a consequence, it can be seen that the value of the equity will mainly consist of the amount that is recoverable from the ICRA account.
If NBN Co was able to increase its RAB through more investment that was funded by equity then it may be able to make a return on that additional equity. But not on the sunk equity which is essentially lost if the ICRA account is capped.
Based on this analysis, NBN Co’s equity value would be approximately $12.5 billion if one did not factor in the time value of money because any returns on the equity are far into the distant future.
The responsible department for NBN Co (Department of Infrastructure, Regional Development and Communications) has adopted a fair value of $19.7 billion in its 2021/22 annual report (see page 204). This was however before the lodgement of the revised SAU by NBN Co to the ACCC with the offer to cap the ICRA.
The Productivity Commission in the above-mentioned report in commenting on DTIRDC’s fair value figure of $19.7 billion indicated that the valuation would be below $18.4 billion assuming NBN Co was required to comply with the competitive neutrality policy.
The Politics of an NBN Co writedown
Labor has previously criticised the then Chairman of NBN Co, Dr Ziggy Switkowski, for claiming that he has ‘figures’ which substantiate a valuation for NBN Co of $50 billion in January 2019. This valuation presumably was at an enterprise level and included the equity and debt funding provided to NBN Co, implying that the government’s equity stake was still worth $295 billion.
At the time Dr Switkowski highlighted the uncertainties around technology and advised waiting for the completion of the build phase for NBN Co before considering a write-down.
These can and should be debated but attempts to value the enterprise probably are better done in the early 2020s once the construction and customer migration phase is over and the NBN morphs into a more typical and profitable telco company.
The then Finance Minister, Senator Cormann, said there was ‘no argument’ and in any case, it was not up to the government and any write-down needed to be done ‘in accordance with the accounting standards, and subject to an independent audit.”
The lodgement of a revised SAU with the ACCC which effectively eliminates the ability to claim NBN Co’s accrued losses would seem to make the write-down only a matter of time.
Of course, there are other threats to NBN Co other than the capping of the ICRA balance. NBN Co has included a detailed analysis of these threats in its new SAU and I will be analysing these in an upcoming post.
Thank you for the opportunity to discuss my submission to this inquiry.
My submission focussed on the ‘Investing in Regional Digital Infrastructure’ of the commission’s interim report on the Digital and Data Dividend.
By way of introduction, I have had a long career in telecommunications in Australia and overseas. I was the initial Chief Technology Officer at NBN Co from 2009 to 2014 and also had a similar role in Hong Kong for a local fibre broadband company from 2015 to 2019. I am now a consultant for Hardiman Telecommunications who provide advice and due diligence on mergers and acquisitions in telecommunications in Asia, Europe and Africa.
In its report, the Productivity Commission has highlighted one of the most significant problems in Australia’s telecommunications industry – namely the inefficient and ad hoc nature of funding the necessary ongoing investment in Australia’s regional telecommunications infrastructure.
Unlike in urban and regional cities, investment in regional telecommunications is in many cases uneconomic – the returns on investments make it unattractive without some form of government subsidy. In Australia, this is especially the case given the low population density – even though regional Australia is a source of much of Australia’s economic wealth.
Despite this obvious problem, Australia’s telecommunications policies have always struggled to come up with a sustainable long-term policy for investment in regional telecommunications.
Instead, the investment decisions have been hidden behind state-owned monopolies (the Post Master General’s department, Telecom Australia, and now NBN Co) with minimal transparency and mainly in response to political rather than economic drivers.
In my 9-page formal submission, I fully support the Commission’s suggestion for a competitive, market-based mechanism to deliver a more efficient way of delivering the Universal Service Guarantee.
However, in my opinion, this does not go far enough.
To create a competitive, market-based mechanism it is necessary to have a long-term sustainable funding arrangement in place to ensure that an efficient market can develop for investing in infrastructure and servicing regional Australia.
My submission highlights that approximately $1 billion per year of subsidies are currently being plowed into regional broadband infrastructure. Approximately half of these subsidies are via industry levies such as the 1990s era USO and the more recent Regional Broadband Scheme. The other half is from a range of ad hoc federal and state government grants to schemes such as the Regional Blackspot Program, Regional Connectivity Program, and other specific initiatives.
The Regional Broadband Scheme, with funding of $417 million, is a particularly narrowly cast burden that is only imposed on high-speed broadband providers such as NBN Co and a small number of its competitors. In my opinion, this scheme, along with other regulatory arrangements, was imposed to protect NBN Co from competition in the hope a monopoly would result along the lines of the old Telecom Australia monopoly for fixed telephony.
A more efficient and effective funding scheme is needed for regional Australia that covers fixed, mobile and satellite infrastructure. I have suggested for some time that all of the current funding arrangements should be replaced by a centrally managed fund that promotes efficiency, using competition where possible, to ensure Australia’s regional broadband services do not fall inexorably behind those of urban services.
A levy of 2.5% on all of Australia’s telecommunication retail services (a market of approximately $40 billion) would raise the $1 billion per annum that is currently being spent in the ad hoc manner mentioned earlier. A centralised fund managed by an existing government agency or a new agency should be tasked with obtaining the most efficient and effective outcomes for regional Australia using the proceeds of such a levy.
In the days of the Telecom Australia monopoly, the government relied on engineers and accountants to manage the implicit cross-subsidy necessary to fund investment in the universal telephone service. This was also the plan with the hopeful re-incarnation of the supposed fixed broadband monopoly under NBN Co.
However, the inevitable onward march of technology is threatening the NBN Co fixed monopoly as the mobile operators begin to offer equivalent services using 5G. The ‘cherry-picking’ of urban customers by these operators will see NBN Co’s internal funding mechanism break down – requiring ever more government funding.
As a result, NBN Co should also be funded from this universal retail funding levy – but only to the extent, it is the most efficient service provider.
More effective and efficient investment will improve the economic and social growth prospects for many regional areas – both those that are currently disadvantaged and those that are contributing significantly to overall economic growth.
Furthermore, more efficient investment should also have the objective of improving the resiliency of telecommunications networks in regional areas. Given the increasing disasters to be expected from the effects of climate change, this will help communities respond and adapt more quickly to the changing world around them.
It is important that reforms are made as soon as possible – especially given the review of NBN Co’s Special Access Undertaking that is now underway. Embedded within the draft SAU is the hidden cross-subsidy mentioned earlier. If it is accepted it will be difficult to undo an arrangement that will become more unsustainable as technologies continue to provide more efficient options to service regional Australia.
I would be keen to hear if you have any questions.
The ‘bush telegraph’ is the colloquial term for how information is informally transmitted around the rural and outback regions of Australia. It is also an appropriate description of how Australia’s telecommunications infrastructure has not kept up to date with the needs of our modern digitally networked society.
The latest episode of this saga sees TPG and Optus in the middle of a dispute being considered by the ACCC over the best way to enable better mobile services for Australia’s regional consumers. TPG has done a network sharing deal with Telstra which would give their customers better network service in regional areas.
Optus believes that will be bad for consumers in the long run because Optus says it will exit the market. The ACCC must decide whether a duopoly of Telstra and TPG is better than today’s Telstra regional mobile monopoly – but with the possibility, Optus may after many decades step up and compete more in the future. The ACCC must decide whether to take ‘the bird in the hand’ or rely on a promise from Optus that may be on the ‘never never’.
Lack of a long-term plan for regional telecommunications investment
But this is just the latest in many ongoing dramas over Australia’s bush telegraph.
There have been serial reviews by various government inquiries over the decades into Australia’s regional telecommunications but little serious action in building a long-term framework that ensures the necessary ongoing investments necessary for the 21st century.
The most recent of the triennial reviews (mandated by legislation) was published in the last few days of the Morrison Government in February 2022. The review highlighted many of the same old issues that have bedevilled regional telecommunications since the privatisation of Telstra – a ‘patchwork quilt’ of connectivity, reliability problems and a lack of resilience in the face of natural disasters.
The committee’s report titled ‘A Step Change in Demand’ puts the problems down to a ‘step change in the ongoing demand for data’ and advocates for a corresponding ‘step change in the policies and programs which support the delivery of telecommunications services in the bush’.
This position serves to highlight all that has been wrong with Australia’s regional telecommunications policy approach. The blame is put on some unexpected event – in this case, a ‘step change’ increase in demand for data. But the demand for data across Australia has been growing consistently at rates between 25% and 35% per annum since 2006. Demand growth at this rate (effectively doubling every 2.5 years) requires significant ongoing investment in network upgrades.
Rather than creating an environment for the ongoing necessary investment ahead of demand, we have added various government initiatives that have reacted to complaints – such as Telstra’s CountryWide division, large investments by NBN Co in Fixed Wireless and Satellite and more recently the Mobile Blackspots program funding for mobile operators.
In general, we have had a series of reactionary politically driven programs that have responded to complaints but provided no plan for ongoing, sustainable, investment ahead of demand in the necessary infrastructure.
Given this lack of foresight and planning to manage the inevitable growth in demand it is little wonder that no proactive initiatives have been taken to tackle some of the harder issues such as overall network resiliency and tolerance to the increasing incidence of natural disasters.
Productivity Commission weighs in on the ‘bush telegraph’
The Productivity Commission, in a recently released interim report on Australia’s Data and Data Dividend, has weighed in on this repetitive process of complaining, contemplating, considering and then finally constructing.
The commission acknowledges that a diverse range of fixed, mobile and satellite technologies need to be considered to effectively and efficiently provide fixed and mobile services to regional Australia.
These technologies are evolving rapidly with private sector providers (Starlink, Telstra, ViaSat, OneWeb and HyperOne) investing alongside government programs such as the NBN, Regional Blackspots and the Regional Connectivity Program.
The commission laments the limited quality and adequacy of the data that, if available, would highlight the ‘geographic disparities in the demand and supply options for regional telecommunication services. Data from work by Infrastructure Australia released in March 2022 highlighted that 23 of Australia’s 48 regions have broadband and mobile infrastructure gaps. But better, more granular data is needed.
Figure 1 – Regions with broadband and mobile connectivity infrastructure gaps, 2022a Source : Infrastructure Australia (2022)
A lack of transparency around NBN funding for its regional networks is also of concern. The commission highlights that the $480 million granted to NBN Co in the 2022 Budget for NBN fixed wireless upgrades lacked important clarity concerning connection types and locations that are necessary ‘to ensure taxpayer funds are being spent efficiently. The grant is also on top of the government equity and mixture of private and government debt that NBN Co has previously used for its funding. It may be a sign of future funding for NBN Co being brought onto the Federal Government’s budget accounts rather than its previous off-budget accounting methods.
The Productivity Commission is considering a recommendation for a market-based mechanism for funding a Universal Service Guarantee tender mechanism to ‘improve access to low-cost, reliable, future-proofed internet services in regional and remote parts of Australia’. This policy has been used successfully in Canada, which has similar geographic challenges for telecommunication, for many years.
Such an approach, if it were combined with a regular funding arrangement and comprehensive geographic modelling of the demand and supply gaps in regional telecommunication services, would go a long way to ensuring Australia rectified its ‘bush telegraph’ problem.
Need for long-term secure funding arrangement
Any such funding arrangement would need to re-direct the likely ongoing funding NBN Co will require to the market-based mechanism. Extra funding should also come from expanding the levy scheme currently imposed on non-NBN fixed network operators (who are charged approximately $7 per month per fixed broadband service under the Regional Broadband Levy Scheme) to encompass all telecommunications services (fixed and mobile) such that all services were levied on a percentage basis using retail prices.
A retail levy of 2.5% would raise approximately $1 billion per year – sufficient to keep ahead of the ongoing growth in demand and enable upgrades in the overall quality and resiliency of the network.
For too long Australia’s ‘bush telegraph’ has suffered from the lack of a proactive plan that ensures ongoing investment in areas that will always need some form of taxpayer assistance. Governments have preferred to leverage their ownership of, initially, the Post Master General’s Department, then Telecom Australia / Telstra and now NBN Co to hide these costs and use these ‘government agencies’ as scapegoats when the inevitable complaints from lack of investment roll in.
The result has been a lack of ongoing, sustainable investment in regional telecommunications and instead a focus on committing capital (in many cases provided by taxpayers) to Australia’s metropolitan areas where the returns are higher and more secure.
Australia’s NBN is the latest example of this approach. Taxpayers are on the hook for $57 billion of investment with a real chance of much of this being written off in the near future. Any such write-off will be a tragedy for the ‘bush telegraph’ as it will likely well and truly exceed the capital invested by NBN Co in regional areas and hence highlight the failure of the hidden cross-subsidy approach within NBN Co.
A market-based approach, as advocated by the Productivity Commission, that requires private and public companies to compete for taxpayer funds and where their investments are transparently tracked and monitored, can ensure that Australia’s important regional and remote telecommunications services are kept at a level that matches those of their metropolitan cousins.
Hopefully, the Productivity Commission’s recommendations in this area will be considered seriously by the new regime in Canberra.
This post was first published in the Australian Financial Review on 30 May 2022.
Immediately after the election had been put behind us the ACCC released NBN Co’s proposed new Special Access Undertaking which, if accepted, would govern the prices of fixed broadband services for most Australians until 2040. The ACCC also released a 52 page consultation paper which contained extensive criticism of NBN Co’s proposed broadband pricing regime.
It is a dense read but the key take out message from the ACCC’s consultation paper is that, if the SAU were accepted, Australians could expect the prices of all broadband services to rise inexorably to eventually be the same as the price of a 100Mbps download service. Australians would effectively be forced to pay much more for lower speed services as they rise to the price of the 100Mbps service, the price of which would also be able to rise at the rate of the Consumer Price Index plus 3%. This convergence of prices arises from NBN Co retaining the controversial CVC mechanism for lower speed services and ongoing growth in internet data usage.
The ACCC says the proposed pricing regime would ‘likely force households and businesses to purchase high speed inclusions at a price that does not represent fair value to them based on their requirements’.
One big conclusion to be drawn from what amounts to a likely rejection by the ACCC of NBN Co’s pricing undertaking is that the Coalition did not fix the NBN in its near nine years at the helm of the controversial state-owned company.
Back in 2013 the Coalition promised ‘fast, affordable and reliable broadband to all Australians’. There is not enough space to detail how the current NBN has not achieved the ‘fast’ and ‘reliable’ objectives but the ACCC have made it clear that the NBN, as a whole, is far from ‘affordable’.
The reason behind NBN Co’s desire to raise prices going forward is the need to re-coup the costs of building and operating the NBN. Taxpayers, and more recently private financial institutions, are forecast by NBN Co to provide total funding of $57 billion by 2024. This is approximately double the $29.5 billion of funding originally proposed by the Coalition.
NBN Co currently does not earn anywhere near enough revenue to justify this level of funding. In fact, the ACCC itself expects the special regulatory account used to track NBN Co’s losses to continue to grow for some time. The escalating prices above CPI and consequenet revenue increases proposed by NBN Co would eventually allow NBN to earn a return on this investment funding commensurate with normal market returns for similar businesses – assuming of course that NBN Co retains its near monopoly on fixed broadand services.
The Coalition made dramatic changes to the technologies used for the NBN – with a focus on re-using and upgrading the copper and cable TV networks originally built to provide landline telephony and Pay TV in the 20th century. However these networks need constant upgrades and maintenance and cannot deliver the higher speeds and capacity that consumers and business demand as internet usage continues to grow at approximately 30% per year (which is much higher than the 13% annual growth NBN Co have used in constructing its proposed undertakings). Further significant investment is necessary, as finally admitted by NBN Co in 2020 when it embarked on rolling out fibre to the home in many areas as per the original Labor plan.
This focus on technology rather than industry structure and reform has meant Australia suffers from having a state-owned monopoly at the heart of its digital economy rather than private enterprise and competition driving investment in infrastructure and innovation. As broadband technologies continue to evolve, with 5G and new satellite technologies in particular, NBN Co will face more competition which will make its economics even more challenging.
While the Coalition can claim some credit for a much better network (ie. compared to Telstra’s old ADSL network) being in place for the work from home revolution precipitated by COVID that came in 2020, it missed the opportunity to re-structure Australia’s fixed broadband industry so that Australia’s highly urbanised society would benefit from private capital and innovation. This was a key recommendation of the Coalition’s own inquiry it initiated in 2014 lead by Dr Michael Vertigan which would have seen the Coalition Multi-Technology Mix as the basis for separate operating companies and eventually private capital investment.
If followed, such a recommendation would have resulted in more efficient investment in the optical fibre that both fixed and mobile networks need to statisfy the ever-growing digital demands of the the economy. Even more importantly it would have allowed government to focus its attention on where the real market failure will always be in telecommunications – the rural and remote areas where the costs of both fixed and mobile networks will always exceed what the consumers and businesses in those areas are willing or able to pay.
Instead the Coalition has perpetuated the old 20th century myth that broadband networks are natural monopolies in our major urban centres. Unlike the electricity and water networks on which this fallacy is based, broadband networks are continually evolving through technological innovation to respond to the high growth of the digital economy. Private investment and innovation is driving this ongoing change – not regulatory and political game playing.
Unfortunately Australia faces further protracted regulatory and political disputation that will be a brake on investment and innovation in the core infrastructure we need to compete on an international stage in the digital economy.
That is the legacy of the Coalition’s nine years at the helm of the NBN.
Is the ACCC helping the Government get the best price for the sale of NBNCo? The competition regulators are doing consumers no favours hindering investment in new telco infrastructure. Who is looking after the interests of telco consumers? asks former NBNCo CTO Gary McLaren.
Despite the $60 billion plus investment in NBNCo, Australia lags far behind the world’s best in broadband speeds; no. 57 according to Speedtest.net, albeit a slight improvement on last years ranking of 68. Nor is it cheap, we rank 128 in the world on the basis of average monthly cost (Source: Cable.co.uk). Australian telecommunications consumers have many reasons to feel hard done by.
The Australian Consumer and Competition Commission (ACCC) is tasked with protecting consumers interest in general. But when it comes to telecommunications, it is increasingly unclear what its role is and how independent it is from Government influence related to the Government owned NBNCo.
The bungled intervention into the merger of Vodafone and TPG means the telecommunications retail sector is now completely dominated by Telstra, Optus and Vodafone/TPG. And they all have to buy broadband from NBNCo.
What is stopping these big players from getting together to extract undue profits from the humble consumers? How will the likely privatisation of NBN Co be managed to actually benefit consumers rather than just become another stitch up by the big telcos?
In October 2020, the ACCC was given an usual “Statement of Expectations” (SoE) by the Minister fro Communications, Paul Fletcher. The SoE was ostensibly issued to ensure that the ACCC, the Department and the Minister are all on the same page when it comes to updating the regulatory pricing arrangements applicable to the non-FTTP technologies. In setting these arrangements the ACCC is supposed to act as an independent, neutral umpire that takes as its primary objective the long term interests of end users of telecommunications services.
However, the SoE also indicates that the Minister, as one of the Shareholder Ministers for NBN Co, is looking to influence the outcome of the ACCC’s decision process in a way which seeks to maximise the financial prospects for NBN Co, thereby increasing possible future returns from the privatisation of NBN Co.
The ACCC is currently considering the long term pricing arrangements for NBN Co’s services to its customers (predominantly Telstra, Optus and TPG/Vodafone) through a revision of NBN Co’s Special Access Undertaking (SAU). There was even a behind closed doors get together of the the ACCC with these players at an ‘industry roundtable’ on 18 June.
Is the ACCC getting too cosy with the big players involved in the telecommunications industry? Why was such an important meeting conducted under Chatham House Rules rather than open to all relevant parties?
The pricing arrangements that the ACCC approves for NBN Co will be a critical factor in whether the government is able to re-coup a positive return on its investment in NBN Co. But consumers are generally best served by lower prices.
The higher the price that NBN Co charges, and that ultimately consumers have to pay, the higher the chance of a higher return for the government. As resellers, Telstra, Optus and TPG/Vodafone, just clip the ticket along the way.
The ACCC has also recently extended its regulation of small competitor broadband networks that build networks that compete with NBN Co. This regulation is unique in the world in putting additional regulations on new network investments by competitors to a dominant network like the NBN. The ACCC argues that this benefits consumers by ensuring that resellers are able to get access to these new networks in addition to the NBN. But the more likely impact is that it discourages new investments which benefits NBN Co at the expense of competitive tension, and increases the likelihood of the government getting a higher price for NBNCo.
This recent history of specific instructions to the ACCC from the government, closed door meetings on long term pricing arrangements for the NBN and continuing regulations on investments that compete with NBN Co does not bode well for the prospects of Australian telecommunications consumers.
Australian consumers deserve to have someone fighting for them in the important area of telecommunications. At it currently stands the only hope is the ACCC, but is its independence guaranteed given the current ownership of NBN Co and likely privatisation?
Back in the day when Telecom Australia was ruling the roost, the Australian business community initiated a purpose-built lobby group, the Australian Telecommunicaitons User Group (or ATUG) to push for reforms and break down Telecom Australia’s monopoly to the benefit of businesses and consumers.
ATUG quickly became a key feature of the Australian telecommunications landscape. It sponsored large industry conferences that brought together key players in the industry to push the opening up of the industry. ATUG’s key push was to breakdown Telecom Australia’s monopoly and overall dominance of the market. The campaign was successful, as Optus and Vodafone became fully-fledged competitors to Telstra, followed the full opening up of Australia’s telecommunications market in 1997. Large new investments in mobile and optical fibre networks during the 1990s and early 2000s benefited businesses enormously. Most large businesses were able to ensure their telecommunication costs were decreased significantly as a range of service providers clamoured for their business.
Australian consumers did not fare quite as well. While some benefits definitely did ‘trickle-down’ to consumers in the big cities and larger regional towns through investments in mobile phone networks, broadband networks were slow to rollout after the demise of the Optus Cable TV network as a viable competitor to Telstra in the suburbs. Regional consumers were even worse off. Mobile and broadband network coverage was patchy and expensive. The National Party agonised over the privatisation of Telstra, but eventually the deal was done in 2005 when Barnaby Joyce was the last Senator to fold and give up any political leverage the National Party once held.
And in the end ATUG folded – closing it doors in 2011. With big business happy there was no desire to fund what was essentially a lobbying organisation that had completed its job. and consumers were again left in the lurch.
Today, consumer have only the Telecommunications Industry Ombudsman (TIO), to manage a complaints process for consumers, and the Australian Communications Consumer Action Network (ACCAN). The influence these organisations have over the industry does not come close to what ATUG achieved back in the 1980s and 1990s.
And then there is ACCC, who seems more focused on propping up the price of NBNCo than protecting Australian consumers.
The Minister for Communications, Cyber Safety and the Arts, Paul Fletcher, has issued a special Statement of Expectations (SoE) to the ACCC regarding its telecommunications-related functions on 9 October 2020. This new SOE apparently sits alongside the generic SoE issued to the ACCC by the Treasurer.
What should we make of this development? Why would the telecommunications industry be signalled out for special attention when it comes to setting the expectations that government has for the ACCC?
The generic form of the ACCC’s SoE is a rather innocuous document that outlines what one would expect of a competition regulator. The most important part of the document is the government declaration of its de-regulation agenda. This has been part of the Coalition Government’s policy for some time and it clearly is looking to the ACCC to be part of its plan “to reduce compliance costs for business and community and contribute to the Government’s $1 billion red and green tape reduction target”.
It should be noted here that the telecommunications industry has been the exception when it comes to this de-regulatory agenda. The Coalition Government and the ACCC have imposed a series of regulations on non-NBN Co fixed broadband companies, and in particular TPG Telecom, to protect NBN Co from competition and re-inforce its monopoly (see for example here). Furthermore the difficulty of doing business in the sector has increased markedly as NBN Co continues to introduce extraordinarily complex pricing plans into the market that seek to control the retail pricing plans made by RSPs (see here $$$).
The generic SoE for the ACCC also outlines the Government’s preference for “principles-based regulation that identifies the desired outcomes, rather than prescribing how to achieve them”.
But what about the new telecommunications SoE for the ACCC? The tone of this document is very different with specific details on how the ACCC should go about its work in some key areas, particularly in regard to the NBN.
The telecommunications SoE points to how the ACCC “could” approach the task of regulating the prices of NBN Co’s Multi Technology Mix networks. It is also explicit in setting clear expectations that NBN Co “will play a key role in increasing competition in the business segment of the market via its build activities”. Both of these statements appear to go beyond the “principle-based regulation” that the generic SoE from the Treasurer requires of the ACCC.
By highlighting these specific issues, is the Government looking for specific outcomes that would not normally be the result of “principles-based regulation” where the same principles apply to all regulated entities (private and public)?
Under the heading of “Regulator Performance” the telecommunications SoE appears to be pointedly reminding the ACCC of the importance of its job and the need to be consultative, transparent and follow a robust process that is designed to minimise negative consequences. Regulatory intervention by the ACCC should have regard to the promotion of the long-term interests of end users of telecommunications services. These are non-controversial statements that are explicitly or implicitly already expected of the ACCC through its legislative framework or the generic SoE provided to the ACCC.
Which begs the questions – why is the Minister explicitly setting expectations that the ACCC should be following rules that are already part of its regulatory mandate? Does the Minister believe the ACCC has not been acting in this way in some of its previous regulatory work in the telecommunications industry? What is the reason for the Minister needing to remind the ACCC of its general obligations?
Under the heading of “Relationship with the Department of Infrastructure, Transport, Regional Development and Communications” the Minister highlights the need for the ACCC to work closely with his Department which advises him on telecommunications policy. In particular the Department should be provided with “sufficient advance notice of significant actions affecting the telecommunications sector”. Such a statement, being made in a formal SoE, smacks of behind the scenes tensions, disagreements and worries that the Minister will be ambushed by the ACCC.
What is the Minister getting at with such pointed expectations of the ACCC, that verge on being a set of directions to the independent competition regulator?
Perhaps the Chair of the ACCC, Mr Rod Sims, hinted at some of this in his appearance in front of Senate Estimates on the 27th October 2020, as reported by iTnews.
“The essence of the [telecommunications] SOE is to keep the minister informed of what we’re doing and to start work on a new structural access undertaking which will govern the regulatory arrangements of the NBN, which have been somewhat in abeyance because the previous structural undertaking applied to the FTTP model and when we went to the MTM model it was just sort of left hanging,” Sims said.
Based on this response the SoE has been issued to ensure that the ACCC, the Department and the Minister are all on the same page when it comes to updating the regulatory pricing arrangements applicable to the non-FTTP technologies. In setting these arrangements the ACCC is supposed to act as an independent, neutral umpire that takes as its primary objective the long term interests of end users of telecommunications services. There is normally a formal submission process that is part of the consultative, transparent and robust process that the Minister specifically mentioned in the SoE.
Why is the Minister wanting some extra dialogue, notice and special treatment regarding the ACCC’s considerations regarding this important activity? Does this dialogue bias the outcome in ways that disadvantages other parties (such as retail service providers and ultimately consumers) that will be affected by the ACCC’s decisions?
One conclusion could be that the Minister, as one of the Shareholder Ministers for NBN Co, is looking to influence the outcome of the ACCC’s decision process in a way which seeks to maximise the financial prospects for NBN Co, thereby increasing possible future returns from the privatisation of NBN Co.
Mr Sims, highlighted such a possibility in his response to some of the questions at Senate Estimates. Again, as reported by iTNews :
[Sims] criticised the privatisation of assets “in a way that often sees the price go up”.
“Users lose just so we can sell them for a very big price, which I don’t think is a very good idea,” he said.
“Here [with NBN Co] what we’ve got to do is just make sure that we get the benefit of this very important technology that can provide very fast data.
“The good news is it was built in time as Covid arrived so we’ve all been able to take advantage of it, but we’ve got to keep in mind that what’s important here is getting the most efficient use of this $50 billion spend, as distinct from necessarily getting a return on that spend.
“I think that’s a principle that applies for a lot of infrastructure, where government has fundamentally been the one that’s built it.”
Mr Sims, in a somewhat ominous tone that implies the matter may be taken out of the ACCC’s hands said, in response to questions regarding the possibility of NBN Co raising its entry-level and mid-tier pricing that this would not be permissible “if we have anything to do with it”.
Hopefully the ACCC will have something to do with it and NBN Co will be required to act like any other monopoly in Australia in a way that is subject to the laws and regulations of the land and not get any favours because it happens to be a wholly-owned subsidiary of the government.
We now await the ACCC’s formal response in its Statement of Intent that needs to be provided within 3 months.
I recently was invited to present to the Australian Telecommunications Associations (TelSoc) and chose to present on what has been happening on the broadband scene in the United Kingdom over recent years.
Of particular interest to me is how the UK market is transitioning from using Fibre to the Node (FTTN) to Fibre to the Premises (FTTP) as the underlying technology. Australia’s current Multi-Technology Mix, which mainly uses FTTN technology, was developed by the Coalition based on guidance that was obtained from British Telecom back in 2013.
However, the UK broadband policy settings, that have promoted competition between fibre network builders, has pushed British Telecom’s network subsidiary, Openreach, to embark on a plan to build FTTP to approximately 20 million premises (approximately 65% of the total) by the mid to late 2020s.
This presentation goes into some detail on how the United Kingdom has transitioned from FTTN to FTTP and contrasts these outcomes with Australia’s lagging broadband performance.
NBN Co’s latest 2020 Corporate Plan was announced last week with the headline being a substantial $4.5 billion investment in deeper fibre for both enterprise and residential customers. This has been welcomed by many and seen as a vindication of the original NBN plan to deliver fibre to 93% of Australian households. However it also signals that the Coalition Government is preparing to double down on its strategy to cement NBN Co as the monopoly provider of fixed broadband in Australia.
Both Malcolm Turnbull and Paul Fletcher were vocal critics of Labor’s plans to create NBN Co and in particular the deals it struck with Telstra and Optus to shut down the pay TV Hybrid Fibre Coax (HFC) networks and effectively both nationalise and monopolise the Australian fixed broadband industry. On coming to power in 2013 and 2014 the Coalition commissioned a number of reviews into NBN Co and the telecommunications industry with the outcome being the Multi-Technology Mix (MTM) model that has completed its rollout this year. An important recommendation from the Vertigan Inquiry was for NBN Co to be dis-aggregated or broken up to encourage infrastructure competition and effectively reverse the monopoly policy of the Labor Government.
In responding to this recommendation from the Vertigan Inquiry in October 2014, Malcolm Turnbull, as Minister of Communications said :
While disaggregation of NBN Co’s business units (as the panel recommends) after the network is complete cannot be ruled out, now is not the time. Breaking up NBN Co would distract its management and delay the provision of high-speed broadband to all Australians.
Now in 2020, with rollout of the network MTM practically complete, the opportunity for the Coalition to revisit the Vertigan Inquiry recommendation appears to have come and gone. The planned investment in more fibre to enable 68% of Australians to get 500+Mbps download speeds is not only a reversion to the Labor Government’s “fibre is best” strategy, it is also a recommitment to the NBN as a fixed network monopoly plan that Labor initiated.
This highlights the complete transformation of the Coalition away from a party that champions free-enterprise and market based technology developments to a party that believes in government intervention in the high stakes game of technology investments. The Coalition has consistently rejected market based solutions to guide the transformation of the energy market and has now clearly committed to re-inforcing NBN Co’s domination of Australia’s fixed broadband market.
Given the significant change in strategy and the large investment required, it is now likely that any privatisation of NBN Co will be delayed until the market sees whether this new strategy is successful or not. A privatisation during a large capital expansion phase is highly problematic. Private investors will be reluctant to be locked in to an unproven strategy and will want to wait to see how the business case plays out in practice.
Business Case for Fibre Investment
NBN Co’s new plans for fibre investment in the enterprise and residential markets are aimed at using its extensive network coverage and scale advantages to capture as much of the fixed broadband market as possible.
Competition between the private sector players (Telstra, Optus, TPG Telecom and Vocus) in the enterprise fibre market has been effectively delivering new fibre connections to large Australian business for two decades. NBN Co entered this market as a disruptor in 2018 and, despite a mini-truce on the method of engaging with end businesses in early 2020, is now expanding its enterprise footprint further with an extra $700 million investment. These aggressive initiatives by NBN Co are effectively stranding existing private fibre assets and destroying any incentive for further investment by the private players. This will no doubt be a successful line of business for NBN Co where it has a huge advantage given its scale and near-zero cost of capital.
Success in the enterprise market will be important because it will need these lucrative cashflows to balance its problems in the residential market.
In the residential sector, NBN Co will be spending $3.5 billion on upgrades to the HFC, Fibre to the Curb (FTTC) and Fibre to the Node (FTTN) networks. As would have been expected the largest spend is on the upgrade to FTTN with $2.9 billion required to enable Fibre to the Premises (FTTP) for 2 million households (out of a total footprint of 4.7 million) on the FTTN network. A quick analysis of the economics of this investment shows that this spend is not motivated by higher returns.
The current NBN Co wholesale pricing 1 bundles for speeds of 50Mbps and above for residential services is presented below. From this, using an assumed take-up mix of different speed, the approximate ARPU increase in the FTTN footprint is $3.76 per month.
This assumed increase in ARPU across the 2 million households in the upgraded FTTN upgraded will provide an additional $90.2 million per year to NBN Co. Assuming that there is no additional operational costs this equates to a return of 3.1% on the $2.9 billion investment. This investment return is under the overall returns assumed in the 2019 Corporate Plan (3.2%) and also the new forecast overall return in the 2020 Corporate Plan (3.7%).
So it seems that the investment in the FTTN upgrades will actually detract from NBN Co’s overall returns. This exposes the main motivation of NBN Co in making this investment – to defend against competition from Telstra, Optus and TPG Telecom using 5G Fixed Wireless Broadband (FWB).
The clear intentions of Telstra, Optus and TPG Telecom to compete in the fixed broadband market with FWB are recognised by NBN Co as threats in the new Corporate Plan for the first time. 2 However, despite this NBN Co has not changed its overall forecasts for take-up which remains at 73-75% of all households. 3
So in summary NBN Co is investing extra capital in the FTTN network in a way that reduces the overall return on its investment just to retain its overall market share. This highlights the defensive, loss-leading nature of its investment in more fibre in the FTTN footprint.
However, to be successful with its plan NBN Co must now complete its somersault by promoting these higher speed plans to its customers. Download speeds in excess of 100Mbps and the corresponding large data volumes are a weak point in the FWB technologies. NBN Co must convince customers to pay significantly more (up to $150 per month retail) in order to differentiate themselves from FWB. This is in direct contrast to the detailed research commissioned by the Coalition Government that Australian households will be well-serviced by 50Mbps speeds until 2026.
Much will hang on positioning the change to be the result of a new COVID paradigm where ‘Working from Home” necessitates such high quality services. But it is unlikely consumers will be willing to pay for these services out of their own pockets – the campaign will need to focus on employers subsidising or paying for high quality home broadband. Are we going to see a transfer of employer costs from office rents to home broadband services?
But why will Telstra, Optus and TPG Telecom, who purchase over 90% of NBN Co’s services for resale to end customers, co-operate with NBN Co in this paradigm shift. The larger RSPs have been the subject of a margin squeeze for a number of years and clearly want to exert pressure on NBN Co to reduce its wholesale price points across all speed tiers to recover some of their profitability. These same RSPs can put pressure on NBN Co by offering lower priced FWB services to compete with the majority of NBN Co’s current services at the 50Mbps and below speed tiers.
The real battle for broadband market share is likely to be happening at the lower end of the market where FWB has its advantages. While NBN Co attempts to pivot to the upmarket business and high end residential / home office worker markets, the FWB players will be bringing their powerful marketing and sales channels, that have been honed for years on mobile competition, to a new battlefront where NBN Co is not able to participate because of its wholesale nature.
Much rides on the outcome of this battle between NBN Co and its biggest wholesale customers. Another opportunity to have the private sector drive investment in complex technology battles has been missed. Meanwhile, as the state-owned NBN Co invests in more fibre in urban areas in a battle with the private sector, regional and rural communities are likely to be waiting for upgrades to NBN Co’s own Fixed Wireless and Satellite networks.
Taxpayers will be taken along for the ride, as the Coalition extends and expands its policies of picking winners in complex technology markets (such as energy and telecommunications) which are essentially competitive. Those Australian taxpayers living in regional and rural areas, that the private sector finds fundamentally unattractive to service, will be looking from a distance and again wondering why the big cities are again getting all the government attention while they get left behind in the digital economy.
See https://www.nbnco.com.au/corporate-information/media-centre/media-statements/nbn-co-proposes-big-discounts-to-wholesale-prices ↩
I have been asked by iTWire to provide my thoughts on where the NBN should go from here as the rollout of the network is announced as completed.
The article appeared on 20 July 2020 and can be read here.
My full answers to the questions submitted are as follows :
I would like your views on the future direction that the NBN should take.
The debate over the NBN has always been framed as one about which technology should be deployed. While I was Chief Technology Officer at NBN Co the debate saw politicians (ie. Conroy v Turnbull) continually argue the merits of fibre (or more specifically Gigabit Passive Optical Network or GPON) versus copper (Very High Speed Digital Subscriber Line or VDSL). No other political debate, perhaps with the possible exception of climate change, has seen politicians get into such a detailed debate about something they have little or no expertise in. On many days I felt as though the politicians were vying for my job rather than who should set the policy for improving Australia’s lagging broadband performance.
Other countries have not had this type of intense technology debate by politicians on how taxpayers’ dollars should be spent for telecommunications infrastructure. Why is this case? Is this a significant part of why Australia is a broadband laggard? To get to the bottom of this dilemma it is necessary to look at the broader history and context of Australia’s fixed broadband problems.
In my view the reason for this peculiar state of affairs is that our political parties, Liberal, National and Labor, are actually unified in an erroneous view that fixed broadband is always a natural monopoly. Most other markets (Western, Asian and others) have been able to move from the entrenched monopolies of the fixed telephony era to structures where competition between technologies (ie. VDSL, HFC, GPON and mobile) has driven investment in higher speed broadband networks in urban areas. Some markets (such as New Zealand and Singapore) have reverted to monopoly structures for deployment of national fibre networks – but none have done this for the less capable VDSL and HFC technologies. Australia has been unique in keeping a monopoly in place through the long transition from the 20th century copper networks to the 21st century fibre network future. Competition between the different fixed broadband technologies has not been part of the policy framework. As a result politicians have been asked to adjudicate on complex engineering and economic decisions.
The reason for Australia’s tri-partite political alignment on a telecommunications monopoly has always intrigued me. The best I can come up with is that each party’s traditional support base has a vested interest in extracting the inherent extra profits (or rents) of the telecom monopoly. The Liberals, as the party of business, have an incentive to orchestrate the privatisation of the monopoly as we have seen with the tortured privatisation of Telstra. The Nationals, as the party of rural and remote interests, have an incentive to see a (hidden) cross subsidy within the monopoly be directed to more infrastructure for the bush. Labor, as the party of trade unions, has seen fit to have a state-owned monopoly that supports a unionised workforce that would have an advantage in directing the rents towards workers in the industry.
Since World War II we can see this play out with the various stages of the development of Australia’s telecommunications. From the 1950s to the 1970s, the then Country Party were able to use their position to direct large investment in the then government owned Postmaster General’s Department’s rollout of telephony infrastructure across most of regional Australia. During the 1980s and early 1990s we saw Labor, at the behest of its unions, consolidate OTC and Telecom Australia into what became Telstra in a way that made it difficult for any new competitors to seriously threaten its dominance. In the late 1990s and 2000s we saw the privatisation of Telstra by the Liberals, finally overcoming one lone National senator’s (ie. Barnaby Joyce’s) objections. The Liberal’s business base had successfully lobbied (remember ATUG) both Labor and Liberal to open up the business telecommunications sector to competition but in so doing, left the consumer sector subject to the monopoly. This left the Liberals a clear path to satisfy the growing financial and investment community with a Telstra monopoly in the consumer sector that would allow it to recover some of its lost lustre after the tech boom crashed its share price.
We have seen the urban consumer benefit hugely from competition in the mobile network sector since the early 1990s. Technology has advanced steadily from 2G to 5G while pricing has decreased. Efficient mobile technology deployments and rollouts have been driven by competition. Technology competition between GSM, CDMA, WiMax, LTE and others has played out in the market rather than in political contests. This contrasts with fixed broadband in Australia where monopoly structures have restricted investment for the urban consumer and forced Australians to react through the political process rather than the market. Meanwhile, large business customers have benefitted from fibre network competition in CBDs and most dedicated business parks.
The NBN era has seen both Labor and Liberal retain this monopoly structure for residential broadband infrastructure deployment. Labor’s FTTP policy had at least some support from an economic perspective of justifying the future network as a return to a natural monopoly. Due to its virtual unlimited bandwidth capacity, an optical fibre can achieve a natural monopoly position which economists define as ever decreasing average unit costs of supply as demand (for bandwidth) increases. Singapore and New Zealand, with government funding supporting private companies, have taken this path. Labor’s deals with Telstra and Optus, along with legislation to disincentivise alternative fibre network rollouts, were aimed at cementing this natural monopoly position. Whilst in Opposition, Malcolm Turnbull (see here) and Paul Fletcher (here), were highly critical of Labor’s monopoly policy. However, rather than take up a pro-competition policy, the preferred area for public debate before the crucial 2013 election was on technology, build cost and time to build the network. This led to the alternative policy for a VDSL FTTN network and subsequent transition to the Multi Technology Model (MTM) when in government.
Once in power, the Liberal’s criticism of Labor’s monopoly policy quickly faded. Undoubtedly a factor in this was TPG Telecom’s immediately announced plans to rollout a competing VDSL FTTB network to about 500,000 inner city apartments. This move by TPG Telecom highlighted the susceptibility of the Coalition’s NBN plan to increased competition, in contrast to Labor’s FTTP more robust natural monopoly characteristics.
Rather than embrace competition as they had done in Opposition, the Liberal policy was quickly redirected towards protecting the monopoly as espoused by the new chairman, Ziggy Switkowski. A range of regulations and a new levy were quickly announced along with new regulations imposed by the ACCC (normally pro-competition but during the NBN era a compliant part of both Labor and Liberal monopoly structures) requiring incumbent style open access regulations on all new broadband networks. The plan to protect NBN Co’s policy has been successful to date, but its ongoing susceptibility to competition continues to be exposed by Telstra, Optus and Vodafone’s plans to bypass the NBN with their Fixed Wireless Broadband services on both 4G and 5G networks.
As is to be expected, the debate at the end of the rollout period, with the Liberals in power, has returned to how best to orchestrate the privatisation of NBN Co. Telstra, in a pre-emptive move, has restructured its business, creating a new business unit, InfraCo, in anticipation of taking advantage of the privatisation. Such a privatisation process will benefit the financial and investor community, but is unlikely to be positive for the urban and rural consumer, as incentives to upgrade the network will be very limited. There has been no discussion about reform of the sector to increase competition prior to NBN Co’s privatisation.
It would seem the political and industry consensus is that Australia’s fixed consumer and small business market should remain an NBN Co (either privately or public owned) dominated monopoly going forward. The debate has been narrowed to, firstly, whether it is a private or public sector monopoly and, secondly, how to regulate the monopoly to make it invest in upgrading the network as broadband demand inevitably increases. While regulating monopolies is not something new, this is usually about the prices they charge, not about forcing them to invest in upgrading technology. Regardless of whether the monopoly is private or public, it is likely the investment will only be made if the government provides the funds or allows higher prices to be charged. The vested interests involved (investors, unions, bureaucrats) will push for more funding or higher prices rather than looking to innovations and efficiencies. As a result technology, and its costs, becomes the frontline of the debate rather than the most efficient way to incentivise the investment.
How do you think the network should be managed in its next stage?
Many commentators in Australia point to the New Zealand FTTP experience as the way Australia should go. In New Zealand there are four wholesale only operators who have been subsidised by the government to build FTTP networks in separate defined geographies. In order to participate in the subsidy scheme, Telecom New Zealand was required to separate its network business from its retail business and create Chorus. These subsidised operators are not protected monopolies – they still face competition from new entrants, Chorus’ older FTTN network and potentially from each other through expanded network builds.
Would this work in Australia? It may have at the beginning of the NBN era if some non-Telstra companies had been available to create FTTP network build momentum and threaten Telstra enough so that it voluntarily separated like Telecom New Zealand. However, with NBN Co now dominating the market with regulatory protections against competition, the subsidies necessary to force upgrades to FTTP would be very high. The only competitive threat would be from mobile operators offering Fixed Wireless Broadband services. This is unlikely to be sufficient to stimulate widespread upgrades of the NBN with deeper fibre networks.
A more informative market to look at for a way forward is the UK. Before becoming Communications Minister, Malcolm Turnbull, consistently used the UK as the prime example of a market that was taking the ‘sensible’ FTTN VDSL approach. British Telecom were in the midst of a large upgrade of ADSL to VDSL very similar to what was proposed by the Liberal NBN policy platform in 2013. However, seven years on, as a result of competition from HFC (Virgin Media) and a range of FTTP companies, British Telecom has now switched to an FTTP upgrade plan. The UK regulator, Ofcom, has encouraged competition and in particular the opening up of British Telecom’s ducts and poles to allow the building of competitive fibre networks.
The option for government sponsored funding of a revised buildout of an FTTP network appears remote given the $51+ billion of funding already committed. The Coalition has ruled out more funding as it prepares the stage for privatisation of NBN Co. A change of government to Labor could see increased taxpayer funding as privatisation is scrapped, but would this funding be sufficient to achieve the natural monopoly advantage of a deep fibre network? Will the Australian public buy the proposition that more taxpayer funding can be efficiently spent when there is likely to be a loss rather than a return from the funding committed to date?
Again the debate would be about technology and costs, not about creating a market structure that would sustainably invest in future upgrades.
Absent large amounts of additional government sponsored funding for NBN Co to pursue a revised buildout of an FTTP network, the only option is for pro-competition reforms along the following lines :
Promote policies that will encourage competition in the building of alternative fibre networks
Remove current restrictions aimed at protecting NBN Co from competition
Create an alternative subsidy scheme for rural and regional broadband investment that does not penalise competitors to NBN Co.
How do you think the network should be managed in its next stage?
The most significant way that NBN Co can be restructured to promote more competition is for the company to be split into technology based operating units. This was suggested by the Vertigan inquiry that was put in place by the Coalition in 2014. However, the Coalition government ruled out disaggregation at the time and instead doubled down on the NBN Co monopoly as described above.
In my view a minimum of four separate units, with different management, should be established. The first should cover the FTTP, FTTC and FTTN architectures as they all have a common network technology evolution end-point, namely Passive Optical Network FTTP. Let’s call this entity NBN_FTTx. The second should cover the HFC network architecture, let’s call this NBN_HFC. The third would cover Fixed Wireless and Satellite, let’s call that NBN_Wireless. A fourth unit, NBN_Core, would cover the core network elements that mainly rely on Telstra’s underlying assets – exchanges, ducts and transit network dark fibre. NBN_Core would provide a common interface for RSPs at Points of Interconnect and associated IT system interfaces.
A diagram may help explain this more effectively :
Each of the access companies (NBN_FTTx, NBN_Wireless, NBN_HFC) would be able to extend and upgrade their networks. Significant overlaps exist between the NBN_FTTx and both of the NBN_HFC and NBN_Wireless networks enabling increasing competition to drive investment.
Progressive stages of privatisation should be used to raise capital for investment in expansion and upgrading of the access networks. Government’s share of each unit would progressively decline, but maybe at different rates. NBN_Wireless will require a subsidy (discussed further below) which may necessitate Government retaining more control over the operations and direction of this entity.
NBN_Core could be merged with InfraCo if a suitable arrangement could be negotiated given the large commercial payments tied up with the lease of ducts, dark fibre and exchange space from Telstra.
This disaggregation of NBN Co needs to be planned and managed to ensure existing relationship with RSPs and customers can be transitioned to the new arrangements. Opportunities for efficient use of new fibre infrastructure investment to service both fixed and mobile (ie. 5G) requirements should be encouraged by allowing the mobile operators to participate in the progressive privatisation of the NBN access companies.
However, privatisation of the NBN Co entities needs to be managed in a way to ensure none of the RSPs are able to re-create a monopoly and dominate the NBN NBN eco-system through the application of normal competition law.
How much money (approx) will be needed in your estimate?
The FTTN and HFC networks will require the most investment. A total of 7.2 million premises will require upgrades with average costs likely to be in the order of $1,000 to $1,500 per premise in order to reach a likely final destination of fibre to within the last 100m of all households. This makes the total upgrade cost between approximately $7 and $11 billion.
The technology evolution of FTTN network will be towards FTTC and FTTP using PON cable architectures. HFC will develop along the clear evolution of the DOCSIS ecosystem with progressive node splits to bring fibre closer to households and business overtime. Depending on the involvement and requirements of 5G (and further mobile network evolution) we are likely to see new fibre architectures develop to achieve efficient fibre deployments that combine both fixed and mobile network use cases.
Further investment will also be necessary for the 1 million premises covered by Fixed Wireless and Satellite in order that speeds of greater than 25Mbps can be delivered on a sustainable basis. Ongoing upgrades will involve more cell sites and new/replacement of satellites. Costs will depend on technology developments but could involve up to $0.5 billion per year in capital expenditure.
How should the remainder of the build (or upgrade if that’s a better word) be handled?
Upgrades in most urban areas would be driven by competition combined with private investment in the progressive privatisation of the NBN Co access companies. Progressive privatisations will allow for the decreasing of risk from an investment perspective leading to higher valuations for the NBN access companies as they achieve a financial track record. Government equity will progressively be of higher value over time as a more sustainable industry eventuates on the back of private sector investment.
Upgrades and ongoing operations in regional areas, where competition is not sustainable due to lower household densities, will require ongoing funding through an appropriate subsidy scheme. The best way to do this would be to impose a Medicare style levy on all telecommunications services at the retail level. With a market size of approximately $40 billion per annum, a 2.5% levy could raise $1 billion per year. This would be sufficient to cover the higher operational and capital costs per households for regional and remote services for both fixed and mobile services (ie. cover more mobile blackspots on an ongoing basis).
To avoid political pork-barrelling, an apolitical agency should be established to determine the best use of these funds to achieve goals associated with uniform pricing and service levels for broadband in areas where competition is failing to achieve minimum benchmarks. A possible model for such an arrangements could be the Pharmaceutical Benefits Scheme which follows the advice of an expert committee (the Pharmaceutical Benefits Advisory Committee) on how best to subsidise different pharmaceuticals needed by all Australians.
Do you think we should end up with all-fibre wherever possible?
While fibre is technically ideal, it is not likely to be economically practical for all Australians. After all the copper network didn’t reach all Australians either. With the technical advances in wireless communications (terrestrial and satellite) we can expect ongoing improvements that can be brought to market by companies with the right incentives.
I do expect the FTTN and HFC networks to be progressively upgraded so that fibre is within at least 100m of most premises in their footprints.
It is most important that we have an efficient investment regime that ensures just in-time upgrades to meet the increasing data demands of our society. Building a one-size fits all network may in fact end up wasting a lot of resources which could be better used elsewhere.
Do you see that kind of outcome eventuating if the NBN is bought by some private interest?
This outcome is possible if private interests are subject to competition as described above. As I mentioned earlier most of the markets that are higher up the scales on international broadband rankings are there because they have created pro-competition policies encouraging the private sector to make fibre investments.
If NBN Co is sold as a monopoly then we can expect what we saw when Telstra was privatised. After much to-ing and fro-ing the rent-seeking monopolists would only invest in upgrades if the government provided the funding (remember Sol Trujillo’s regular trips to Canberra). It would be the worst of all possible outcomes. If the definition of insanity is to do the same thing over and over again and expect different results then privatising NBN Co as a monopoly would surely qualify.
And if it is sold, which private company is best suited to take charge and remedy the faults that exist?
It doesn’t matter which companies end up participating as long as competition is forthcoming. It is most important to ensure that no one company ends up dominating the market and as a result refuses to invest without guaranteed exorbitant profits. We have been in that situation before and need to avoid it at all costs.
But if NBN Co is privatised as a monopoly then we can expect little, if any, upgrades towards a deep fibre network without significant government subsidies thrown it. The Australian private sector is very good at extracting money from government to enhance its profits. If this path is followed then Australian taxpayers and consumers will have again suffered a case of losses being socialised while the profits are privatised.
So if Australia cannot find its way out of its fixed broadband monopoly dilemma then it would be much better to keep NBN Co as a state-owned company. Better to have the government accountable for the cost and profits rather than let Australian private sector establish yet another private monopoly.