18 December 2014

The Government, after a full year of reviews into the NBN, has made its first tentative steps into putting its stamp on Australia’s telecommunications industry with new policy reforms and revised deals between NBN Co, Telstra and Optus announced over the last week.

Rather than taking on any bold new initiatives, as recommended by the Vertigan Review, to re-create a competitive infrastructure market for Australia’s telecommunications market, the Government has opted for a minimalist change focussed on technologies rather than market structure.

Somewhat surprisingly the Government has announced plans to effectively strengthen NBN Co’s broadband infrastructure monopoly rather than subject it to more competition. Although the regulatory reform paper states “the Government is seeking to establish a more competitive regulatory framework” the reality is much different.

Firstly, a new carrier licence condition, effective 1 January 2015, and new legislation will require all competing providers of superfast broadband networks to separate wholesale and retail functions and operate under a wholesale price cap regime.

Secondly, all owners of high-speed broadband networks will by required to contribute funding to the non-commercial fixed wireless and satellite services via a new levy scheme.

Thirdly, new legislation will be introduced to remove a “loop-hole” in the existing legislation that allows existing fibre networks to be extended by 1km and not contravene “anti-cherry picking” legislation introduced by the previous government.

Although, there will be much rhetoric that these measures are aimed at “levelling the playing field” for NBN Co, the reality is that potential new network builders are being discouraged by targeted policies that raise the barriers to build new high-speed broadband networks.

New entrants, such as TPG Telecom, who have announced plans to build competing broadband networks into apartment blocks, are clearly the focus of the new policy. But these same measures may impact other new entrants from building innovative wireless networks (using WiFi or 4G) for residential or small business customers.

Australia, unlike other international markets, will have a forced legislative separation between network owners and retail service providers. Innovative business models that develop in international markets based on vertical integration of network and service may not be sustainable in Australia’s regulated market framework.

Importantly, however, the Government is requiring NBN Co to preserve options for a future disaggregation of its technology assets. Financial and IT separation along technology lines in NBN Co will be vital to keep such options open to future governments.

So it would seem the Government is looking to keep the private sector out of Australia’s broadband infrastructure market in the short term with the possible option of privatising a disaggregated NBN Co at some later date when the build of the network is well underway or complete.

No doubt a big factor in this strategy is the desire to maximise any future sale proceeds from a future NBN Co privatisation. Australia’s current telecommunications malaise stems from a similar motivation during the reforms of the 1990s that combined OTC and Telecom Australia together and allowed Telstra to dominate all fixed networks in order to maximise proceeds during three rounds of privatisation.

But what of the new NBN Co deals with Telstra and Optus? How will these new deals shape the future of Australia’s telecommunications?

The first important point to note is that both these deals involve a progressive transfer of network assets to NBN Co in line with the NBN rollout. If the network rollout stalls or ceases then both Telstra and Optus retain their network holdings. As described by Telstra this provides a “natural hedge” to any political, technical, operational or financial impacts to the rollout.

Secondly, at least in the case of Telstra, there are clauses in the new agreements that “give Telstra protection against a disposal of the copper or HFC assets that it [NBN Co] acquires from Telstra”. So Telstra, and perhaps Optus, have secured some control of any future disaggregation of network assets.

Thirdly, Telstra will retain ownership of its ducts and pits through which the various cable types (fibre, copper and HFC) have been laid. Telstra will therefore be a significant and influential “landlord” for NBN Co’s and any new asset owner’s cables.

Although it is not perfectly clear from the public announcements, it would appear that Telstra and Optus will retain ownership of network assets not required by NBN Co. For example, Telstra may retain copper ownership in areas with NBN Co only requires HFC assets to build the NBN.

The rest of the telecommunications industry, beyond Telstra and Optus, who are not privy to the negotiations for infrastructure access, must look on with concern. The advantages Telstra and Optus have in retaining unused infrastructure and preferences during any “NBN Co privatisation” process are on top of the significant financial benefits achieved through the sale of these assets.

These uncertainties are on top of the new regulations and legislation on investment in high-speed broadband networks. The message is clear to all potential new entrants – don’t invest your capital in Australia unless you are prepared to take on the NBN Co, Telstra and Optus triumvirate.

But will these reforms and new deals enable Australia to keep pace with the rest of the world in the digital economy? Australia has been a laggard in fixed broadband for the last 15 years, trailing to the back of the OECD pack in broadband penetration and performance. Other economies are relying on either infrastructure competition or government utility style investments to drive the building of more fibre infrastructure to manage a once in a century transition to a “deep fibre” telecommunications network.

The Government, rather than trusting the private sector to drive investment, has decided to continue the previous government’s policy of backing itself to pull Australia up the broadband international rankings. Competition may still be an option for later, but the big players have already dealt themselves a seat at any privatisation table.

Much like the monk St Augustine, who asked the Lord to make him pure, but just not yet, the Government seems to be seeking ideologically purity in competition in telecommunications, but not right now.

This article first appeared in the Australian Financial Review on 17 December 2014.