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Henry Thornton - Corporate: A discussion of economic, social and political issues Another fiasco - the NBN Date 18/05/2010
Member rating 4.3/5
I hope I’m wrong, Henry, but I fear this will end in tears.
By Barry Nosworthy Email / Print

My dear Henry,

Thank you for sending me the recent consultant’s report on the National Broadband Network.  I know I spend too much time out of the country but, after reading this report I wondered just what planet I was on!  My redoubtable and sometimes caustic research assistant, Beryl, suggested it might be doubling up as a film script for the sequel to Alice in Wonderland.

From the press clippings I’ve managed to scan it seems the reaction thus far from the commentariat, perhaps distracted by the Federal Budget and looming elections, has been simply to enthuse that the report supports the assertion that this is all doable, and that it is doable within the original costing envelope of $43 billion.  And, ominously for Telstra, that it can be done without Telstra’s cooperation.  All of which sounds like a rehash of press releases about the report, rather than a critical assessment of what is now on the table. 

I wonder just how many people will last the distance for the full 534 pages of consultant speak (delivered at a cost of almost $47,000 per page).  Henry, as an aside, how you ever thought about the national savings we could make by putting consultant reports on the PBS schedule as an alternative to sedatives?  It would also be a good idea to pass this on to Don Watson for his assessment of the full extent of linguistic crimes against lucidity.  For example, the word “commerciality” acquires hitherto unimaginable ranges of meaning.  The underpinning mantra of pragmatism, flexibility and foresight (see page 9) would delight George Orwell.  But I digress.

Before getting buried in the detail it is worth stepping back and asking the naïve question of just what this is all about.  Beryl, my assistant, reminds me that back in the office we have a whole filing cabinet full of reports on broadband.  Remember the Broadband Services Inquiry headed up by Brian Johns in the early 1990s (about the same time the country was in uproar over the roll out and overbuild of cable television strung out on ugly, thick cables along street poles in leafy  - before water rationing - suburbia?  Remember the National Bandwidth Inquiry chaired by the ubiquitous Terry Cutler in the late 1990s?  So we have been talking about this for a long, long time.  Broadband is clearly a good thing.

At the outset let me say that there is much to applaud about the NBN initiative and this report.  Despite the naysayers, demand for bandwidth will continue to grow - it’s a bit like the demand-side version of Moore’s Law - and mobile broadband is no long term solution (as those with kids who download games know all too well when they get the bills).  Fibre to the home is undoubtedly the long run infrastructure platform.  And both the government and the consultants are absolutely right that our legacy industry structure, the result of past poor public policy, is no platform for the future.  An “open-access” infrastructure framework is undoubtedly the right way to go.  All this makes it really important to get this initiative right, which is why this report on the National Broadband Network merits close attention and careful critique.

Unfortunately, reading the McKinsey report on this latest initiative in nation building generates a “back to the future” sense of déjà vu.

Does anyone remember the origins of Telstra?  This was “Bomber” Beazley’s merger of Telecom and OTC to form a national flagship telecommunication carrier fit to take on an ugly horde of foreign would-be competitors.  The more acerbic reporters of the day labelled this monster “Megacom”.  To his credit Paul Keating lambasted this mockery of deregulation and competition policy, but lost the argument in the upsurge of nationalism (and concessions to vested interests).  Twenty years on we’re building another national flagship enterprise, but this time under the more anodyne label of the "National Broadband Network”. 

Wait, Henry, I’m having more flashbacks.  In the 1990s the path to telecommunications deregulation was to be one of “managed competition” to a timetable.  Then it was to be seven years of regulated duopoly – Telstra and Optus – until the time of feasting in 1997 with the opening of the competitive floodgates.  And the result?  I’ll leave that verdict to you, Henry, but apparently the market is not going to give all Australians, wherever they live, real broadband any time soon.  Previously mooted alternative policy solutions, like the structural separation of Telstra on appropriate terms have never been fully tested.

The McKinsey NBN Report repeats the old formula, but on a massively amplified scale.  This new Government Business Enterprise, NBN Co, is needed for the eight year plus roll–out of “fast” broadband and then a bit more time will be needed for all this to become “commercial” enough to attract private debt financing with the prospect of yet another telecommunciations privatisation some thirteen plus years out.  But this time, presumably, most of the eager subscribers to the sale of Telstra will be thinking about nursing homes, and we can market to a fresh tranche of unscarred investors!  At least they will be able to invest in a privatised legal monopoly.

McKinsey estimate that the peak funding outlay by us taxpayers will be $26 billion in year six.

This is essentially an implementation plan without any coherent policy framework.  In fact it is a circular argument.  Before the election Labour promised us a 100Mbps broadband nirvana, delivered through a Public Private Partnership.  No one would miss out, so this network would truly have a nation-wide footprint.  After the election the Government set up NBN Co, and told it to get on with the ill-defined but highly aspirational job.  Telstra would be cajoled into cooperation, with the gentle persuasion of draconian legislation if needed.  In parallel the Minister, independently of its NBN Co, commissioned this study to advise on implementation issues and tangible regulatory actions.  Note carefully, this report is about the implementation of a policy that is taken as a given, despite the fact that the report provides no coherent summary of just what the grand policy design actually is.  The introduction to this report summarises the “stated policy objectives” in just one paragraph. (Probably not the fault of the consultants, Henry, because we were told the original press-release length policy was devised at 30,000 feet of quality flight time between the PM and the Minister).  So it is probably inevitable that the implementation realities start to take the gloss off some of the promises.

The promise of “superfast” broadband at affordable prices.  The original keyword was 100Mbps.  This implementation model now suggests an “entry level” offering of 20Mbps, and a peak data rate ceiling of 12Mbps if you live in the bush.  This is beginning to sound like the next generation definition of a basic “standard service” which someone has a “universal service obligation” to deliver.  The logic of the report would imply that this non-commercial obligation should shift to NBN Co.  There is also a commitment to uniform pricing, implying built-in cross-subsidies.  There is also an implied subsidy for someone to launch next generation Ka Band satellites (the “commerciality” of which is extremely suspect).  To offset these impediments to “commerciality”, cherry-picking by competitors will be penalised and the prospect of a Universal Service Levy is mooted.  Pricing for services above the “entry level” remains vague, but there is support for price differentiation between different classes of user.

The bottom line is that to eventually become a “commercial” and economically viable proposition we might have to put aside any predilection for competition policy and market economics and settle in for a longish period of good old fashioned central planning.  The Report, amazingly, canvases some quite extreme implementation options to make the NBN “commercial”. 

What happens if we have a broadband party, and no one turns up?  Well, there is always the fall back of government procurement, and the eGovernment delivery of education, health, and community services.  Plus we can force customers to come to the party.  How?  It’s simple.  Offer incentives for service providers to migrate customers across to the new network. Regulate to ensure we get this commercial result through immunities to avoid planning controls.  (There is a delicious irony, Henry, in suggesting overhead wires would fit within a schedule of “low impact” facilities).  Unlike some others, however, I am more sanguine about the requirement that new estates provision ducting and piping (as is the case with other utilities).

Henry, next time we catch up for lunch at the Club we can talk about particular areas we might dissect more forensically, but in the meantime my “helicopter” take on all this is as follows.

One. The “back to the future” framework wastes an opportunity to break with the past.  It has always puzzled me why all Australians should expect access to a utility service on a uniform basis, nationwide.  We don’t provide access to energy or transport or even health services on this basis.  Cost-effective access to shared infrastructure is one of the reasons we have cities!

Two.  The unilateralism of this programme – or progrom – has no regard to existing market players and established infrastructure assets, nor to its potential impact on the competitive playing field.  Telstra is not the only vertically integrated operator, and I suspect Telstra has more fibre lurking around the local loop than anyone admits.  There is also very little reference to downstream market implications, such as the debates in the USA around “Net neutrality” and the emergence of access bottlenecks in content markets.  Instead of foresight, we are reminded that a lot of policy issues will need to addressed later on, with more studies. 

Three.  Whilst the consultants expound a philosophical predilection for “pragmatism, flexibility and foresight”, it is a brave person who speaks confidently of “future proofing” a multi-decade experiment in a fast changing technology environment.  Twenty years ago few people had heard of the Internet.  Here in this report numerous issues remain open-ended, whether we are talking about the optimal network topology for competitive service provision, or the long-term regulatory and competition policy framework. 

Four.  Risk, and risk management.  This is simply not addressed.  The idea of a “go it alone” option without a settlement with Telstra is neither pragmatic nor realistic.  Whether we love or hate Telstra we cannot ignore it, and its shareholders. 

Finally.  Our good friends at the Productivity Commission must be laughing at the thought that someone might just dust off their excellent reports on good policy and programme design principles, and use them as a template for assessing the robustness of this bold foray into market design! 

I hope I’m wrong, Henry, but I fear this will end in tears.
Henry ... here is some information on how the censorship firewall of Senator Kim il Conroy can be overturned. Your readers may appreciate it.
Sir Wellington Boote

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