The cross-subsidies embedded in NBN Co’s pricing model, which are used to fund uniform wholesale prices as required by the previous government’s announce-first-and-work-it-out-later approach to communications policy, have been criticised by the Australian Competition and Consumer Commission and other respected analysts in submissions to the expert panel conducting a cost-benefit analysis of the NBN.
Australian governments of all political persuasions have always considered with good reason that the availability of affordable communications services in the bush is critical to nation building.
In practice, this has meant that cross-subsidies have been part and parcel of Australia’s telecoms sector since the Postmaster-General’s Department was established more than 110 years ago and tasked with simultaneously providing affordable universal services while operating in a commercial manner.
In the days when the minister ran the PMG and prices for telephone installations and line rentals in country areas were below those of the cities, despite their underlying costs being exponentially higher, it went without saying — and few did talk about it — that an opaque web of cross-subsidies was operating. Broadly speaking, telecoms services subsidised post; the city subsidised the bush; and business subscribers subsidised individuals.
Three early inquiries into the PMG recommended that an independent board govern the department; all were ignored. One factor in this was lobbying by country MPs and other rural bodies. They knew how vulnerable country people would be to higher prices and/or fewer services if the PMG’s commercial drivers gained sway over its social role.
Just as the ACCC has called for explicit subsidies to unprofitable areas of the NBN rollout, so did Gough Whitlam in the lead-up to the 1972 election call for an ‘analytical approach’ to the PMG, and for subsidies to be provided ‘by open rather than covert means’.
Whitlam did not achieve this, but his government did take the first steps towards bringing some accountability to the telecoms sector. He established a royal commission into the PMG’s operations and, consistent with advice from economist ‘Nugget’ Coombs, equalised charges for phone installations and line rentals between country and city.
Though PMG revenues from profitable services still cross-subsidised more than 90 per cent of country subscribers’ phone installation costs, the rural response was vituperative. Country Party MP Bob Katter (father of the KAP leader), accused the Labor government of ‘the most vicious, vindictive and savage attack ever on any section of the Australian people’.
Another problem with cross-subsidies, whether used by the PMG, its successor, Telecom, or NBN Co, is that their inherently opaque nature makes it virtually impossible to reliably quantify them. Even genuinely curious communications ministers have never known the real cost.
This was one of the few issues that defeated the Whitlam government’s royal commissioners. They found it ‘difficult, if not unrealistic’ to unscramble the cross-subsidy egg and were reduced to counselling that Telecom should aim to ‘minimise it’.
The Fraser Coalition government’s Davidson inquiry into the sector took a more purist position, as did Treasury and the emerging free market business lobby. Davidson recommended Telecom be further corporatised and act in commercial self-interest.
If government wanted to service unprofitable areas, it should provide direct subsidies. However, this was easier said than done — and it never was done.
The cross-subsidy issue was also one of the key factors that killed off any chance of opening Telecom’s basic network to limited competition in the late 1980s.
Even the current universal service obligation, which is funded through an industry levy, is at most a second best policy outcome. This is because other users of communications services pay for it rather than all taxpayers. No government wants these costs on its books.
If the Communications Minister, Malcolm Turnbull, decides that this is an issue he wants to tackle, he will be taking on a challenge that has defeated all of his predecessors. However, and perhaps fortunately for the communications sector, this is not something that seems to have worried him before.
First published in The Australian on 25 March 2014.
John Doyle is a PhD candidate in politics at La Trobe University and is a former Optus executive and board member of telecoms industry peak body Communications Alliance.