This was political ‘shock and awe’ by Labor, not the outcome of orderly, evidence-based policy-making. It was a response to the highly embarrassing collapse – triggered a few months earlier by Australia’s telecommunications giant, Telstra – of the comparatively modest NBN policy that had featured prominently in Labor’s 2007 election campaign and first year in office.
The new announcement promised much faster broadband over a more extensive network using superior technology. It also foreshadowed an eight-fold increase in public spending, from under $5 billion to over $40 billion. Neither of these figures meant much, however – the first reflected a deeply flawed understanding of an earlier Telstra proposal and the second was, in the government’s own words, just a ‘preliminary estimate’.
One consistency between both plans was that the network would be ‘open access’ and wholesale-only. The valid logic was that, with no skin in retail, the NBN operator’s overriding commercial incentive would be to drive as much business as possible over its network. It would be configured such that the telecommunications, internet and media companies using it could meaningfully differentiate their product and service offerings to the market. Economy-wide innovation would follow.
This was entirely unlike the structure that had existed in Australia since the Hawke government created Telstra and introduced competition in the early 1990s. Telstra owned Australia’s core network infrastructure and also dominated the retail space. Its wholesale customers, which had to connect with Telstra’s network to operate, were also its retail competitors. The playing field was heavily tilted in Telstra’s favour and Telstra had the motive and means to keep it that way. Regulations, even after major amendments, could only go so far to even things out.
For most of 2008 the assumption was that, one way or another, Telstra would build and operate the NBN. Under its strikingly bellicose American management team, the company had openly barracked for Labor to defeat the Howard government on that basis. But as Telstra became worried after the election that a side-effect of running the NBN might be its ‘structural separation’ – the splitting of its network and retail operations – it stopped cooperating with the new government and, in a confrontational and misjudged game of brinkmanship, effectively torpedoed the entire project.
Rather than explore alternative, more targeted, policy paths to deal with Australia’s broadband problems – of which a number were available – the politically red-faced government took the Year Zero option. In a radical post-GFC intervention, Labor would remake Australia’s telecommunications sector afresh by grafting a new state-run monopoly onto existing structures.
Rudd proclaimed that creating a new, wholesale-only NBN company ‘solves, once and for all, the core problem created when the previous Prime Minister [Howard] privatised Telstra a decade ago without ever resolving the conflict of a private monopoly owning the network infrastructure and dominating the retail market.’ The Communications Minister, Stephen Conroy, said more bluntly that the new industry structure would fix ‘a mistake by the Hawke government taken further by the sale of Telstra’.
Channelling his inner Godfather a few months later, Conroy held a legislative gun to Telstra’s head and made the company an offer it couldn’t refuse. Telstra could get with the program and ‘voluntarily’ separate its wholesale and retail functions – or the government would do it itself, in which case Telstra might also find itself banned from acquiring new wireless spectrum for its mobile business and being forced to sell its controlling stake in pay-tv operator Foxtel and, more to the point, its strategically important cable network.
There was political payback in Conroy’s approach, but he was also protecting NBN Co’s future viability. Telstra chose option A though extracted its pound of flesh. Following lengthy negotiations, NBN Co agreed in 2011 to pay Telstra more than $10 billion (in 2011 dollars) over at least thirty years to rent its network assets and to disconnect and migrate its customers to the new network.
So how did Australia end up in this situation? If we go back to April 1990, we see that a key priority for newly re-elected Prime Minister Bob Hawke was exposing the government’s domestic telecommunications monopoly, Telecom, to serious competition. This was practical policy, not ideology. Amidst rapid technological changes, a dynamic communications sector free to raise capital and motivated to offer higher quality and more innovative services was an essential enabler for Australia to survive, even thrive, in a globalising, liberalising world.
This was a tough gig for Labor. Hawke entrusted his close ally Kim Beazley with constructing a package of reforms that were both economically credible and acceptable to a sceptical party room and hostile union movement, and which also removed as a political problem for the government the financially stricken state-owned satellite company, Aussat.
Senior officials in the Department of Transport and Communications had in fact been working on this since the previous year. They wanted to drive as much competitive intensity as possible into Australia’s telecommunications sector. To achieve this, their preferred option was separating Telecom’s network and retail operations and merging the government’s highly profitable international telecommunications monopoly, OTC, with Aussat to form the basis of a reasonably strong competitor.
There was in-principle support for Telecom’s structural separation from within Hawke and Beazley’s offices. Treasury was a natural ally. And it seems that the Treasurer, Paul Keating, who was not a Telecom fan, was amenable. But the option was never seriously pursued. Why was this?
First, the weight of opposition from Telecom and the telecommunications unions, the ATEA in particular, backed by much of Caucus and the wider union movement, was too great. Beazley was keenly focused on keeping the party room and unions on-side. He and his office well remembered the national havoc repeatedly wrought by the ATEA under Fraser, by virtue of its industrial monopoly over critical parts of Australia’s telecommunications infrastructure. There was fear that even tentatively exploring structural separation would trigger similar action.
Second, structural separation is a reasonably simple concept to understand but very complicated to implement in practice. And back in 1990, there was deep uncertainty amongst officials about its technical feasibility – if not under any circumstances then certainly within the timeframe set by Labor’s political imperative to have competition up and running by the next election.
A central problem was that policymakers depended on Telecom for technical expertise about an option that Telecom itself fiercely opposed. Officials accepted that, with its unique insider advantage, Telecom could stymie even an independent feasibility study. They could see no way to persuade ministers to buy into a policy decision with highly technical elements in the face of resistance from the undisputed technical expert.
And third, most importantly, Beazley was personally opposed. His policy inclinations were in the opposite direction. He envisaged Telecom becoming a national champion state enterprise that, by competing successfully in liberalised telecommunications markets off-shore, would generate export revenues and provide commercial opportunities for Australia’s manufacturers.
Beazley’s vision meant making Telecom larger and stronger, not breaking it up. This was also something that had the makings of a potentially saleable pitch to Caucus and the unions. Introducing competitive dynamics into the local telecommunications sector was important, but it wasn’t the main game.
The reform option that Beazley pursued was arguably the weakest for domestic competition. Telecom absorbed OTC – a long-coveted prize – to become a ‘megacom’ called Telstra. The insolvent Aussat, dismissed by Keating as ‘space junk’, was dressed up and sold off as the basis of a new competitor called Optus. New regulations would be put in place to offset Telstra’s omnipotence. Keating ran a famously public campaign against this lopsided structure that, ironically, nudged Caucus sceptics and the unions towards Beazley. They didn’t want competition, but were willing to back Beazley’s model.
A dynamic local telecommunications sector was also important to the Howard government from 1996. But as with Labor, it wasn’t the top priority. For Howard, maximising Telstra’s sales price, to pay down debt and fund key election commitments, came first – and the whole of a network-owning, retail-dominating ‘megacom’ was worth more to investors than the sum of its parts.
The Coalition put serious effort into strengthening regulations to counter Telstra’s market power and opened the sector to new competitors (in keeping with Labor’s original plan), but there was a conflict at the heart of its policy – and with Telstra’s privatisation taking ten years, it was there for a long time. Competition was important, but shielding Telstra’s privileged position – to maintain its market value – was more so. When Labor’s Lindsay Tanner attempted in the early 2000s to establish an inquiry into structural separation, partly to pressure the Coalition over privatisation, the government quickly shut it down.
The Hawke and Howard governments respectively created and consolidated an unsustainable telecommunications sector that was handicapped by an insurmountable power imbalance. But while the consequences of their decisions are clear in hindsight (and were forecast at the time), they reflected, as usual in real-world policy-making, a series of judgement calls and trade-offs that were credibly defendable at the time. There was, for example, a genuine belief that regulation could be, as one senior official expressed it, a ‘surrogate for competition’ – and indeed, for all its flaws the new arrangements brought substantial improvements to the range, quality and cost of services and to Australia’s economy more widely.
When NBN Co completes its network rollout in 2020, the structural separation of Telstra will be effected – some thirty years after the model was first proposed in Canberra. However, the highly politicised announce-now-and-work-it-out-later context of NBN Co’s birth and early years, and the incompatible commercial and policy objectives that it was saddled with, means that the benefits which ultimately accrue – and they will – will come at a higher cost in capital and disruption, and higher end-user prices, than would otherwise have been the case.
Labor’s level of political investment in the NBN meant that money was no object in ensuring the project’s ‘success’. After regaining government in 2013, the Coalition had NBN Co adopt a more commercially rational patchwork of less premium technology options to reduce costs and lead-times. It has faced heavy criticism for this, and there are reasonable arguments both ways, however to focus on this is to miss the bigger picture.
Perhaps with recent history in mind, Australia’s competition regulator, the ACCC, has urged the government to ensure that NBN Co proactively configures its network with future disaggregation (when ultimately privatised, consistent with bipartisan policy) in mind. This would promote stronger infrastructure-based competition and is sound advice, though may well be easier said than done.
Photo: Wikimedia Commons by Bidgee
This piece originally published on APH.