Australia - broadband

Razor gang should take on broadband subsidy

AS TREASURER Wayne Swan looks for additional savings to bolster the budget surplus, he should talk to his colleague Stephen Conroy, the Minister for Broadband, Communications and the Digital Economy, and suggest he take another look at his planned $4.7 billion subsidy for national broadband.

It would be an act of kindness that would not only save the Government from spending money it doesn't need to, but would also save Senator Conroy from opening a protracted and costly regulatory war with Telstra that would delay a true high-speed broadband network for years.

Despite having had two months as minister, it seems Conroy has failed to realise that an ill-considered, simplistic policy for a competitive tender for broadband isn't going to work

The competitive tender presumes that somehow Telstra will agree to vest its local network assets into a new network company under the public-private partnership that Conroy envisages. This would effectively split the company and subject it to structural separation, which regulators worldwide have dismissed as costly and damaging.

That the policy could have been predicated on a privatised Telstra willingly spinning off its network is extraordinary, yet it remains at the heart of the rival bid from Telstra's competitors, the Optus-led group of nine (G9), to build the national fibre-to-the-node network that will carry high speed broadband.

The G9 proposal is still being given serious consideration in Canberra. The Australian Competition and Consumer Commission has found little fault with it, even though it rejected other elements of the G9 scheme when it considered the special access undertaking G9 lodged as part of the development of the plan.

Telstra has flatly rejected the proposal, but shortly after his appointment, Conroy dismissed their complaints as "jockeying and lobbying from parties as they work to convince the Government that they are best-placed to build the new network and seek the terms that are most favourable to them".

He seems to have missed the point. As owner of much of the infrastructure needed to provide a national broadband network, Telstra has said it sees no need or value in sharing that infrastructure with the Government or any other group. Telstra believes it is sufficiently competent to build a national broadband network itself under the right regulatory settings.

It would be more useful and certainly more prudent for the budget if Conroy were to step back from his tender proposal and find out quite what the right regulatory settings might be, because with regulatory relief, Telstra could readily fund a national broadband network without any need for government subsidy.

For over a decade, Telstra has been required to make its networks available to competitors at marginal cost, based on the now-exhausted premise that once competitors aggregated sufficient demand and revenues, they would start building their own networks.

Over this period, the subsidies to competitors have grown under a web of ever more arcane regulation that has continued to lower the price at which competitors can use Telstra's network.

Similarly, the complex question of the costs of rural cross-subsidy has been ignored ever since independent expert advice suggested in the late 1990s that the annual cost was closer to $600 million than the $200 million the Howard government determined it to be.

With adjustment to the regulated price of access for competitors, a review of the cross-subsidies and use of the regulatory holidays that US and German regulators have adopted to encourage fibre and high-speed broadband investments, Telstra could pay for the national network from its own cash flows.

But in Canberra, the intellectual investment in competition at all costs, or more correctly regulated market entry at all costs, precludes any rational adjustment of policy.

Telstra's complaints are deemed to be those of a wounded monopolist trying to re-establish its market dominance.

Yet in light of the recently completed European Union review of telecommunications regulation that rejected structural separation and, given the progress now being made in many other markets with regulatory reform and the rollout of broadband, it's time the minister took a step back.

It would be unfortunate if he failed to do so because he must understand that, even if tinged with some self-interest, Telstra's complaints do have some merit and it is committed to stopping any further regulatory erosion of its shareholders' value, so the tender cannot work without an open cheque from government.

If Senator Conroy tries to push through his plan, he will find himself looking as hapless as his predecessor Senator Coonan did on the broadband issue. I doubt if that's what the new minister wants.