Full Marx for Turnbull's NBN

Decades of government fixation with telco theory instead of network outcomes has dug Australia’s broadband network into a deep and messy hole.

Oh for a few years without revolution.

The past quarter century has seen the end of the Soviet era in 1989-90, a digital revolution straight after that via the world wide web,  revolutions in financial engineering that set markets rocketing up and then crashing down, and a sovereign debt crisis that is, frankly, still revolting.

To top all that off in 2014, religious fundamentalism is exploding in the Middle East and China’s economic miracle is perched atop a time-bomb stamped ‘Made in Hong Kong’.

Where to look for stability? Surely something must stay the same.

Thankfully, here in an Australia some things will never change. While the rest of the known world crumbles, it looks likely that the over-priced and underperforming telecommunications sector Australian politicians have created, will endure for 1000 years.

This week the government took delivery of the third report from Michael Vertigan, who has led the panel that wrote a cost-benefit analysis of NBN Co, and now has made a range of recommendations as to how to bring competition to a nation that is wallowing at 55th place in the international broadband league tables.

To do so would be a revolution in itself, ending an epoch of policy bungling that, coincidentally, began not long after the Berlin Wall came down.

Yes, that’s how long we’ve been stuffing it up.

Back in 1991, it was Labor that made the first error by merging the publicly owned Telecom and OTC to create a single behemoth rather than finding ways for the two of them (or split up or privatised versions of them) to compete.

And while the entire western world crowed about the commies being wrong, and the Thatcher and Reagan reforms being the true road to prosperity, Labor was too slow to notice that a giant Telecom/OTC, renamed Telstra, was by its very nature a roadblock to real competition.

Telstra owned the fixed-line network that was just starting to be used for digital traffic (remember the excitement of buying 14k, 28k, 33k and 56k modems?). Making that accessible to competitors was theoretically possible -- though in retrospect highly artificial.

In some markets -- for instance the power and water markets -- competitors can seamlessly sell their project across borders and, therefore, compete without a Byzantine matrix of competition rules.

When a single entity owns the entire wholesale network, as Telstra did, ‘laissez faire’ economic principles don’t work. To the extent the regulating agency ‘let Telstra be’, the company did the only rational thing it could and gobbled up economic rents for years.

There is no point criticising Telstra for its actions. Its directors, particularly the infamous Sol Trujillo and his communications supremo Phil Burgess (no relation) in the mid-2000s, ruthlessly exploited the advantage over rivals.

If Labor had committed the original sin of setting up one mega-company with a monopoly hold on the fixed-line network, the Howard government exacerbated the situation by agreeing to begin privatising the asset without fixing the mess Labor caused.

Prime Minister Howard, like King Isildur in the Lord of the Rings, had a chance to cast Telstra ‘back into the fiery chasm from whence it came’.

But like Isildur, Howard was “from the race of men, whose hearts desire power above all else” and rather than destroy what Labor had created, he chose to keep it, slice it into three and sell it to Australians, many of whom were aware of the great success the Thatcher and Major governments had had in the UK with sell-offs of utilities and railways.

The first slice of Telstra, T1 in 1997, netted the government $14 billion.  

The second slice, T2 in 2000, raised $16 billion and cost 300,000 investors their shirts. They paid so much for the second offering that it took a full eight years, including dividend payments, to get back to break-even point.

Given that history, it was a miracle that in the final two years of the Howard government, investors were coaxed by the slick salesman Trujillo into buying up the government’s remaining 50.1 per cent stake. As it turns out, that was a much better buy.

Importantly, though, that was the point of no return in the ongoing regulatory failure. Before the T3 sale, the government still had the power to force a structural separation of Telstra into a wholesale network company.

So gargantuan folly number two has to be attributed to the Howard government.

But wait readers, there’s a third cock-up to keep this mess bubbling along for decades.

When Prime Minister Rudd and his communications minister Stephen Conroy planned the creation of NBN Co to effectively buy back the wholesale network from Telstra and replace all that copper with fibre, they made themselves an easy target for incoming leader of the opposition Tony Abbott.

In the 2010 and 2013 election campaigns, the Coalition attacked the all-fibre NBN plan as a ‘Rolls Royce’ network. It was a ‘white elephant’ that cost far too much -- at that time estimates of the price tag varied from $36 billion to $43 billion. 

Rudd and Conroy had tried to build a $4.7 billion, co-funded fibre-to-the-node network, and fully expected Telstra to bid to build it. At Telstra, Trujillo and Burgess played the government like a fiddle and arrogantly refused to submit a conforming document by the government’s tender deadline.

That, one supposes, is when Rudd and Conroy snapped. They flew influential journalists into Canberra and revealed - ta-daa! -- the all-public, all-fibre network.

It was specifically designed to atone for the sins of their Labor forefathers, and to do what John Howard could not -- destroy a monopoly that was extremely popular with voters who held its shares.

When they shocked Telstra and the nation with that news, Australia’s broadband infrastructure was ranked 12th in the world.

And how the wheel of history turns -- we are now ranked 55th in the world, because no other incumbent monopoly has been privatised with such cack-handedness.

There are comparisons, however. A quarter of a century ago, flushed with success privatising power and water companies, Britain’s Major government tried to do the same with the nation’s train networks.

While some private enterprise rail lines ran well, overall it was an unmitigated disaster. Even the Conservative’s policy director from that time, David Willetts, later told The Daily Mail: “I would not defend the way we carried out the railway privatisation ... We had a model for gas and electricity, where you had a neutral grid then you had competing providers putting electricity or gas into the grid. The Treasury applied that model to railways and it was the wrong model.”

Some of the lines have now passed back into public ownership, and there is pressure from the left of politics for more to follow. As London Assembly Labour member Val Shawcross described it recently:

“When National Express withdrew from running the East Coast Main Line there were concerns that the state-owned Directly Operated Railways would not be able to deliver a good service. But not only has DOR succeeded in doing so, it has also just returned a £200m surplus to the Treasury, rather than to shareholders.”

The decision by John Major to follow the prescriptions of the Adam Smith Institute laid the foundations for the mess we see today. At the time we were promised a system that would improve services, with Major telling parliament in February 1993: ‘franchises will provide a better, cheaper and more effective service for the commuter.’” Commuters got the opposite.

When one is too much in thrall to a theory, rather than pragmatic outcomes, the political contest becomes about proving that position to be right -- and to hell with the voters.

And that is exactly what has happened over two decades to Australia’s telecommunications market.

Labor, crucially, cleared a path for incoming communications minister Malcolm Turnbull to ‘destroy the NBN’, as Abbott put it while in opposition, by agreeing to a ‘roll-in’ implementation.

That meant the bush would get its super-fast broadband before the cities, and also meant that vast amounts of capital would be consumed in the regions before city voters saw any improvement in data speeds.

Labor gave that concession to independent MPs Rob Oakeshott and Tony Windsor to convince them to back Prime Minister Gillard to form minority government. But although their goal of serving regional Australia was noble, politically it was disaster -- the cities fell further behind.

And now, the Vertigan Panel has suggested yet more regulatory contortions and gymnastics to make an uncompetitive market into a naturally competitive one -- it called for NBN Co to be broken up and sold off in chunks, and for a new regulatory authority to be created to allow appeals against other regulators.

The government has ruled most of that out, for now at least.

And frustrations are boiling over, particularly among the group of companies waiting to rip into Telstra’s economic rents.

The Competitive Carriers’ Coalition issued a statement in response to the third Vertigan report saying: “The inquiry has been an expensive distraction that has done little more than create uncertainty and disquiet across the industry during a crucial period of the transition to a new broadband network.

“The priority for the government should be speeding up the structural separation of Telstra, the building of the NBN and the reduction of prices for basic services to all Australians.”

It’s a frustration all voters should share, regardless of their political stripes or their convictions about free markets or state owned entities.

The CCC’s view ‘looks through’ the political spin, in the way Karl Marx advised 20th century revolutionaries to see the actual economic outcomes of their societies rather than live with ‘false consciousness’ that things were just as they should be.

Well, Marx’s ideas were, in the final analysis, deeply flawed. But his doctrine of ‘historical materialism’  -- seeing what is actually there rather than been anaesthetised by the assurances of worm-tongued politicians -- applied to the current NBN mess.

Broadband is not Telstra’s only revenue stream, but it is the one that gives it its mighty market power. Telstra’s profits have remained strong (see chart below) through the years despite Australia falling further and further behind in the global broadband rankings.

Graph for Full Marx for Turnbull's NBN

That’s the ‘material’ fact of the two decade history of Labor and the Coalition spending all their time proving the other side wrong, worrying that Telstra shareholders were okay, that the investment banks that sold it off where okay, that the government departments were okay ... a failing, utterly, to deliver a market in which firms profit because they keep up with global competitors, rather than exploit a broken regulatory framework.

Turnbull's own historical legacy will be determined by the improvements he helps deliver to consumers, not by the number of reports he commissions to prove that 'private' always beats 'public' or that the whole mess was somebody else's fault.

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