The benefits of breaking up NBN Co

Disaggregating NBN Co might be one way to encourage infrastructure-based competition, but it could prove a tricky process.

Rod Sims is spot-on when he says that the national broadband network represents the first time a market structure could be created that could deliver effective infrastructure-based competition in the Australian telecommunications market. The tricky thing is how to achieve it.

The Australian Competition and Consumer Commission chairman, speaking at CommsDay’s ‘NBN Rebooted’ conference, added his support to the recommendation of the Vertigan Committee that NBN Co should eventually be "disaggregated" into competing business units based on its different technologies.

The NBN, under Malcolm Turnbull’s multi-technology framework, will include fibre-to-the node, fibre-to-the-premises, the two HFC networks now owned by Telstra and Optus, satellite and fixed wireless technologies. In concept, carving up NBN Co into fibre, cable and satellite/fixed wireless units would enable three competing businesses to be created rather than the single national wholesale monopoly that NBN Co is building today.

There is little doubt that the best outcomes for consumers are driven by infrastructure-based competition. This also reduces the need for complex and intrusive regulatory interventions and the unintended consequences -- including a dearth of infrastructure-based competition and incentives for ‘’gaming’’ by competitors and regulators -- that an over-reliance on regulation can generate.

The difficulty with disaggregating NBN Co, which Sims acknowledges, is that Ziggy Switkowski, Bill Morrow and their team at NBN Co are only just bringing order to the chaos that has characterised the rollout of the NBN so far. They are trying to manage the complex shift from Labor’s all-fibre-to-the-premises network to Turnbull’s multi-technology approach.

The priority for NBN Co and the government is to accelerate the pace of the rollout and actually connect premises (which they are doing) while minimising the capital and operating costs and the overall exposure for taxpayers.

Turnbull has ruled out disaggregation today but hasn’t completely taken it off the table as a longer-term option.

Sims takes the very sensible position that even if NBN Co isn’t disaggregated in the near term, it is important that measures are put in place now to facilitate future infrastructure-based competition. He referred to the internal systems, accounting and reporting arrangements that would make it easier to separate NBN Co at some point, while acknowledging that putting those arrangements in place would come at some initial cost.

If it were possible to organise NBN Co internally to prepare for an eventual disaggregation it would be sensible to do so, as long as the costs and distractions weren’t too significant. At the moment NBN Co has a daunting array of challenges to deal with, but as the new organisation settles and the rollout becomes more routine, it should be something on the government and NBN Co’s agenda.

Sims mounted a strong defence of the role that the ACCC’s regulation of the pricing of access to Telstra’s fixed line network has had on infrastructure-based competition in the past. However, it is instructive that the only investment in competitive infrastructure generated by the access regime was the relatively modest investment by Telstra’s competitors in digital subscriber line access multiplexers. Thanks to the ACCC’s low pricing of Telstra’s unconditional local loop, they were able to piggy-back on Telstra’s infrastructure. One could blame Telstra’s lack of investment in broadband (and that of its competitors) on the nature of the access regime.

True infrastructure-based competition would enable competition and the market to drive investment and innovation.

Sims believes that NBN Co should eventually be privatised and that disaggregation should precede privatisation. As he says, if NBN Co is privatised as a monopoly to maximise sale proceeds, its separation (and the introduction of infrastructure-based competition) will never happen.

With at least $30 billion of taxpayer equity in NBN Co when the rollout has been completed, a future government will inevitably want to cash the investment out.

The problem that will arise if disaggregation is to eventually occur is one that has distorted the telecommunications regime ever since competition was introduced to it nearly two decades ago.

The size of the continent and the way the population is dispersed means there is a very large cross-subsidy -- perhaps $5bn in net present value terms -- between metropolitan consumers and those in rural and regional areas.

In a monopoly, that cross-subsidy can be internalised. With disaggregation and privatisation, a new way of funding that cross-subsidy would need to be created if uniform national pricing is to be maintained and a competitive landscape created.

The Vertigan Committee suggested that the government could write-down the value of sub-economic infrastructure as it was brought into service. Taxpayers would, in effect, capitalise and write-off the cross-subsidy, with an on-going subsidy funded directly from the budget or via and industry levy.

An explicit subsidy would be preferable, and less distortive, than the hidden cross-subsidy we have now. Given the country’s fiscal position it is improbable, at least in the medium term, that any federal treasurer is going to sign up to a big on-budget subsidy of rural and regional broadband consumers.

There are some practical obstacles to preparing NBN Co for disaggregation at some point in the future and to dealing with the implications of uniform national pricing for both competition and social equity.

Given our experience of the complexities and negative influences on competition and investment of a regulated fixed line monopoly in a sector of vital national importance, however, they are issues that should continue to be debated and that should remain on the longer term telecommunications policy agenda.

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