It has been a tough few weeks for Telstra’s biggest shareholder. Share prices have hit a nine year low, negotiations with the ACCC on a fibre to the node network failed, and senior Telstra executives continue to denigrate the Federal regulatory regime. The fact that the Federal Government has decided to press ahead with the sale in 2006 regardless suggests that it has bungled the management of the sale and the service.
This situation might not be so serious if it wasn’t for the fact that telecommunications is absolutely vital to the national security and economic and social development of Australia. We are increasingly reliant on e-commerce, e-health and e-banking. High speed Internet is essential for successful engagement with the modern economy and society, especially so for small business and for people in rural and remote areas in overcoming isolation and lack of services.
Yet Australia is still behind the OECD average in terms of broadband penetration – ranked 17th among 30 OECD countries.
Image by Ian McAuley
Competition has improved in the telecommunications markets over the years, especially in mobile phones, but Telstra, with its ownership of the copper network and Hybrid Fibre Coax (HFC) cable (used for pay TV and broadband delivery), is still the dominant player in most other telecommunications markets.
Telstra has both the ability (through its ownership of the essential elements of the infrastructure) and the incentive (because of its vertical integration) to favour its own interests.
For example it has been argued that Telstra’s withdrawal from talks on fibre to the node network has little to do with obliging third-party access, and everything to do with maintaining investment uncertainty for its competitors and keeping them off existing distribution lines for as long as possible.
The Government tried to deal with this issue through legislated accounting separation, which sought to separate, through the accounts, its wholesale and retail businesses, but this has failed spectacularly so far. Even the Minister for Communications says accounting separation has been inadequate.
While many in the industry supported the aims of operational separation, players, including the ACCC, warned that the Government’s version was weak and unenforceable. The Democrats moved amendments to strengthen the model, including giving the ACCC divestiture powers, but the Government ignored them.
Australia is behind on broadband access because the Government will not, for fear of Telstra’s reaction, tackle the structural issues in the telecommunications market and within Telstra with anything more than light touch regulation. With a massive float looming and more on the way, it also won’t want to upset prospective shareholders with threats of more onerous access requirements
So one of Australia’s largest and most monopolistic companies will get away with putting up ongoing barriers to competition and neglecting investment in infrastructure.
Telstra frankly has the Government where it wants it — trapped in its own ideological web.
There are, however, three things the Government could do if it was prepared to intervene.
At a bare minimum it could give the ACCC divestiture powers. The Blair Government gave its communications regulator strong and enforceable operational separation powers including the option of forced divestiture under the Enterprise Act. So far this seems to have with worked with British Telecom and may help pull Telstra into line and force greater transparency and cooperation. But it would not improve the competitive regime or give country customers parity, and delays in action could still be considerable.
Secondly, Telstra could be required to divest its ownership of the HFC cable and interest in Foxtel. This would open up more competition in the market. The ACCC has argued that Telstra, in protecting the revenue of both the copper wire and the HFC network, will only invest in services that would cannibalise the revenue of the other network.
While this strategy would improve competition in infrastructure, it won’t assist rural customers or indeed many metropolitan customers, where HFC cable does not and is not likely to exist.
The Democrats say that for fair and transparent competition and parity for rural Australians the Government must separate the wholesale access network from the retail business and retain ownership of the infrastructure.
Telstra wholesale would have no interest in Telstra retail or any other retail operation. Telstra wholesale, especially in government ownership, would sell access to its telecommunications hardware to retailers on more or less equal footing. Price parity between metropolitan and rural users would be achieved through government policy. Regulating access to the network would be largely resolved and simplified. Profits from wholesale would be used to maintain the network and build a national fibre network, although additional revenue may be needed to complete this.
Ownership of the HFC cable could be retained in this case, or divested to raise revenue for fibre roll-out. A highly desirable outcome would be to rationalise the Optus and Telstra HFC networks that were unnecessarily duplicated in the mid-nineties, particularly if this could extend the reach of the network.
The Government has argued that the cost of structural separation may outweigh the benefits, but has not conducted a proper investigation and can’t back its claim with evidence.
The OECD strongly suggested its members consider structural separation to promote competition in utilities, as an alternative to regulation. This view is shared by the National Competition Council.
While we recognise it’s not just a matter of splitting the company in half and that there are aspects of the wholesale that could be considered retail etc, this could surely be left to the experts to work out.
The value of the copper wires and pipes and exchanges is roughly equal to the Government’s current 51% shareholding at $22.9 billion, so institutional and mum and dad investors would not need to be disadvantaged in a transfer of shares to the retail arm. In any case, adjustments could be made by a share buyback scheme — again an equitable arrangement could be found by the experts.
More and more analysts are coming around to the idea of structural separation. It is the way to a more transparent, fairer, efficient telecommunications market, and it is not too late for the Government to go down that path.