Wednesday, March 04, 2009

More of the B-Grade Movie

I didn't get to hear much of the Senate NBN select committee today, so this post is about yesterday afternoon mostly. But I do note that the Department of Broadband Communications and the Digital Economy seemed to be being thanked almost as soon as they had started. Possibly a record short appearance for the Department. Will Mr Lyons get a gold star?

First an item I forgot to correct yesterday. In evidence one witness claimed there was only an access regime to services in telecommunications, not infrastructure or facilities. he statement is incorrect. There is only access to services under Part XIC of the Trade Practices Act, but there is a facilities access regime in the Telecommunications Act. This covers towers and ducts, for example. Hopefully someone will make sure the Committee understands this.

Yesterday afternoon's big show was Telstra. Senator Minchin I think was hoping that Telstra would be howling about its exclusion from the process but Telstra's David Quilty effectively said "We've moved on." However, Telstra quite subtly provided a submission to he Committee - tabling it at the meeting. They have since posted it on NWAT.

This is an interesting move because it is now not protected with the Parliamentary priviledge it would have attracted if lodged in the normal way. But the manner they chose meant it couldn't be seen by others before they appeared.

The piece tries to flag the critical issues as a grouping of risks. The first are "build risks" that are all alternatives of the problem to be faced when someone else is trying to upgrade Telstra's network. In case Telstra hasn't noticed, just as with the network information for the tender process, the Commonwealth has the power to requisition any information it wants from Telstra. The second category is "financial risks", which are all just variants of Telstra's assertion that only a firm earning economic rents like them could be trusted to build a new network. (Telstra is cute here, they are one of Australia's biggest firms but they themselves have NEVER engaged in an equity fund raising. The proceeds of their floats all went to the Government as vendor. The next two groups of "operational risks" and "technology risks" all look to me to be the kinds of risks Telstra would be relying on its equipment vendor to mitigate.

The "security risks" are the biggies. Telstra asks what protections are proposed to make sure network details don't wind up in criminal hands. Telecom old-timers would remember the days when technicians were regularly caught aiding SP bookmakers and having management cover up the issue - until a late 70s enquiry insisted that all matters of potentially illegal activity had to be referred to police. Thy go on to concern themselves with something they call an "end-to-end interception requirement" which has no basis in law - the agencies don't need interception on the copper they just need the traffic to be interceptable by the appropriate party. Telstra asks "Does the proposed builder intend to use a set of vendors that can convince the relevant Australian security and law enforcement agencies and those of our close allies that their equipment offers world class levels of security and is in no way compromised by any links with foreign entities?"

Has anyone noticed that the only act of state sponsored terrorism in the antipodes was the French (you know, Alcatel) sinking the Rainbow Warrior? The "competition and regulatory risks" is a confusing mish-mash of suggestions that the cost of separating Telstra is made hard if done at the same time as the NBN build. What part of "you get separated node by node" doesn't Telstra understand? Under "coverage risks" there are some good questions about spectrum availability for any wireless component - but we know the Austar 2.3GHz was on offer to OPEL and the $4.7B will buy a bit. I won't comment on the "economic risks" because a relative may have contributed to their preparation.

Presumably plenty of material here - but their strategy may have backfired because these would all have been interesting questions for the committee to have asked Department officials today.

Meanwhile yesterday Austar seemed to really miss the opportunity to press home the point about OPEL that Senators Nash and Minchin had been pursuing. Austar rightly pointed out that OPEL provided neither the coverage nor the speed required from the NBN, but it did demonstrate the benefit of a tender that resulted in extra backhaul capacity being constructed and priced at a subsidised rate, and that significantly more of the footprint should be addressed by wireless than currently allowed for. Wireless can bring forward the benefits of the NBN claimed for the deployment of Broadband by Telstra quoting Access Economics.

The Government has an option to go part way here with the Axia bid. This bid also supports some key recommendations of the Regional Telecommunications Review about access to backhaul. Art Price seemed to do a good job of explaining that today, but I'm not sure the committee fully understands the model.

On a related matter today Telstra is reporting that there has been a significant wind back in regulation in the UK, in particular over the separation model. I'm not all that surprised - but I've never been a fan of the model deployed in the UK (by BT choice) and NZ (by Government fiat) for operational separation.

Let's recap. The regulator OFCOM kept threatening he would refer BT under the Enterprises Act to the competition regulator, that reference could have resulted in divestiture orders. BT offered the functional separation model which was acepted by the regulator. Functional separation suffers from a major flaw, the investment incentives of the business unit are no longer aligned and ultimately the single board to which they both report can't reconcile the investment decisions. In short, an effectively functionally separated firm would voluntarily structurally separate.

I've asked BT reps a number of times why they haven't fully structurally separated and received three different answers.

1. There are benefits from the retail and wholesale/networks arms being in common ownership. Well, if there are any such benefits the dealing isn't arms length and the downstream firms still aren't getting to compete fairly.

2. By being functionally separated rather than structurally separated the regulator gets more visibility. This is an argument that reveals the objective of a captured regulator. It begs the question, why under separation should the regulator need visibility.

3. By being functionally separated we can "fine tune" the dividing line, because its hard to decide where it should be drawn. In other words, BT expects eventually to be able to redraw the line out of existence.

BTs separation has been a carefully worked fraud that has been ham-fistedly instituted in NZ. What I describe above as the "node-by-node" separation of Telstra's copper into an access network owned by a new operator, together with a totally different entity owning a subsidised (price averaged) backhaul network is the way to provide a truly new market structure that will facilitate dynamism in the market. (Dynamism is the simultaneous operation of competition and investment).


Mark said...

Hi David

How does the Telecom Bonds fit into the world of equity raising for Telstra?

There a "cute" old advert up on youtube

Telecom Australia had been corporatised in 1989 at that point. (I remember the C of A Z series number plates disappearing off their vans)


David Havyatt said...

Mark - Telecom Bonds were debt raising activities not capital raising activities. Corporatisation did occur in 1989. At the time the remaining $3B of debt (that ultimately dated back to 1959 when the PMG became self-funding) was converted to equity - this was repaid as a "special dividend" immediately prior to privatisation.

At one stage the Telstra Now We Are Talking site included the full history in their "Facts and Figures" section that has since disappeared - but you can find my reference to it.