The Scales report

My opinion piece 'Lessons from the latest NBN reviews' appeared in Tuesday's AFR commenting on the Scales and KordaMentha governance reviews.

It is by no means everything I would like to say about those reviews - but space did not allow more. This is a more extensive and updated commentary on Scales (but does not repeat everything from the original).

The Scales report released by the Minister for Communications, Malcolm Turnbull, into the public policy process from April 2008 to May 2010 is of little more than historical interest to the community.

Despite the access Bill Scales had to individual and documents, the report provides virtually no new information on the development of Broadband policy. The reverse is sometimes the case, that Scales passes over or fails to consider significant issues.

Most importantly it found absolutely no evidence that there had been at any point a public announcement that was different to the private advice. This is most significant given the way Mr Turnbull continued to assert that there was some mischief in the policy process. 

For example, in answer to a question without notice on 20 November 2013 he tried to connect the calculation by Lazard's of a negative $31 billion NPV with the Corporate Plan detail of a 7% IRR saying "No wonder Australians lost faith in Labor. No wonder they are sick of their spin." 

Later on 11 December he finished an answer with "Tomorrow we will see the truth about the NBN. The Labor Party do not want to hear it. They do not want to know how many billions of dollars they have wasted. They do not want to know how many falsehoods they have told." None of the reviews conducted by Mr Turnbull has found any evidence of falsehoods.

However, its political and public policy purposes and conclusions should be noted by all because they will continue to be the core themes of policy over the next few years..

There are three important observations to make. The first is that all policy is bounded by the current reality, optimal solutions are constrained by sub-optimal starting points. The second is that the public service has been so gutted from 1996 on that it is unable to perform its essential roles. The third is that because public policy is determined by a political process, all statements are political.

The current Minister has regularly made much of the limitation he faces in implementing his NBN policy by the current state of NBN Co. The same was true of Senator Conroy as Minister who inherited two decades of policy failure. This started with the policy to pursue infrastructure based competition that so spectacularly failed in fixed line markets. It was compounded by the privatisation of Telstra.

The facts at the time Labor announced its 2007 policy was that Telstra had made a totally unacceptable policy proposal to Howard Government, and that Government had struggled to respond. In his report Scales claims “During 2007 the Howard Coalition Government was actively attempting to speed up the roll out of broadband in Australia.”  A core element of the “Australia Connected” package announced in June 2007 is stated as:

A plan to facilitate a new commercial fibre optic network build in cities and larger regional centres via a competitive bids process and subsequent enabling legislation. This process was to leverage the previously announced proposals to roll out a commercial fibre broadband network by Telstra and the G9 consortium (neither organisation was seeking funding). The aim of the competitive bids process was to evaluate the regulatory arrangements for the investment in an open and transparent manner. (P.16)

This was, in effect, a tender for regulatory arrangements. Telstra was seeking exemptions from aspects of the access regime while G9 required access to Telstra’s copper. The Departmental process for this exercise was the precursor to the NBN Mark I - with an Expert Panel chaired by the Secretary of the Department.

The final main component of the environment Senator Conroy inherited was a Telstra management team that had declared outright war on the Government. Bill Scales had his own disagreements with Donald McGauchie, the Telstra Chair who led the robust changes. The Chair’s insistence in hiring John Short to assist with the final privatisation was claimed to be the reason for Scales resignation.

That the conditions for policy implementation are far from ideal puts additional pressure on the public service. The Scales report, and indeed the National Audit Office review of NBN Mark I, found the public service at least missing in action in the outcomes. Scales in his report concludes:

It is clear to me that during the whole of the period of this Audit, public officials involved in the NBN policy development process, in both its manifestations, worked with remarkable dedication and commitment to attempt to make this policy work….

However, it is also clear from the evidence provided to this review and from the comments from those I interviewed from within the public service that they had difficulty in having their ‘voice’ heard on many of the most important public policy matters related to the Labor Government’s NBN policy.

Scales notes that in part this can be attributed to the chaotic processes of the Rudd Government. He is generous and attributes it to the specific circumstances of the early Global Financial Crisis period, but as history shows there was a serious issue with the management approach of the Prime Minister himself. The recommendation that the Australian Public Service examine its capability and impact is certainly worth adopting.

As I will explain later I think Scales is over-describing the supposed impact of the chaos and the impact in Government on the project. However, there are a number of very specific areas where the public service was deficient in executing the Labor 2007 policy. Two principal ones were the choice of a standard tender process and a lack of appreciation by Department officers of the centrality of industry structure reform to the Government.

The ANAO report on the NBN tender referred approvingly of the processes pursued by the Department to maximise competitive tension. This is usually a good thing, because it brings the price to Government down. But it was entirely the wrong outcome for the NBN. The two major expected respondents, Telstra and the G9, meant that the loser of the tender was going to become a customer of the winner.

While Telstra had, in the words of Phil Burgess, rejected the idea of holding hands and singing Kumbaya, the idea of a single approach with all RSPs participating was actually the best outcome for Government.

The evaluation criteria for the tender included the degree to which the response resulted in industry structural separation, but it was only one and none of these had been weighted. When the Regional Telecommunications Independent Review Committee chaired by Bill Glasson proposed to include in its recommendations an absolute requirement for structural separation under the NBN, Departmental officers expressed concern. On their reading this was not an absolute requirement. The Minister’s office had no such concern.

As the Mark I tender came to a conclusion this became the defining issue for Telstra. It was the Government’s refusal to undertake not to seek structural separation that resulted in Telstra not submitting its full bid. (It is also worth noting that Scales concludes the exclusion of Telstra was entirely appropriate). Telstra could only be taking this position so late in the process because the centrality of the issue was not clear in the tender.

Senator Conroy has made no secret of the frustration he found with the Department Secretary he inherited and her reappointment. He has always been clear that structural separation was a core element of the policy, and has been clear that a simple purchasing tender process was always the wrong approach.

I do know that when the Secretary was writing the strategic imperatives for the Department she had implementing the Government’s policy as the primary objective. As I was briefly in the Department at the time, I suggested that the actual first priority was to advise the Minister on the economic, social and technological changes occurring that might require a policy response. The Secretary rejected that.

The position of the Department Secretary reflected two changes that had occurred under the Howard Government. The first was the unequivocal position that policy would be made by Ministers and communicated to the Public Service for implementation. The second was that expert advice was no longer provided by the bureaucracy but outsourced.

So to the extent the Public Service failed in the implementation of the NBN policy it was primarily a consequence of Howard Government reforms.

On this subject there is clearly much progress to be made. The Government also released last week a perfunctory response to the Interim Report of the Senate Select Committee on the NBN. In a number of places it states that a more detailed view of the issues arising can be found in a document (Response to the Senate Select Committee) which was posted on the Minister’s blog. The metadata of that document reveals it was authored by a member of the Minister’s staff.

Finally, the Scales Review provides deep insights into how public policy is always inherently political.

The first evidence is in the management of the report itself which has been released in a way designed to maximise the reporting of a simple message. It was tabled out of session in the Senate and posted on the APH website just before 5pm. Journalists from The Australian were asking questions of Opposition members as early as 5:15pm (or as late, given deadlines). Only The Australian and Communications Day seemed to be aware of it. The Australian predictably splashed the story under the headline “Labor’s NBN ‘rushed, chaotic’." Yet the fact is that Scales didn't say the NBn process was rushed and chaotic, he said that Government as a whole rushed and chaotic at the time the report was considered.

Minister Turnbull then ran with his rehearsed lines about Labor’s NBN being a most wasteful exercise. However, Minister Turnbull did not reflect on the substance of the Scales report, in particular recommendations that all projects over $1 billion be subject to cost benefit analysis by the Productivity Commission or Infrastructure Australia. That is perhaps because Mr Turnbull eschewed these august bodies for his own CBA, and secondly because his CBA is two months overdue.

****

My published comments noted:

Reports also focused on the criticism of the ACCC’s advice on the cost of FTTP versus the cost of FTTN followed by an upgrade. The two Professors on the Expert Panel are, however, have previously stated that it was a conclusion reached independently of the ACCC advice.

In fact it is far worse than this. Professor Tucker this week came out to record that Scales was wrong on his assertions about the ACCC advice writing:

He also argues the panel of experts (of which I was a member) assisting the Rudd government did not properly test advice from the Australian Competition and Consumer Commission (ACCC) about the upgradeability of a Fibre-to-the-Node (FTTN) network to a Fibre-to-the-Premises (FTTP) network, and that the panel inappropriately relied heavily on this advice in making recommendations to the government about the development of the NBN.

Professor Coutts made his in a letter to Communications Day so I will repeat them here:

Re ‘Rod Tucker claims Scales ignored advice on ACCC role’ in yesterday’s CommsDay. As a member of the expert panel with Rod Tucker on the 2008/09 version of the NBN formulation I can only strongly echo Rod’s comments that we thoroughly considered the options for the NBN particularly FTTN and the possible scenarios to transition to a FTTP solution which is accepted worldwide as the ‘final solution’ as [Telstra chief scientist] Dr Hugh Bradlow has said publicly several times! Our conclusion in 2008 that FTTN could not be assumed as a transition to FTTP (unless done by Telstra!) was reached before the ‘unsolicited’ report by the ACCC was received literally at the 11th hour of the process and certainly did not influence our conclusion. Mr Scales mentions only one (Analysis-Mason) of three detailed reports comparing the costs of FTTP versus FTTN which we considered, all of which are in the public domain!
Rod, I and Tony Shaw each individually told Bill Scales that the ACCC ‘bombshell’ as it has been termed was NOT a major influence (let alone a ‘bombshell)’ on our conclusion re FTTN transition to FTTP. Tony Mitchell who was unable to meet Mr Scales also shares this recollection. I cannot usefully speculate on what John Wiley and Patricia Scott would recall as influencing their decision to concur with the conclusion made by the panel. Hopefully the history of NBN will be written from objective analysis of the evidence (both written and oral) and after reflection of outcomes for Australia!