Sunday, August 24, 2014

Kim Williams demonstrates bias for prejudice over facts

The SMH published an extraordinary extract from Kim Wiliams' new book Rueles of Engagement yesterday. Headed NBN wars we are told that 'Former Foxtel and News Corp chief executive's new book explores the dysfunctional regulatory regime that set the stage for the government's costly NBN rollout.'

The extract is so riddled with errors I am reproducing it in full here with my commentary. The original text is in bold - my commentary in italics.

In periods of technology evolution it is profoundly dangerous for governments to act as a proxy for normal commercial processes. Anointing winners never works. That is not and should never be the game of government.

"Normal commercial processes" in fact do not apply to the construction of infrastructure with natural monopoly characteristics. Government is forever picking "winners" - be that for tenders for road construction or even in making the decision which road to build. The NBN policy consisted of both - an attempt by tender then a decision to self construct.

The National Broadband Network (NBN) is the most recent example of an unaccountable announcement with a humungous financial commitment being made by a government with limited real understanding of its actions, based on poorly developed strategy and nothing more than technology romance. The hubris contained in a commitment to provide ‘‘ fibre to the premises’ ’ (FTTP) for more than 95 per cent of Australian homes misunderstood the complexity of the technical landscape, especially with regard to the exponential innovation and growth in smart wireless technology. It would be a subject for a political sitcom.

The Government's initial policy decision announced in April 2009 was informed by a range of Government agencies and the outcome of the original tender. That is on the record and backed up by the Scales Review. The final decision - the one on which funding was made - flowed from the Implementation Study and the first Corporate Plan. The decision was very well informed.

Evidence of the role of the Implementation Study and other research flows in the move from a 98% FTTN originally proposed, to a 90% FTTP goal and then a 93% FTTP objective in the Statement of Expectations informed by the Implementation Study and the Corporate Plan. In fact, understanding the "complexity of the technical landscape" is why there has NEVER been a goal to connect "more than 95 per cent" with FTTP.

No-one in the tech community is still backing "smart wireless technology" as an alternative to deeper fibre penetration. 

I followed the NBN with keen interest because it was core to the future of media and telecommunications and fundamental to any number of future commercial decisions. At Foxtel we embraced a constructive approach, given the then government’s almost virulent dislike for any public or private criticism, and so we assumed it would be happening and we had better live with it and ensure the best outcomes we could. In a speech to the National Press Club I think I used the euphemism ‘‘ bold’ ’ or ‘‘ courageous’’ .

Is it indicative of Williams that when he follows something with "keen interest" that he gets the detail of the policy wrong?  I do admit that I could never understand News Ltd's opposition to the NBN. While it potentially gave a serious leg-up to OTT competitors, it also offered News the ability to break out of its very unhappy symbiotic relationship with Telstra. 

Williams in his Press Club address used "bold". One might think he could have looked it up on the Foxtel website himself rather than rely on his memory. That speech - of course - was just the usual very insular diatribe of the Foxtel wish list. Nothing at all really about visions of the digital economy, just a narrow insular position of what served the interests of Foxtel. 

The original decision by Kevin Rudd and Stephen Conroy reflected an unusual degree of ignorance as to how the broadband challenges in Australia had come about from poor regulatory settings and the absence of well-developed long-term policy. The complex set of circumstances as to what was driving this craziness seemed to be well understood in the telecommunications markets but was badly managed on both sides of politics and abominably by the bureaucrats who were commercially naive and inexperienced. The result is that a cost well beyond $40 billion has been foisted on the taxpayer with uncertain return let alone secure capital recovery.

The simple fact is there were two contending views of the "complex set of circumstances" that were creating the broadband challenge. Telstra's view was that it had no incentive to invest in an environment of cost-based regulation, its competitors view was that Telstra had the incentive and opportunity to favour itself through being vertically integrated. 

Both challenges were attempted to be addressed through the NBN Mark I tender, through the contribution of Government capital to ease the investment hurdle, and the requirement for a separated open-access network. I will agree that the use a standard procurement process tender resulted in a poorly managed outcome, but the ANAO does not share that criticism. 

As has been outlined in the first interim report of the SSCNBN the so-called "Radical Redesign" scenario in the NBN Co Strategic Review is the more accurate description of what the Board and management of NBN Co were forecasting in September 2013. It still however understates revenue and overstated potential completion times. That scenario does not support the contention of "uncertain return let alone secure capital recovery."

The NBN could easily have been established with existing and new private sector telecommunications players using their own capital, provided the ground rules as to operational objectives had been clearly spelled out and the regulatory settings and expectations were clear and sufficiently certain that the necessary long-term capital could be deployed confidently . This would have confined the cost to the taxpayer to several billion dollars to meet evident areas of disadvantage (economically or geographically).

This was simply not the case because the player with access to the network refused to bid on the basis that structural separation was not something they were prepared to agree to. 

The reason that this sad, confused disarray has come about lies equally at the doors of the Australian Competition and Consumer Commission (ACCC) and a neophyte government possessed with the view that it could solve the issue with a single silverbullet solution.

There was a public policy process that ran for almost two years from the April 2009 announcement, and it was a revision of a previous policy approach. This was neither rushed nor determined by the activity of a single agency.

The decision was made in an air force jet between Kevin Rudd and Stephen Conroy with no financial or other constraints; the worst kind of politics: fast-fired , remote decision making with no professional or grounded advice as to how it might work and how it would be defended convincingly over a very extended timeframe.

The extent to which any "decision" was taken on a VIP flight in January 2009 it was simply that the Minister could bring forward an alternative proposal to NBN Mark I to Cabinet. Everyone should read the Cabinet Manual - that is how everything starts. Development of a policy to bring to Cabinet requires the approval of the PM first. 

In fact as Wayne Swan's book has now revealed there WAS a proposal to rush the analysis and include it in the stage 2 stimulus announcement in February. But it wasn't - it was subject to detailed review by central agencies and the SPBC (or gang of four).

Telecommunications in Australia has been bedevilled by a dysfunctional regulatory regime ever since the OTC/ Telstra merger and then when the Telstra monopoly was broken and subsequently privatised. The ACCC, due to its serial under-performance in the telecommunications arena, is largely to blame. It has a well-developed ideological detestation of Telstra on the one hand and has enabled itself to be gamed ruthlessly by Telstra’s competitors on the other.

The ACCC has no "ideological detestation" of Telstra, no matter how much it might feel like that to Telstra. At the point Williams is referring to ACCC decisions were subject to merits review by the Australian Competition Tribunal and I am unaware of any case where the Tribunal found against the ACCC. 

"Gaming" was a conduct involved in by both sides, as ultimately it should be if firms are seeking optimal outcomes for themselves. That the system itself suffered from serious design flaws that permitted gaming there is no doubt.

What it has never achieved is a clear set of operating rules to achieve a constantly improving competitive landscape that encourages competition and innovative evolution to consistently improve consumer outcomes. The commission seems never to have accepted that when competition works well it can be ferocious – there are winners and losers.. All too often the commission endeavours to correct the market for those who fail in order to shape and drive it, aiming to shape the market in an image that suits its own preferences. The ACCC has not been held to account by successive governments and, in fairness , parliaments for the entirely dysfunctional telecommunications landscape and the resultant costs that have been passed over to the longsuffering taxpayer.

No doubt, from time to time Telstra has massively overplayed its hand and the competitive respondents have resorted to invoking excessive recourse to the ‘‘ mother regulator’ ’ in response. What has resulted is a largely toxic regime between the ACCC and Telstra from the late 1990s through the first decade of the 21st century.

The ACCC was never making "winner vs loser" decisions nor exercising subjective judgement. It implemented the law, as is its job. 

David Thodey’s regime as CEO of Telstra in recent years has convincingly addressed much, but the negotiated outcome in that period to secure the NBN has become the new reality: it replaces a private, near-monopoly network with a new government-owned and controlled monopoly, which hardly constitutes major progress on any reasoned analysis.

Let's just be clear that the operation of Telstra as a private near-monopoly is a creation of the 1990s. The model of Government building and owning telecommunications infrastructure has been the global norm - other than in North America. That original monopoly HAD repaid all is capital and provide a return on investment each year prior to privatisation - an asset with a carrying value of zero was then sold for tens of billion of dollars.

The only time anything like infrastructure based competition had threatened it was in HFC networks, and Foxtel was the beneficiary of the decision by Telstra to build its own. Just so that the former CEO of Foxtel gets it - the HFC network which was Foxtel's only original distribution medium was built by Telstra when it was entirely Government owned.

And also, so he gets it, there is a huge difference between a vertically integrated firm that competes in retail markets with its wholesale customers and a wholesale only open access network.

Conroy was obsessed that the provision of enhanced broadband would be centred around an FTTP approach across the length and breadth of Australia . This was built on the vainglorious empty statement he repeated endlessly to anyone who would listen: ‘‘ nothing is as fast as the speed of light’’ . This approach had little to do with the reality of hybrid technology environments and the complexity of modern technology options and networks, let alone diverse user needs and affordable costs. The leaden hand of government in mandating that the solution had to be fibre and a new monopoly demonstrates the poor intellectual investment in the whole process.

I don't recall Senator Conroy using the line "nothing is as fast as the speed of light" much - though it has been used by many, including the head of New Zealand's Crown Fibre Holdings.  As I've previously written it is also dumb, because the propagation speed of light in a silica fibre is slower than either radio waves or current in a twisted pair. 

The fact that Kim Williams hadn't read it does not mean that there had been no extensive analysis. Some was in the public domain. Also as I wrote for the AFR an analysis of FTTN post NBN Mark I was pointless as Government had no access to copper, and also as I wrote for the AFR (different story) to get Telstra to take Government seriously they had to commit to a network that did not need Telstra. 

There was no publicly available strategy supported by an independent needs audit or future options backed up with an independent cost/benefit analysis. For the government to usurp an arena where the private sector has the capital capacity and experience, reject existing players and accept the financial and rollout responsibility in the largest single start-up in world history should demand an explanation and clear reasoning and accountability for the decision.

The Government did not "reject existing players", existing players rejected the Government. As to private sector "capacity and experience" to build the network, NBN Co used exactly the same outsourced contractors that Telstra has used over the years - including one, Visionstream, that began its life inside Telstra as the special purpose vehicle to build the HFC network for Foxtel.

The NBN in its creation, its commitment , its settings and its performance is a wholesale testament to policy and regulatory failure. If private sector undertaking was done in this fashion it would never secure finance and the board and executive team of that entity would lose their positions.

This is a line that it is hard to determine whether Williams has copied from Malcolm Turnbull or Malcolm Turnbull was picking up originally from Kim Williams. However, the Strategic Review, the Scales report and the KordaMentha review of governance have ALL FAILED to find any evidence of any policy process or governance failure. Indeed, as noted above, the Strategic Review more than anything else confirmed the business plan for FTTP. Far more importantly the Strategic Review's very best effort to calculate the "real cost of Labor's NBN" fell spectacularly $20 billion short of the number that News Ltd had blazoned across the front page of the Daily Telegraph in April 2013.

Rudd/Gillard have lost office but the ACCC continues with its ideological kitbag, its unaccountable slow processes and its lack of any capacity to innovate and provide efficient regulatory solutions that provide certainty to investors and better outcomes for telecommunications consumers. I only hope that Ziggy Switkowski, the new NBN Chairman, and his new CEO, former Vodafone CEO Bill Morrow, bring their considerable operational experience to deliver a better, saner, transparent operating environment.

Let's just have one last ideological swing at the ACCC shall we? The only "ideological kitbag" the ACCC has is its prosecution of the Competition and Consumer Act and the neoclassical ideal of competitive markets. Williams extensive list of senior executive roles includes a mix of artistic bodies, public sector bodies and private sector firms. The bulk of his private sector experience, however, has been as head of two firms that were the dominant player in very concentrated industries. One of those, Foxtel, achieved the monopoly status that any evolutionary economist would identify as the standard endpoint. That firm's comfortable position will now face competition as the consequence of technological change. It is no wonder that Williams finds "competition policy" anathema.

I really don't want to read Kim Williams book, but I am now fascinated by what else he might say.

Judging however from this extract perhaps the reason he was no longer required at News Ltd was because of a tendency to conduct analysis on the basis of personal prejudice rather than facts.

Footnote: The decision by Telstra to partner with News Ltd for pay TV and create Foxtel has been described by David Thodey as the "best decision ever." (It was in the AFR - trying to find link). For the history buffs the wise people in Telstra in charge of HFC, having decided to build an HFC network and having lost Seven and Packer to OptusVision, were determined to find an overseas pay TV partner (to match the presence of Continental CableVision in OptusVision). Only two people inside Telstra made the case for News Ltd - Harvey Parker and myself. Harvey was the more influential, but I had many productive discussions with Malcolm Colless.  

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