Paul Fletcher MP

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Address to CCC AGM: 28 November 2013

Portfolio Speeches Thursday, 28 November 2013

I am pleased to be with you today to speak at the AGM of the Competitive Carriers' Coalition.

In my previous life as an Optus executive I worked closely with the CCC and its member companies.

For example, when Sol Trujillo arrived at Telstra in 2005, that company offered a deal to the Howard Government – we will build a broadband network if you change the law so Telstra does not have to give open access to the new network.

The CCC worked closely with Optus and others from the competitive side of the industry to make the case that the government should look this gift horse very carefully in the mouth.

That episode highlighted a tension which frequently arises in telecommunications policy - between the pressure for shiny new network facilities on the one hand and enduring principles of competition on the other.

For many years the CCC has been a strong voice for keeping the focus on competition as a policy priority.

When Labor first announced its National Broadband Network plan in March 2007, competition was supposed to be a guiding principle.

In the six and a half years since then, quite a few compromises have been made.

Today I want to start by talking about those compromises.

Second, I want to discuss what we are doing to get the NBN – and in turn competition – back on track.

Thirdly, I want to highlight the significant opportunity for reducing the regulatory burden in telecommunications – and how this links in to our broader policy agenda in the sector.

Conroy’s Competition Compromises

Let me turn firstly then to another CCC – ‘Conroy’s Competition Compromises.’

When Labor first announced its plan for a national broadband network in March 2007, the plan was supposed to be all about competition.

The policy document contained a commitment to ‘ensure competition in the sector through an open access network that provides equivalence of access charges and scope for access seekers to differentiate product offerings. But in fact over time a series of decisions were made which involved significant compromises with the fundamental principle of competition.

One was the ownership structure. Originally NBN was supposed to be only partly government owned. This was so for both the 2007 and the 2009 versions of Labor’s policy.

In fact, we have ended up with NBN Co being one hundred per cent government owned. This obviously increased taxpayers’ financial exposure – but it also has competition implications.

This is because government inevitably faces competing objectives when it is both the owner of a telecommunications company – and setting the rules under which that company operates, including rules governing the prices it can charge.

Another decision with competition implications was the restrictions imposed by legislation on new market entrants operating broadband networks offering speeds of 25 Mbps or more. Such new entrants are required to offer a layer 2 bitstream service – the same as NBN Co – and give access to their network on essentially the same terms as NBN Co. This was quite a significant departure from previous policy settings – and makes competitive entry more difficult than it otherwise would be.

Another decision which tended to constrain, rather than stimulate, competition was the approach to previous government took to greenfields.

There was a growing industry of specialist companies building fibre optic networks in new developments. These were built under commercially negotiated contracts with developers - who found that offering a fibre connection to purchasers of homes in the development was an attractive selling point.

But Labor’s approach was in effect to mandate that NBN Co would build all fibre access networks in new developments. Theoretically a developer could still use another company: but why bother if NBN Co would do it for free?

This caused a massive bottleneck, as developers waited for the inexperienced NBN Co to meet the demand. It also choked off the existing competitive market – replacing it with a 1970s Soviet style environment in which you got a connection only when the monopoly provider was ready to build it for you.

So the point I am making is that the previous government took quite a number of decisions, as part of getting the NBN underway, which on a standalone basis tend to constrain or compromise competition rather than stimulate it.

The justification for these decisions was that they would facilitate the arrival of the new market structure – a wholesale only, open access network used by multiple retail service providers – and this was such a positive for competition as to outweigh some of the compromises.

We have obviously inherited these policy settings.

Some we cannot do much about, at least in the short term. For example, much as we would like to get more private sector capital into NBN, the reality of the business model makes that unlikely in the short term.

Others we can have a look at, as part of our various review processes – and I will talk about that in a moment.

Our Plan to Get the NBN – and Competition - Back on Track

Against that background, let me now turn to the Coalition’s policy priorities – in getting both the NBN and competition back on track.

As I hardly need to tell this room full of telecommunications professionals, turning around the NBN business is a challenging task.

The previous government committed to a vastly ambitious program with no real understanding of the scale of what it was committing to.  The proof is in the poor performance of NBN Co against its own commitments.  

For example, NBN Co’s first Corporate Plan issued in December 2010 said the fixed network would pass almost 1.3 million premises by 30 June 2013.[1] Its second Corporate Plan issued in August 2012 said the fixed network would pass 341,000 premises by 30 June 2013.[2]

In fact, as at 30 June 2013 the actual number of premises passed was 207,500.[3] Of course, as we later learned, over 55,000 of these premises were so-called ‘service class zero’ – they could not actually receive a service.

Associated with the poor performance was a corporate culture which seemed to ‘accentuate the positive’ to an excessive degree, while showing a reluctance to acknowledge unpalatable truths.

The Coalition has been taking a very different approach. An early indication has been our insistence on a more honest approach in stating how many premises are in areas where construction has commenced.

Under Labor, the test for whether construction had commenced was whether design work had started. In effect, it is like you saying that construction has begun on your house because you have gone to an architect and asked for a sketch plan. The ordinary meaning of ‘construction commenced’, of course, is very different.

One good example is an area of about 2,500 premises in Prospect, in South Australia. NBN reported that construction had commenced in April 2012. By November 2013, nothing had happened. The designs had not even been finalised. Yet all these premises were shown on a map on NBN Co’s website as premises where construction had commenced.

We want a corporate culture which operates according to the facts, not politics. The information the company operates on must be accurate and the information the company provides to the public must be accurate.

Consistent with this principle, the Government is now requiring NBN Co to publish weekly information on its website showing the number of premises passed, premises passed but not yet able to connect and premises with an active service.  

Our next priority has been to put capable people into the company. Within weeks of coming to government, most of the board was gone, not because they are bad people or because we do not recognise the work they have done – but because between them they had very little telco experience.

Ziggy Switkowski – one of Australia’s most experienced senior telecommunications executives – was appointed chair, and he was soon joined by a number of other extremely well qualified telecommunications industry veterans.  

Let me particularly note here the appointment of Simon Hackett. As the founder of Internode, Simon has been at the absolute forefront of the delivery of broadband services in the consumer market.

For years Internode used the unbundled local loop and line sharing regulatory frameworks to deliver broadband services over a mixture of Telstra’s network and Internode’s own network facilities.   In regional South Australia, for example, Internode was often delivering broadband services such as ADSL2+ before even Telstra offered these services.

Simon’s experience is incomparable – and enormously valuable to a company like NBN Co which has a business model entirely based on providing wholesale services. NBN Co needs to provide offerings which appeal to companies like Internode and its successors – or it risks not getting the take up that it needs.

I also want to make the point that Simon comes from the non-Telstra side of the industry – and was a key figure in the CCC and also the G9 group of companies which banded together in response to Telstra’s fibre to the node plans in the middle of the last decade.

The new board of NBN Co is already making changes to the management of the company. Two vastly experienced telco and broadband executives, JB Rousselot and Greg Adcock, have also joined. Again, the people they replaced simply did not have the same depth of industry experience.

There will be more changes, as we make sure that the board and management of this company have the skills and experience which equips them for the hugely ambitious task which the company faces.

Let me turn from the people to the plan. From the outset, NBN Co had a problem with its business plan.   That was hard to avoid when the starting point was a political announcement - with key network design parameters set by politicians.

External consultants McKinsey and KPMG were then retained – with the job essentially of back solving a financial model to find a moderately credible way of showing a positive financial return. They managed to do it – but at the cost of a series of very optimistic assumptions.

To single out just a couple, the cost assumptions were optimistically low – while the assumption that ARPU would rise steadily was out of tune with what has actually happened in broadband markets over the last decade.[4]

The problem was compounded when the NBN Co management was required to generate a Corporate Plan to deliver a 7% return . Again, the plan appeared to back solve to meet the target, with even more optimistic assumptions such as average revenue per user (ARPU) tripling over the life of the plan.

By contrast, this government wants NBN Co’s board and management to develop their own plan – a credible, realistic and achievable plan - and commit to it.

That is why the company’s board and management are carrying out a strategic review. They are assisted by capable external consultants such as Boston Consulting Group, Deloitte and Korda Mentha – but it will be the company’s plan.

Of course, while the strategic review is underway, the company needs to make sure it continues with the rollout. In the Interim Statement of Expectations, we have asked NBN Co to avoid service disruption for consumers; minimise the impact on the construction industry and employment; and achieve the less costly and quicker rollout objectives as seamlessly as possible.

Rather than everything coming to a halt, work is continuing. Fibre is being deployed in new developments; at brownfield sites where build instructions have been issued to contractors; and in the transit network.

So far I have talked about how we will get the rollout back on track. Let me now talk about a quite distinct issue – how we will get competition back on track.

The strategic review is about optimising the performance of the company. But that is only part of the picture.

The company has a particular perspective. The government has a broader perspective.

That is why, for example, we have announced plans for an independent cost-benefit analysis and review of regulation.

This will analyse the economic and social costs and benefits (including both direct and indirect effects) arising from the availability of broadband via various technologies.

It will look at the appropriate long-term regulatory framework for a future NBN environment, and in the period leading up to it.

To carry out this review, we will engage a panel of experts – and draw on perspectives from different sides of the fiercely contested telecommunications regulatory policy debate.

I have talked a lot about our plans to get the rollout back on track. Let me come back to the fundamental point about why this matters: the speed of the rollout is key to the achievement of structural separation and a new market structure in fixed line telecommunications and broadband.

If we look across the Tasman, we can see one approach to structural separation. In New Zealand, government funding was used as the carrot to induce Telecom New Zealand to separate into two separate companies. This delivered complete structural separation immediately.

By contrast, the Australian model we have inherited from the previous government will deliver structural separation gradually, area by area, as the new network is rolled out and Telstra ceases to operate its own access network in each area.  

The precise mechanics of how this will happen of course will depend on the renegotiation of the Definitive Agreements between Telstra and NBN Co, but that fundamental deal structure of gradual build out of the new network, and Telstra gradually moving across to that network, is unlikely to change. 

What that means, of course, is that the speed of rollout will be critical for two quite separate reasons. The first reason is the obvious one: the quicker the rollout, the quicker that Australians will be able to get services over this new, high speed network. 

The second reason is more subtle, but profoundly important for competition: the speed of rollout determines the speed at which structural separation is achieved.  So under the construct we have inherited, the rollout of NBN’s network – and the speed at which that occurs - becomes a key instrument of competition policy in telecommunications. 

So when I talk about the focus we are putting into developing a credible plan for the rollout, a plan which board and management can commit to, I am talking as much about competition policy as I am about the progress of an infrastructure project. 

A key implication of the structural separation path chosen in Australia is that, until the NBN arrives in a particular area, Telstra is likely to retain its dominance in that area. This will mean the interim equivalence and transparency measures have a lot of work to do.  

As everybody here is no doubt aware, these include:

  • an overarching commitment to equivalence that can be directly enforced by the ACCC;
  • price equivalence arrangements, including greater transparency of Telstra's internal management accounting and reporting framework;
  • improved ring-fencing arrangements regarding how Telstra’s retail, wholesale and network business units deal with each other;
  • better information security arrangements to protect wholesale customer information;
  • improved access to Telstra exchange buildings and external interconnect facilities;
  • a new ‘fast track’ dispute resolution process overseen by an Independent Telecommunications Adjudicator to resolve non-price equivalence issues; and
  • a reporting, governance and enforcement framework to monitor Telstra’s compliance with its Structural Separation Undertaking (SSU).

In both the interim and the long term, the ACCC continues to play a key role as the competition watchdog. It will continue to oversee Telstra’s compliance with its structural separation undertaking, enforce the access regime, set benchmark wholesale prices and guard against anti-competitive behaviour.

The Government is very interested in hearing the views of industry on the long term regulation of the industry . We will, for example, be consulting on the effectiveness of the existing Part XIC access regime as part of the review of the regulatory arrangements for the NBN which is about to commence, and I am sure many of you will be making submissions expressing your views.

It is my hope that once the structure of telecommunications becomes more level and transparent, there will be less need for the high level of regulatory intervention that currently applies.

Regulatory simplification

That is a good basis to turn to the third issue I want to cover today: our emphasis on simplifying and removing regulation.

The Abbott Government has set an ambitious goal: by the end of our first term in Government, we will have reduced the cost to Australian business of regulation and red tape by $1 billion a year.  

The communications sector is a prime candidate for reform. As this audience is only too well aware, communications is a highly regulated sector.

Let me quote from what I said in Wired Brown Land:

“We need to lay the right ground rules for a vibrant Australian broadband sector. That means tough regulation of the monopoly broadband network, targeted government subsidies where the market does not deliver the services Australians deserve, but otherwise as little regulation as possible."

There has been a continuing accretion of layers of rules and regulations since the market was ‘deregulated’ in 1997. Some of this is vital to facilitating competition - but much of it is of questionable value.

We have to ask ourselves whether the policy objectives underpinning regulation in the communications sector are still valid. If they are not, the regulation should go.

If an objective is still valid or policy dictates that a new objective should be adopted, we need to consider the smartest and most cost effective way of achieving that objective.

Already Minister Turnbull and I have received some very good ideas from industry participants on reducing red tape.   

Minister Turnbull has this week written to companies across the communications sector asking for ideas on what might be called the ‘low hanging fruit’ – changes we could make as early as next year to reduce unnecessary regulatory burdens.

Speaking as a former head of regulatory affairs at a large telco, let me express my strong belief that there is substantial scope for the reduction of red tape in the communications sector.  

I would encourage everybody in this room to put some energy into this issue.  Let us know about the regulatory requirements you face.  Let us know what takes up time, resources and money.  Let us know where you think government and its agencies gets too involved, or asks for too much information, or gets in the way but delivers no benefit.  

This is a high priority and focus in the Communications portfolio. 

Our aim is to deliver real reform in the communications sector through better regulation which lowers the cost burden on business while maintaining necessary consumer and other safeguards.

Real reform will only be achieved through careful consideration of a range of complex policy issues across the communications portfolio. The deregulation agenda therefore is not just a short-term process.  

However, we expect there should also be some early opportunities – where we can get started on removing redundant or unnecessary regulation and reducing costs of regulatory administration.

The government intends to hold its first “Regulation Repeal Day” in the Parliament in early 2014, and the Minister and I are keen to seize this chance to remove unnecessary regulation in the Communications portfolio.

Conclusion

Let me conclude with the recollection that late in 1996, after completing several months on the staff of then Communications Minister Richard Alston, I said to a senior official of the Department that I felt it had been a very busy year.

Her response: “It’s always a busy year in this sector.”

Seventeen years and a few grey hairs later, I have to say that assessment has consistently been proven correct.

This is a fast moving, yet heavily regulated, sector which attracts a great deal of policy and political focus.

The CCC plays an important role. Government will not always agree with you – but we certainly welcome and value your input.

At this busy time, with so much to do, your input is more important than ever.

Today I have sought to discuss three clear priorities in the communications portfolio. We want to get the NBN back on track; move to a more competitive industry structure; and seize opportunities to get rid of unnecessary regulation.

This is an ambitious agenda – but if Australia is to capture the full benefits of broadband and the digital economy, it is an agenda we must complete.

The government looks forward to working with the CCC and its members on this critical national agenda.

Thank you.



NBN Co, Corporate Plan 2011-2013, 15 December 2010, p. 15
NBN Co, Corporate Plan 2012-2015, 6 August 2012, p. 36
NBN Co Media Release, ‘NBN Co Meets Revised End of Year Rollout Target’, 4 July 2013.
McKinsey & KPMG, ‘Implementation Study into the National Broadband Network’, March 5 2010, p 254

Authorised by Paul Fletcher MP, Level 2, 280 Pacific Highway Lindfield NSW 2070.

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