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Submission on Draft Guidelines Expert Task Force

In addition to the Wholesale Access Principles I have forwarded on behalf on the Wholesale Industry Group I would like to make some more general observations.

As a global telecommunications consultant I am in the position of being able to follow industry developments, both in Australia and overseas. Our senior analysts share notes on national infrastructure projects, regulatory issues and government policies, and we have direct contact with many governments and regulators.

The insights thus gained form the basis of BuddeComm’s analyses and reports, and we would be happy to make these available to assist you, the Expert Taskforce.

I have no doubt that most of you are very much aware of the critical role that the broadband infrastructure now plays in our society and our economy.

However you have been charged to base your advice on the future, not the past, and this will necessitate a focus on the services that will become available over fibre networks. In many ways these will bear little resemblance to the ‘Model-T’ broadband services that we currently enjoy.

A true broadband environment will be crucial for the delivery of:

e-health services –this sector could produce savings of around $30 billion over the next ten years (according to their own reports);
smart energy meters – linked to broadband networks, these can produce energy savings of a similar magnitude;
education – another multi-billion dollar activity.

The above services represent a great deal more than simply achieving Internet access speeds of 10Mb/s in a few years’ time.

Because of the importance of this infrastructure to the nation (e-health, education, energy savings), it is highly likely that broadband access will be free in the future.

The quality of the Expert Taskforce and the integrity of the people involved give me confidence that you fully realise the importance of this work. It is not something that can be rushed to suit political agendas, and it is important from the outset that the members of the group feel comfortable with the guidelines that have been set.

A project of this magnitude will only work if the ground rules are sound. For more than a decade I have been asking the following questions.

Where is the national blueprint for this national infrastructure?
Do we know where the gaps are?
Where are the existing networks and how can we maximise what we already have?
How is all this going to come together?
Where is the national discussion on this subject with state government, local councils, local communities, e-health, education and the utilities?

All of these issues are fundamental to the project if it is to be successful.

Even if we put aside the national interest and allow a more commercial environment to overbuild existing networks, how will they interconnect, and under what conditions?

Even though Telstra’s current management is unwilling to cooperate, the importance of the incumbent cannot be ignored. The project could end in failure if Telstra is not taken into account, both as a potential contender and as the key partner to any other possible participant.

It is not in Telstra’s interest to cooperate, as any change will result in more competition and less market dominance for them, and very strong government guidance and regulatory powers need to be in place to get the basics right – this is what is happening in all the other countries that are grappling with these issues.

Most people in the industry agree with me that the optimal solution for Australia would be (in both rural and metro areas) to use the existing infrastructure (from Telstra) and only make new investments where they are necessary. Our relatively small market does not support the level of infrastructure-based competition necessary to allow competitive forces to work this out.

The competitive environments that now exist in Europe, Asia and North America didn’t happen overnight. They were arrived at through good government policies that regulated the competitive environment around these investments. It is from that sound underpinning that further national policies in relation to infrastructure were developed.

I am not unduly worried by solutions such as:

competing networks
monopolistic networks
a combination of the above

….but the basic framework would have to be right.

One only has to look at the current mayhem in the market, and the history over the last few years, to see that we don’t have a solid foundation in place that will permit us to proceed along the lines set out in the draft guidelines. So before the Taskforce goes any further I would suggest that we first work on this foundation.

I am convinced that any solution, advice or outcome that is arrived at, based on the plan as it now stands, will fail.

We are not alone. Most countries, especially those in Europe, face the same problems; however they have all recognised the need to have the foundations in place before any large-scale infrastructure projects are developed.

A great deal of useful information is available from countries such as Britain, Netherlands, Sweden, Denmark, Ireland, Switzerland and Italy, as well as from the European Commission and the OECD. I have been personally involved in establishing high-level government connections on these issues and can guarantee there is plenty of excellent information available on the subject within the bureaucracy.

And we know what the outcome must be. It must be an environment based on network access that is on a level pegging (see Wholesale Access Principles). This can be achieved through:

commercial arrangements;
regulatory authority; or
intervention from the financial market – for example, by splitting the infrastructure from the services.

Here are some examples from around the world:

The UK: under pressure from Ofcom, BT operationally separated its network infrastructure in early 2006, and this has led to a steady increase in revenue and share price. New wave revenue (from networked IT services and broadband) now accounts for 40% of the group’s total revenue.
The Netherlands: pressed by OPTA, KPN has reached commercial arrangements with its wholesale customers for access to its national fibre network.
Ireland: Babcock and Brown (new owners of Eircom) are negotiating terms with the government, under which a possible structural separation can take place.
Sweden: TeliaSonera’s dominance over the infrastructure-based fixed line and broadband markets prompted the Swedish government (influenced by events in the UK) to sell its stake in the incumbent and prepare for TeliaSonera’s wholesale business to be spun off into a separate unit.
Denmark: the private equity owned incumbent is rationalising its core business with a view to transforming its legacy network into a multimedia network in the next few years, providing 50Mb/s Internet to households and paving the way for the network to be separated from the content side.
Italy: the regulator and government are both pressing for Telecom Italia to separate its retail and network operations, with draft legislation aimed at keeping the network as an Italian-owned strategic asset.
New Zealand: the government is working on legislation for the full structural separation of Telecom New Zealand.

All of these options exist, but it must be said that the so-called commercial solutions were arrived at only because a gigantic regulatory stick was at the ready when these commercial negotiations took place.

The groundwork for the job that you have been asked to do simply doesn’t exist, and unless this framework is put in place the outcome will not be in the national interest.

I firmly believe that it is your responsibility to ensure that the right foundations are laid, and, if that is not within the scope of your brief, then I would strongly advise the group to hand the project back to the Minister, as it will be impossible under the current guidelines for the group and any potential participants to prepare a commercial proposal for the kind of networks we are talking about.

A good starting point would be to accept the Wholesale Access Principles within the guidelines. This could force the parties to the negotiation table.

Unfortunately, under the current circumstances it would take well over a year for these Principles to be put in place, and for the behaviour of the key players to change sufficiently to allow for commercial proposals to be developed. This would, I believe, be a part of the regulatory review the ACCC is currently commencing, but these outcomes are not expected until late 2008, or even 2009.

Let us try to get things the right way round this time – let’s put down a solid foundation before we start building the castle.

Paul Budde

Submission on Draft Guidelines Expert Task Force

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