Senator the Hon Helen Coonan

Minister for Communications,

Information Technology

and the Arts

Address to the Sydney Institute

Connect Australia - Future proofing the nation

Sydney

Tuesday August 23, 2005

 

Introduction

Given the events of the past week you won’t be surprised that this evening I want to talk Telstra – not just Telstra, but about the emerging story of telecommunications in Australia.

When it comes to telecommunications it is abundantly clear that we can only expect the unexpected.

In 1876, an internal Western Union memo from the US stated:

“This telephone has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.”

In 2005, it is not surprising that telecommunications services are such a flashpoint in the national psyche at the moment as they have long underpinned the prosperity of Australia.

In the early days of the colony, letters ferried between Britain and Australia carried social, economic, political and scientific information.

And when the electric telegraph was introduced in the mid-19 th century then the country really started to zing when the goldfields were connected with major population and agricultural centres.

One thing that hasn’t changed as telecommunications have evolved is that the challenges of connecting our vast continent, with all of its tough terrain and scattered populations still remain.

But despite these challenges, connecting the country is of enormous national benefit and nothing less than a social good. In the 21 st century to not have access to even the most basic telecommunications services means isolation and often times desolation.

The Howard Government has taken a proactive approach to developing the telecommunications industry, proceeding down a path of deregulation that began in 1997.

When we came to Government in 1996, Labor had spent many years presiding over a cosy duopoly of Telstra and Optus. Labor wimped out on the sale of Telstra and had utterly failed to address Telstra’s dominant position in the market.

Labor had forced the closure of a mobile phone network and overseen one of the greatest missed opportunities in our telecommunications history by watching Telstra and Optus partially roll out duplicate pay TV networks.

Now we have more than 100 telecommunications providers, prices have fallen by 21 per cent, the Australian economy employs 30,000 more people and is some $10 billion larger than it would have been without the competition reforms.

Small businesses have benefited from competition to the tune of $2.1 billion and Australian households by $5.5 billion.

This Government also introduced a range of telecommunications consumer safeguards to ensure there is support for low income earners and those living in rural and regional Australia.

But with a country as large and sparsely populated as Australia there will always be areas of the nation where it is uncommercial for any operator to go. So the Government makes targeted investment in services where there is market failure most notably in rural, regional and remote Australia.

This investment ensures we do not have a two-tiered telecommunications system where people living in metropolitan areas enjoy the benefits of competition while rural and regional Australia is left behind.

We have already spent more than $1 billion on telecommunications services since 1997 in rural and regional Australia alone and this investment has simply transformed the way in which Australians can live, work, get an education and have a decent life in rural Australia.

Selling Telstra

Competition, consumer safeguards and targeted assistance all interplay with the Government’s long-standing commitment to sell our remaining share in Telstra.

One element of the recent debate about privatisation - and one I feel that is consistently overlooked - is that selling Telstra is in the national interest.

The Government wants to sell its remaining share in Telstra to remove the inherent conflict of interest between the Government being the rule-setter and policeman for the entire telecommunications industry while at the same time being the owner of the largest phone company in Australia.

Resolving this tension is possibly the most powerful argument for selling the Government’s shareholding.

Selling Telstra is not about flogging off an asset to pad our bottom line, it is not about unleashing a dominant telecommunications provider to crush competitors and it is not about deserting the bush.

Selling Telstra is actually about completing the transition from telecommunications being provided by a Government Department, the PMG, to telecommunications being provided by a multitude of nimble private sector interests.

This transition began the moment the former Labor Government corporatised Telstra and allowed Optus to enter the market in 1991.

The Government has consistently stated however, that there are three preconditions for the further sale of Telstra –

• That services in rural and regional Australia are adequate;
• That there is value for taxpayers; and
• That we have the authority to sell from Parliament.

Getting value for taxpayers from the sale of Telstra has always been a prerequisite of going ahead with full privatisation – that is just a matter of common sense.

But I have said before I am acutely aware, that at the end of the day the Government will not just be judged on whether Telstra shares sell for ten cents more or five cents less.

What the Australian people expect of the Government, and what history will also judge us on, is whether we deliver a strong competitive telecommunications market and whether that market delivers the services Australians need to make their communities strong and their businesses competitive now and into the future.

I admit the Australian public still need convincing that there is no connection between Government ownership and service levels in Australia. But it is worth stating again that you don’t have to own Telstra to regulate it.

Whether or not the Government owns 50 per cent or less of Telstra, we will continue to set the rules under which all telecommunications providers can operate in Australia and require compliance with these rules through legislation and licence conditions.

It is an incontrovertible fact that the less the Government has owned of Telstra the more services have improved.

Ten years ago the Government owned all of Telstra – prices were higher, services were slower and you could have any choice of telephone as long as it was black!

Targeted investment in new telecommunications infrastructure and services will best be enhanced when the Government is able to focus on its core business of setting the rules for the whole industry and Telstra can focus on being competitive and delivering the very best services to its customers free of any Government overhang in its shareholding.

That is why I have been working for many months on a plan to future-proof telecommunications in Australia.

The plan

Last week the Government announced a generous and far-reaching package of measures to Connect Australia now and into the future.

There are four key planks in the package:

• An immediate investment of $1.1 billion in services now and a $2 billion fund to generate revenue for services in the future;
• Introduction of operational separation to deal with ongoing concerns about Telstra’s high degree of integration;
• Improved competition regulation; and
• Enhanced consumer safeguards.

Connect Australia

The $1.1 billion Connect Australia package is the biggest regional telecommunications assistance program in Australia’s history.

Connect Australia will rollout affordable broadband connections to people living in regional, rural and remote areas, extend mobile phone coverage, build new regional communications networks and set up vital telecommunications services for remote Indigenous communities.

The $878 million Broadband Connect program will give all Australians access to affordable broadband. The funding will be competitively neutral, technology neutral and demand driven.

The $113 million Clever Networks program, supplemented by at least matching funding from State and Territory Governments and private investment, will be strategically invested in new broadband infrastructure.

This builds on the success of previous broadband infrastructure programs such as the National Communications Fund, the Coordinated Communications Infrastructure Fund and the Advanced Network Program – where Australian Government investment of $109 million has leveraged further investment of $360 million in new broadband infrastructure.

Through these programs n early 1,800 sites in more than 600 towns across each state and territory have had broadband services rolled out through a variety of technologies, including fibre, DSL, Wireless and Satellite.

This includes connections to health clinics, hospitals, emergency services, schools, TAFE colleges, homesteads (for distance learning) and regional Universities. And Fibre backbone networks have been constructed in South Australia, Tasmania and NSW.

Recognising that major gaps in mobile phone coverage remain, and also that some parts of Australia will never be covered by terrestrial mobile networks, a further $30 million will be provided for Mobile Connect to both terrestrial mobile coverage and to expand the satellite phone handset subsidies scheme.

Remote Indigenous communities are among the most disadvantaged groups when it comes to access to modern communications services.

The $90 million Backing Indigenous Ability package will deliver Internet and videoconferencing in remote Indigenous communities and improved Indigenous radio and television services.

Future Proofing

The second funding element of the package will ensure that telecommunications services remain adequate into the future – what the Estens Committee called future-proofing.

Already the Government has issued Telstra with a licence condition requiring the company to implement and maintain an effective local presence in rural, regional and remote Australia and has committed to holding regular, independent reviews of telecommunications services in the bush.

No-one knows what the telecommunications landscape will look like in 10 years time. So, short of a crystal ball, regular reviews are the next best thing to determine the future telecommunications needs of Australians living in regional areas.

The first review will commence three years after the sale of Telstra or at an earlier time as directed. They will then occur at least every four years after that.

To complement these reviews, the Government will create a dedicated $2 billion Communications Fund which will be invested on behalf of the Australian people, managed by an independent Advisory Board with the interest generated to be spent on upgrades and rollouts of telecommunications services.

And on top of Connect Australia, the Government will begin the rollout of the Metro Broadband Connect program in January to fix the blackspots that continue to affect around 200,000 households in outer metropolitan areas.

The $50 million funding will be targeted towards metropolitan areas where affordable broadband access is not available due to the lack of suitable network infrastructure.

By the end of 2003 there were approximately 900,000 households in metro areas that could not get a terrestrial broadband service such as ADSL or wireless broadband.

By the end of this year, that figure will be around 200,000.

With this massive, targeted investment package designed to meet the need that we have identified for rural, regional, remote and metropolitan Australia, the nation can be confident that services will continue to improve.

Services will not always be perfect. There will always be a hill that blocks a mobile tower, or a tunnel that interferes with phone reception, but services will be available and affordable and the Government is committed to ensuring they remain so.

Competition Reform

The Government is firmly of the view that competition is ultimately the best means of delivering better and more innovative services which is why earlier this year I undertook a review of the regulatory arrangements that apply to telecommunications carriers.

The result of that review is a series of reforms to telecommunications competition regulation. These reforms strike a balance between the need for regulation which promotes competitive services and investment in new infrastructure while allowing Telstra the scope to meet changing market conditions and demand for services.

The centrepiece of the competition reforms will be a requirement on Telstra to introduce operational separation within Telstra’s organisation. This avoids the more risky and unacceptable forced structural separation but will deliver what many consider accounting separation has failed to deliver.

The objective of operational separation is to provide equivalence and transparency to Telstra’s wholesale customers. It is designed to fit within Australia’s existing regulatory framework and to fit with Telstra’s business arrangements.

The hope, and one of the tests, for operational separation is that it minimises the chances of repeating last years complaints about Telstra’s ADSL prices.

These complaints centred around allegations that Telstra was selling products to its retail customers cheaper than to its wholesale customers.  It resulted in a protracted dispute between the ACCC and Telstra which was eventually settled but not to the satisfaction of anyone.  Avoiding repeats of these situations is in the interests of Telstra, its competitors, the regulator and the public.

The framework will ensure that wholesale customers of Telstra receive equivalent, but not necessarily exactly equal, treatment as Telstra retail in terms of price and non-price terms and conditions.

An internal wholesale pricing mechanism for Telstra will be developed. Telstra will be required to maintain separate retail, wholesale and network business units and to publish internal contracts setting out non-price terms and conditions.

These could cover, for example, the timeframes for supply of services and fault recitification. The model for Operational Separation was developed with expert advice in consultation with Telstra and the ACCC.

Compliance with operational separation will be imposed through a licence condition enforceable by both the Minister and the ACCC. The model provides a sound approach to achieve transparency, without slicing and dicing Telstra or breaking it up.

It is credible, cost effective, durable, enforceable and tailored to Telstra’s business.

But it is not a panacea – other competition regulation will remain and be amended to provide companies with greater certainty when making investments in new networks and to speed up decision making by the ACCC.

Building on the existing provisions that allow any company to obtain an exemption or agree regulatory conditions with the ACCC prior to making investments, the government will require the ACCC to take account of the costs and risks of new investment when making decisions under the telecommunications access regime.

When specific telecommunications regulation was introduced it was assumed that the provisions would be transitional.

That is, when competition was sufficiently developed it would be possible to wind it back and revert to the general competition arrangements in the Trade Practices Act.

With this in mind the Government will hold another regulatory review in 2009 to assess how competition has developed and whether any further adjustments to competition and telecommunications specific regulatory regime are warranted.

Consumer Measures

The Howard Government has built the current consumer protections and we will maintain them including the Universal Service Obligation, the Customer Service Guarantee, untimed local calls, priority assistance and price controls.

The new price controls that apply to Telstra will operate from 1 January 2006 and will only apply to Telstra’s legacy network.

The price controls have been developed to strike a balance between the tightening of price controls proposed by the ACCC and the loosening of caps sought by Telstra.

The price of a local call has been fixed at 22 cents. Untimed local calls remain. On average, the price of a basket of services used by households and small businesses will not be allowed to rise – they will fall in real terms. And Telstra’s basic line rental products can only rise by the rate of inflation.

In a departure from previous price control arrangements, big business has been excluded from the arrangements on the basis that these customers are able to negotiate individual agreements with Telstra.

This focuses the price controls on protecting residential and small business consumers who use Telstra’s fixed line network. Under the price controls, Telstra is required to provide parity in the local call prices offered to customers, including the local calls offered in package deals.

This means that Telstra has the flexibility to develop a range of call packages and customers can choose the one most attractive to them and their needs.

The price controls are complemented by a package of measures to protect low income consumers and will ensure the benefits of competition in the form of lower prices, are passed to consumers.

Consumers are quite rightly the end-game for the Government in telecommunications but experience has clearly demonstrated that competition and getting the balance right is the only way to deliver the services Australians want and need.

Getting the balance right

The Government often talks of the conflict of interest in being both the rule-setter for Telstra and the majority shareholder. Never has this been more apparent than in the past few days in the very public discussion that has centred on regulation.

When I announced the regulatory review back in April, commentators mused over whether I would go soft on Telstra or adopt perceived ‘harsher’ and perhaps more stringent regulatory measures as advocated by the ACCC.

I think now when you have Telstra squealing a bit and the ACCC’s Graeme Samuel broadly accepting a good Mercedes model rather than a preferred Rolls Royce, then you must have achieved an appropriate balance.

But it is worth reflecting on some features of the competitive environment to put the Government’s regulatory reforms into perspective.

And also to show that claims that Telstra is over regulated are, in my view, over stated.

Australia has a balanced telecommunications specific regulatory framework which contains the same core elements as those in most other countries.

• There is an access regime to ensure new market entrants can get access to essential services provided by the incumbent telco;
• There are rules to tackle allegations of anti-competitive conduct;
• Price controls; and
• Specific consumer safeguards such as the Universal Service Obligation which apply to the legacy network.

In a recent submission to the Canadian Government, one Australian expert concluded that Australia’s regulatory regime is far more relaxed, less administratively burdensome and in most respects more balanced than the regime in Canada.

Evidence of this can be found in the fact that Telstra is still a highly vertically and horizontally integrated company.

It is the 19 th largest telecommunications company in the world by revenues, and the 8 th largest by earnings.

It is not prevented from operating in any part of the market and has a fixed and a mobile arm, directories and even a pay-TV network.

There are some key differences in the Australian regime compared to those operating in other countries such as:

• In Australia the regulator does not have powers to force divestment of companies;
• In the first instance, it is expected that access prices will be settled through commercial negotiation rather than through published, regulated prices.
• The costs of providing the USO are shared by the whole industry.

• In other countries, including the UK, the incumbent is expected to absorb the entire costs of providing the USO on the basis that being the USO provider gives a sufficient competitive advantage to the company discharging the obligation as its customers upgrade to other services.

Some might say that these examples play into the hands of people wanting to impose even more regulation on Telstra.

However I think we have the balance about right. We are not in the business of crippling Telstra, but we do want to give new entrants a fair go. If we get this right, then consumers benefit – and the evidence to date confirms that consumers are benefiting.

There has been a lot of attention on Telstra’s recent results which, despite announcing a $4.4 billion profit, show that Telstra, like every other dominant telco in the world, is facing pressure on its PSTN (fixed network) margins.

The decline in these revenues has been a feature of Telstra’s results for some time and comes as no surprise. The problem for Telstra is that the growth services – mobiles and broadband – both have more competition than fixed services.

For Telstra to preserve its earnings and profitability it needs to grow its revenue – this could mean either convincing people to spend more on telecommunications services, clawing back market share from competitors or buying into new services such as content.

It is legitimate for Telstra to leverage a position of dominance in legacy PSTN services into new services as long as it is done without taking unfair advantage of market power.

Because of its scale, scope and resources Telstra should be well placed to make strategic investments in new networks and innovative services not the subject of legacy regulation.

For instance, there is no regulation in the mobile market other than the regulation that applies equally to Telstra, Vodafone, Optus and Hutchison.

There is still no retail regulation on broadband products nor on Telstra’s wholesale broadband products.

Put simply, the mobile and broadband sectors are competitive – Telstra might have to work harder in these markets to make money but it is still the biggest player.

-Leader or Laggard?

In December, the OECD found Australia’s broadband penetration rate to be in the lowest quartile.

Contrary to some people’s views, the challenge is not as dramatic as first thought.

High speed services can be delivered to most of Telstra’s customers over the copper network using various flavours of ADSL. Admittedly this is not inexpensive, but the point is it does not require an entirely new network.

What it requires is investment by Telstra, or its competitors, in ADSL 2+, and more importantly, the silver bullet that would make consumers want broadband speeds of 6 mega bits per second and above.

Although Australia’s love affair with technology is now kicking in and we have the 10 th highest rate of take-up of broadband in the OECD, we came off a very low base.

Take-up in rural and regional Australia now rivals take-up in metropolitan areas (19 per cent compared to 21 per cent) and this has largely been driven by the Government’s higher bandwidth subsidies – with more than 600 communities now connected in the last year or so alone.

Of course, the lion’s share goes to Telstra as the largest provider – 60 per cent of the $158 million committed. So therefore it is fair to ask what Telstra and indeed the other major providers were doing to rollout broadband prior to Government intervention?

Over the past six months many providers have come to me with proposals to roll-out services, including Optus with their Bridge to Broadband, Austar and Unwired with their wireless proposal to offer broadband over pay-TV cables and even infrastructure companies and banks with plans to invest in infrastructure.

Telstra was a late entrant into the debate with its plan to ‘hotwire’ the nation, an 11 th hour proposal that has received a good deal of publicity.

Telstra’s proposal

Telstra proposed a $5.7 billion network upgrade, the cost to be shared with Government, conditional upon an immediate wind-back of specific telecommunications access and competition regulation and abolition of telco specific regulation within three years.

Rather than adopt this approach, the Government has pursued the approach that has been proven to deliver benefits to consumers:

• Allowing the market to compete and deliver services in commercial areas of the market;
• Investing taxpayer’s dollars responsibly- and only doing so in response to market failure;
• Not picking technologies; and
• Not picking any particular provider.

We want to encourage competition in the market for non-commercial areas, not just competition for the market which is what had been proposed.

However, looking at Telstra’s proposal there do seem to be some similarities with debates that have occurred in the US in recent years. It is worth noting two key differences between the US and Australia.

• In the US the telecommunications companies face widespread competition from pay TV companies who own an alternative cable network passing most homes; and
• There has been major structural intervention in the US in the 1980s – similar intervention has never occurred here.

These two differences mean the US is a very different market in which to debate the appropriateness of interventionist telecommunications regulation.

It is not as if we are blind to the importance of ensuring that Telstra must be able to compete effectively. We have specifically applied a model of operational separation that was not too onerous on Telstra.

We want Telstra to keep investing. We want Telstra, or other companies, to use the provisions in the Trade Practices Act to obtain regulatory certainty. Moreover, as part of our reforms the ACCC will be explicitly required to have regard to the risks associated with new network investment when setting access prices.

Telstra are yet to demonstrate what the current regulatory regime is restraining them from doing. We are confident that none of the regulatory changes proposed will prevent Telstra from innovating and investing where it is in their commercial interest to do so.

Moreover, as the market in telecommunications evolves, so too should regulation.

There will be opportunities going forward to consider how the USO should be provided and by whom, what price controls should apply after the next three years and whether it is necessary to maintain telecommunications specific regulation.

Much of this will be dependent on how effective the new framework is and how a fully privatised Telstra and its competitors respond over the next few years.

Telstra’s value

Finally, I will make a few observations about the so called impact of regulation on the sale. Of course, the Government does not give advice or comment on the share price or value.

However it is worth pointing out to commentators speculating about the effects of regulation yet again that operational separation was tailor made to suit Telstra’s business structure and had been substantially agreed with Telstra’s senior management at least on the non-price issues.

It was designed to minimise costs and risk to Telstra’s legitimate business and, I believe, it will still have that outcome. Greater transparency and efficiency between its business units can only improve Telstra’s competitiveness.

Telstra still enjoys the benefits of owning the legacy copper network. Copper has proved to be very resilient, its death knell has been sounded many times but it fights on.

ADSL2+ technology allows speeds of up to 15 mega bits per second to be delivered over copper and new Australian technology is breaking ADSL’s distance barrier allowing broadband to be delivered up to 20 km from an exchange.

We should also not forget that Telstra will qualify for a substantial share of the subsidies included as part of the Connect Australia package. In short, Telstra is hardly a dud.

No sale, no deal

But all of these arguments will sound a bit hollow if the Government’s longstanding and long stymied objective of eventually selling our remaining share in Telstra is resisted. To those criticising the Government’s substantial Connect Australia package or holding out for more, I issue some timely advice.

Continued and enhanced investment in telecommunications services in rural and regional Australia will be substantially boosted by the passage of the sale legislation through Parliament. No sale, no deal. That is the political reality. So I would urge those questioning the proposal to remember that services in this country have only improved the less we have owned of Telstra. Previous tranches of the Telstra sale have allowed us to invest heavily in services.

I believe Connect Australia can ensure all Australians enjoy 21 st century telecommunications both now and into the future. This should give the doubters both the comfort and the confidence that in telecommunications no Australian should be left behind.