JOHN MENADUE. The NBN and the wholesale/network arm of Telstra that should never have been sold.

Yesterday Malcolm Turnbull , perhaps unwittingly,sheeted home the real responsibility for the NBN debacle to the privatisation of Telstra by the Howard Government.  In his attempt to blame the Rudd government for the current problems, he really let the cat out of the bag.  He said

If you want to look at a country that did this exercise much better, it was New Zealand. What they did was they basically ensured the incumbent telco – the Telstra equivalent – split its network operations from its retail operations and then that network company, called Chorus, became in effect the NBN.’

But the Howard government made sure that we couldn’t go down the same route as New Zealand by separating  Telstra’s network and retail operations.  The Howard government sold the lot together. As a result, NBN had to start again rather than developing out of the network/wholesale arm  of Telstra that would have remained in public hands.

Set out below is a post on this subject which I wrote in January 2016.

The current NBN mess started with the decision of the Howard Government to privatise the whole of Telstra and not just its retail arm. If the wholesale/network arm of Telstra had remained in public hands we would have been well on our way to a successful NBN.

Unfortunately, at Tony Abbott’s urging, Malcolm Turnbull also let ideology take over with the resulting problems of an NBN that is slow, obsolete and expensive.

The confusion and the delay that we have got ourselves into with the NBN can be traced back very directly to John Howard and Senator Minchin when they decided to privatise the whole of Telstra and not just its retail arm. That privatisation was in three stages; 1997, 1999 and 2006.

If there had been ‘structural separation’ with the wholesale arm being kept in public ownership, we would now be well on the way to completing the NBN. But with the wholesale arm of Telstra sold off with the rest of the business, the Labor government had to start again.

When he became  a Minister of Communications  in the Abbott Government Malcolm Turnbull clearly didn’t want good advice on the NBN which would have run counter to his ideological leanings and that of his coalition colleagues. He got rid of all the board directors including sacking Brad Orgill, a director of NBN. Malcolm Turnbull didn’t even consult the board before he acted so rashly. Surely the NBN directors had a lot to offer. Institutional memory doesn’t come cheaply or easily in any organisation.

Brad Orgill who would not have been welcome by the Coalition and the News Group for his investigations into the Rudd Government’s Building the Education Revolution said in an article in the Australian Financial Review  (October 4, 2013)

“Would NBN even exist if earlier governments had not made the grave error of privatising Telstra as a vertically integrated business? No. And for me this is the most galling. The privatisation of Telstra’s wholesale business was clearly a mistake. If its wholesale business had continued as government-owned there would be no need for NBN and replacement of copper with fibre would have been progressively undertaken, as has happened in the rest of the world by an established incumbent operator with substantial advantages in resourcing, access and intellectual property. NBN illustrates the risks of privatising natural monopolies.’

Natural monopolies should remain in public hands. We accept that case for example in respect of water and sewerage. We don’t need competitors laying competing and parallel water and sewerage pipes. Competition is best left to the retail level. So it is with telecommunications where exchanges, cables, wires, poles and the pits of the natural monopoly should remain in public hands to serve the whole of Australia regardless of location or class. Opportunist businesses should not be allowed to “cherry pick” the most profitable parts…

The new chair of NBN, Dr Switkowski has been parachuted in by the Liberal party. He has little experience in roll out of construction projects which must dominate the future of NBN. I wonder what he now makes of the Liberal party nonsense of copper connection from the node to the premises when in a 2009 interview he said:

‘The NBN was an important project and that an all fibre networks is a desirable end point. I think the government strategy of investing in a high speed fibre optic base broadband network is a good one. I think it will make a difference to us as a nation and it will ensure more equity in access to relevant services for all Australians.’(AFR 4 October 2013)

Malcolm Turnbull and the Liberal party have described the NBN as a ‘white elephant on a massive scale”. Initially the Coalition described the NBN as “a dangerous delusion”’ and given us quite exaggerated estimates of cost blow-outs. Whilst the NBN has failed badly to achieve its planned roll-out, it is still on budget at $43 billion according to the retiring CEO of the company.

Yet Rio Tinto has had to write-off over $US35 billion in bad investments over the last five years. More write-offs are likely from its coal investments in Africa. BHP has also written off billions. In the clamour to decry public investment in the NBN, the ideologues, including the politicians and business commentators, chose to scarcely mention the appalling business decisions of Rio Tinto and BHP.

The Labor government was criticised because it has not presented a cost-benefit study of the NBN. But I suggest that this criticism has been a quite conscious device to discredit and hopefully delay and then destroy the NBN. A cost-benefit study may be appropriate for private investments with a life of 10 to 15 years. But the NBN will have a public life of perhaps 50 years or more. How useful is a cost-benefit study in those circumstances?

Brad Orgill has commented that a cost-benefit study would not have been required if the Howard government had not sold Telstra as a vertically integrated telco.

Cost-benefit studies of NBNs have been carried out all around the world and the results have been overwhelmingly favourable There has been almost unanimous agreement that fibre to the premises is the best option. McKinsey reported that the financial case for a NBN was strong. Access Economics and IBM have also reported positively on the productivity benefits to the nation of the NBN.

On balance a cost-benefit study would have been useful if for no other purpose than to silence the politically driven critics. In the Howard years there were 25 enquires into telecoms without any serious progress on structural issues.

John Howard left Australia with a major structural deficit in our budget which many commentators, including the IMF, have highlighted. In the same way, the Howard government’s ideological blinkers about privatisation have put us back ten years in developing a world-class NBN. Malcolm Turnbull has told us that he hopes to get politics out of the issue. But it was John Howard’s ideology and politics above everything else, through the privatisation of a vertically-integrated Telstra that has got us into this predicament. Malcolm Turnbull will be hard-pressed to free himself of the political baggage which he and the coalition carry on this vital project.


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7 Responses to JOHN MENADUE. The NBN and the wholesale/network arm of Telstra that should never have been sold.

  1. Greg Sutherland says:

    And the same principles and demonstrated failure of governance and responsibility can be seen in the NSW power industry disaster.

  2. Dog's breakfast says:

    “Natural monopolies should remain in public hands. We accept that case for example in respect of water and sewerage.”

    Fairly simple really, and I have argued often that this is the principle on which these decisions should rest.

    My only quibble with this Ian is that it goes a bit further back in my memory, which I accept may be faulty. My recollection is that it was a Kim Beazley decision in the Keating (or perhaps Hawke) government which split Telecom up, but not as a network operator and retailer, and that this decision was that Keating was fulminating against at the time. Keating later expressed much disgust over it.

    But you’re dead right, none of that was a problem until it was sold in the way it was. It was always a stupid and ideological position. All those years of Sol Trujillo wasting our time and the governments, waging wars in the media and getting nowhere. As a public utility they could have been rolling this out through the metro areas prior to 2010, fibre to the premises as you would do it if you owned all the ducts and wires. They could be working on completing all the regional areas now, with most already done, and the network, worth vastly more as fibre optics, would have remained in public hands and we could have had a genuine market for retailers.

    Neoliberal economics at its finest, sell everything in public hands without rhyme or reason. The small amount the nation made from selling it has had to repaid in spades to get what is gong to be inferior to what we had. Dumb, dumb, dumb.

  3. Expat New Zealander says:

    I would like to correct an error regarding privatisation of telecommunications in New Zealand. I lived in New Zealand until 1991. This quote is from the wikipedia entry for Spark New Zealand (formerly Telecom NZ), which accords with my recollection: “Telecom New Zealand was formed in 1987 from a division of the New Zealand Post Office, and privatised in 1990. In 2008, Telecom was operationally separated into three divisions under local loop unbundling initiatives by central government – Telecom Retail; Telecom Wholesale; and Chorus, the network infrastructure division. This separation “effectively” ended any remnants of monopoly that Telecom Retail once had in the market. In 2011 the demerger process was complete, with Telecom and Chorus becoming separate listed companies.”
    So structural separation occurred well AFTER privatisation, not before. New Zealand went through the process of breaking up the equivalent of Telstra.

  4. Kevin Dillon says:

    The points re Telstra wholesale – retail split and the Howard era privatisation/small government blindspot are well made.

    But the story isn’t complete without also mentioning Labor’s rejection of Telstra’s mid-90’s offer to build out FTTN nationally – along with Telstra’s request for associated time-bound regulatory relief to do so.

    Net-net there are many models by which the national broadband investment could have been encouraged/carried out.

    In Australia with our comparatively low demand density/overall operator opportunity it is very important to choose the most optimal model. sadly, through shenanigans on BOTH sides of politics we’ve managed to lumber ourselves with the least optimal investment approach.

  5. Eric Hodgens says:

    It looked so good when Kevin Rudd announced it. But without control of the main network it was doomed to trouble – which soon began and has continued till now. So, the sale of the network was the greatest error.

    Trouble is we must have it at any cost unless 5G can compete not only on speed but on cost-effective volume.
    Luck is not the sole prerogative of the Dubbo street which has FTTP. Some in the city have FTTB (fibre to the building). NBN cannot compete with that – not their fibre.

  6. Julian says:

    John, thank you once again for reminding us of this notable stuff-up.
    I despair at Australia’s continuing ability to do this; indeed if this ability was an international competition, we would have to be up there in the medal count.
    Is it really possible that ideology is the single and most obvious explanation for our national tendency to bugger-up things, or is something else happening here ?
    There is any number of brilliant persons in this country, but they don’t feature in the political classes. Perhaps I have answered my own question. Thoughts anyone ?

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