Ministers for the Department of Communications and the Arts

The Hon Paul Fletcher MP

Previous Parliamentary Secretary
to the Minister for Communications

CommsDay Melbourne Congress

7 October 2014


Last week the Vertigan Panel released its report on future regulation of the broadband market in Australia.

While worded in appropriately bureaucratic language the report makes one thing very clear: competition was the first casualty of Labor's NBN policy.

Obviously the second casualty was the public purse, and the report has a bit to say about that as well.

In a year when CommsDay is celebrating its twentieth anniversary – something for which I offer my hearty congratulations – it is particularly timely to reflect on the importance of competition in telecommunications.

Today I want to look first at the priority given, rightly, to competition in telecommunications and broadband policy over the last twenty years; next at how the Rudd-Gillard-Rudd Government compromised on competition through its NBN policy settings; and thirdly talk about the directions the Abbott Government is taking to restore competition to its central importance as a policy goal.

But we need to be clear – there are some difficult trade-offs required, and in some key areas the previous government's actions mean we do not have the degrees of freedom we would like to have. So the road back to greater competition, at least in fixed networks, may take some time.

Competition: the priority in telecommunications policy for twenty years

Just twenty five years ago, if you wanted the phone on at home, there was one place to go – Telecom Australia. If you placed an order, it could easily take you up to six weeks to get connected. If you didn't like it, tough – there was no alternative provider.

A long distance call would cost you 60 cents a minute or the equivalent of $1.16 a minute in today's dollars. Today Telstra charges 25 cents a minute for any long distance call, capped at $3 for the first three hours.

The comparison for international calls is even more telling: in 1989 it cost $3.69 a minute for a call to the UK (expressed in 2014 dollars); today Telstra will charge you 21 cents a minute, or you can get a $15 a month pack which gives you unlimited international calls.

We should never forget that all of the hundreds of pages of legislation and regulations come down to this above all else: how do we best serve the customer and give him or her the most modern and efficient telecommunications and broadband services, at the lowest possible prices, and with the highest possible levels of service and customer convenience?

This is the idea encapsulated in the words of the statute: "the long term interests of end users."

And it was the recognition, twenty five years ago, that we were a long way from meeting these objectives, which began a comprehensive reform process in Australian telecommunications.

We had the 1989 Act, the 1991 Act, the granting of the second fixed line licence to Optus, the granting of the second and third mobile licences to Optus and Vodafone, the ballot which gave people a choice of long distance provider for the first time, and subsequently the 1997 Act and the full liberalisation of communications with effect from 1 July 1997.

Looking back on the last twenty years, competition has delivered profound benefits for Australians. The story is particularly compelling in the mobile sector– where we have had at various times four, and today three, vertically integrated mobile network operators, competing with extraordinary intensity.

Start with take up. In June 1996 there were 3.6 million mobile services.

By June last year, there were over 31 million mobile services in operation.

Next look at the prices customers pay for their mobile services. In the 15 years from 1997 to 2012, the cost of mobile calls fell by half.

Perhaps the most important benefit competition has delivered is the rate at which the latest technologies are rapidly introduced.

Look at the latest iteration of mobile: in the two years to 2013 smartphone penetration has increased by around 34 per cent. And over that same period data downloads over smart phones increased by 453 per cent.

There are clear public benefits from the uptake of the latest technologies. Deloitte Access Economics estimate that the current wave of mobile technologies will result in productivity benefits to the Australian economy worth $11.8 billion over the period 2013 to 2025.

But without competitive pressure we would be much less likely to get these new technologies – or at least to get them quickly.

One illustration of this point is that Telecom New Zealand persisted with its increasingly elderly analogue AMPS network until March 2007. It got away with it because the market was simply less competitive than Australia.

In the fixed market, competition has similarly delivered benefits – but not of the same magnitude.

With the principal exception of the Optus HFC rollout, we have not seen significant examples of new fixed line networks being built to compete with Telstra.

Even so, there have been some competitive bright spots over the years, such as competitors like Optus, iiNet, Internode and more recently TPG delivering innovation in fixed broadband services. It was thanks to the access regime, and the willingness of new entrants to invest, that Australians first received access to ADSL2+, naked DSL and VoIP.

Rudd-Gillard-Rudd Government Compromised on Competition

The intense debate in the last term of the Howard Government about how to upgrade fixed broadband triggered Labor to seek to differentiate itself with the broadband policy it released in March 2007 – which proposed a $4.7 billion public contribution towards a 12 Mbps network to be built in conjunction with the private sector.

As history shows, once in government Labor could not execute on its policy. By early 2009 the Rudd Government had been forced to exclude Telstra from the competitive selection process – and had a gaping political problem it was desperate to fill.

Labor solved its political problem very effectively with a "shock and awe" strategy of announcing a $43 billion fibre to the premises network.

But while the FTTP NBN achieved the Rudd Government's short term political goals – it was certainly an 'announcable' – as public policy it was atrocious.

Here is what eminent former public servant Bill Scales AO had to say in his Independent Audit of the NBN Public Policy Process released in August this year:

…the public policy process for developing NBN Mark II was rushed, chaotic and inadequate, with only perfunctory consideration by the Cabinet…There was no business case or any cost benefit analysis, or independent studies of the policy undertaken, with no clear operating instructions provided to this completely new Government Business Enterprise, within a legislative and regulatory framework still undefined, and without any consultation with the wider community.

The unfortunate legacy of this chaotic process is what the Abbott Government is forced to deal with today. Let me highlight several of the serious, long term consequences of these inauspicious beginnings.

First, a politically motivated network design was chosen which was slower and more expensive to roll out than a more rational choice.

Why did the Rudd Government announce speeds of 100 Mbps, not 80 Mbps or 50 Mbps? Well, 100 is a nice round number and sounds lovely in a media release.

The more rational approach would be to understand what benefits we are seeking to deliver with higher speed broadband, what speeds are required to deliver those benefits, and then choose a network design which most rapidly delivers those benefits.

As the Vertigan Review has confirmed, Labor's politically driven approach resulted in a network that was vastly more expensive than it needed to be.

The cost benefit analysis conducted as part of the Vertigan work found that the Coalition's multi-technology-mix NBN has net economic and social benefits of about $18 billion in today's dollars, compared to a baseline in which there is no further rollout of superfast broadband.

Measured on the same basis, Labor's FTTP NBN has net benefits of about $2 billion. This difference arises because the multi-technology NBN can be delivered more quickly (enabling benefits to be realised sooner) and requires less upfront investment (increasing net benefits).

Second, the implementation strategy was very risky, and I argued in as 2012 speech:

"…to build three brand new networks using brand new equipment and the very latest generation technology to pass almost fourteen million premises by 2025; to do so with a brand new company, established from scratch with no existing track record; to force some ten million households off their existing network onto the new network; and incidentally to underpin all of this with brand new billing systems, operational support systems, customer support systems and all of the other IT apparatus of a huge telecommunications enterprise.

Similar points were consistently made by then Shadow Minister Malcolm Turnbull and others in the Coalition taking an interest in these issues – and Bill Scales in his recent public policy audit also highlighted this issue.

NBN Co was not fit for purpose. It was a start‐up company given a job that only a well‐functioning, large, and established telecommunications company would have been able to undertake in the allotted timeframe.

As Malcolm Turnbull pointed out in a recent speech, what we have discovered since coming to government is that in fact in Opposition, if anything, we "underestimated the depth and breadth of the problems we would uncover inside NBN Co."

Amongst the things he mentioned that we were surprised to discover, upon coming to government, were:

  • NBN Co didn't know to a level of detail beyond the nearest million how many premises there were in Australia, or how many it needed to serve for the project to be finished.
  • the address database NBN Co was using was so unreliable that the actual number of houses and businesses in an area was on average 15 per cent fewer than the number in the database.
  • The NBN Co Corporate Plan had underestimated demand for the NBN in rural and remote areas by a factor of 2 to 3 - meaning the company needed to connect up to 600,000 users in these areas not 230,000.
  • The company had built its BSS/OSS environment - the complex IT systems which allow the network to be managed, faults to be logged, new services provisioned, and billing records kept - assuming no fixed access technology except fibre would ever need to be supported. It had also made choices which severely limited the IT environment's scalability – a remarkable oversight if your ambition is to have every premise in Australia as a customer.

While these are all very serious consequences of the chaotic and rushed public policy process, in my view the single most serious consequence of Labor's approach was the damage it did to competition.

Let me highlight some of the major errors.

Paying existing competitors to exit

First, Labor arranged for Telstra and Optus to be paid to exit the market – that is, to cease using their HFC networks to compete in the market to serve residential and small business customers with broadband services. These arrangements would ordinarily breach the Competition and Consumer Act, so Labor amended the law to permit them.

The focus of telecommunications policy for twenty years had been to stimulate the building of new networks to deliver increased competition – so called 'facilities-based competition.' The Rudd-Gillard-Rudd Government specifically reversed direction on this policy – it was now paying competitors to withdraw network facilities from the market.

Specific restrictions on competitive entry

A second measure Labor took which was damaging to competition was to legislate new provisions which made it much harder for competitors to NBN Co to enter the market to provide so-called 'superfast' – that is, over 25 Mbps – broadband services to residential and small business customers.

There are two key restrictions: first, if you do so you must offer a layer two bitstream service (that is, a wholesale service similar to what NBN Co offers); and secondly, you may not sell to retail customers, you can only sell on a wholesale basis to retail service providers.

The Vertigan Report contains an apt summary of the competition-chilling effect of these provisions:

In practice…the rules greatly diminish the commercial incentives to enter wholesale markets because none of the considerable efficiencies of vertically integrated operations are available, while at the same time entrants face almost certain competition from a taxpayer-funded provider.

Competitive Consequences of Rural Model

A third impediment to competition was the strategy implicit within the NBN of granting a national monopoly and requiring that the company charge uniform wholesale prices in both metropolitan and regional and remote areas – that is, regardless of whether the customer is in an area that is low cost to serve or high cost to serve.

As the Vertigan Review highlights, this has significant implications for competition, with the panel noting that it is

…mindful of the distortions uniform price requirements impose, including in terms of preventing the emergence of competition in regional areas (where prices are forced below cost) and encouraging potentially inefficient competition in metropolitan areas (where uniform prices might be above costs.)

Of course, there is nothing inherently wrong with subsidies being provided to fund services in areas where a private provider cannot profitably operate. The Coalition has always stood up for the communications needs of those in regional and remote Australia, and always will.

But history teaches that you get much better outcomes if subsidies are clear and transparent; the arrangements which Stephen Conroy has left us with are as opaque and byzantine as it is possible to imagine.

Chilling of private sector investment

While NBN Co's rollout proceeded at a snail's pace, private sector providers responded rationally to the economic and legal barriers which had been put in their way. We have seen a distinct chilling of private sector investment – and a reduction in both competitive vigour and service availability as a result.

One good example is that, around the country, many customers today find it impossible to obtain a new DSL service – because the exchange has run out of ports. It is understandable that Telstra and other commercial providers of DSL services are often reluctant to invest in additional DSLAM capacity. The legacy of Labor's policies is that they have no certainty as to how long they will be able to provide continued service, and in turn therefore as to whether they will be able to get a commercial return on their investment.

Weakening of Competition in Mobile

A significant by-product of Labor's misguided approach to NBN was the lack of policy attention given to competition in the mobile sector.

In the auction of 700MHz 'digital dividend' spectrum in 2013, Senator Conroy set an unprecedentedly high reserve price for the auction, $1.36 per megahertz per head of population - much higher than the price paid in similar auctions in other countries. The immediate result was that Vodafone, the third mobile operator, chose not to bid.

In setting out to make as much money as possible from the auction, Labor got things the wrong way round. The primary goal should have been the efficient allocation of this spectrum, to support a competitive market in mobile broadband.

But Conroy's mishandling of the auction left that objective at serious risk. By leaving some spectrum unsold, there is less mobile broadband capacity available - and we will hit mobile broadband bottlenecks more quickly than if all the spectrum were in use.

By setting a reserve price that the smallest mobile operator could not justify paying, Conroy markedly reduced competition in the market for 700 MHz mobile broadband services.

Restoring Competition as a Central Policy Goal

I have argued that competition is of the first importance as a policy goal in telecommunications and broadband; and that of the many serious consequences of Labor's rushed and chaotic policy process for NBN, the most serious was the compromising of competition.

Which brings me to the third main area I want to talk about this morning – what is the Abbott Government going to do about restoring the centrality of competition?

I want to talk about a number of priorities – some shorter term, some inevitably longer term.

Clear Articulation of Policy Goals – and Trade-Offs

The first thing you are seeing from this government is a clear statement of our policy goals in broadband and communications – including a clear recognition of some of the difficult trade-offs we face.

As Malcolm Turnbull said when announcing the Coalition's broadband policy in 2013, if it was up to us, we would not have started from here. Thanks to the policy mess the Coalition government has inherited, we face numerous constraints.

To take one example, the Vertigan Review recommended that there should be a clear, explicit, on-budget subsidy for the rural and remote telecommunications. That is straight from the economic textbook and perfectly sound.

But taxpayers have already been compelled to make a very large financial commitment to the NBN, at a time when the Australian Government is under great pressure to get its spending under control. So the current macroeconomic environment simply does not make it feasible to consider additional – and ongoing – subsidies out of the budget.

Another clear trade-off arises when it comes to the question of whether TPG – or any other operator – should be permitted to build fibre optic networks to apartment buildings so as to serve residents of the building. The first best position is clearly not to have legal restrictions on market entry.

That being said, regardless of the NBN policy framework, there would always be a policy question about whether it is a good idea to permit a single carrier to obtain exclusive control of the access connection to every apartment in a particular block.

Given the way that vectored DSL works, the carrier wholly controls the line between the DSLAM in the basement and the individual apartment. If that technical control is reinforced by legal control – an exclusivity agreement with the body corporate – then that obviously means there is the capacity for the carrier in question to exercise market power in relation to that building.

There is also the fact that we came to government with a commitment to complete the NBN, and industry participants have taken substantial business decisions in reliance on that commitment – particularly the many participants who have decided to operate as retail service providers rather than vertically integrated businesses. For this reason the Minister recently announced his intention to make a licence condition that will apply to TPG's carrier licence in relation to the operation of its planned services to apartments.

The Vertigan Report specifically acknowledges the practical constraints – and costs – the Government faces in reducing market regulation, as a consequence of the complex rules and burdensome financial commitments left by Labor.

Practical constraints, including the characteristics of particular geographic markets, can prevent market-based arrangements achieving fully desirable outcomes. So too can past decisions by governments and regulators, as those decisions leave a legacy which cannot be simply erased nor even necessarily overcome at reasonable cost. Any move to sustainable and efficient arrangements must recognise these constraints.

The Government's detailed response to the Vertigan Review will come later in the year following decisions by cabinet. But the suggestion in the Review that there should be a national broadband objective, established by legislation, certainly goes to a key weakness of the arrangements we have inherited.

Labor never made it clear exactly what policy problem it was seeking to solve with the construction of the NBN in its chosen specification. Lack of clarity of objective led to lack of clarity in the way the policy was implemented.

Look for Ways to Reduce NBN Co's Dominance Over Time

One of the Coalition's priorities, over time, is to look for opportunities to wind back NBN Co's dominance. Are there markets NBN Co does not need to be in? Does its integrated structure make it more dominant than if it were split up into different companies?

The Coalition signalled that we were open to considering these questions in the policy we took to the 2013 election.

For example, in relation to the NBN satellites, we said:

We will consider opportunities to realise value from the satellite contract by seeking private operators or owners for the NBN satellite service, if this enables price and service levels for regional consumers to be improved.

When NBN Co carried out its Strategic Review at the instigation of the government in late 2013, it showed only limited enthusiasm for exploring such avenues, and repeated that position in the Fixed Wireless and Satellite Review which reported earlier this year.

The Vertigan panel has taken a different approach to this question than NBN Co. It recommends that NBN be disaggregated into competing business units, initially structured according to the company's existing and planned network technologies. This might mean, for example, that there was a standalone fixed wireless business, free to compete with the fixed line broadband network.

The Government in its initial response has made it clear that while such disaggregation cannot be ruled out, now is not the time. Given our priority on successfully executing the roll-out, we do not want to distract the management team with managing the complexities of a break-up.

Another recommendation is to end the existing arrangements where NBN Co builds new network in greenfields developments for 'free'. Instead, the Vertigan Panel recommends the creation of a competitive market for greenfields connections. The Government intends to consult with industry with a view to finalising reforms in this area that redress competitive neutrality concerns.

Execute Competently on the Broadband Rollout

Much of what I have talked about concerns longer term priorities. The most pressing current competition priority is to execute competently, and as rapidly as possible, on the NBN rollout.

As I have articulated and as the Vertigan Review reminds us, in numerous ways the model we have inherited involves substantial compromises when it comes to competition. The justification offered by the designers of the model is that it delivers a uniform wholesale network, meaning all retail service providers are competing on a level playing field.

For as long as the network reaches only a small percentage of Australians, that justification is only theoretical; to make it real we need to get the network rolled out as quickly as possible.

At the end of September 2014, NBN Co had passed a total of over 700,000 premises across all technologies. This is more than double the 344,000 premises that had been passed when the Coalition took office in September 2013.

Additionally NBN Co has today activated NBN connections at more than 255,000 premises across all platforms. By contrast, only 88,000 premises – a third as many – had been activated at the time of the election.

So NBN Co has significantly picked up its rate of rollout in the last twelve months. But of course there is a long way to go and the roll up rate needs to ramp up very substantially; before that can happen we need to finalise the negotiations with Telstra and get the new model in place.

Leverage NBN Investment to Facilitate Competition

Another shorter term priority is leveraging NBN investment to facilitate competition. Under its fixed wireless rollout, NBN will build some 2,700 base stations around Australia. There is a real opportunity to leverage this public investment to stimulate competitive entry by mobile network operators into markets that they otherwise could not make a business case to enter.

One of the non-Telstra operators has provided directional cost estimates of building a new mobile base station in a rural area from scratch. The civil works cost about 60 per cent; in addition backhaul, when converted to a capital cost equivalent, makes up some twenty per cent of the cost.

These numbers would suggest that the incremental cost to a mobile network operator of building – and operating – a base station in a town which has an NBN tower should be considerably lower than if it is required to build from scratch.

It is not just the civil engineering costs where there could be savings.

Under the previous government, it seemed NBN Co had little appetite to sell backhaul to mobile network operators. We have given different guidance to NBN Co, and its October 2014 product roadmap shows that NBN Co is presently consulting with industry on its proposed 'cell site access' product.

Where a mobile network operator collocates on an NBN fixed wireless tower, and that tower is connected by NBN fibre, then NBN Co will have a backhaul product available for purchase. If NBN is using microwave backhaul, the likely model is that NBN will allow the mobile network operator to install its own microwave equipment on the tower.

Other Measures to Stimulate Mobile Competition

In addition to facilitating the availability of NBN towers, the Abbott Government is taking other measures to stimulate competition in mobile – with a particular focus on regional and remote Australia.

During the election campaign we committed to invest $100 million in fixing mobile black spots in small communities, along major transport routes, and in locations prone to experiencing natural disasters – as well as areas with unique coverage problems such as high seasonal demand.

This investment is expected to leverage at least an additional $100 million from parties bidding in a competitive selection process, due to get underway in coming weeks. We expect that some 250-300 new mobile base stations will be funded around the country.

The rules of the process will require the mobile network operators to specify locations at which they would propose to build or upgrade base stations. The locations must be drawn from those nominated by members of the public. Some 6,000 locations were nominated before nominations closed recently.

Today I am releasing the list of locations in the database.

It is important to understand that this does not mean there are 6,000 locations where a new base station is required.

For one thing, in many cases a single base station will be capable of covering multiple locations – as around three quarters of the nominated locations are within a few kilometres of another nominated location.

In addition, to nominate a location you were not required to give any proof that it does not have coverage – so it is likely that at least some nominated locations actually do have coverage already.

In fact, when we compared the nominated locations to the carriers' existing coverage, by asking how many of them had at least some coverage in a circle of 10 kilometre radius around the nominated location, we found that over 80 per cent of locations had coverage to more than 30 per cent of that area.

So being on the list of nominations is a starting point: the mobile network operators will then select which locations they put forward as sites for base stations to be funded under the programme, and they will need to demonstrate exactly how much new coverage will be provided by that base station.


Let me conclude where I began: with the observation that competition has delivered great gains to Australian telecoms users, and to the industry itself.

Sadly under the Rudd-Gillard-Rudd Government the pursuit of competition in broadband was downgraded as a policy objective.

That needs to be corrected – and despite the constraints we have inherited, that is the direction the Abbott Government wishes to pursue.

It cannot be done overnight – but the Vertigan panel has given us a very good roadmap for future policy directions in broadband and telecommunications in Australia.

1 Prices Surveillance Authority Report 14, Inquiry in Relation to the Supply of Telecommunications Services, 1987, p 29. This was the 'day' rate for a call for a distance of between 50 and 85 km.

2, downloaded 2/10/14

3 Prices Surveillance Authority Report 20, Inquiry in Relation to the Supply of International Telephone Services by the Overseas Telecommunications Commission, 1989, p 28;, downloaded 6/10/14

4 AMTA, 'Ten Years of GSM in Australia'

5 ACMA Communications Report 2012-13 p 8

6 ACCC telecommunications report 2012-13 p 112

7 ABS (2013), Internet activity:

8 Deloitte - Mobile nation: The economic and social impacts of mobile technology


10 Bill Scales, Independent Audit of the NBN Public Policy Process, August 2014, p x.

11 Paul Fletcher speech to Kickstart Conference, February 2012

12 Bill Scales, Independent Audit of the NBN Public Policy Process, August 2014, p x.

13 Malcolm Turnbull, Speech to Corporate Turnaround Conference, 'NBN On The Right Track – But Real Risks Remain.'

14 Vertigan Panel, National Broadband Network – Market and Regulatory Report, p 16

15 Coalition Policy Document: "Fast Broadband and an Affordable NBN"

16 NBN Co, Fixed Wireless and Satellite Review, pp 50-51,

17 Vertigan Panel, National Broadband Network – Market and Regulatory Report, p 11.

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