rudd stimulus package, page-12

maybe you should read this rather than buying the TLS argument...Singtel for example is actually financially stronger than TLS


Minister must read between the lines of Telstra claims

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Paul Kerin | December 08, 2008
Article from: The Australian

TELSTRA wants Communications Minister Stephen Conroy to think he faces a Hobson's choice on the National Broadband Network: Telstra or nothing. Nonsense!

Indeed, Conroy should be thinking, "anyone but Telstra".

I've long argued against spending $4.7 billion of taxpayers' dollars on a "next generation" (fibre-to-the-node or premises) NBN.

But dumping this fundamental election commitment would be political suicide.

Claims that the NBN process is "in tatters" because Telstra didn't lodge a formal proposal by the November 26 deadline are ridiculous.

The tender was an outstanding success. Conroy received five formal tenders and a "letter" from Telstra chairman Donald ("Grouchy") McGauchie. Singapore's recent NBN tender attracted only two bids but achieved an impressive outcome.

Government should only promote an NBN if it benefits citizens, not telcos. Citizens care about price, speed and availability.

While many bid specifics are shrouded in confidentiality requirements, we can infer much from bidders' key characteristics: capabilities, funding, access to enabling infrastructure and incentives.

The first three are necessary for the public interest to be served, but insufficient -- incentives are what really matter.

While Telstra stresses the "necessaries", it has no advantage on the first two, shouldn't have an advantage on the third -- and is streets behind on the fourth.

Telstra and its supporters want us to think that building the NBN is so hard that only it can do it. Kevin Morgan -- whose self-description ("independent telecoms consultant") is oxymoronic -- labelled my recent assertion that network rollout "isn't rocket science" an "extraordinary claim". That's drivel.

Most network rollout work is mundane stuff like creating like trenches and ducts ("passive infrastructure"), or accessing existing ones, and running fibre (a commodity) through them. Anyway, telcos don't build networks.

They hire specialists such as Alcatel-Lucent and Ericsson. Telstra hired Ericsson to build its Next G network. Ericsson delivered and deployed access equipment and core infrastructure and provided design, installation, integration and project management services. Sure, telcos work closely with the hired help, but anyone can hire them.

Yet Grouchy's letter cites Next G as evidence of Telstra's "outstanding" network development capabilities and Telstra's plan to hire Alcatel-Lucent to build the NBN as if that's a unique advantage.

Telstra has no experience in creating no-conflict open-access next-generation networks. Axia specialises in it -- examples include Alberta's SuperNet and French regional networks. It also led the OpenNet consortium that won Singapore's NBN tender. Its key OpenNet partner is Singtel -- parent of Optus, another bidder.

Telstra also has no experience in public-private partnerships, the Government's preferred NBN model. It despises them. Axia has multiple PPP experiences.

Telstra's scare campaign regarding all bidders' finances is disgusting. Grouchy's letter trumpeted Telstra's A credit rating.

Subsequently, he publicly questioned all bidders' funding ability "in these very troubled times". He denigrated Optus's bid on ABC television, saying "they can't fund it, they've got no money".

Telstra issued an appalling media release entitled "Will Singtel cough up for the NBN?" Here are the facts. While Telstra's S&P credit rating is A, it's inferior to the A+ that Singtel and Optus hold. Grouchy knew Conroy requires parent company guarantees anyway.

Telstra's gearing ratio is 55.5 per cent, Singtel's 25.8 per cent. Telstra's interest cover is 9.7 times, Singtel's 18.7. Singtel's market capitalisation exceeds $40 billion and its 55 per cent shareholder Temasek, the Singapore Government's investment house, has $190 billion in assets and a AAA rating.

Therefore, a relevant question would be: how would the already highly geared Telstra fund an NBN? No wonder Telstra proposes investing only $5 billion -- half what Optus committed.

Telstra's only advantage -- passive infrastructure access -- simply reflects past governments' failure to split up Telstra pre-privatisation. But the legislation guarantees rivals access at a price. At access prices disclosed in an ACCC expert witness statement, an FFTN NBN would pay over $125 million annually to access ducts between Telstra exchanges and about 70,000 nodes.

Creating new ones would cost billions. However, as the ACCC bases access prices on incremental cost and the expert witness attests that most Telstra ducts have sufficient excess space for rival cables, the Government should virtually eliminate annual fees. A bigger access concern is Telstra stalling. The NBN provider will need certainty that this won't happen. Conroy should go overboard in legislation to give certainty on low access prices and quick access. It must give Telstra no recourse, Otherwise, it will be worthwhile Telstra suing just to delay rollout.

Telstra's integrated structure gives it dysfunctional incentives.

Telstra, like all bidders, promises to provide open and equal access. But the real issue is: at what price? Four bidders have incentives to charge much lower access prices than Telstra because they'll sell wholesale NBN access only and not compete at retail.

Nor will they sell substitute wholesale and retail products over other networks (ADSL over copper and cable).

In contrast, Telstra would want higher access prices, for two reasons. They weaken wholesale customers' ability to compete against it downstream. And they reduce cannibalisation of substitute products. For these reasons, Telstra's incentives to roll out the NBN quickly and drive uptake and ongoing utilisation are weaker.

Therefore, letting Telstra run the NBN works against each thing that citizens care about: price, speed and availability.

That's why the Singapore Government not only required bidders to say they'd provide open access, but ensure they would by mandating the NBN's "effective" structural separation. Singtel's NBN stake couldn't exceed 30 per cent unless it ceased to compete downstream. Thus, open access and structural separation are strong Conroy preferences.

It could be argued that even a non-integrated NBN provider would still price too high -- after all, it's a "monopoly". But citizens care about broadband speed, not which network it is from.

That's yet another reason why Telstra shouldn't run the NBN. If it does, it will continue to face almost no wholesale broadband competition.

If the NBN isn't Telstra, it will face competition from Telstra's broadband over copper and HFC -- and give Telstra serious competition, handing it an incentive to lower prices and improve speed on other networks.

All bidders accept that the ACCC should regulate access prices anyway, unlike Telstra. But no bid is perfect. Conroy's post-tender negotiations are vitally important.

All bidders seek protection against Telstra building its own NBN. This is understandable given that Telstra followed Optus's HFC rollout street by street. But Conroy must not protect against competition, although he should remove the uniform price requirement that accentuates vulnerability.

As NBN costs vary greatly with population density, uniform pricing reduces ability to compete in low-cost areas and therefore actually causes higher overall prices.

All bidders propose switching all copper access lines from exchanges to nodes -- as Telstra proposed previously.

Their rationalisation is that fibre and copper can't co-exist because it causes interference. But many experts claim this isn't true.

The best evidence is that Singtel has promised customers that its copper network and OpenNet's NGN will co-exist.

Conroy should not agree to this proposal.

Paul Kerin, Professorial Fellow, Melbourne Business School, has no relationship with any bidder.