Telstra Deal Locks In NBN


Regular New Matilda readers will know I am a supporter of the National Broadband Network and a grudging admirer of Communications Minister Stephen Conroy’s ability to kick heads and get deals done. This week, he added another achievement to his impressive ministerial record with the formal signing of a deal with Optus and Telstra to move the NBN one step closer.

Yesterday’s announcement of a three-way deal between the National Broadband Network Company (NBNCo), Telstra and Optus is a crucial milestone for this government. Politically, it’s a desperately needed win amid the orgy of media coverage over the anniversary of Kevin Rudd’s replacement by Julia Gillard. Economically, it’s equally important, suggesting that the NBN will now almost certainly proceed. In policy terms, it’s a major and welcome reform.

Indeed, unusually for this government, the policy implications are far more important than the media spin. This deal is the penultimate piece of the puzzle in the structural separation of Telstra.

The term "structural separation" is often bandied about, but rarely defined. The key issue here is the legacy of repeated policy failures by successive governments, going back to Kim Beazley’s time as the communications minister in the Hawke government. As Australia’s telecommunications infrastructure modernised, little was done to address the market power of Telecom, the old publicly owned monopoly that built and owned the copper wires travelling to every Australian home.

When John Howard privatised Telstra in 1997 the result was a vertically integrated behemoth. Not only was Telstra the largest player in the retail market, it was also an aggressive and ruthless monopolist in the wholesale market. Those of us who have had to wait weeks or even months to get ADSL connected to our homes by a non-Telstra internet service provider will understand the havoc Telstra was able to wreak with its market power.

For years, broadband in Australia lagged behind our international trading partners because Telstra refused to play nice with its competitors, or the government. Under former CEO Sol Trujillo, Telstra had proposed building its own broadband network, but only on the condition that it didn’t have to share the infrastructure with anyone else. Even the Howard government baulked at this power-play, backing the ACCC in an increasingly bitter legislative battle against Telstra’s anti-competitive practices.

When Labor gained office in 2007 with a policy of building a publicly owned fibre-to-the-node network, there was much speculation about how it would manage to roll it out. Trujillo and his henchman Phil Burgess were barnstorming around the country campaigning against the evils of big government, and Labor’s campaign costings of around $4.7 billion looked inadequate for the scale of the job.

So when the government announced tenders to build the NBN, Telstra refused to put in a serious bid, instead submitting a short memo as a way of flexing its muscles. The reasoning was that the government needed Telstra’s ducts, tubes and copper wires to build a new network, and that Telstra could always threaten to compete against a new network with its considerable resources. The effect was a slap in the face for Senator Conroy, who eventually declared the bid "non-conforming".

The bankruptcy of Trujillo’s strategy was vividly exposed in 2009 when Conroy decided to make an end-run around Telstra with his decision to build a publicly owned fibre-to-the-premises network. Not only would the government build its own network, but it would also legislate if necessary to break up Telstra. The idea of cutting Telstra out of any deal and going it alone transformed the broadband debate, and quickly brought Telstra to the negotiating table. If the government needed Telstra’s pipes and conduits, it was equally apparent that Telstra needed the government for its commercial survival. Sol Trujillo was already back in the US by then, replaced by the kinder and gentler public persona of David Thodey, who was charged with a mandate to end the war with the government.

The end result was yesterday’s announcement, in which the government, via its wholly owned National Broadband Network Company, acquired Telstra’s existing cables, copper wires, pipes and so on. While the deal has been in the works for more than a year, yesterday’s so-called "Definitive Agreement" means that the government and Telstra have agreed to the $9 billion deal to "provide for the reuse of suitable Telstra infrastructure and for Telstra to progressively structurally separate by decommissioning its copper network and broadband HFC network capability during the NBN".

NBNCo also picks up a handy subsidiary network of Optus coaxial cable customers for a "mere" $800 million. It makes the rollout of the NBN much cheaper and easier, because one of the largest costs of construction is actually the digging of trenches and the laying of new pipes and cables. In this context, the $11 billion shelled out yesterday is a wise investment.

Business Spectator’s Glenn Dyer has a useful round-up of the analysis and commentary on the deal — and it’s largely positive. For instance, veteran telco analyst Paul Budde told the Herald Sun that "the massive capacity of the network, its ubiquitous nature and the low cost to end users will see a shift in the national economy towards a digital economy." Columnist John Durie points out in The Australian that the net result of Telstra’s privatisation and eventual lease-back of the copper network means that the federal government has come out ahead: "The government has sold an ageing monopoly network in exchange for a new one and arguably is still in front."

The deal means it will now be extremely difficult for an incoming Abbott government to unscramble the NBN egg, which means that Stephen Conroy is well on his way to finally achieving structural separation of telecommunications assets in Australia. Careful reading of the detailed business case for the NBN reveals that the government will in time own a nation-spanning asset of huge worth to the broader economy in terms of productivity growth.

The political significance of the NBN should not be understated either. When Tony Windsor threw his weight behind Julia Gillard to form a minority government last August, he cited the NBN’s importance to regional Australia as his key reason. We have another two years of the Gillard Government before we return to the polls. By then, the NBN will be well on its way to construction. Whatever else happens in the next two years, Labor will be able to point to a genuine nation-building achievement.


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Ben Eltham is New Matilda's National Affairs Correspondent.