Generating Solutions for Improving Rural and Remote Communications in Australia.

Rural and Remote Communications 7th Annual Conference
Sydney
27 November 2002

Assessing the impact: implications of Telstra’s full privatisation in the bush

About a week ago I received an email that lamented the fact that the Coalition just doesn’t understand that it is not just voice telephony that is important to rural Australia, it is the ability to get online.

Absolutely!

The real measure of the internet’s importance lies in the fact that it goes to the core tool of human development – communication.  It elevates communication to a level never before imagined.  In so doing it creates a platform for human endeavour and development that nothing that has gone before it can match.

It represents the technical core of converging digital technologies.  Internet Protocol is the holy grail of communications.  For these reasons the internet is central to the development of human society for the foreseeable future.

It is this central role that makes access to and use of the internet essential for nations concerned with social advancement underpinned by economic growth.  Those nations with the edge in pervasive internet use will be best positioned for the future.

Labor understands this and this understanding informs our vision for communications in Australia.  Our commitment to fairness and opportunity will see an Australia striving for universal broadband in a way that is inclusive of all Australians, no matter where they live. 

This is the vision against which we judge the Coalition’s performance in Government. In contrast, the Coalition set itself one task and one task only: Privatising Telstra.

Now, sure, there are some token words and ad hoc programs devoted to pacifying the outrage triggered by neglect – a little bit of digital divide over here, a dab of advanced networks over there, a sprinkling of competition policy on top – but nothing that tampers too much with the main game – privatising Telstra.

Privatising Telstra.  This privatisation agenda has for seven years been all-encompassing.  There was no real consideration of the information revolution that was taking place, or where the opportunities lay for Australia.  To this day the array of disjointed programs and grant schemes are still driven by the need to create the pre-conditions to sell off more of Telstra.

And don’t be fooled by any announcements about delays.  Privatisation is the still clearly the main game.  The Minister has made that very clear.  Even the recently released Estens Report was an exercise of codifying the conditions by which the Coalition would give itself permission to privatise. 

We even know what these conditions are.  In Senate estimates hearing last week, where the opposition has a chance to ask the Minister directly about policy and programs, Senator Alston outlined the two, yes, only two, recommendations that he thought, if addressed, would constitute reasonable grounds to proceed.

I asked the Minister if the assessment of regional telecommunications in the Estens Report in gave comfort to the Coalition in its plans to privatise Telstra. The Minister replied:

I think, overall, it is a very positive assessment, but it does involve 39 recommendations and obviously they have to be addressed.  But the main two that relate to present performance, which are the licence condition [for 19.2kbps] and the poorly performing exchange service areas, are the ones that I think are eminently doable, and from then on most of it is really about the future.  The future does not really relate to whether present service levels are adequate. The future relates to how you might ensure they continue to be adequate.  Therefore, a lot f those recommendations have to be considered separately from out pre-condition [for T3].

When pressed, the Minister confirmed that only two recommendations arising out of the Estens Inquiry are relevant to the Governments decision to privatise the remainder of Telstra.  These are recommendation 2.9, which relates to Telstra being required to come up with a strategy to address the worst performing Exchange Service Areas, and the recommendation that the Government make it a carrier licence condition that Telstra provide 19.2kbps minimum speed for dial up internet connections. 

It should be noted that the Coalition has already said this is their new standard and have been offering subsidies through Telstra to bring speeds up to 19.2kbps since earlier this year, so this isn’t even new.  Telstra were doing it anyway.  And it begs the question of the relevance of 19.2kbps anyway.

Where is the commitment to maximising the social and economic benefits from internet access?  Where is the acknowledgement of the undisputable fact that it is rural and remote citizens that are most in need of broadband communications services by virtue of their physical isolation from communities and institutions? 

Well, I have to say it is true to form that the Coalition have distilled two recommendations that relate to issues either already covered by previously announced commitments or issues that one would expect Telstra had an obligation to their customers to deal with anyway.

It is also worth looking at recommendation 8.1, if for no other reason than to illustrate how soft and ineffectual an exercise the Estens Inquiry actually was.  This recommendation reads:

“Telstra should be required to maintain an ongoing local presence in regional, rural and remote Australia. The requirement should only apply to Telstra consistent with its status as the primary universal service provider. The requirement should not be unduly prescriptive or burdensome, and should be broadly compatible with Telstra’s commercial interests."

Clearly the Estens Inquiry members concur with the Coalition that Telstra’s commercial interests are to be put before services in regional, rural and remote Australia.  If it is fully privatised, this requirement will ensure that Telstra leaves town faster than the banks.

I want to give some examples of behaviour that will be exacerbated if Telstra is fully privatised.  There is evidence all around as to how Telstra will conduct themselves, now and this is enlightening if the Coalition were to succeed in their plans.

In particular, Labor believes that full privatisation would lead directly to:

But perhaps most significantly:

I believe that it reasonable to assume that 51% public ownership tempers at least to some degree the prospect of these detrimental impacts.

For these reasons, in addition to the principle, Labor has opposed the first two tranches and we will continue to vehemently oppose T3.  In addition to retaining what’s left of public ownership, Labor will also use a number of policy tools that are available to assist in achieving our vision. I will come back to these later in the presentation.

I will now turn to evidence that:

Full privatisation would lead directly to a significant decline in already disturbing levels of service

The Australian Communications Authority (ACA) Telecommunications Performance Reports of 2000-2001 and 2001-2002 illustrate that a large part of the national rise in fault levels is attributable to the rising fault rate in rural and regional areas. Rural and regional faults rose 50% over this period while metropolitan faults remain steady.  This statistic alone highlights the arrogance of the Minister’s claim that the Estens Report is, and I quote “a very positive assessment…”

Further evidence of neglect is the continuing use of archaic pair gain systems like the 16/6 and similar systems.  The pair gains provide access to only 6 ‘dial tones’ at any one time for 16 customers.  Telstra’s statistical optimisation was based on the assumption that only six customers were likely to use their phone at any one time.  Perhaps when the phones were only used for voice calls, they got away with this.  What Telstra has ignored, however, is that usage patterns have changed with the increased use of dial-up internet connectivity.  The result is that people are on the line longer. 

So usage patterns have changed, but the system has not.  This means as more people use the internet for longer, less people will have access to any dial tone at all.  Apparently this is not a technical breach of the USO.   But tell that to the customers on these types of systems don’t even know it, but just can’t get through or who get drop-outs all the time.

All in all, there are some 1.3 million services being provided through different types of pair gain systems.  These line-splitting technologies reduce internet connection speeds to varying degrees and some types do not carry ISDN services and none currently carry ADSL.

At estimates last week I also fund out some more about another type of technology that Telstra use in rural exchanges.  The DCS20.  There are about 1000 of these in use, and I quote Telstra “in small, minor rural areas”. 

To put it simply, apparently DCS20’s divide 120 lines between 480 provisioned services.  So, as far as I can ascertain, they are like huge pair gain systems that potentially restrict the number of customers that can use the phone at any one time.  To make matters worse, for customers trying to use dial up internet, the connection speed is limited to 14.4kbps.  Not even 19.2kbps.  If this is the case, Telstra will need to replace all of these completely just to honour the Coalition’s current promise to bring internet connection speeds up to 19.2kbps.  Telstra say they are currently contemplating this problem.

Finally, Telstra confirmed that the DCS20 services do not support any higher bandwidth service: no ISDN, let alone ADSL.  My advice to people who think they might qualify as living in Telstra’s definition of a small, minor rural area, is to try and get a line out and ask Telstra the question.  And demand action.

This is the record of service levels now. There is no way it would get better if Telstra were let of the leash.

I am proud that my web-based pair gain campaign led to an ACCC investigation.  About a month ago the ACCC announced that, and I quote:

“There will be greater disclosure and acknowledgement by Telstra of the use of PGS [Pair Gain Systems].  For example, Telstra’s website now makes explicit reference to PGS, contains a basic explanation for such devices and, importantly, explains the potential effect PGS have on dial-up internet access speeds and ADSL.  Explanation of PGS is also expected to be made available soon on the jointly Telstra/Government funded ‘Internet Assistance Program’.

In addition, Telstra are also required to provide information about pair gains upon request for a second line, if that second line is for the internet.

Full privatisation would lead directly to a further reduction in much needed investment in the aging copper network. 

The Besley Telecommunications Services Inquiry exposed the fact that more than half of Telstra’s network was older than 20 years, which was the originally projected lifetime.  30% had been in operation for 30 years and that 5% was older than 50 years. 

This aging copper network has been neglected and is clearly increasingly susceptible to failure.  There are two areas that have attracted some attention recently that I would like to mention.  First is the debacle relating to ‘seal the CAN’.  This CAN, the consumer access network, is the cable network that connects houses and businesses with the exchanges.  Telstra used a gel sealant to try and seal leaks in the protective casings around the cables, which corroded if in contact with moisture.  This debacle cost Telstra a fortune and contributed to further damage, not remediation, to their network.

Another disaster waiting to happen is the changes in the practice of maintaining air pressure in larger cables.  This air pressure is designed to keep out moisture in case of damage, and also served to alert technicians to the problem.  According to evidence heard recently, Telstra now uses far less pressure in the cables, do not fully utilise the air pressure alarms system and in some circumstances have ceased using air pressure in some cables altogether. 

Telstra also use technology called RAM-8’s in rural Australia.  These are designed to boost the signal along long stretches of copper by using electrical current.  58,000 customers are on RAM-8 systems, but CEPU officials claim that the current itself can cause damage to the cable, particularly if moisture is involved, causing significant failures.  RAM-8’s are still being installed.  They have maximum internet speeds of 26kbps.  According to evidence, only newer versions support ISDN.

It is really hard not to draw the conclusion that when it finally rains, Telstra will be praying for a flood, so they can claim a ‘Major Service Disruption’ as a result of abnormal weather conditions and escape paying the Consumer Service Guarantee to those affected by what will no-doubt be a number of outages. 

Finally Telstra has no plans to make 4,300 of their 5200 exchanges ADSL ready.  You can make a safe bet that most of the 800 already done and the extra 100 promised are not in rural Australia.  This renders ADSL virtually irrelevant to rural and remote Australia.

For remote Australians, copper is not likely to be their concern.  Rather, their interest is in the Extended Zones contract for un-timed local calls.  There is a so-called two-way broadband internet services currently being provided as part of this contract.  It is important to note, however, that this service in only included as a ‘bonus extra’ from Telstra.  There is no guarantee or commitment that it will continue beyond the life of this contract.  It is not required by the contract, under legislation, service guarantee or standard.  Remote customers are already asking questions about the future of this requirement. 

The Government should at least indicate their willingness to include that service in the next contestable tender for the extended zones contract.  I can’t see a fully privatised Telstra doing that again.

Full privatisation would lead directly to Telstra flexing their monopoly muscles even more strongly to suppress the competition and investment.

Telstra, joined at the hip with the Coalition, bleat about the constraints of part public ownership, and how it stifles corporate plans.  They say they would be more competitive if they were fully privatised.  But what does this mean?  Perhaps it means more able to completely destroy any competitor that dares to raise their head to service local loop customers in rural and regional Australia.

The contemptuous attitude by Telstra towards potential competitors in rural Australia is perhaps best illustrated in northern Victoria, where Telstra is now offering The Riverina Development Board telephone calls for as low as 9 cents.  Apparently the deal is part of a Telstra ‘cash for councils’ strategy.  GMTel, a regional telecommunications company, had offered discounts of up to 24% off existing Telstra bills to the local council, water utility, hospital and TAFE.  But then Telstra swooped in and offered the wider regional board a deal that cuts prices further and provides a couple hundred grand for a community development fund and project officer.

GMTel’s CEO, Ross McPherson has asked the right questions and now the ACCC is looking at whether Telstra’s action constitutes predatory pricing, which is against the law.  As McPherson said, Telstra has a different rate card in the bottom draw that they pull out when they need to crush a potential competitor.

The best hope for these competitors is that competition laws and the Trade Practices Act are strong enough to prevent predatory pricing and anti-competitive behaviour.

Given that Telstra engage a huge number of lawyers to thwart and delay the efforts of competitors seeking access by appealing decisions made under existing competition law, we can only assume that they would become far more aggressive if they were fully privatised. This practice has been characterised regulatory gaming, and has been roundly criticised by the Labor Opposition.  It was a particular focus in a policy discussion paper released earlier this year by my colleague Lindsay Tanner, entitled ‘Reforming Telstra’.

Another area of complaint has been Telstra’s ‘passive resistance’ to access seekers whereby competing carriers and carriage service providers wait the full length of the permitted time before Telstra fulfil their obligations under the law to provide access. I fear this arrogant attitude will turn nasty under a fully privatised Telstra, and that the remedy will be fraught with litigation.

But perhaps the most concerning decision regarding competition recently is the granting of an 87B exemption from the third line forcing provisions to Telstra by the ACCC. This exemption is a condition of the content sharing deal between Foxtel and Optus and will enable Telstra to bundle fixed and mobile telephony and internet with Foxtel pay TV.

The industry has already expressed their apprehension that permission to bundle may help Telstra block any potential first mover advantage others may have in 3G by sheer marketing weight behind new, bundled deals.  

In the context of the Pay TV announcement two weeks ago, Professor Fels said: “The ACCC continues to be concerned about the level of vertical integration in the pay TV industry, particularly given the position of Telstra as a major shareholder in Foxtel.”  He went on to say “This leaves the ACCC with concerns about the appropriate regulatory regime in both pay TV and telephony markets.” 

This has led to speculation in the media that the ACCC may suggest that Telstra quit or sell down its share in Foxtel.  The ACCC has said it will be providing advice to the Minister on these issues.  Given all this concern, can you imagine how a fully privatised Telstra with 50% share of Foxtel, would conduct itself in the Pay TV and cable market?  It would not be pretty, I suspect 

What does this mean for rural and remote Australia?  I believe that any further vertical consolidation across content and infrastructure by Telstra means less diversity and reduced competition.  This only serves to lessen further what little pressure there is on Telstra to think about new investments in rural and regional Australia.

Where to from here?

I would now like to turn to the policy ideas that Labor has identified. Policy solutions that drive innovation and investment include: creating compelling content and applications, leveraging the opportunities presented by convergence, managing fair competition, controlling Telstra’s monopoly, increasing internet connectivity, organising government-driven demand for broadband and leadership.

Creating compelling content and applications

The Government is fond of saying that bandwidth and content is a chicken or egg problem as an excuse for doing nothing about either.  In fact content and broadband are part of an innovation cycle, each driving the other.  That means this is not a problem, but an opportunity, because stimulation of either, or better yet of both, accelerates this innovation cycle.

I also want to stress the importance of ‘always-on’ internet access. Always-on internet is a pre-cursor to the full exploration and exploitation of bandwidth-hungry content, services and applications.  Always-on really changes the way people can and do use the internet.  Starting with the removal of a layer of annoying dial-up procedures and theoretical greater reliability (unless it’s ADSL), through to the use of ASPs and the prospect of utilising computing power through the ‘grid’.

Leveraging the opportunities presented by convergence

Labor sees another policy tool as convergence itself.  I believe that the convergence platform is the internet and that the market has already confirmed this.  Convergence should create opportunities for ‘disruptive technologies’ to enter the market.  Such technologies seek to displace the traditional pricing and service structures that are the stock trade of Telstra.  Recognising convergence as a critical ‘change agent’ requires foresight by investors and governments alike. 

Labor believes that the Coalition has put its head in the sand and deliberately ignored opportunities to leverage convergence to improve competition, and in some cases, like Digital TV, worked specifically to close off these opportunities for disruptive technologies at the behest of the market incumbents.

Managing Fair Competition

There are real competitors out there.  Their role is crucial in providing opportunities for regional Australia in ways that Telstra just can’t.  Telstra’s dismal level of investment and extensive use of pair gains ensures that their existing copper network will never provide the sort of ubiquitous, always-on broadband services necessary for the future– even in metropolitan areas.

These alternative carriers and carriage service providers come in many shapes and sizes.  For example, there are several broadband infrastructure alternatives now well established in larger regional markets including Neighbourhood Cable, Transact and Saskatel.

Controlling Telstra’s monopoly

The concept of structurally separating the business units of Telstra is not new.  The fact that it is still widely discussed and gaining popularity is testimony to the continued exploitation by Telstra of their residual monopoly.  The theory is that if Telstra were two separate companies, one infrastructure/wholesale and the other retail telephony/internet/mobile, there would be a far less opportunity for exploitation of vertical integration, using market share to dominate and to engaging in regulatory gaming.

Labor is still contemplating the possible models for improving the transparency of Telstra.  One end of the scale is structural separation, with the government maintaining the current proportion of ownership in the two entities.  The other end of the scale is improving transparency through the Trade Practices Act using the Record Keeping Rules provisions.  In between there is a virtual separation model that is more like ‘ring-fencing’ the defined business units through mandating formal accounting separation.

Increasing Internet Connectivity.

Labor has already committed to closing the digital divide, but we need to go further than this.  I believe that a vision of universal broadband access is appropriate.  Achieving this will help give Australia the edge we need in a globalised world.  This means Labor will be working towards always-on, broadband for all its citizens.  When expressed in these terms it is easy to see why many pundits describe the future of internet connectivity as being analogous to a utility.

In the same way that power, water, sewerage and a voice telephony service were considered basic services last century, always-on broadband will replace voice telephony through a digital gateway in the home or workplace that will provide not just internet as we know it, but a diverse array of passive and interactive digital services.

Labor understands that to realise the benefits of such advances for Australian society, the transition from narrowband to broadband needs to be as efficient and equitable as possible.  Because of Australia’s geography and uneven population densities, this will require strategic intervention.  Whereas the Coalition looks at the findings of Besley and now Estens to define the mandate for privatisation, Labor observes that even these compromised inquiries highlight how unequal the transition has been so far. 

To flesh out the real picture on the state of the network and this transition, Labor initiated a Senate Inquiry into the ability of the existing network to support broadband services in the future.  It is currently hearing evidence about the weaknesses and continuing neglect of the copper network and hopes to report in the first half of next year. 

Organising Government-driven Demand for Broadband

There is also proven potential in using aggregated government and community demand to build the business case for alternative broadband networks.  This is particularly important for communities outside the cities where Telstra have complete control of the ‘pipe’ into town as well as the local loop.  Labor governments around the country have taken the initiative.

One example is the NSW Government’s Department of Information Technology and Management, recently invited Expressions of Interest for proposals for Broadband Solutions to NSW Government agencies.  The EOI states:

The NSW Government is seeking innovative solutions and structures to provide NSW agencies with Broadband services, potentially using State Owned Fibre Assets, and, to a lesser extent, other State Owned Telecommunications Infrastructure.

The NSW Government also wishes to encourage the investment in and/or extension of cost-effective Broadband telecommunications services to the wider New South Wales community. This consists of both the residential and business markets with a particular emphasis on regional and rural locations.

In contrast to the Labor states, the Federal Government has bundled together their IT and telecommunications contracts into vertically integrated mega-contracts, of which Telstra have the lion’s share of the telecommunications.  Multinational IT companies have the bulk of the IT work.  It is worth noting that Telstra itself has the IT and telecommunications contract for Senator Alston’s own department, DoCITA as well as the ACCC.

Leadership

In conclusion, I would like to turn to leadership.  Labor understands how crucial strong leadership from the executive government is. This leadership needs to go beyond having a good idea.  It requires facilitation of strong partnerships between citizen, government and business and ensuring that the vision is shared among all stakeholders.  It must be a collective goal. 

This vision has not been forthcoming from the Coalition.  This privatisation agenda has for seven years been all-encompassing.  There was no real consideration of the information revolution that was taking place, or where the opportunities lay for Australia.

This is the environment in which Labor has considered communications policy.  Labor’s activities are driven in part by our role as opposition, exposing the weaknesses and neglect of the Government’s myopic agenda. That is a necessary and important role in any democracy, albeit an essentially negative one.

But a parallel – if less often reported – campaign has been to provide a way forward, to express a vision, and to devise a plan for communications under a future Labor Government.  A plan that is not pre-occupied, conflicted or compromised by the privatisation agenda.

So we do these two things at once.

Labor is currently in the midst of a comprehensive policy review.  We understand that communications policy needs to been guided by a vision, not merely an arbitration between the existing incumbent companies. 

Today I have outlined just some of the policy ideas that drive innovation being considered by Labor.  Just to recap, they include: creating compelling content and applications, leveraging the opportunities presented by convergence, competition, controlling Telstra’s monopoly, increasing internet connectivity, government-driven demand for broadband and of course, leadership.

In closing I would like to quote Professor Bill Lavery from the Townsville campus of James Cook University:

In the end, … if we want to have regions where citizens have access to reasonable hospitals, schools, TAFEs, universities and with some employment-generating high tech industries in the regions … somehow we must have policies for ‘affordable business broadband for Regional Australia’.