Thursday, July 28, 2005

RARA telecommunications

The political calculus advances a nanometre at a time. ABC News writes:
Telstra says it may not be able to continue to provide basic services to rural areas.
The company's head of regulatory affairs, Kate McKenzie, says the Government does not provide enough funding for it to meet universal service obligations.

So, at last, Telstra is publically distancing itself from the current regime in which unprofitable RARA services are funded in part from Telstra's profits in other (i.e. city) areas and in part from taxpayers. I have thought for some years that this is about the worst imaginable way of solving the problem because:
  • It impairs Telstra's competitiveness in those markets in which it competes. This curtails the benefits that competition would otherwise provide (ultimately, lower telecommunications costs for the Australian economy) and costs taxpayers money, both in a capital loss sense (lower sale price when Telstra finally is sold, and the impact is enlarged as time before the sale goes on) and as an ongoing expense (as long as the current inefficient service delivery infrastructure is entrenched, the amount of annual taxpayer subsidy required will be larger than it would otherwise be).
  • It entrenches poor, costly service delivery in RARA.
  • It encourages inefficient use of the taxpayer subsidies that are being paid to support USO delivery in RARA because, at present, only Telstra has access to those funds. There is no competitive pressure to cause a reduction in the subsidies required and/or an improvement in service provided for those subsidies.
That this could be happening anywhere in the world would be unfortunate, but it is a tragedy that it is occuring in Australia where the introduction of a full-service competitor (Optus) to transition smoothly and rapidly from government monopoly to market-based solution was not merely conceived, but successfully executed. Despite that, and despite the phenomenal improvement the introduction of competition from Optus (and later others) brought about for city dwellers, the political will to bring the same thinking to bear in RARA does not yet seem to exist.

A thumbnail sketch, for those who don't grasp what I'm on about: switch the RARA USO from being a Telstra monopoly to simply being a government contract which is put out to tender. This would require that the subsidy being paid by tax payers be larger in total, but could, in the short term, be entirely funded by removing the rebate that Telstra currently gets for providing the RARA USO; that is to say, by having Telstra pay corresponding more tax, tax which, if it were any other telco, it would currently be paying anyway. In the longer term, I believe that it would actually make more sense to treat the RARA USO as being a piece of social infrastructure like any other which should be funded from consolidated revenue, i.e. across all taxes, not just a telco-specific tax. My reasoning here is (a) that we don't ordinarily tax utility-constructing contractors (think road-builders) to fund the building of RARA utilities and (b) it is difficult to even identify telcos (is Skype in or out?) and, even when we can, it is near-impossible to fairly apportion USO costs. RARA USO should be treated like any other piece of subsidised infrastructure and paid for out of the taxes extracted from society as a whole, ostensibly to benefit society as a whole.

A further thought: introducing competition doesn't merely expose RARA USO service provision to market-discpilined cost control - although no doubt one or more tenderers would approach the problem from this perspective - it allows for the possibility that competitors could pursue entirely different approaches to the problem. e.g. My guess is that the maintenance of the wire network, notably the "last mile" which, in RARA, could well be the "last 10-100 miles" is the major expense in RARA service provision. What if the holder of the rest-of-Australia (i.e. not Sydney and Melbourne) 3G license could put the spectrum to use not merely (or at least not exclusively) for 3G mobile but for, say, WiMAX. The option then arises for phone handsets in RARA homes and businesses to no longer be attached to the end of a mile (or 10 miles, or 100 miles) of wire. Such an approach would incur some costs in handset provision, but enormous savings in the maintenance of a wired network. As long as Telstra holds a monopoly in RARA service provision, there is no incentive to do this, but the moment that this service provision is put to tender, the opportunity exists for a group of investors to fund exactly this. If such an approach gets up and is cheaper than Teltra's solution, then the nett subsidy paid by taxpayers would actually drop.

Telstra appears to be aware of this analysis too (from another ABC News article):
[Telstra's head of regulatory affairs, Kate McKenzie] says that there should be a model that is "properly funded to ensure the sustainability of those services going forward"
Of course it's entirely possible that Telstra is simply putting out the hat for more money, not advocating the introduction of competition in its comfortable RARA monopoly.

Comments from Queensland Nationals Senator Barnaby Joyce suggest that less charitable interpretation:
"We just reiterate that if you don't believe in the universal service obligation then we should have structural separation so we give everybody a chance to get in there and compete.

"I know that Telstra is not a punter for structural separation and they don't want USO. So what do they want? They want a fully privatised monopoly on the Australian people and they are not going to get that."

I'm not clear on what "structural separation" is, but it sounds something like what I'm describing. It does appear that the good senator is entirely capable of flying off into schoolyard rhetoric though. From the first ABC News article again:
"If [Telstra] were to resign from their USO obligations that means they don't take regional areas seriously and if they don't take us seriously we won't take them seriously and we won't vote for it."
Is he really saying that he'll only vote to lift Telstra's USO obligations if Telstra says that it wants to continue carying them? This is right up there with the lunatic political calculus that I described a few months ago (roughly that, if Telstra is the problem, that Telstra must remain entrenched, impervious to all competitors).

I guess that I'm capable of a little schoolyard rhetoric too.

What intrigues me and inspired me to post today is that, for the first time that I've noticed, Telstra is willing to put some effort into reforming the current RARA USO situation. Now if only some competitors can be emboldened to push competitive proposals, perhaps in co-operation with the NFF if not with the National Party itself, some progress may be made on providing better service to RARA, reducing the taxpayer cost of doing so and freeing up billions of taxpayer dollars that are currently locked up in Telstra shares.