full opinion/analysis by Renai LeMay
22 August 2013
A growing body of evidence is mounting that NBN Co should seriously consider contracting the nation’s incumbent telco Telstra to build large sections of the National Broadband Network infrastructure, no matter which major side of politics wins the upcoming election, and no matter whether a fibre to the node or fibre to the premises model is eventually chosen.
There was a lovely moment during the high-profile debate held between Shadow Communications Minister Malcolm Turnbull and Business Spectator publisher Alan Kohler several weeks ago which perfectly encapsulated the extensive difficulties currently facing the Federal Government’s flagship National Broadband Network project.
The formal proceedings were over; Kohler had questioned Turnbull on the Coalition’s NBN policy, asking most of the more obvious questions about the issue and obtaining most of the more obvious answers. Question time had started and a venerable gentleman from the audience had asked the inevitable, and highly irrevelant question, about why the NBN was even an issue when the future of broadband was clearly “wireless”. Turnbull and Kohler were relaxed and comfortable, lounging on stage and enjoying the familial atmosphere so typical of business lunches in Sydney; in short, things were proceeding as expected.
And then a very solid question — one might even call it a Great Question, in the traditional ancient Chinese sage style — came out of the blue. Introducing themselves as being from global bank Citigroup, an audience member left of stage pointed out to the Member for Wentworth that all of the international examples Turnbull likes to habitually use to demonstrate the strengths of the Coalition’s NBN policy related to incumbent telcos in their home country — AT&T in the US, BT in the UK, Deutsche Telekom in Germany, France Telecom in France and so on. The international equivalents of Australia’s own telco incumbent, Telstra.
“I wondered if there was maybe a more radical option,” the questioner asked Turnbull with respect to Australia’s own NBN. “You might actually just get the incumbent telco, which has all the infrastructure, to build this grand plan … I wonder how many governmets around the world are actually re-building monopoly infrastructure. Zero. The Government’s building a monopoly, so I wondered if a radical rethink … the guy that has all the infrastructure and all the know-how to build this for you, you subsidise it in non-dense areas and take a slightly more pragmatic approach.”
The question clearly took Turnbull aback with its audacity. It was the sort of question so large that nobody asks it in the NBN debate any more, because its underpinnings seem so out of date. It was the sort of question being asked in 2009, but that nobody ever thinks to put to politicians. “That’s an analysis that’s so rational and sensible that it could never get any traction,” Turnbull told the Citigroup banker, uttering a wry chuckle.
The questioner’s implication — that Australia’s Federal Government should stop trying to build a national telecommunications network and simply let the most qualified organisation in Australia do it (Telstra, the only company which already owns and maintains a national telecommunications network), is not a topic of discussion which is prevalent in Australia’s telecommunications sector. In setting up NBN Co and instituting the NBN policy back in April 2009, the then-Rudd Labor Government changed the nature of Australia’s telecommunications debate. Right now, it is assumed in Australia that it is NBN Co and its contractors which are building the NBN, not Telstra. Telstra’s role is, more or less, to passively sit by and watch that effort proceed apace, with a small bit of side work cleaning up its ducts.
However, internationally, this approach is very far from being the norm. In fact, it is clearly the stand-out exception.
In the United States, although some small challenges have emerged in certain areas from new market entrants such as Google, it is almost universally incumbent telcos such as AT&T which are upgrading copper telecommunications networks to fibre. In the UK, it’s BT which is doing so. In France, it’s France Telecom. In Germany, it’s Deutsche Telekom. Closer to home, in New Zealand, it’s Chorus, the split-off of Telecom New Zealand, which is upgrading the company’s network. In Singapore, the company’s own NBN rollout was largely deployed with the assistance of the company’s still government-controlled incumbent SingTel.
Only in Australia has a country’s government chosen to upgrade its national telecommunications infrastructure through its own efforts, ignoring the incumbent telco.
And yet, there is a growing body of evidence mounting in Australia’s telecommunications sector that the question put to Turnbull about Telstra at his debate with Kohler was, in fact, precisely the right question which both sides of politics should be asking themselves right now in terms of the National Broadband Network.
The reason this question can be asked again now, where it could not be asked in the years immediately following the announcement of Labor’s NBN policy in April 2009, even up until the end of 2012, is that in that period, there was still a very strong degree of optimism in Australia’s telecommunications sector about NBN Co’s ability to actually deliver on its promises and deploy a fibre to the premises network to most of Australia. Throughout that period, the company was seen to be making rapid progress on the project — signing landmark deals with Telstra and Optus to gain access to the telcos’ customers (and in Telstra’s case, infrastructure), signing massive, billion-dollar deals with network equipment vendors and construction firms, hiring Australia’s top telco staff, and generally getting on with the job of building a national broadband network. Throughout those years, there was a sense that NBN Co could actually do what Labor had promised it could.
However, over the past six months to a year, that confidence has rapidly eroded, as NBN Co has continually suffered extensive delays with its rollout with have starkly demonstrated how much it is struggling to make its model work. At this point, it’s impossible not to conclude that the project has been mismanaged to some extent. NBN Co’s $11 billion contract with Telstra substantially delayed its rollout, government regulatory changes relating to greenfields estates delayed it further, and the company has suffered extensive issues with its contractor workforce that have at times descended into a farce, with NBN contractors actually ripping cable out of the ground on occasion or being unable to deliver on their commitments across whole states. There are also asbestos issues with relation to Telstra’s ducts and pits — issues which Telstra knew about but which NBN Co probably didn’t realise the full extent of.
Even when NBN Co has been able to deliver on its promises, as it did in July when it met its (significantly revised) rollout targets for the end of June, its numbers have been extremely questionable. The company was recently forced to acknowledge that about a third of premises NBN Co has counted as being “passed” by its fibre network can’t actually connect to the network. The company has also quietly taken steps to ensure eagle-eyed observers can’t get as much granular detail about its network rollout as they used to; likely precisely because examination of its detailed network rollout data has clearly revealed the extensive nature of the rollout problems it’s facing.
Against this backdrop of rollout failure, other countries have accelerated their own next-generation broadband initiatives by taking advantage of the skills, infrastructure and corporate knowledge inherent to their country’s incumbent telcos.
In New Zealand, Crown Fibre Holdings, the company established by the Government to roll-out ultra-fast broadband to 75 percent of New Zealanders, recently announced it had already finished construction on 20 percent of the project. In Singapore, use of fibre broadband services is rising rapidly and the country believes it will shortly finish its own NBN rollout. Across Germany, France and the US, much of each country’s copper network has already been upgraded, and of course the starkest example of the NBN’s failure to deliver Australia faster broadband can be found in the UK, where British telco BT recently revealed it had deployed fibre to the node broadband to some 16 million premises — in the same time it has taken NBN Co to get to a little over 200,000 fibre to the premise installs in Australia.
If you speak to industry insiders about what path the Federal Government should have chosen for Australia’s telecommunications sector a decade ago, it seems clear that the most productive effort would have been to structurally separate Telstra into several separate companies, while it was still majority owned by the Government. Such a separation — which would have seen Telstra’s retail and mobile operations separated off into one company, and its fixed copper and fibre network infrastructure into another — would have solved much of Australia’s telecommunications problems already. The Government could then have incentivised Telstra’s network spin-off to upgrade its copper network around Australia — precisely as the UK and New Zealand Governments have so successfully done.
Turnbull alluded to this argument in his answer to the Citigroup questioner at the Kohler debate.
“The two best examples of getting national broadband upgraded, and one in which there’s a lot of fibre to the premise being built are Britain and New Zealand,” the Liberal MP said on the day. “In both places, the Government required the incumbent, BT in one and Telecom NZ in the other, to separate their customer access network business. In Britain they did a functional separation into a company called Openreach, which runs the separate division, and NZ as you know, they did the full monty and they spun it out into Chorus, which is a separate listed company.”
Turnbull added: “If you could wind the clock back, and obviously Telstra would have to play ball and this is all fantasy football now … But the smartest deal would have been to persuade Telstra to split its customer access network into a separate business, just like Telecom New Zealand did, then you would have all the years of corporate knowledge and expertise, you would have it run by people who knew what they were doing, and you’re dead right, and then you say, we want you to upgrade everyone’s broadband, we know that a lot of it is not commercial, so let’s have an arm wrestle about the level of the subsidy.”
The quick-witted Kohler was quick to put the question to Turnbull: “Are you going to have a crack at it, then?”
Turnbull’s answer was, on the face of it, the logical one, stating that it would be “too hard”, practically, to just turn around the Government’s massive NBN undertaking on a dime and return to a past idealised model. The Liberal MP also noted that he wanted to be very careful that the Coalition didn’t promise anything in its telecommunications policy that it couldn’t actually deliver.
On this issue, Turnbull is right; clearly, at this point, it would be very difficult to structurally separate Telstra through legislation. And just as clearly, the Federal Government should not just abandon the whole NBN project and walk away, shutting down an initiative which has taken billions of dollars to get off the ground.
However, just as clearly, the idea of bringing Telstra back into the NBN construction effort in some shape or form has not gone away, due primarily, no doubt, to the sheer amount of evidence stacking up globally that it is really only incumbent telcos who are able to upgrade national telecommunications infrastructure en-masse to a national generational network level — fibre to the node, to the basement, to the premises, or some combination therein.
The question popped up again this week during Turnbull’s Google Hangouts session with the Sydney Morning Herald. Informa senior analyst Tony Brown asked Turnbull whether one way of fixing the issues with NBN Co’s contractor workforce would be to bring in the Australian company most qualified to roll out telecommunications infrastructure in the existing copper network — the company that owns it, has all the network information, decades of experience and an existing workforce stretching into the tens of thousands that don’t need: Telstra.
Even after only a week of the issue being front of mind, Turnbull’s view on the situation had already progressed.
“It is curious that Telstra have not been used as a contractor to build any part of this network,” Turnbull responded. “I’m not aware of a new generation network of this kind … I’m not aware of any new generation network that are not being built by the incumbent. Even in say, Singapore for instance, there is an independent entity, a separate entity that is going to operate the network, [but] they’re still using Singtel to do the construction.”
“I assume Telstra was excluded for political reasons, but Telstra should certainly be a candidate. Obviously there are details of price and matters of that kind, that are pretty relevant, but Telstra does have a huge amount of experience.”
To understand why Telstra was excluded from being part of the NBN rollout right from the start, you need to understand the fraught relationship which the company had with the Federal Government when NBN Co was first setup. The company’s then-board, led by chairman Donald McGauchie, had appointed a new chief executive, Sol Trujillo, explicitly with the intention of divorcing Telstra from its government past and turning it into a real, independent, commercial, profit-generating corporation. Trujillo was certainly successful at doing this, but the American executive and his team also took an extremely hostile attitude to the Federal Government and the then-Communications Minister, Stephen Conroy.
NBN Co was set up almost explicitly as an anti-Telstra: A wholesale-only monopoly player which would forcibly separate Telstra from its copper network and resolve forever the inherent conflict between Telstra’s retail and wholesale functions in the market. The NBN policy aimed to achieve the same structural separation aims as NZ and the UK were achieving — but through radical government spending intervention in the telecommunications sector, instead of regulatory intervention. The NBN represents the Government’s effort to force structural separation on Telstra, a telco which clearly did not want it.
However, what’s important for both sides of politics to realise at this juncture is that the situation which resulted in Telstra being locked out of involvement in the NBN rollout has changed dramatically over the past several years.
Firstly, it should be apparent by now that NBN Co is not successfully delivering on its mission of replacing Australia’s copper network with fibre. Perhaps that’s something that should be have been expected — after all, it was a company formed from scratch which aimed to deliver Australia’s largest ever and most complex infrastructure project. Right now, NBN needs construction help, and Telstra is the best-equipped company in Australia to provide it with that help. It is just much more expert, and has a much larger resident, highly trained workforce, than NBN Co’s current contractor base does. It doesn’t have to learn how its network infrastructure — pits, pipes and ducts — work; it just has to start threading fibre through. It doesn’t have to ramp up its skills base; it just has to order its staff around. It doesn’t have to ask for permission anywhere, about anything; it can just do whatever it wants. It’s Telstra’s network.
Experience internationally suggests that incumbent telcos can deploy network infrastructure much, much faster than any other organisation can; they just have everything ready to go. They don’t need to ramp up — they exist ramped up.
But secondly, other conditions have also changed. Telstra’s new management under David Thodey is no longer hostile to the Government and the NBN — in fact, Telstra’s chief financial officer Andrew Penn said last week that Telstra’s main mission was to support the NBN rollout. “We’re very happy to work with either government, either policy, to basically help them deliver what is ultimately a government policy decision in terms of the method of the rollout of the National Broadband Network, and that’s what we’ll do,” Penn said on the ABC’s Inside Business program.
Unlike when it was being led by McGauchie and Trujillo, Telstra is clearly aware right now that it will be forced — by hook or by crook — to structurally separate its options. The company is no longer seeking to stop the process, but merely seeking to get the best deal out of the whole thing. Hence, the $11 billion deal the telco struck with NBN Co and the Government several years ago to transfer its customers onto the NBN and open its infrastructure; a deal which is already bringing millions of dollars into Telstra’s coffers every month. I strongly suspect that Telstra will welcome any way it can bring even more revenue in from its involvement in the NBN process — especially if it thinks the Government will pay a little more than it probably should, because the NBN rollout needs Telstra’s involvement at this point.
Then too, Telstra’s rivals have traditionally been suspicious about any involvement which Telstra could have with the NBN. But that suspicion primarily only extends to the operation and ownership of the network infrastructure, not the construction of the network per se. I asked iiNet chief executive Michael Malone yesterday whether he would see it as an issue for Telstra to be involved in the NBN construction effort. In response, Malone pointed out that through the years 1999 to 2003, Telstra operated a wholly-owned networking subsidiary, Network Design and Construction, as a commercial division, which provided companies like iiNet with network construction services. The unit was integrated back into Telstra in 2003, but Malone still remembers it ten years later.
“My starting point is, whoever can do the construction at the appropriate price and faster installation, go for it,” the iiNet chief said.
Telstra’s involvement will particularly aid in the case where, as is currently looking likely, the Coalition wins the upcoming Federal Election and seeks to implement a fibre to the node model across the NBN infrastructure, rather than the current fibre to the premises style favoured by Labor. In that case, where Telstra will be required to directly work with NBN Co on integrating its copper network with NBN Co’s fibre infrastructure, it particularly makes sense that Telstra takes on the majority of the construction work involved in the project. Again, here Telstra is the most qualified organisation to deal with its own existing network; other third party groups are not going to be as expert in this type of construction and are just going to take a lot longer to get the job done. It just makes no sense for NBN Co to be engaging third party contractors to deal with both it and Telstra on integration of new fibre cables with Telstra’s copper, when it can simply pay Telstra to do both.
However, even in the case that Labor wins and the current FTTP rollout proceeds, Telstra is still the most logical company to conduct the majority of the rollout. The company’s successful delivery of an all-fibre to the premises network rollout in the South Brisbane Exchange area over the past several years to 18,000 premises strongly demonstrates that the company is competent at this role and has already learnt its FTTP network rollout lessons.
During the progress of the South Brisbane rollout, Telstra director of Fixed and Data Access Engineering, David Plitz wrote in a blog on Telstra’s site in January, Telstra trained around 120 technicians specifically on fibre to the premise technology, with 24 trainees starting “their telecommunications careers” in the South Brisbane area, and most continuing with Telstra after the finalisation of the project. Telstra laid 284km of fibre-optic cable in the project, laid 26.4km of “new conduit” and replaced or upgraded 1661 pits which give access to the cables.
Sounds like a recipe which could be repeated around the nation.
I know that arguing that Telstra should be brought in to accelerate the NBN construction effort will be a controversial line of argument. Many Australians have a strongly antagonistic view of Telstra, courtesy of its ongoing bad behaviour in a number of areas. I have strongly argued recently that even under its new chief executive, the genteel David Thodey, Telstra is still acting like the big, bad telco monopolist that it always has been.
However, it’s hard not to acknowledge that when it come to the NBN rollout, the Government (led by either the Coalition or Labor) really does need Telstra’s assistance with the NBN right now. After a decade of telecommunications policy which haven’t delivered Australians much in the way of substantial service delivery improvements, virtually the only thing which matters right now is that Australia’s National Broadband Network project accelerates to light speed, something it can very likely only do with the assistance of Telstra. For its own part, Telstra would love some more government money.
How do we know Telstra would even be interested? I encourage you to read this Financial Review article published in May, which revealed the existence of Telstra’s Project 45; a secret internal project designed to help Telstra win precisely what I’ve been talking about; new construction work with the NBN. The newspaper reports (we recommend you click here for the full article):
“Telstra offered to help accelerate the rollout of the national broadband network in an audacious bid to capture more construction work in the massive project and safeguard a multi-billion-dollar windfall for its shareholders …
once work in [a fibre-serving area module] begins, NBN Co is budgeting about five months for physical design work … Sources said that in Project 45, Telstra was able to complete this physical design work and remediations for about 15,000 homes in the five areas in just four weeks – leaving only the installation of fibre uncompleted.”
Doing a deal with Telstra can often seem, according to people who have done so, like sitting down to dinner with the devil. But in this case, when it comes to the telco being contracted to conduct much of NBN Co’s network construction work, it’s starting to seem more and more like a match made in heaven.