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Rollout of the National Broadband Network
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Joint Committee on the National Broadband Network
(Joint-Friday, 17 June 2011)
ACTING CHAIR (Mrs D'Ath)
Senator IAN MACDONALD
Senator IAN MACDONALD
Senator IAN MACDONALD
Senator IAN MACDONALD
Senator IAN MACDONALD
Senator IAN MACDONALD
- Senator CAMERON
Content WindowJoint Committee on the National Broadband Network
Rollout of the National Broadband Network
WOODS, Mr Michael Colin, Deputy Chairman, Productivity Commission
Committee met at 09:34
ACTING CHAIR ( Mrs D'Ath ): Good morning. I declare open this public hearing of the Joint Committee on the National Broadband Network. Before calling the first witness, I ask that the committee agree that the media be allowed to film the proceedings today in accordance with the rules set down for committees, which include not taking footage or still images of members' papers or laptop screens. There being no objection, that is so ordered. I want to convey the apologies of the committee chair, Mr Rob Oakeshott, the member for Lyne, who had to be in his electorate today due to the impact of the severe weather and flooding over the past 48 hours. I will be chairing the hearing today.
Today the committee will be hearing from the Productivity Commission in connection with our general oversight role of the National Broadband Network. After that the committee will spend the remainder of the day taking evidence on the Telecommunications Legislation Amendment (Fibre Deployment) Bill 2011. The committee intends to wrap up its public hearings on the bill today so we can move to finalise our report quickly.
I welcome the representative of the Productivity Commission. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be reported by Hansard and attracts parliamentary privilege. Would you like to make an opening statement to the committee?
Mr Woods : No. I am happy to have a discussion with the committee about the matters before it.
ACTING CHAIR: I note in your correspondence to the chair of the committee that there is a current investigation going on by the Productivity Commission and that the commission is not in a position to comment on that. You have stated, though, that you would be in a position to explain what your normal processes are and, maybe, what is the expected time frame for that investigation
Mr Woods : I am happy to. We do have a function under our act of investigating matters of competitive neutrality, the aim of which, basically, is to ensure that government businesses do not enjoy an extra competitive advantage by virtue of their public ownership. Businesses, or indeed other government enterprises who consider that a government business has a competitive advantage and is exercising that, may complain to the Productivity Commission. We examine that and undertake a preliminary examination to see if it meets certain tests. One of those tests is that the business is in fact a business that is relevant to competitive neutrality. If you like, in a minute I can go through some of those tests for you. We then, on the basis of our initial investigation, come to a view as to whether the issue is such that it does warrant a full investigation by us. In that case we go through the various aspects of the business that may be acting contrary to competitive neutrality and produce a report which becomes a public report and is forwarded to the Treasurer. If it is helpful to the committee, I am happy to go through the sorts of tests and processes that we go through. Would that be a useful background?
ACTING CHAIR: If you would like to give an overview, yes.
Mr Woods : When we receive an investigation we test first whether the business does undertake user charging: that it is out there in the marketplace setting prices and charging for its goods or services. We examine whether there is an actual or even a potential competitor—there does not have to be a competitor active in the marketplace, so long as there is the potential for a competitor to be operating in that business. We look at whether there is managerial independence of that business enterprise—that is, is it able to make decisions about the goods and services it produces and about the prices it sets. Clearly, if government predetermines what a price is for an enterprise, then it does not have that independence, and that is then a matter of government policy rather than the enterprise acting in a competitively neutral manner in the marketplace.
We also test for significance. Some of the tests there are: does it operate under the Commonwealth Authorities and Companies Act, the CAC Act; is it a share limited trading enterprise; are its revenues in excess of $10 million? These are indicative tests, although we look at each of those tests on its merit. If it is a significant player in a small market and it does not meet the $10 million threshold, we would still be prepared to investigate that because it would have an impact on a particular marketplace.
If it meets all of those tests, then we go through and look at some of the advantages that it may be operating under. 'Is it exempt from any taxes?' would be a relevant question. Does it borrow at rates that are not market rates? Does it comply with the full range of regulations that businesses are required to comply with? Does it achieve—or, in the case currently before us, ex ante is it likely to achieve—a return on assets that is commercially comparable? Then the question is: do the benefits of application of competitive neutrality outweigh any costs that may be incurred in moving to that process?
Those are the sorts of tests we go through, and those are the sorts of factors. We are not constrained only to those particular factors. We do look across the whole range of the business's enterprises to see if there are any other commercial advantages it may have. On the basis of that, we will prepare a report. We will submit that report to the Treasurer. The commission being the transparent body it is, we also produce a public report to that effect.
We have done a number of reports in that formal manner, but I would have to say that the majority of our business is more of an educative role. This may be for government businesses—quite often if they are thinking of restructuring their business they will come to us and seek our views on whether operating in such a manner would be competitively neutral—but also a lot of businesses come to us and say they have concerns about this or that public enterprise, and we will undertake a preliminary investigation. If we find that it does not meet the business test or that there is compliance, based on a preliminary investigation, we will report that back to the individual business, and they will then make a decision about whether they wish to pursue with us to a full investigation or are happy with that. So most of our business is in that educative role and trying to resolve issues in a productive and cooperative manner. That does not reach the light of day in the sense of coming out as a public document, but it is open to any business to request that that happen.
That is broadly how we fit. It is on the record that we currently have three complaints before us, from OPENetworks, Comverge and Service Elements. We have received their complaints. We have conducted preliminary investigations and find that there is reason to move to a full investigation. We have met with each of those three. We have met with relevant government authorities and NBN Co., so we are undertaking the first steps in that process and we are moving through that investigation.
Mr TURNBULL: Mr Woods, one of the things you urged the government to undertake in respect of the NBN—I am referring to the submission you made to the Senate committee—as a means of reducing the risks and costs of the NBN, was undertaking a thorough cost-benefit analysis. Is it still your view that a cost-benefit analysis would assist in reducing the risks and costs of the NBN?
Mr Woods : I do not recall us using the word 'urge' but, yes, we did provide a submission to that particular committee and we did note the benefits, as we have on many other occasions. It is not particularly directed at that instance. We do, as a general principle, consider that cost-benefit analysis can provide useful insights for government policy into issues of appropriate resources allocation.
Mr TURNBULL: You have not changed your view about the merits or the desirability or the utility perhaps of a cost-benefit analysis?
Mr Woods : As a general principle we continue to believe that cost-benefit analysis is a useful tool. We also make the point that you do not actually rely exclusively on the numbers that a cost-benefit analysis will produce because it is the product of many assumptions. As long as it is a transparent process of identifying the various costs and benefits and it is transparent as to the assumptions that you have made—and there are very many complex assumptions to be made in these things; they are not simple, but they are an instructive methodology—then that is a useful contributor to decision making.
Mr TURNBULL: You would agree that there are many benefits from ubiquitous and affordable fast broadband?
Mr Woods : We make a general point that ICT can assist in improving the productivity of the economy in a number of ways—the connectivity of the population, the reduction of costs in production by businesses, informing consumers so that they can exercise choice more readily and therefore put competitive pressures on producers. As a general principle, improvements in ICT throughout the economy have positive benefits.
Mr TURNBULL: Do you agree that the utility of ICT is a function of the applications that can be deployed or used over a telecommunications network?
Mr Woods : I would have to keep my comments general. As you would appreciate, the Productivity Commission draws on particular inquiries that it has undertaken. It does not provide a general commentary on economic matters. We stick very strictly to particular issues we have undertaken an examination of and we are prepared to speak at length on that particular inquiry that we have conducted, but at a general level I would propose that there are considerable benefits to be had from extending ICT through the economy while recognising that there are costs. It is a matter then of particular market players making judgements as to whether they consider that there are benefits. Of course, the primary benefits are the applications that travel across the particular forms, whether it is broadband, wireless or whatever the technology for the carriage proves to be. Most of the significance at a general level is driven by having competitive providers developing applications that are used by players in the community and the economy.
Mr TURNBULL: Are you familiar with the technology or technique described as fibre to the node?
Mr Woods : I am aware of it.
Mr TURNBULL: And you understand that it operates by taking the end of the fibre further into the field and then connecting it to the existing copper loops such that the distance of those copper loops is sufficiently short to enable very high speed broadband to be delivered over that hybrid fibre and copper network?
Mr Woods : I am generally aware of that.
Mr TURNBULL: Are you aware that that approach has been undertaken in many markets because it is able to achieve significant improvements in broadband speed at a lower cost than running fibre into each home so that it terminates within each residence?
Mr Woods : I have seen reports that various countries adopt various initiatives and are also going through various waves of initiatives.
Mr TURNBULL: You might have seen Mr Quigley last night observe that fibre to the node is a technology you would use if you were focused on cost controls—I think that was the—
Mr Woods : I missed that particular—
Mr TURNBULL: Would you agree that the objective of improving ICT connectivity across the country is best enabled if access to that connectivity is affordable to people in all income groups?
Mr Woods : There are different ways of making it affordable. There are separate questions of whether the particular expenditure on infrastructure is the most cost-effective way of delivering that. Also, there are different technologies that may be suited to different environments, and also different companies may wish to pursue different technologies as they evolve in the economy. So I cannot give you a view. It is not a matter that the Productivity Commission has investigated.
Mr TURNBULL: Let me share something with you. The most recent ABS figures on access to the internet indicate that, of households of $40,000 income or less, about 34 per cent have no access to the internet, whereas in households with higher levels of income access is in the range of 90 per cent or more. Is that news to you?
Mr Woods : Those particular figures are not ones that we have investigated, but I am happy to accept them.
Mr TURNBULL: All right. We might ask you to look at that. But you would agree with me, wouldn't you, that the object of a better networked society is best achieved if everybody in that society can afford to have access to the connectivity that broadband offers?
Mr Woods : And there are different ways of ensuring that affordability.
Mr TURNBULL: I agree, but is your answer to my question yes, or do you think it—
Mr Woods : My answer to your question is that there are greater benefits from having more people connected; that is the very nature of a network activity.
Mr TURNBULL: Correct. I thought you would agree with that. That is good. So we have agreed on that. If that is the case, is it not a matter of real importance to ensure that the method used to deliver that ubiquitous broadband is one that is delivered at a cost that enables the government, in this case, consistent with your principles of competitive neutrality, to offer that service at the lowest cost?
Mr Woods : I think that brings us back to our original discussion on cost-benefit analysis. Lowest cost is not necessarily always the best outcome; it is a matter of which outcome produces the greater net present value of benefits that exceed costs. It is also an incremental question. It is not as if we are always operating—although some do, as we know from the CN issue—in a greenfields environment; it is operating in the context of what is already there. So what produces the greatest net incremental benefits over the net incremental costs from where we are is what I would pursue. But I would not accept that it is necessarily always the cheapest deployment that produces the greatest net benefit.
Mr TURNBULL: In your Senate submission, talking about competitive neutrality, you said:
In a practical sense this would mean, for instance, that the prices set by any government-owned business should fully reflect resource costs and, in doing so, achieve a commercial rate of return on the business' capital.
Mr Woods : Yes, they are parts of the test for neutrality.
Mr TURNBULL: And it would follow, wouldn't it, that if a government were to spend substantially more on achieving the objective of universal and affordable broadband than it needed to do, that, consistent with the competitive neutrality principle I have just read back to you, would mean that the price the government would have to charge for its service would be higher than it otherwise would be.
Mr Woods : Certainly from the strict competitive neutrality perspective what we would be requiring is a demonstration—and in this case it would be ex-ante rather than ex-post—that the pricing structure reflects a commercial rate of return. If the costs that the particular business undertakes has a higher cost than might otherwise occur, then the price that it would need to charge as a consequence to produce a rate of return on assets would necessarily be higher.
Mr TURNBULL: So it follows, therefore, that the objective of universal and affordable broadband is best advanced if the cost of the network is as low as possible, consistent with achieving the broadband objective?
Mr Woods : And different technologies will produce different benefits and that is what a cost-benefit examination would illustrate.
Mr TURNBULL: I think we agree on that. Would the Productivity Commission—
Mr Woods : I am happy to agree with what I have said, yes.
Mr TURNBULL: That is good. Spending money is always of a matter of great amusement to some of my colleagues.
Mr TURNBULL: Mr Woods, would the Productivity Commission, if requested by this committee, be able to undertake a study of the National Broadband Network objective with a view to determining that what you described as a 'rich mix of technologies' would be most likely to deliver the objective of universal and affordable fast broadband?
Mr Woods : The Productivity Commission would be able to create a document for the committee which drew on information that it had to hand. This goes back to another debate. We are happy to produce documents that we have to hand; we are happy to create documents that draw on information that we have to hand. Clearly we are not able to create documents based on information that we do not have to hand.
Mr TURNBULL: You do not know what you do not know.
Mr Woods : Precisely.
Mr TURNBULL: Let me put this squarely to you: it is clear enough, Mr Woods, and I think everyone will agree with this—at least I would hope they would in general—that there is a diminishing return of broadband connectivity to a user, for example a residential user, at the point the conductivity becomes faster or bigger, the pipe becomes bigger, than any applications they can either deploy on it or are likely to deploy on it. That additional capacity is of little or no utility. That is clear enough, isn't it?
Mr Woods : For a normal household, and again we are venturing into areas that the commission has not specifically investigated, there would be diminishing marginal returns.
Mr TURNBULL: And so a technology which is able to offer broadband speeds which are vastly in excess, for argument's sake, of the present or likely future needs of a residential customer but which would do so at a very substantial additional cost would have limited utility. Do you agree?
Mr Woods : I think the focus there is on likely future needs. I recall being very proud of some of my early computing capacity, which is now miniscule. Again, we have not undertaken an exercise to forecast likely future needs. But if the last 10 years are any indication it is very difficult to envisage what future applications might be. No doubt, there are companies out there who are currently devising applications that may require higher speed or greater bandwidth than is currently the case, but we have not investigated that.
Mr TURNBULL: Sure. If we were to ask you to undertake that analysis in considering, for example, whether a more economical approach—at least in part of the footprint of the NBN—would be fibre to the node, or fibre to the curb, as opposed to fibre to the home, could you provide us with some assistance there?
Mr Woods : We would be able to create a document that drew on the information that we currently have.
Mr TURNBULL: Could you look for further information? Could you make some inquiries?
Mr Woods : If government invited us, or even requested us, to undertake an inquiry into that matter we could go through our normal inquiry processes. We are not a short-term research entity.
Senator CAMERON: You are not the Parliamentary Library either.
Mr Woods : We undertake a thorough investigation into matters. That is the nature of who we are and what we do and, hopefully, we are respected for the outcomes that we produce. They are not always agreed to, but that is a separate question. But at least the process that we go through is. If we were invited by government to undertake that research, then we would be perfectly able to do it. But at this point we could only respond with information that we have to hand.
Mr TURNBULL: Okay.
Ms LEY: Are you unable to do this unless invited to by parliament?
Mr Woods : We undertake minor research ourselves, although I have to say that with constant pressure on our resources that is something that we do less frequently these days. Our primary role is to undertake inquiries and investigations that are required of us by the minister—that is under our act—and we think we do those in a very thorough—some might say overly timely—transparent and open manner. We consult openly with all stakeholders, we always produce a draft report for consultation and it is the nature of who we are. That is the process we go through.
Mr TURNBULL: I have one more question on the fibre deployment issue, and it really relates to another issue. You have been contacted by the greenfield operators on the competitive neutrality—
Mr Woods : Yes. We have three before us.
Mr TURNBULL: Let me just describe an issue we are confronting which is probably a bit narrower than what you have been asked to look at. At the moment, we understand that the current scheme is that a developer of a greenfields development will either have to provide the pits and pipes at his or her own expense and then the connectivity will be provided by the NBN in certain developments of a particular size, or, if the NBN is not able to do that then Telstra will put in a copper network, right?
Mr Woods : Fibre or copper or whatever, yes.
Mr TURNBULL: Presumably, that will then have to be replaced by the fibre at some point. What a number of the developers and greenfield operators have put to us is that this is putting them in a position where there is considerable uncertainty and delays. I do not think that there is any doubt that that is the case. It has been put to us, and we are reflecting on this arrangement, and I would just like to get your views on this as to how this would fit in with competitive neutrality. If the arrangement was that a developer could choose to employ an appropriate telecommunications person or company to install fibre in the development, and if that was done in accordance with technical standards set out by ACMA in consultation with NBN Co., and if the developer, having done that, was able to require NBN Co. to buy that network at an agreed schedule of so many dollars per premises connected, do you think that is an approach that would assist in achieving the objective of competitive neutrality?
Mr Woods : On the basis of the complaints that we have, we are certainly conscious that there are two different pricing models being adopted. One is by NBN Co. that says that it is fibre and connectivity that it will undertake itself but then recover through pricing from service application, as distinct from various greenfields operators who want a two-part pricing in recovering their fibre from the developer versus then pricing backhaul and related matters to the retail service providers. So we are conscious that there are different pricing models.
Competitive neutrality requires that the business overall produces a rate of return on assets that are comparable commercially. It does not therefore dictate that each and every single good or service that that company produces must comply with that stricture—in fact, any business will have a range of pricing on its product range depending on loss leaders or Ramsey pricing for where it thinks it can get the greatest price from the market, whatever the case may be. So there are two issues. There is a specific issue of that particular product or component of its business and there is the broader issue of whether the business as a whole is earning a commercial rate of return.
Mr TURNBULL: I think I can fairly describe the position like this. If the developer is in a situation where NBN Co. says it will provide fibre to his development then, subject to NBN Co. getting its act together and doing it in a timely way, fibre will be provided and his residences will be duly connected. If NBN Co. says, 'No, we are not going to do you at this stage' then the best he can get is the Telstra copper. A number of developers have said that this puts them at a disadvantage because the development down the street might be able to say, 'We have the fibre connected' and that is a selling point. How valid the difference in connectivity is may be a moot point, but nonetheless it is obviously an advantage. So developers have said that if they then choose to put fibre into their development themselves in order to aid their marketing, they will then have to do it at their own expense.
Mr Woods : Yes, they would make a judgment as to whether they wish to pay for a greenfield developer to come in and pay for not only the pits and pipes but also the fibre connectivity.
Mr TURNBULL: This is why I am putting to you this variation on this arrangement. As long as it was done in a technically compliant way and met the specifications, the developer would be able to recoup the cost of it from NBN Co. in return for NBN Co. acquiring a network.
Mr Woods : We have not explored that, but that clearly is a permutation that the committee could follow through.
Mr TURNBULL: But that would level the playing field, though, wouldn't it?
Mr Woods : That would be one way of doing it.
Senator XENOPHON: Further to Mr Turnbull's line of questioning on competitive neutrality, there is no constraint on the commission to investigate complaints of competitive neutrality because indeed that is within the scope of the Productivity Commission Act.
Mr Woods : We undertake a function according to the act where somebody complains. We do not have discretion other than if it is vexatious or frivolous or if on preliminary investigation we find there is no substance.
Senator XENOPHON: And this is within an office of the Productivity Commission—
Mr Woods : An office in a semi-virtual sense, I would have to say. We do not have the luxury of having people permanently sitting there waiting for a complaint to come through. We have research officers who, depending on the nature of the workload, are also asked to undertake these functions.
Senator XENOPHON: And this is through the Australian Government Competitive Neutrality Complaints Office. It sounds as though it has its own building when in fact it is a virtual—
Mr Woods : It does. If only we did and had staff. How good would that be? But we do not.
Senator XENOPHON: Yes. Given the issues raised by Mr Turnbull about some of the matters that may be raised in terms of competitive neutrality, are you confident that the commission has the appropriate resources to deal with such a complaint in a timely manner?
Mr Woods : For the very first time we have actually put a person on this full-time for the duration of this complaint. There are two staff who have a familiarity with this function—and I as deputy chairman have the commissioner role—and they normally do it as part of their ongoing activities. On this occasion, because of the nature of the complaint, we have put one of those two people on it full time. We understand the importance of that investigation and we are resourcing it we think suitably.
Senator XENOPHON: I want to go to issues of process in terms of what assistance the Productivity Commission can offer this committee. I just want to show you a letter from the Prime Minister to me dated 23 November.
Mr Woods : We have a copy of that. We received it from the Assistant Treasurer on 17 December I think.
Senator XENOPHON: In answer to Mr Turnbull's questions—and I think that was in relation to the cost-benefit analysis and in particular what the difference in the cost would be if it were fibre to the kerb, which, as I think Mr Turnbull said, compared to fibre to the home—and given the Prime Minister's letter of 23 November, is that something you have an implicit authority to undertake if the committee requested that you do so?
Mr Woods : We would certainly like to explore with the committee the nature of the task, the resources and to what extent it extends beyond what information we currently have. I think this is a process of understanding—today being the first meeting with the committee—of what the committee's requirements and expectations are of the commission. We are happy to explore those opportunities and to see whether they fit within that letter.
Senator XENOPHON: Sure, but in terms of that letter, the usual remit of that is for the Productivity Commission to get an instruction from the Assistant Treasurer; is that right?
Mr Woods : If it is a significant piece of work that goes beyond information that we currently have, we would go to the Assistant Treasurer.
Senator XENOPHON: Although in this case, has that been circumvented by virtue of the Prime Minister stating in the letter on 23 November—and I want to put this in context:
The JCNBN will report on rollout progress, report against the final business plan, assess risk management processes and look at other matters the Committee determines are relevant to its deliberations.
It also states:
… government agencies and officials, including the Australian Competition and Consumer Commission, the Productivity Commission, the Australian Communications and Media Authority as well as NBN Co. will, if required, be able to appear before or contribute advice to the JCNBN. The scope of this advice will be consistent with the purposes of the JCNBN as outlined …
Given the Prime Minister's letter, if the committee says, 'We would like you to look at this issue about the cost-benefit differences between fibre to the kerb or fibre to the home,' is that something that you have the authority to do, short of getting a specific authority from the Assistant Treasurer?
Mr Woods : Depending on the specific nature of the request. If it is a matter that is broadly within our information, knowledge and capacity then we would, happily. We are here today to assist the committee in its deliberations, and we have the letter from the Prime Minister. If it is a more significant piece of work, then the question is: does the Prime Minister's letter envisage that we undertake significant pieces of research on behalf of the committee? I think I would want to test it. But it would be contextual; it would depend on—
Senator XENOPHON: Again, I am just trying to understand the process of the scope of what you can do if requested to do so by the committee. Again, further to Mr Turnbull's line of questioning, if there were a request to look at a particular issue, which would be consistent with the terms of the Prime Minister's letter—
Mr Woods : Then the Prime Minister has spoken and we would comply.
Senator XENOPHON: And if there is a contest as to the interpretation of that letter is that something that is resolved internally by the commission or is it something that you would seek further advice on either from this committee, from the Assistant Treasurer or from the parliament?
Mr Woods : We certainly would not unilaterally draw a line. We would clearly seek advice and guidance.
Senator XENOPHON: But in terms of the Productivity Commission's capacity to undertake, for instance by way of example, an analysis as to the efficacy, in terms of what it would deliver to consumers of fibre to the kerb, by way of shorthand, compared to fibre to the home, what the cost differential would be and also what the differences are in delivery, in terms of service outcomes. Is that something that you would envisage as a significant exercise that would require direction from government, or are you comforted by the Prime Minister's letter?
Mr Woods : Clearly, the Prime Minister has requested that we be fully cooperative with the committee. If I can draw an analogy of public and private health, looking at the hospital costs—
Senator XENOPHON: Sorry, I think that was my doing that referral. I apologise.
Mr Woods : It produced useful public information. But the point of it was that it was a significant piece of work. I think it took us five months, or something to that effect. It required the use of three or four researchers, full time. We are not a big organisation. The government (a) agreeing to your request and (b) instructing us meant that we allocated those resources appropriately. It really does come down to the resources and the extent to which it extends beyond—
Senator XENOPHON: I will not labour this much further, but further to the issues raised by Mr Turnbull, would you envisage that to be a significant project or something that could be relatively easily done in a timely manner in, say, the next three or four months?
Mr Woods : If it is a short piece of information it may produce only a partial answer. We then have no control over how such a partial answer would be used. Our normal preference is to receive a significant term of reference, such as in the case of public and private hospitals, and work it through to finality within the time frame we have so that we are satisfied that we have completely understood the issue—we have consulted with stakeholders, we have exposed the draft and we have produced a report that we think will stand the test of time. That is by far the preference of our operation.
Senator XENOPHON: Sure. So, hypothetically, if this committee provided you with terms of reference that were not inconsistent with the Prime Minister's letter, would that carry the weight of a formal request for a report?
Mr Woods : If we determined that it was consistent with the Prime Minister's letter, if we considered that it required a significant piece of work that was beyond the information we were able to compile, then we would seek guidance.
Senator XENOPHON: And that guidance would be your own interpretation of the document?
Mr Woods : We would not be making that decision. Government would make the decision as to whether that was complying with the Prime Minister's initial request or whether they wished to take the matter further.
Senator XENOPHON: From a point of view of interpretation of a document in terms of the plain-word meaning of it, surely the commission is able to determine what it believes the document means rather than being told by somebody else what it means.
Mr Woods : If on our reading of the document it is something we are able to comply with in the normal course of our business, then we are here to serve the committee as requested by the Prime Minister, but we would have done it as a matter of course anyway.
Mr HUSIC: You were asked earlier by Mr Turnbull in relation to cost and access relationship that access itself is a function of many things, correct?
Mr Woods : Yes.
Mr HUSIC: For example, cost would be one factor but actual physical access to a network would be another one, do you agree?
Mr Woods : Yes.
Mr HUSIC: Would it also be shortsighted to build a network of this type? I recall that you were quizzed broadly in relation to current data usage by consumers. I am seeking your opinion whether it would be shortsighted to build a network based on assumptions that currently exist about likely use of speed, data download and what we know right now in making a short term estimate, whether it would be pointless building a network that just accommodated that, correct?
Mr Woods : To offer a view as distinct from an opinion, we would want to investigate the issue of possible trajectories of future use and technology and applications.
Mr HUSIC: If I understood correctly—because there were a number of questions asked of you by Mr Turnbull—you gave a response something along the lines of 'the cheapest option is not always the best option on a network', correct?
Mr Woods : For many things; this being one of them.
Mr HUSIC: Why would that be?
Mr Woods : Because it is a matter of working out what option produces the greatest net benefits, and sometimes a slightly higher cost activity can produce even greater benefits so that the net benefit of that option can be greater than the option based on the cheapest possible cost.
Mr HUSIC: I saw in your submission on page 2, where you discussed the potential benefits from fast broadband, the commission made reference to studies that have been conducted about the type of sectors that would benefit from improved ICT and productivity that would flow from that. You mentioned the wholesale trade, finance and insurance sectors. I think you said well-regulated and widely accessible NBN might be expected to facilitate further direct productivity benefits as well. Has there been any work done within the commission to update what you found in the late nineties in terms of efforts to productivity is in those sectors?
Mr Woods : No, this was a recent submission and it drew on information. We do constantly undertake work on productivity, hopefully. We are currently looking at the productivity cycles of individual industry sectors. Interestingly, therefore, coming up with aggregate productivity figures hides an awful lot of relevant detail industry by industry. In this particular case we note that ICT has differential impacts and that in some cases something that you would not necessarily expect, like wholesaling, can have significant benefits.
Mr HUSIC: On page 5 of your submission you discuss optimism bias and what could help offset that bias through properly structured PPPs. Can you talk about how, on the basis of the current arrangements, risk is mitigated through the arrangements set up by the rollout of the NBN and arrangements it has set up with contracting firms?
Mr Woods : No, we are not able to respond to questions about NBN specifically because it is not a matter that we have inquired into. But we do make some general points that, if you focus on the PPP side of it, these are financing arrangements that have high transaction costs. The contracts themselves are very complex and in large part it boils down to this: to what extent government is prepared to take risk, in which case very little has been gained, or to what extent there is a genuine acceptance of risk by the party most able to manage that particular risk. In any project there are a whole range of risks, starting from construction risk right through to sovereign risk.
ACTING CHAIR: In answer to a question from Mr Turnbull you said that you are aware that faster speeds could be obtained from a copper network by shortening Telstra's copper line to the home. Would you agree that if we continue to use that bit of Telstra's copper lines that would leave Telstra in control of a network and, to have competition, either the copper would have to be bought from Telstra or Telstra would have to be compensated? I think the outgoing ACCC Chairman, Graeme Samuel, in his statement to the Press Club on 15 June went to the estimated cost of compensation to Telstra, which was around $15-$20 billion.
Mr Woods : For the preface to your question, I would want to check the Hansard. I am happy to agree with what I have said. I am not always sure that that concluded that I always agreed with Mr Turnbull's original question. I would want to check Hansard that in fact that is what I did agree to. I would reinforce that the commission has not undertaken an inquiry into the relative speeds and benefits of copper versus fibre, although it is a generally known matter, and therefore generally known to the commission, that fibre has many potential benefits. But in terms of your more specific question on pricing and options, these are not matters that the commission has dealt with.
Mr HARTSUYKER: Are you familiar with the technique of test marketing?
Mr Woods : Yes, I am aware of it.
Mr HARTSUYKER: What is your understanding of test marketing?
Mr Woods : In what context?
Mr HARTSUYKER: How do you see test marketing working? You said you had an understanding of the rule.
Mr Woods : As a general principle, it is used by a company that wishes to develop a product and therefore to offer it in various pilots and in various forms. Is that the area that you are referring to specifically?
Mr HARTSUYKER: Yes, basically. Do you see it as a useful technique?
Mr Woods : This is not our area of expertise, but we did make a point in our submission to the previous Senate inquiry that piloting of projects, as we recommend for public policy quite often to undertake pilots and learn from them, is a very useful way of gaining an understanding and being able to finetune either the public policy or the particular good or service before you roll it out more generally.
Mr HARTSUYKER: If you were to test market a particular product at a particular price, be it a good or a service, and the demand for that product was very high, what would that say to you about that test market?
Mr Woods : As a general principle, I would feel more confident.
Mr HARTSUYKER: Would you say if the demand was very high that perhaps the price may have been too low? What conclusions would you draw from a very high-demand situation?
Mr Woods : You would have to examine what was driving that demand from a whole combination of things. It could be the price being offered; it could be the quality being delivered; it could be the pent-up demand because there was no alternative beforehand; it could be the range of options for which that good or service could be used that are now available but were not previously. There is a variety of things, but an expert in that field on that particular good or service would know those things and would investigate them.
Mr HARTSUYKER: If the demand for that product was very low, what would that tell you?
Mr Woods : Again it would depend on the nature of the particular good or service and the circumstance in which it was offered. There would be questions of availability of product to use on that good or service. It could be a feature of price; it could be a feature of the quality; it could be a feature of certainty. Some people are slow adopters; some people are early adopters. In any particular marketplace you find early adopters are willing to trade off certainty for access. A lot of people are slow adopters. In fact, the great majority of people fit somewhere in the middle, but there is a fairly standard bell curve—or an S curve, depending on how you graph it—of early adopters.
Mr TURNBULL: For crossing the chasm?
Mr Woods : Yes. The majority of people are in that middle range and some people are very slow adopters and would want greater certainty and understanding before they adopted it.
Mr HARTSUYKER: If you were to run a test market exercise and the demand for the product was abysmal, would that make you stop and think and maybe review what you were doing?
Mr Woods : It would cause you to question whether the early adopters have embraced it while others are taking more of a wait and see approach, but, as I said before, it would cause you to also question issues of cost, quality, competitive product and even education. Consumers have to invest to have an understanding of a particular good or service. If the investment cost is higher than they think the returns might be, they are less willing to then invest in that information search and therefore to adopt the product.
Mr HARTSUYKER: As a responsible manager, if you put out a test market and you get an exceedingly poor response, do you think you are duty bound to really have a long, hard look at what you are doing?
Mr Woods : I would assume that anybody in that circumstance would take lessons from it and that is why they would have undertaken a test market in the first place.
Mr HARTSUYKER: Would seven people in Armidale be cause for concern to you?
Mr Woods : I think we are going into an area where we have not actually undertaken that investigation.
Senator CAMERON: I want to come back to this issue of cost-benefit analysis. You used the example that when you started using a computer you had no idea where we would end up. I think that is broadly how you put it.
Mr Woods : I think that would be a common experience.
Senator CAMERON: So the whole question of technology and where it will end up is still very difficult to ascertain, isn't it?
Mr Woods : There are people who investigate it more closely than we ever have, but even they are no doubt surprised from time to time at new breakthrough developments. If they knew the breakthrough developments beforehand they would have made the money in doing them.
Senator CAMERON: The witch-hunt by the coalition against Mr Quigley was on last night in a Senate estimates hearing.
Mr TURNBULL: I object to that.
Senator CAMERON: You know that is what it was, Malcolm.
Mr TURNBULL: Chair, can you take charge of this?
Senator CAMERON: An absolute witch-hunt against Mr Quigley.
Mr TURNBULL: We have the Productivity Commission here.
Senator CAMERON: You should be ashamed of yourself. It is an absolute witch-hunt.
CHAIR: Let's just ask questions of the witness instead of arguing with each other. Senator Cameron, direct your questions to Mr Woods.
Senator CAMERON: It was outrageous. The witch-hunt was on last night, let me tell you—I was there.
Mr TURNBULL: This is the hearing where Mr Quigley said he had misled the Australian public about his role at Alcatel.
CHAIR: Senator Cameron and Mr Turnbull!
Mr TURNBULL: He apologised to the Australian public for giving false answers to questions which he said were legitimate. That is not a witch-hunt—
Senator CAMERON: You should be absolutely ashamed of yourself.
Mr TURNBULL: that is Australian parliamentarians doing their job. You are a disgrace.
CHAIR: I ask that both Senator Cameron and Mr Turnbull stop for the moment. We have a witness here. Can we ask questions of the witness.
Mr TURNBULL: Was Mr Quigley doing your bidding when he gave the original statements? Who is doing whose bidding?
Senator CAMERON: Yes, I knew you would react to that.
Mr TURNBULL: Quigley does his own. He is responsible for his statements and I am responsible for mine—you are responsible for yours and they are irresponsible.
Senator CAMERON: It was you doing Tony Abbott's bidding; you should stand up and—
ACTING CHAIR: Senator Cameron and Mr Turnbull, if we are going to keep going like this I will excuse the witness as you obviously do not have any questions. Can we just ask the questions of the witness and continue? We only have a short period of time left. I do not want to suspend the proceedings.
Senator CAMERON: Mr Quigley did indicate that there were huge expectations from a range of international bodies about the growth of the use of broadband around the world. Would you agree with that, that you expect a huge growth?
Mr Woods : It is not a matter we have investigated to the level of Mr Quigley or any other expert in this field, so we go by general observation that there has been a growth in applications that is quite significant and there is likely to be in the future.
Senator CAMERON: There is this huge growth as expected. Are you aware of the statement from Mr Graeme Samuel that he made to the Business Spectator in October 2010 in relation to the gross benefit?
Mr Woods : No, but I am happy to respond, if it is a matter that I am able to respond to.
Senator CAMERON: I will just quote it. Mr Samuel said:
There’s another element of the social-cost-benefit analysis also that is going to be quite complex, and that is that this is an infrastructure investment that has, if you like, a lifetime of about 50 to 60 years on any reasonable analysis by any technical expert, about 50 to 60 years.
I don’t think there is anyone in the country or in the world that will be able to tell you the benefits flowing from a high-speed broadband network five or 10 years out, let alone 20 or 30 or 40 or 50 years out.
He goes on to say:
And therefore when people talk about social cost-benefit analyses or cost-benefit analyses, I think that their failure to understand that what we’re talking about here is a visionary project much like the Snowy Mountains Scheme, which I will venture to suggest to you was never the subject of a cost-benefit analysis as been described, but was the subject of a range of different elements, not the least of which was a vision as to how it might benefit communities in general into the future.
What parts of that statement would you agree with?
Mr Woods : I do recall that statement now that you have drawn it to my attention. We noted, at the time, amongst ourselves his commentary. That does not move us from the view that a cost-benefit analysis to the extent that there are uncertain benefits into the future is not something that, at least by identifying the uncertainty of the benefits, might add some clarity to the debate as a whole. This is in the context of our general proposition, which we have had on the public record not only in this context but in many others, that a cost-benefit analysis can be a useful tool to shed light, but it does not mean that there is a certainty approaching either the costs side or the benefits side but some quantification or, at least, elaboration of the uncertainties can aid in public policy judgment.
Senator CAMERON: Are you an expert on cost-benefit analysis, Mr Wood?
Mr Woods : I would not consider myself one of the foremost technocrats, but I am sufficiently familiar with it. There are various complex matters about discount rates and about treatment of uncertainty, and there are three or four people in the country who explore this to infinite detail, I would have to say.
Senator CAMERON: A cost-benefit analysis could be a bit like an econometric model. It depends what you feed into the cost-benefit analysis of what comes out the other end?
Mr Woods : Absolutely, and the benefit of it is to be very transparent about what the assumptions are so that those assumptions can be tested. It is only as good as what you do with it.
Senator CAMERON: So, if you get the assumptions wrong, the cost-benefit analysis can be meaningless.
Mr Woods : Yes, and I did make the point earlier that the cost-benefit analysis in itself should not be the basis of decision-making. It is purely a tool to help.
Senator CAMERON: It is just a tool.
Mr Woods : Yes, that is all we have ever claimed it to be.
Senator CAMERON: You made some comments a moment ago about test marketing. When a company is in its infancy, effectively in start-up, would you expect the company to have a full market from its infancy or would you expect the company to grow, including undertaking infrastructure, build, customer acquisition and organic growth?
Mr Woods : In my answer I made a number of points relevant to your question, including that the customer base has to get to know the product to invest in information. Even with the same level of information amongst different customers there is a different uptake rate. Behavioural economics shows you quite clearly that there are early adopters, there is a great middle ground and that there are late adopters. Also the purpose of a test market quite often is to refine the pricing, the quality, the colour, the size and features of the particular good or service. All of that is undertaken with a view then to refining the product, improving the information and understanding the customer response to cost, quality, timeliness and performance.
Senator CAMERON: In the commission's Senate submission from July 2009—and Mr Turnbull has reflected on that this morning—at the bottom of page 8 you say the following:
This averts the problems previously identified by the Commission, and noted in its report on National Competition Policy (Productivity Commission 2005), arising from the vertical integration of telecommunications companies.
Is that still the commission's view?
Mr Woods : The commission had the view in its 2005 report, and if you go back to 2001 when we produced a report on telecommunications, that vertical separation—in whatever form, and that can be a variety of forms—removed the potential for a company which has a monopoly component to it to therefore exercise control in downstream markets such as retail service provision. That was our view at that time and I see no reason to change that view but we have not investigated it.
Senator CAMERON: So you have had a consistent view that vertical integration was a problem from 2001?
Mr Woods : Yes.
Senator CAMERON: And you reported that to government in 2001?
Mr Woods : We had a term of reference which requested us not to examine the question of structural separation and, therefore, we did not report on structural separation of Telstra in the report. But we did in chapter 2—as I recall because I was the presiding commissioner—make general reference to the policy consequences of having vertical integration.
Senator CAMERON: So you were instructed not to deal with the biggest problem facing the industry really?
Mr Woods : Our terms of reference excluded us from making recommendations on that.
Senator CAMERON: So that was the Howard government?
Mr Woods : It would have been.
Senator CAMERON: Excluded you from addressing the biggest problem facing the industry.
Mr Woods : The terms of reference were on the public record, as is our report.
Senator CAMERON: But you just indicated you were excluded from dealing with it.
Mr Woods : The terms of reference did that.
Senator CAMERON: So really you were hamstrung from taking a position that would benefit the consumers in Australia.
Mr Woods : My answer is that we conducted the inquiry in accordance with our terms of reference as we always do.
Senator CAMERON: So we have a situation where you alerted the then government in 2001 that there is a significant, major problem through vertical integration and nothing has been done about that until 2007 through 2011.
Mr Woods : I am happy to go back to the Hansard but the point I made is that we made general reference that vertical integration can produce issues in relation to downstream competition.
Senator CAMERON: I know from my experience with the Productivity Commission that competition is a very important element in your modelling of how the economy works.
Mr Woods : Not as an end in itself. I would have to make the very strong point but we see that, where appropriately applied, that can improve the efficiency of the operation of the economy. But we do not pursue competition for its own end.
Senator CAMERON: So you would agree that we need structural separation. Structural separation is a good thing—you have been saying that since 2001. Did you say 'yes'?
Mr Woods : I drew attention to the fact that we raised some issues in relation to structural separation, as per our terms of reference. We did not actually inquire into that issue, but, in the general principle, we drew attention to it.
Senator CAMERON: Congratulations, Mr Woods, because it was quite courageous to do that in 2001. I do not normally give plaudits to the Productivity Commission but you deserved one there. You would agree, wouldn't you, that in any assessment of the benefits of the NBN that we ought to take into account the value of the structural separation of Telstra, which the NBN facilitates through the migration of customers onto the NBN?
Mr Woods : That would certainly be one of the issues that we would look at in terms of the benefits of that process, quite clearly. As you know, competition can be beneficial in the marketplace.
Senator CAMERON: Is there any way that you can build in a longer-term analysis, with all of the difficulties that we have been discussing? It would be pretty difficult to do a cost-benefit analysis with all these uncertainties.
Mr Woods : Certainly in the area of technology especially, but not only, uncertainty is probably more profound and it would be incumbent on you to be very clear as to the assumptions you made so that those could be (a) tested by others in the field and (b) taken into account by those who are making decisions in part influenced by such an analysis. I repeat again: we do not seek cost-benefit as the answer; it is purely a tool to assist in identifying the costs and the benefits and the uncertainties that surround it.
Senator CAMERON: How important is it for the productivity of the nation that we have access to the best technology in communications and broadband?
Mr Woods : It is important to the nation in two respects. One, that technology, ICT—as several of our reports that we have drawn attention to say—can improve the productive efficiency of the economy, can improve consumer choice and information and can lead to connectivity. There are a whole range of those benefits, but there are different technologies that produce different levels of benefit for different cost. Also, different customer bases are likely to want to focus on different aspects of that technology for different use.
Senator CAMERON: Has the Productivity Commission done any work on the cost to the Australian economy of the Howard government's failure to act on your advice in 2001?
Mr Woods : It was not advice in terms of a specific recommendation, because that was not part of our terms of reference; it was a general statement within the body of a report on telecommunications.
Senator CAMERON: It was quite an important statement.
Mr Woods : We put it in there because we felt it was important. It was a report of 700-odd pages. We hope they are all important.
Senator CAMERON: Getting rid of vertical integration, getting rid of a blight on competition—
Mr Woods : I do not think we used those terms.
Senator CAMERON: You do not use those terms? You are much more measured, are you? Could you do an estimate of the cost to the economy of the Howard government's failure to deal with vertical integration and provide fast broadband to the economy?
Mr Woods : That would be a very theoretical discussion. It would be so fraught with challenges and I am not sure the conclusion would be all that helpful.
Senator CAMERON: It is not theoretical in the context that, if we could have got rid of vertical integration in 2001, the economy would be better off. You do not need a theoretical formula to come to a conclusion on that, do you?
Mr Woods : You could not quantify what that might mean and you would also have to come to views on what else may have happened in the related space. I am sure there would be somebody who would want to venture their arm on a view on that, but it is not something that would be a natural activity for the Productivity Commission. The quantification of that degree of benefit is something that I would not be able to conjecture on. As a general principle, we saw that there could be benefits from the structural separation; therefore we would expect that to flow through to the economy, yes.
Senator CAMERON: So in 2001 you said, 'There's a big problem here, you should deal with that problem.' Nothing was done about it so that was a net cost to the economy.
Mr Woods : No, we did not make a recommendation to that effect because we were not asked to.
Senator CAMERON: Don't you think it is even more important that you actually were forced to say, 'We think this is a problem,' even though you were directly told not to deal with it by the Howard government. It is very courageous, Mr Woods, but you actually said, 'We have to do something about this.' It is unusual for the Productivity Commission to do that, is not it?
Mr Woods : The Productivity Commission looks at an issue and it looks at the context in which the issue is placed. We do that in all of our inquiries. We have our terms of reference but we have to understand where they stand within the general events and public policy framework of that particular issue. In that respect our commentary which, I would have to go back to the report, but out of 700 pages, may have comprised of a couple of pages would not have been all that unusual.
Senator CAMERON: Do you do this regularly? I will ask you a specific question here. If a Treasurer says to you do not look at this issue—
Mr Woods : Do not make recommendations.
Senator CAMERON: Do not make any recommendations on this issue—
Mr Woods : We will comply with that.
Senator CAMERON: You comply with that. So I would put it to you that it is unusual for you to spend two pages in a report saying, 'Alert, alert! You have to deal with this. It is a problem. It is a problem for productivity, it is a problem for the economy in 2001. Please do something about it.' That is what you said wasn't it?
Mr Woods : I would direct the committee's attention to the actual words of the report. As you would imagine they are not expressed in those terms.
Senator CAMERON: I thought they would have been good sense for you to express it in! But the meaning was the same, 'Look, here is a problem, let's simplify it. This is a problem that has to be dealt with.' That is vertical integration in 2001—you said that basically.
Mr Woods : We said there is a general problem relating to vertical integration, yes.
Senator CAMERON: Thank you.
Senator STEPHENS: Mr Woods, in the commission's submission to the select committee the issue of community service obligations was raised and the argument was put very strongly that there needed to be a very transparent process there. I wonder if you would like to comment on how adequate community service obligations could be met through the NBN? What mechanisms might be put in place?
Mr Woods : As I mentioned, we have not investigated the NBN specifically but as a general principal we strongly favour community service obligations being transparently met by government rather than being embedded within the operations of a business specifically. Whether it is concessions to pensioners or access of particular groups to a service or good, if that is being undertaken explicitly to provide a benefit to that group, then we would as a general principal support that being done transparently through the budget so that the business is allowed to operate in an unfettered and commercial manner. So it would charge the normal price whether it charges the individual and they then get a rebate from government or whether it charges the government part of the subsidy component and the individual pays the smaller price. There are issues of administrative detail and you should do whatever is the most cost-effective and of benefit to the individual. We strongly support that community service obligations are transparently met and do not interfere with the general commercial operations of the business.
Senator IAN MACDONALD: As competition watchdog, so to speak, are you at all concerned with the fact that at the end of this we will have a government-owned monopoly on the basic network? As I put to them at a previous meeting, what incentive will there be for the government-owned monopoly to upgrade and keep abreast of the very latest technology—technology we cannot even imagine nowadays? Does that concern you? Is it something that has come across the commission's—
Mr Woods : We have not investigated this one specifically, but as a general principle one of the features of a monopoly is the potential for there to be less incentive to be the most efficient operator and reflect customer demand. So it is then a matter of putting in a range of other incentives, some of which, as you are familiar with, are price caps or related issues on the pricing side. But there are also a range of things. In fact, we do it ourselves in terms of our reporting on the provision of government services. Benchmarking is a very important way of transparently and publicly drawing to attention the relative efficiencies of monopolies or other government business providers who may not be subject to normal market scrutiny. So we would anticipate that reporting, benchmarking, transparency and a rigorous approach by a government business unit within central agencies that would closely monitor the behaviour are all ways in which you can try and correct for some of the features of a monopoly.
Senator IAN MACDONALD: But would you share a concern that, particularly, a government monopoly is unlikely to have a market incentive to improve because there is no-one else to compete with—it does not really matter?
Mr Woods : It is slightly more complex than that in the sense that, if the business is set up and its rate of return is dependent on the greatest use of its facilities, that can be one way in which you can encourage it to operate in a more commercial manner, as distinct from if it is the end deliverer of services—I think that is where the problem is particularly—where the customer either takes it or leaves it because that it is all there is on offer. But if it is an intermediate good or service then quite often, provided that there are strong incentives for it to produce a commercial rate of return and that it is subject to close scrutiny, there are other market factors that would give it some incentive to ensure maximum use of its facilities. So it is a slightly more complex issue.
Senator IAN MACDONALD: I would like to pursue that, but I have run out of time. Finally from me, I note that in your submission you talk about the Aussie Infrastructure Bonds. You said:
Such bonds, if structured appropriately, can provide a level of market-based discipline to the project. To achieve this, the bonds need to be serviced from income generated by the infrastructure project rather than from general tax receipts.
Have you seen anything that might lead you to suspect that any such bonds, if they are ever issued, will be serviced from income generated, or will they just be serviced from general tax? There is a view around among the market that at the cost that this is currently predicted to be, which everyone expects will blow out, it is very unlikely that there is ever going to be any commercial return. So have you seen anything—
Mr Woods : Not in terms of that project specifically, but again that statement is drawn from a report that we did on financing of infrastructure. We are very happy to talk about areas where we have conducted an investigation and have some knowledge. On this one the results were very clear: that a specific bond can involve much higher costs. There is retailing, you get less depth and less duration, and therefore issuing prices are usually higher than general fundraising by government. So a bond that was not focused on the performance of the individual piece of infrastructure but just had a different name brand could in fact have a higher cost for fundraising than general fundraising by central borrowing authorities.
Senator IAN MACDONALD: Does that mean it is less likely to attract investors?
Mr Woods : It is a combination. If you offer the right price you will get sufficient investors. It is a trade-off between the number of investors and the price you are willing to offer. It will have one or both effects.
Senator IAN MACDONALD: But the price you are willing to offer depends upon what return you are likely to get.
Mr Woods : If it is partial equity then it does. If it is general bond raising but nominally tied to a piece of infrastructure in a hypothetical sense then you get the cost but you do not get much benefit.
ACTING CHAIR: Mr Woods, I have one follow-up question and then we will have to close this part of the hearing. It is on the questions put by Senator Macdonald in relation to NBN being a monopoly and your submission on underpricing and access to infrastructure where on page 8 you state that:
The NBN company will operate the FTTP network, selling only to wholesalers. This averts the problems previously identified by the Commission, and noted in its report on National Competition Policy (Productivity Commission 2005), arising from the vertical integration of telecommunications companies. In principle the new company would have no incentives to favour one wholesaler over another and this could encourage strong competition among wholesalers and retailers.
Do you still stand by that?
Mr Woods : We are happy with the conclusion—picking up on an earlier discussion—that if it is an intermediate good or service and it is open access then in fact it does have some incentives, provided there is rigorous testing of its performance, to attract as much business into it as possible because that generates the greatest returns to it.
ACTING CHAIR: Thank you, Mr Woods. I am sure there will be lots of opportunities to invite you back before the committee at another time. Thank you for attending today to assist the committee. If the committee has any further questions they will send you these in writing through the secretariat.
Proceedings suspended from 11:02 to 11:20